Half a second of waving a credit card, a loud bleep and the transaction is complete. Retail Week’s first experience of contactless payments in a live environment has been a success.
However, this is just one transaction – using the card of a Visa employee – in a café under one of Visa’s offices. It’s surely going to take a lot more than this to demonstrate to large retailers that they should undertake significant upgrade projects to give customers this payment option at tills.
Apacs, the UK payments association, has published estimates that more than 5 million contactless cards will be issued by the end of this year and will be accepted at at least 100,000 locations. If this happens, then it is likely the critical mass required to drive further adoption will have been reached. But, with less than 11 months left of 2008 and, in practice, less time for upgrades to be completed, with systems locked down from November onwards, there is a long way to go to reach this target.
The roll-out started in London and focused on seven postcodes, from the City to Canary Wharf. A mix of retailers and selected cardholders who regularly use their cards in these postcodes were chosen to participate.
Since the launch, the roll-out has been expanded across London and is supposed to be followed by a gradual, national roll-out during the year.
According to Apacs, card issuers are replacing debit and credit cards to their own timescales, while it is up to individual merchants to decide whether to adopt the necessary technology.
Becoming a reality
Barclaycard Business head of contactless payments James McDonald explains how much the market has developed since the launch. He says that, between them, the various payment processing providers have about 3,600 sites that accept contactless payments in London. 1,500 of Barclaycard’s live outlets are in London – it has 3,200 outlets up and running in total – with about a further 1,000 due to go live.
McDonald says: “We will roll out nationally. We have already signed up 4,000 outlets and expect to have 20,000 to 30,000 by the end of the year.” In addition, he says that all consumers can apply for Barclaycard’s contactless payment card. He adds: “Some view [the London launch] as a pilot – we consider it a full-blown launch.”
Lloyds TSB Cardnet committed to roll-out plans at the beginning of February. Its spokeswoman says: “It is our plan to roll out in excess of 1,000 terminals in London in 2008 and work with Apacs, the card schemes and the card issuers on plans for the rest of the UK.
“In terms of merchants, we have a number of smaller retailers that are interested (newsagents, sandwich shops etc), but we are also in negotiations with larger retailers about the technology,” she says.
Perhaps the real measure of how successful the roll-out will be in the next few months is how many of the contactless card readers have been sold. OPI, which supplies readers to all the major players, says that it has sold 14,000 readers in the UK so far.
Clearly, there is a long way to go to even come close to hitting the estimates for 2008. However, there is also something of a consensus that, once early reports on the success of the initial sites in London come in – likely to be within the next six weeks – then more retailers will start to make a decision about whether they will attempt a roll-out this year.
Smart Technology Solutions (STS) vice-president of business development Cameron Olsen says: “We really haven’t seen the big players adopt contactless payment yet. It will be in April to June that we start to see implementations.”
He says that STS is working with medium-sized merchants, which will start to go live with contactless systems within four weeks. The company has also been in discussions with larger retailers and most have examined the relative costs and benefits. For instance, STS is running a user group at the end of February, which will act as a technical forum for its technology partners. Olsen explains that this will include a presentation from a member of staff within Boots’ information systems and technology department. He says: “Catherine Curry from Boots is going to give a presentation on why it is looking at rolling out contactless payment.”
Larger retailers that integrate payment processing with their EPoS system are likely to have to adapt their systems to accept contactless payments. McDonald says that Barclaycard is working with the main EPoS software suppliers on the specifications they need to adhere to in order to add a contactless payment option to their systems. He adds that one large retailer is to go live with contactless payments, integrated into its EPoS system, in February. However, he was cautious of revealing the company’s name until its testing is complete.
The other main barrier to adopting the technology is cost. This is less about the capital cost of the equipment and more about the charges merchant acquirers will make for processing contactless payments. Glue4 managing director Dr Neil Garner helped MasterCard create its PayPass contactless proposition. He says: “Unlike Chip & PIN, retailers are keen to look at contactless payments. There are definitely significant benefits, but big retailers are still unclear about what it will cost in terms of transaction charges, whereas there are known costs for cash and debit card transactions.”
Retailers are also starting to get into the replacement cycle for their Chip & PIN hardware. With integrated Chip & PIN and contactless devices due to come onto the market soon, this could provide a simpler, more cost-effective way for retailers to add the functionality.
Platform for growth
In the US, where the market is slightly ahead, there are examples of contactless payment infrastructure being expanded for other purposes. Garner explains: “It opens up opportunities for more unattended terminals. It also creates an opportunity to develop contactless loyalty cards and gift cards. In the US, quite a few retailers are looking at innovating with different loyalty card formats.”
However, there is also an acceptance that contactless payment will not be attractive to some retailers. McDonald says: “The technology provides a transaction that is fast and convenient. For a retailer, that has to convert into tangible benefits. The transaction speed will have a different value from one retailer to another.”
He admits that, while coins in particular are very costly for some retailers to handle, larger and more efficient retailers may find that the costs of accepting contactless payments are higher than handling cash.
Visa Europe vice-president and head of acceptance Kevin Smith agrees, suggesting that consumers’ take-up of the payment option could be more critical in the short term. “There is no reason why every merchant should have the technology, but there is no reason why every cardholder shouldn’t have contactless capability,” he says.
He adds that big-name merchants adopting the technology will act as a catalyst for others. However, he is realistic that supermarkets will not go for wholesale adoption overnight and they may choose to consider it for urban environments only.
McDonald concludes that Barclaycard Business understands that it has to take the lead on this, if it wants to get retailers and consumers onside. “You wouldn’t make these roll-out decisions by waiting for the metrics. We will roll out contactless payment to establish critical mass and drive the industry,” he says.
Even with this attitude, the targets for 2008 are a steep mountain to climb. The banking industry is determined to make this work, but will have to provide further proof of financial benefits and, most likely, incentives for retailers in order to build compelling business cases.
The case so far for contactless payment
A study by Deloitte, sponsored by Visa, has examined the benefits that have been seen in countries where contactless payments are more advanced.
There are more than 10 million Visa payWave cards in circulation worldwide, particularly in Malaysia, South Korea, Taiwan and the US. Deloitte says that the experiences of merchants in these countries is that purchases can be made up to 25 per cent faster than those made with cash.
Deloitte says that this increase in speed and convenience has been proven to translate into improved commercial performance. For instance, chemist and beauty chain Watsons in Taiwan says it has witnessed a reduction in average queue times of 77 per cent. This has led to higher turnover at the point of sale and an average transaction value for contactless payments that is 2.3 times higher than for cash purchases.
Deloitte also spoke to a range of merchants in the UK and found there was scepticism about the adoption of the technology. Deloitte has identified 16 merchant categories that account for almost 90 per cent of the under-£10 cash market in the UK. Of these, vending, buses, supermarkets, newsagents, convenience, fast food and personal care are the largest. So far, newsagents, grocers and chemists have been among the first to go live in the UK.
Barclaycard has a tie-up with Transport for London on the combined payment and Oyster card. Visa says it is in discussions with other transport organisations about how it could make the technology work for them.
However, no big supermarkets have given the technology their seal of approval – something that the banks must remedy if they want plastic to be a realistic alternative to cash.