As the issue of security continues to be debated, contactless payments are quickly moving into the mainstream - but only in niche markets - as financial institutions and retailers alike see the various contactless technologies as ways to speed customer purchases, pleasing consumers with speed of transactions and providing retailers with better efficiency (the availability to handle more transactions in less time), with more customer information.
   Among the security advantages the contactless payments offer are:

• The user never needs to let go of the contactless device, be it a chip card, keyfobs waived at terminals, fingerprint, iris identification or some other method.
• The contactless devices are harder to counterfeit than magnetic stripe cards.
• Any information on a chip card or keyfob device is encrypted.

    However, among the security concerns are:

• The underlying radio frequency identification (RFID) technology, which allows the card's chip to be “read” by the scanning device may also be able to be read by cyber- crooks at a distance.
• Merchants may charge the device without the consumer actually presenting it for payment (the customer may be shopping, not buying, on a particular visit).

    Brian Triplett, Senior Vice President for emerging products for Visa USA, said that the security concerns have been addressed via the encryption and because the devices need to be within a few inches of the payment terminal for it to be recognized, which would prevent it from accidentally being charged when no purchase is made.
    Contactless payments, as the name implies, means no contact is needed between the payment card and the payment terminal. However, the typical contactless token still needs to be within a couple of inches of the RFID receiver, though there are exceptions (i.e., contactless devices used for highway toll payments). Though technically passing the token near the payment terminal should result in payment, sometimes the device has to be tapped on the payment terminal. Even then, there have been occasional issues with the contactless key-fob being recognized.

History, Growth Prospects

    Contactless payments first came into vogue in this country with Mobil's (now ExxonMobil's) “Speedpass” in 1997. There was even some reported speculation that Mobil's ownership of the technology made it a more intriguing merger partner for Exxon.
    According to the Contactless Payments Council, recently issuers representing all three major card brands, American Express, MasterCard and Visa, have begun regional and national rollouts of contactless smart chip technology for fast, secure payments. Major fast food and convenience retailers, such as McDonald's, 7-Eleven and CVS pharmacy, have also committed to deploying new point-of-sale terminals to accept the contactless payment devices.
    The Smart Card Alliance Contactless Payments Council was formed to focus on facilitating the adoption of contactless payments in the U.S. through education programs for consumers, merchants and issuers. The group is bringing together financial payments industry leaders and suppliers and will be reaching out to involve the merchant community. The Council's primary goal is to inform and educate the market about the value of contactless payment and work to address misconceptions about the capabilities and security of contactless technology.

Opportunity or Not?

    Some of the misconception is just how valuable the technology will be for merchants, acquirers and independent sales organizations, according to some experts.
    Marc Abbey, analyst for First Annapolis Consulting, Annapolis, Md., says that contactless payments are being pushed primarily by issuers and card associations and that there is little interest from the acquiring and ISO community. However, they will move in this direction if it means losing business not to do so. So he recommends that ISOs stay abreast of contactless payment developments.
    “I've talked to a number of merchants both with and without the technology today. Those who don't have it are waiting for consumer demands. Those who do have it have done so because they received a good deal on processing from the 'biopay' entity,” said Harold Montgomery, CEO of Calpian, a Dallas, Tex.-based, financing resource for ISOs.
    “There's a strong possibility that merchants will implement contactless payments as a requirement rather than an opportunity,” Abbey added. “Issuers are fairly sophisticated as how they are approaching this, as opposed to the way they approached chip cards in the late 1990s. They've been running the pilots more effectively.”
    Even one of the major proponents of contactless payments, Visa USA, admits that the technology is designed for areas where speed is an issue (i.e., service stations, quick service restaurants), but the few seconds a contactless payment saves over a card payment makes little difference at a typical retailer, like a department store.
    Contactless payments aren't designed to replace payments via magnetic stripe cards, said Visa's Triplett, but instead to replace cash payments, particularly in those locations, where speed and convenience are critical.
    “We're trying to replace cash with electronic payments,” Triplett said. So the primary markets are those in which payments tend to be under $25, plus convenience stores, including those that are within gasoline service stations.
    “Smart chip or biometric enabled contactless payments have tremendous potential but we are not there yet,” added Sean Kumar, President of IDentesys, a Woodstock, Ga.-based company that provides the Pay by Smile contactless payment system, which uses iris identification. “Card issuers, equipment or terminal manufacturers seems to project a huge ROI for retailers or ISOs but a niche case has yet to be made. The hype alone will not sustain the growth or acceptance.”
    Despite the skepticism, however, merchant acceptance for contactless payments is expected to more than double this year. According to Triplett, 8,000 to 10,0000 merchant locations were able to accept contactless payments by the end of 2005. That figure was expected to grow to more than 25,000 by the end of this year.
    So there can be some future benefits for ISOs, according to Kumar.
    “ISOs can profit in the long term from building a system where the contactless technology is embedded to compliment the system and its price is bundled with other components such as loyalty and other stored value applications,” Kumar said. “A combination of government mandates by authorities such as the Department of Defense, federal authorities, and other government-related agencies also strongly drive the contactless technologies in all applications. So overall opportunities are tremendous.”

New Programs Launched

    The card issuers have launched some major pilots to push contactless payments this year.
    At the start of the 2006 Major League Baseball season, nine teams started accepting MasterCard International's PayPass, or contactless payment option, at in-stadium concession stands.
    The interest among baseball teams was quick concession stand transactions, enabling fans to return to their seats quickly. Cardholders simply tap their PayPass-enabled card or device on the specially equipped merchant terminals throughout the stadiums when purchasing concessions under $25.
    PayPass is now accepted at Busch Stadium, Citizens Bank Park, Dodger Stadium, Fenway Park, Great American Ballpark, Petco Park, Shea Stadium, Turner Field and Yankee Stadium.
    "The benefits and functionality of MasterCard PayPass are ideally suited for stadium settings," said Art Kranzley, MasterCard Executive Vice President, advanced payments. “PayPass is a perfect way for sports teams to enhance the fan experience by allowing fans to quickly make their purchases, so they can return to their seats to enjoy the game."
    The movement into the baseball arena comes on the heels of the technology's introduction among National Football League stadiums in 2005.
    Visa recently announced the availability of the Visa Contactless Mini Card, delivering all of the speed of contactless payments in a card that is about half the size of a traditional payment card and easy to carry on a key ring. The new Contactless Mini Card is the industry's first alternative contactless form factor that is ready for large- scale commercial deployment.
    “Sometimes the biggest advances for consumers are the smallest, and that's true for the Visa Contactless Mini Card," said Elizabeth Buse, Executive Vice President, Product Development and Management, Visa USA. “Its ease of use will help continue the momentum behind Visa Contactless, as we offer more payment choices to cardholders."
    In the U.S., millions of Visa cards were issued in 2005 with the new contactless feature. Chase has led the way with contactless payments through its launch of over six million Chase cards with "blink." Chase cards with blink were issued in key markets such as Atlanta, Dallas/Fort Worth, Denver, New York, Orlando and Philadelphia, launching the first wide-scale geographic deployment of contactless credit cards. Chase cards with blink can be used everywhere consumers use credit cards now, and blink can also be securely used where contactless payments are accepted including merchant locations where speed and convenience are essential.

New Equipment

    Some equipment makers are moving strongly into the market as well. In April, Hypercom Corp. introduced the new P4100 PIN Pad, the first universal RF-enabled multi-application PIN entry device designed to meet the rigorous new PCI (Payment Card Industry) security standards established by Visa International and MasterCard International to protect consumers at the point-of-service. The sleek, compact device easily integrates with Hypercom, VeriFone and Ingenico card payment terminals as well as leading electronic cash register systems, allowing retailers to quickly take advantage of the increase in PIN- based and contactless card transactions.

Biometric Providers See Opportunities

    The growing presence of contactless payments is leading to more growth for biometrics payment providers.
    Albertson's, Inc. is implementing Pay By Touch biometric payment systems in its Jewel-Osco stores throughout the Midwest. The rollout, which began in the Chicago area early this year, included deployments in all 204 Chicago area Jewel-Osco Chicago area. Last year, the company rolled out the technology at Albertsons stores in the Portland, Ore. area. In the pilot program, a significant number of customers utilized the Pay By Touch option, according to the company.
    Albertsons customers who used the technology in the company's Portland-area pilot program reported that they were convinced it is a faster, easier and more secure way to pay for their groceries, according to Pay By Touch. The Jewel-Osco launch of Pay By Touch represents the largest market-wide launch of any retailer that has adopted the leading-edge technology.
    Yet Kumar is a little more skeptical.
    “An entire system has to be created not the infrastructure, or chips, or readers. While all participants such as terminal manufacturers, issuers, processors, retailers and marketers, etc, readily acknowledge the need for critical size and interoperability, they give different meanings to these terms. Other sectors, particularly telecommunications, have played a considerably larger and more significant role in the development of the contactless application and market growth,” Kumar said.
    “An even more important question concerns the future: is the market ready for a take-off and or will they remain forever an application of the future? There is no clear consensus on this question,” Kumar added. “The biggest hurdle will be a possible zero-sum or win-loss game within the industry players, where one player's win is another player's loss. While in principle they all agree on its necessity, in practice they seek to control its timing and scope in order to preserve competitive differentiation. They see it a relative rather than an absolute requirement subject to cost benefit analysis and tactical behavior and this may hurt growth.”