Contactless Payment Cards Catch On With Consumers

Banks are rapidly taking up contactless technology, testing and launching credit and debit cards that need only be passed before a point-of-sale reader and don't necessarily yield a receipt for signature.

As of September, more than 30,000 U.S. merchant locations had point-of-sale (POS) hardware that could read and authorize contactless payment tools, and more than 13 million consumers had the payment devices, according to Celent.

The company predicts that number will reach 20 million by the end of 2006; by 2011, contactless payments will capture 15 percent of the target market.

"This product is growing pretty fast," noted Rahul Gadkari, marketing manager for banking at Gemalto. Worldwide, some 40 million contactless cards have been shipped for various applications, he added.

Gemalto represents the recent merger of smartcard industry technology manufacturers Axalto and Gemplus. The companies that formed Gemalto helped MasterCard develop its PayPass contactless products. "There are a lot of reasons they are not like your conventional mag-stripe cards," Gadkari added. "They have their own operating system."

However, the technical structure is not what attracts card associations to contactless technology. Organizations such as MasterCard, card issuers US Bank and Chase, merchants McDonald's and AMC Theaters, and consumers are moved by the speed, convenience and "cool factor" of the new cards.

Is Contactless Also Priceless?

MasterCard's PayPass is perhaps the best-known contactless card in use in the U.S. The tool is being tested in New York City subway stations on plastic issued by Citibank, and it can be used at 1,000 Coca-Cola vending machines in Philadelphia.

Chase Bank distributes its contactless "blink" credit and debit cards across the country in cooperation with both MasterCard and Visa. Recently, Chase opened its Freedom account to the blink option, too, indicating strong response to contactless among accepting merchants and consumers, Gadkari said.

Wells Fargo is on schedule to reach 400,000 contactless Visa credit cards by year's end, and US Bank has announced a contactless payment project in Denver that will allow select customers to use Visa contactless credit cards at more than 600 area merchants.

Banks and networks MasterCard and Visa have only to gain from contactless rollouts. However, merchants get more of a mixed bag. On one hand, merchants win because they move consumers through purchase transactions quicker. For example, receipts under $25 do not elicit paper for consumers to sign; they simply tap their contactless cards and go.

"Contactless requires a minimal change to infrastructure. Merchants update their POS terminals with contactless readers. They don't need to change their entire POS, and nothing really changes on the back end because contactless payments are processed like magnetic-stripe card payments," explained Gadkari.

What the card networks and issuers like most about contactless payments -- the higher interchange fees that apply -- is what hurts merchants the most.

"Merchants like the convenience of contactless. It speeds checkout lines," according to Ed Lawrence, managing associate at Auriemma Consulting Group of Westbury, N.Y. "There is absolutely no doubt they're paying a higher interchange."

What may be priceless to MasterCard, Visa and their member banks is pricey to merchants.

Security Detail

"Consumers who have it like it," Lawrence claimed. "A lot of people, when it first came out, said it was going to be like the chip card" -- the smartcards introduced by First USA, Fleet Bank, Target and Wells Fargo in 2000.

However, two years after its appearance in the marketplace, all signs point to a long, healthy, innovative life for contactless cards.

However, a recent story in The New York Times reported the efforts of an academic team to determine the safety of contactless cards. JupiterResearch surveyed non-users of contactless about what would compel them to try the technology.

The resulting report revealed that 41 percent would most likely take up contactless if assured that their financial information was secure, and 35 percent would if given a better explanation of benefits and risks.

"The number two response in my eyes indicates the need for a better education campaign on how contactless works and what the value proposition actually is," said Ed Kountz, senior analyst at JupiterResearch and author of the report.

"Consumers aren't saying they wouldn't use contactless, but a better understanding of the value proposition and security of the device would prompt them to adopt. Our research indicates those consumers who try tend to remain users," he added.