Contactless is approaching tipping point, but concerns remain about costs and whether shoppers will embrace the system without a national consumer awareness campaign.

PIN-free paying is almost here. More than 9.6 million UK consumers now own contactless payment cards. This will reach 14 million by the end of the year, and 25 million by the end of 2012, according to the UK Cards Association.

A handful of retailers - including Boots, Spar, Co-op, Poundland, plus many cafes from Eat to Subway - are early adopters, already serving customers with contactless terminals in their busiest stores. Tesco says it has installed contactless terminals in “a handful of stores” while Wilkinson is believed to be making headway too.

‘Tap and go’ payments for transactions under £15 are part of everyday service in central London and Liverpool, but millions of consumers haven’t heard of it yet.

“We’d like to see a couple of big issuers increase their rate of roll-out so that the momentum for merchant adoption can really get going,” says Barclaycard head of payment acceptance Stuart Neal. “At Barclaycard we’re leading the way and are issuing a large number of contactless cards every month, but we can’t do it on our own. Many retail IT directors tell us they’re keen, but it’s often a matter of fitting contactless into their wider EPoS development schedule, and getting the business case approved.”

Basket case

Retailers dealing with larger basket prices certainly aren’t in a hurry. “Contactless is limited to transactions under £15 so it wouldn’t be relevant to us until we’re more involved in the convenience market,” says Morrisons group treasurer Paul Coyle.

Bob Jarrett, professional services director at independent retail trade body BHF-BSSA, says not all smaller retailers are convinced of the business case yet. “Some retailers will compare the cost of switching to electronic payment with cash handling, and even though low interchange rates have been set, contactless will nevertheless be perceived as an increase in cost by some.”

BRC director-general Stephen Robertson argues that banks charges on card payments are too high generally, and “they can’t expect to maintain those excessive charges as numbers of non-cash payments grow”.

Visa and MasterCard insist they are incentivising retailers to offer the Visa payWave and MasterCard PayPass cards by setting low interchange fees for contactless transactions - just 4p for purchases below £10 and 1p for purchases below £2, says Visa. And there are a long list of benefits. Once in mass use, stores can capitalise on consumers’ apparent love for the speed and convenience of contactless payment, and see their throughput greatly improved. Queuing times can be reduced by 15% to 20%, and average transaction times cut by 40% if MasterCard is to be believed.

“The real tipping point will come next year when tier one retailers including the big grocers start to implement contactless,” says MasterCard general manager for business development Alan King. “There’s been a realisation now that the benefits just can’t be missed,” he says.

There is evidence from the US market - several years ahead of the UK in regard to contactless - that spend goes up when people use contactless cards. “The theory is that previously people paying for items in a sandwich bar, convenience store or newsagents were reliant on whatever change they had in their pocket,” explains King. “With a contactless card the opportunity is there to pick up that extra magazine or packet of biscuits because you’re not restricted to the spare cash you are carrying.”

Efficiency savings

The banks are keen to remind retailers that cash handling is not cost-free, so switching to contactless secure payment could save money and improve efficiency. “Retailers need to think carefully about the fixed and hidden costs of cash,” says Darren Wilson, chief executive of HSBC Merchant Services. “There is staff time spent cashing up, secure bank runs, night safe costs. If you hold large amounts of cash in store it’s a security risk.” Staff theft from the till is less likely with less cash around. And reconciliation can be quicker when the trading day ends if the majority of payments have been electronic.

Co-op wants to improve the in-store experience for customers across its 3,000 store network says director of food IS Mark Hale, but is also looking for evidence of increases in average transaction values as its trial progresses. “Industry research shows contactless transaction times to be significantly faster than cash payments and also quicker than standard Chip and PIN payments,” he says. “We’re confident we will see transactions speed up and we will carry out our own measurements to ascertain the exact benefit. Industry analysis shows a potential for an increase in average transaction too.” Co-op’s trial, in partnership with Barclaycard, began in June this year and contactless is expected to be rolled out to 100 food stores in 2011 and all stores by 2012, if things go smoothly.

Hale says he’s aware that some customers have been nervous about the security and risk of contactless payments until they fully understand how it works. “Our communications plan, developed following customer research and focus groups, will seek to allay any fears that our customers may have. The aim is to offer choice and convenience for our customers, as contactless will be just one option for payment,” he explains.

A lack of awareness

With no big national consumer awareness campaign planned to help ease shoppers into the routine of using their contactless cards, some retailers are worried that it falls to them to educate customers on the payment system. Barclaycard has been a pioneer of contactless and invested in a massive TV ad campaign - notably the ‘waterslide commuter’ - depicting the ease of cash-free living, but as one retail IT director put it: “They’re great ads, but they don’t explain much about how the system works, where cards should be used, and key points such as warning people they might still be asked for PIN verification sometimes.”

King at MasterCard says the gradual adoption of contactless is very different from the ‘big bang’ of Chip and PIN when people needed to know their PIN from a certain date. “There’s no need for a ubiquitous campaign this time, and we’re finding localised education days are very useful.” For instance MasterCard and merchant acquirer

RBS Worldpay demonstrated the technology to consumers and retailers in Williamson Square, Liverpool, last year, when a city-wide trial was being launched.

“As critical mass develops we will see more people exploring that way to pay for themselves,” says King. “When I visit the Canary Wharf Boots, which was one of the first stores to install contactless terminals, shop staff seem very comfortable in prompting customers to pay that way.” And of course issuing banks are sending out leaflets explaining contactless whenever new cards are distributed.

Barclaycard and mobile phone operator Orange are close to launching a phone that facilitates contactless payments, and there’s little doubt that this way of paying will become important in the near future. “Retailers are starting to realise that if they make the investment in contactless now, they’ll be well positioned to help consumers jump from plastic to mobile phone payments,” says Neal. “It will happen sooner than we think, opening up really exciting marketing opportunities.”

Make Contact: Cutting costs at SPAR

The business case for contactless was easy for SPAR UK to make, because the convenience store operator needed to update its EFT terminals to meet PCIDSS compliance anyway, says Spar UK IT controller Roy Ford. Busy Spar stores in central London and Liverpool are already serving customers faster since introduction of the integrated contactless EFT payment solution that the company developed with IT partner Business Computer Projects.

“A major benefit for us is reduced transaction costs for debit cards too because contactless charges are up to 40% cheaper than standard debit transactions,” says Ford. He says that from November the terminals will be rolled out to more stores within the M25 and around Liverpool. Spar has paid for the technology update itself, but had “assistance” from its acquiring bank.

9.6 million

Credit and debit cards issued with contactless functionality

27,000

Contactless terminals in place

7%

UK cardholders with contactless functionality on at least one debit or credit card

20%

UK cardholders expected to have at least one contactless card by the end of 2012

Source: The UK Cards Association