Slow penetration

[Dave Birch] The roll-out of contactless payments is proceeding, but it’s still slow, because it takes a long time for merchants to change or upgrade their POS technology, even when they want to. Bu they may not want to, because they don’t perceive enough value for them, or because they anticipate incentives from other players in the market.

An absence of incentives—particularly for merchants—is handicapping contactless payments in the U.S., and by extension mobile payment at the point of sale could suffer, according to a new report by Aite. About 40,000 U.S. merchants now accept contactless cards and fobs, or 0.5% of all merchant locations. That number will grow to 271,000 over the next six years, but the penetration rate after that time will still be only 2.5%. If these projections prove accurate, it will mean rough going at best for near-field communication (NFC). To make NFC work, cashiers must be equipped with contactless readers. The painfully slow merchant penetration by contactless “kills NFC”, according to the report author Nick Holland.

[From Digital Transactions News]

Nick is, of course, right to highlight the feedback loop that is operating here. There are some banks and retailers who are investing in contactless for its own sake, but there are many who are investing in contactless because they see it as a stepping stone to the greater value-added possibilities around mobile. Now, I certainly see myself in the mobile camp, but that doesn’t mean that contactless can’t be successful in its own right as well, as I was reminded yesterday when driven insane by a Woking Borough Council parking machine that purported to accept cash (credit cards, having been invented less than fifty years ago, are not yet on the menu) but refused my tenner and my 5p pieces, rendering me unable to pay until I found some more coins on the floor in my car. How can it be more cost-effective to operate antiquated system than to accept cards? Anyway, the point is that converting unattended points of sale to contactless must be a good idea if you want to drive acceptance:

MasterCard Worldwide and USA Technologies announced the expansion of ePort cashless payment terminals to 17,500 vending machines nationwide, adding more than 4,000 new locations that accept MasterCard PayPass contactless payments.

[From MasterCard Expands PayPass Acceptance to Over 17,000 Vending Machines]

I wonder if the roll-out will naturally accelerate as merchants replace their POS terminals and systems or whether specific incentives (as noted above) will be required to tilt the balance? If I was a merchant, I’d think it worthwhile holding out and even though I know that it makes commercial sense, I’d still want to try and get a better interchange rate out of the bank if I could. In theory, if the benefits are distributed between banks, consumers and merchants then the costs should be distributed similarly, but in practice in the short term it means banks spending money issuing contactless cards and the acquiring side catching up later (this, incidentally, is one of the lessons from the DoCoMo “curves” in Japan). Therefore, so long as the merchant benefits are sufficient, the infrastructure will sort itself out.

But what are the merchant benefits? I’ve just been reading a from Deloitte — the audit, tax, consulting and corporate finance company — called “Contactless Payments Technology, Catching the new wave”, which says that their research with leading merchants has identified six main benefits to the transition to contactless:

1. Improved speed of throughout.
2. Increase in average transaction value.
3. Competitive differentiation.
4. Reduction in cost.
5. Better customer insight.
6. Improved service delivery.

Point 4 is in my mind because of something else I’m working on at the moment: if the merchants are underestimating the cost of cash, then charts and spreadsheets will eventually convert them, so it’s not a real blocker, but if the cost of cash really is much lower than the banks think (I don’t believe this, by the way) then there’s going to be more of a problem. Anyway, I wouldn’t disagree with any of these benefits, but reading them reminded me that I have some (albeit anecdotal, but) recent evidence that things may not be going as smoothly as may have been hoped so far as the London rollout of contactless technology is going. A couple of days ago, I found myself at a Tube station in North London. As I was wandering out, I saw a small newsagent kiosk and I went over to buy a paper and some gum. It came to about a pound. I was just about to unzip a pocket in my backpack and rummage around for change, when I noticed that the kiosk had a contactless reader. Since I had my OnePulse card in my pocket, as I’d just used it to get off the Tube, I waved it over the reader.

This is precisely the circumstance for which nature intended contactless cards in general and the OnePulse card in particular: the low-value cash-replacement transaction coupled to transit. In my fevered imagination, I could already picture myself turning smartly on my heels after less than 500 milliseconds and going about my day with a spring in my step. But , unfortunately, nothing could have been further from the reality.

When I waved my card at the reader, nothing happened. The woman serving me asked if I really wanted to use the “terminal”. I said yes. She said: “It will be an extra five pence”. I said that I still wanted to use it — I am nothing if not dedicated to gathering practical experience — and so she rekeyed the amount into a separate POS and indicated for me to wave again. Which I did, and it worked. Nevertheless, something that should have been fast and convenient was in practice slow and inconvenient (and expensive). Uh oh. I missed out on a pleasant experience, the merchant may well have missed out on a sale while I was messing around at the kiosk and neither of us was left feeling positive about the exciting new technology.

Whether it’s the lack of suitable terminals for the kinds of merchants, miscommunication between acquirers and merchants about benefits, simple unfamiliarity or whatever, I hope someone on the business side has a handle on this.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]