Realistic dynamics of contactless

[Dave Birch] In a recent post, Aneace observes that if improved speed is the key merchant benefit of contactless (which I’m not sure about: as discussed before, it’s one of a portfolio of benefits) then the use of magnetic stripe cards under $25 (ie, with no signature required) undermines the business case:

Contactless has always been positioned on one single merchant benefit: speed. So waiving the signature for transactions under $25 just kills contactless.

[From Waiving signatures for small purchases torpedoes contactless]

This is true to some extent. But it’s really only true in the U.S., where all transactions are online, and in comparison to similar card transactions. In chip environments, an offline chip-based transaction is going to take a couple of hundred milliseconds. Contactless is very fast, remember, partly because of the technology’s heritage in the transit world, where it is turning full circle: transit companies don’t really want to run ticketing operations at all, so they would be more than happy to have “pay at gate” where bank and other payment cards are used to enter/exit the transit system. This is why pilots and trials in this direction are useful indicators of the way the payment environment might develop. For example,

MasterCard is teaming with The Port Authority of New York and New Jersey and NJ Transit for the eight month trial, which is set to kick off in early 2009. Customers will be able to pay fares on buses and trains between New York City and New Jersey by tapping their contactless device at turnstiles and on fare boxes.

[From Finextra: NY commuters to trial contactless payments on buses and trains]

In the non-transit environment, or I should say non-“closed” environment, the only way to get 200ms transactions is to go offline. But even then, while you’re standing around waiting 10 minutes for your latte, 200ms may be neither here nor there! So in most markets (ie, markets where not all the transactions are online), contactless products will run adequately fast and are a better option than no-signature stripe cards because of the improved security.

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.

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