By Patti Murphy
The Takoma Group
Contactless cards have allure. Apart from that, however, there doesn't seem to be enough motivation for merchants or consumers to augment use of mag stripe cards and terminals with contactless alternatives.
A new report from Aite Group LLC counts contactless terminals at about 40,000 merchant locations, and the lion's share of those (83%) are at stores operated by large multistate retailers. Among them: McDonald's Corp. (with by far the largest number of tap-and-go terminals), CVS Caremark, BP PLC gas stations, Walgreen Co., Jack in the Box Inc. and Petco Animal Supplies Inc.
Consumers who have contactless cards or key fobs number about 19 million, Aite noted. To put this number into perspective, Aite estimates that 3% of all debit cards in the hands of consumers today are contactless; among credit cards, contactless cards/devices account for less than 1% of the total.
Despite the meager penetration of contactless devices, Aite sees a future for contactless payments. Nick Holland, Analyst and author of the report (Contactless Payments and NFC in the United States: Beyond Science Fiction) expects growth in merchant acceptance points, albeit at a somewhat slower pace than champions of the cause would like.
He predicts 217,000 contactless-enabled merchants by 2014, which would increase merchant penetration to 2.5% from 0.7% today.
That seems a bit optimistic; it works out to just under 30,000 new terminals a year. During a presentation at the Northeast Acquirers Association's Winter Seminar (in chilly Vermont) in January 2008, an informal audience poll found only about four individuals offering merchants wireless solutions.
In a survey of acquirers, conducted separately by Aite in the fall of 2007, none of the firms queried ranked contactless functionality an important merchant offering. Adil Moussa, the Aite Analyst who spearheaded that survey, said he found acquirers saw offering contactless payment functionality "as a neutral benefit at best."
Research conducted by First Annapolis Consulting and presented at the NEAA event mirrors closely Aite's findings. Referencing the terminal giveaway trend, First Annapolis Consultant Ramsey Mark Elias warned that contactless functionality may become a competitive necessity for acquirers and their partners.
"You have to have contactless terminals in your arsenal. If you don't, someone will be there to give it away for free," Elias told the group.
Although the current model for contactless payments may not survive long term, Elias suggests that near field communication (NFC) technology could become the foundation for a new contactless payments model.
NFC is a short-range, high-frequency wireless technology that is being integrated into new generations of mobile telephones. First Annapolis forecasts as many as 100 million NFC mobile phone devices could be able to support payments by 2012.
The chief selling points for contactless payments are speed and convenience. And the data, on its face, seems compelling.
Aite broke down the time intervals needed to complete various payment transactions. This is in keeping with other industry data, and it's good to have at hand when discussing payments with clients and prospects.
It takes 12.5 seconds to complete a contactless card transaction, 28.5 seconds for cash, 64 seconds for checks, 48.4 seconds for credit/signature debit, 44.4 seconds for PIN debit and 15.6 seconds for biometrics-based payments.
The numbers that count most for this discussion are contactless and cash, the tender that contactless cards are supposed to replace.
Sixteen seconds, of course, is no small gain. But how much of that time savings is truly attainable for the typical merchant?
"Although a contactless card transaction is measurably faster than a cash transaction, this is essentially meaningless - both forms of payment typically involve opening a wallet, removing the card or cash, interacting with a store employee, placing of change and receipts back into the wallet and placing purchased items into a bag," Holland wrote.
"The actual speed and/or convenience of the transaction is clouded by all of the peripheral activities. This equally applies to convenience and security - consumers and merchants are unlikely to notice the advantages of a card transaction over other forms of payment unless explicitly pointed out to them."
Training is another critical consideration. I still cringe over the experience a colleague had trying to use a contactless terminal at a nearby QSR that apparently had not yet trained all of its employees on the new devices.
There also are hard-dollar costs to accepting contactless payments: terminals and interchange.
Holland believes terminal prices will drop to below $100, which could prod some adoption. He and Elias both agree interchange concessions aren't likely. "The issuers won't go for it," Elias said.
I'd have to agree. With all the legal and PR attacks on interchange, neither card issuers nor the card companies are apt to accept pricing concessions.
Let's get real: If the card companies really wanted contactless card payments to take off, they would've lowered the price of entry already.
In fact, it can be argued that the card companies are undermining the case for contactless, either unwittingly or intentionally.
Have you seen those Visa Inc. commercials depicting a checkout line moving swiftly and smoothly as customer after customer uses a "contactless" Visa card, until someone comes along with cash and holds up the line? As Holland pointed out during an interview, the cards in those commercials all have mag stripes.
And what about the companies' decisions to implement signature waiver programs for low-dollar credit and debit card transactions?
"The negligible difference in time between tapping and swiping a card negates the speed value proposition for contactless cards," Holland wrote. "Furthermore, consumers are not encouraged to develop new patterns of behavior at the point of sale, instead falling back on time-tested swiping habits."
So here's the bottom line on contactless payments: They're hip, but growth will be slow.
And if you want to be a full-service partner with your merchants, include contactless terminals on your menu of offerings.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com.
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