As all of the major card associations launch contactless payment
initiatives, Radio-Frequency (RF)-based contactless payment systems
have quickly become the latest trend in the payment industry. With
RF-based contactless payment devices (cards or key fobs), consumers
can now quickly and easily pay for transactions "with a wave."
From the positive results achieved in early implementations, market
momentum is building and widespread deployments are commencing in many
This new technology offers convenience and value to all parties in a payment transaction:
- Consumers find RF-based contactless payment devices easy to use and
like the increased speed and control of transactions.
- Besides moving checkout lines more quickly, retailers are seeing increased revenues,
as consumers spend more per transaction and transact more frequently.
Issuers see contactless payment as a means to increase credit card
transactions in traditional cash-only retail segments and enable new
customer-facing programs and services.
- Acquirers and ISOs can gain
additional revenue and help their retailer customers take advantage of
the benefits of contactless payment.
How Does Contactless Payment Work?
Contactless payment is straightforward for both the consumer and the
retailer. Consumers use a payment card or a key fob that is equipped
with a chip and antenna and that communicates consumer account
information via radio frequency to the retailer's payment terminal.
The payment terminal then connects to the appropriate financial
networks or other back-end processing systems to authorize the
transaction. Once authorized, the consumer completes the transaction
in a fraction of the time required by cash or traditional credit or
debit transactions that require a card to be swiped through a reader.
RF-based contactless payment is ideal for retailers where speed of
payment is essential, such as quick serve and casual restaurants, gas
stations, convenience stores, grocery stores, theatres, transit/metro
stations and parking facilities.
A good example of contactless payment
in the U.S. is MasterCard® PayPass®, which is currently being piloted
in Orlando, Florida, with Chase, Citibank and MBNA are issuing
RF-based contactless credit cards to existing cardholders. Paying with
a MasterCard PayPass card is easy and fast.
- The consumer is issued a
MasterCard PayPass contactless credit card that includes both a
contactless interface to an on-card chip and a magnetic stripe. Track
1 and Track 2 magnetic stripe data (cardholder name, card number and
expiration date) and other security information are stored in the
- The retailer connects radio frequency-based reader/writer
devices to existing point of sale (POS) terminals or systems. Low-cost
RF-based terminals are available that can be installed at retailers in
minutes, typically without POS software changes.
- When making a
purchase, the consumer waves the PayPass card in close proximity to a
specially-equipped terminal. The card communicates payment account
information wirelessly to the terminal via radio frequency, providing
all the information needed to complete the transaction.
- The terminal
processes the payment as it would a traditional magnetic stripe credit
card transaction, sending the account information and transaction
amount to the appropriate acquiring processor for authorization.
Unlike EMV-based smart card and other RF-based payment
implementations, MasterCard PayPass requires no changes to the
acquiring and processing systems for authorization and settlement.
- If the transaction is authorized, the consumer receive payment
confirmation and completes the transaction. For many lower value
retail purchases (e.g., for fast food, theatre ticket purchases or
parking), a signature may not be required, further speeding the
The early results reported from the MasterCard PayPass pilot are
extremely positive. "New MasterCard PayPass Utilizes Contactless Card
Payment Technology," MasterCard press release, December 12, 2002.
- In consumer research completed by MasterCard, 63 percent of
consumers surveyed have said that they would "definitely" or
"probably" use MasterCard PayPass if their bank offered it to them and
that it would replace cash in more than half (53 %) of their future
- In an employee pilot at MasterCard's headquarters,
purchase transaction times were reduced up to 64 % and the average
transaction amount increased by 10 % (as compared to cash).
retailers accepting PayPass city-wide include: Boater's World,
Chevron, City of Orlando Parking, Eckerd, Friendly's, Loew's Universal
Cineplex,McDonald's, Ritz Camera and Wolf Camera, with additional
retailers and quick serve restaurants planned.
Two other U.S. RF-based contactless pilots are also in process,
demonstrating the increased emphasis card associations are placing on
contactless payment. MasterCard and Nokia have launched a PayPass
pilot in Dallas, Texas, working with AT&T; Wireless and JPMorgan
Chase., "Nokia Introduces Dallas to a New Wallet", Nokia Press
Release, May 13, 2003, "MasterCard PayPass Continues to Build Momentum
as "The Simpler Way to Pay"," MasterCard press release, May 13, 2003.
In this pilot, a Nokia SmartCover is equipped with the contactless
MasterCard PayPass chip and consumers pay by waving their Nokia mobile
phones on PayPass-enabled terminals. American Express is also piloting
a contactless payment device, ExpressPay, that is targeted for use
when transaction values are low and speed of payment is critical.
American Express has reported excellent results so far, with customers
spending 17% to 33% more than with cash and transactions that are 28%
faster than cash and 42% faster than card transactions. "Blue Lite:
Amex Tests Speedpass-Style Card," American Banker, May 20, 2003.
Why Are Retailers Interested in Contactless Payment?
Retailers are showing strong early interest in contactless payment, recognizing that
contactless transactions can add value to a number of retail
applications traditional credit/debit card payment, loyalty and
prepaid/gift cards and private label and co-branded credit cards.
Traditional Credit and Debit Card Payment. Initial contactless payment
pilots have focused on using RF-based payment cards or key fobs to
replace traditional magnetic stripe credit and debit cards. Consumers
value the increased convenience and speed of transactions, with
contactless payment eliminating the need to fumble for cash or to hand
over a card for payment. Both MasterCard and American Express have
also reported that consumers like paying with contactless cards,
finding them fun and easy to use. With such strong positive consumer
reactions, retailers who adopt RF-based contactless payment can expect
a high degree of customer satisfaction with the new payment process
and a number of tangible benefits.
- Replacement of cash. Cash made up over 43% of the 116.7 billion
consumer payment transactions in the United States in 2001. "Consumer
Payment Systems," The Nilson Report, Issue #777, December 2002.
By replacing cash with contactless payment, retailers can speed
transaction processing and reduce cash handling costs and losses from
pilferage. For example, McDonald's has now taken the lead in accepting
credit and debit cards and is also testing RF-based contactless
payment systems at a number of locations throughout the U.S.
Conversion of fast food customers to RF-based contactless payment
offers tremendous value to the retailer, eliminating cash and saving
- Faster transaction processing. RF-based contactless payment speeds
transaction time at checkout, with transaction time even further
reduced in retail segments where card associations no longer require
signatures if transactions are below certain limits (e.g., quick serve
restaurants, movie theaters, parking lots). This results in retailers
being able to more efficiently handle a larger number of customers
(especially important during peak periods).
- Increased size and
frequency of transactions. Early implementations of contactless
payment have shown that consumers spend more if they don't need to use
cash and that they frequent retailers who offer a more convenient
checkout. Increases of up to 30% in sales for retailers accepting
RF-based contactless payment have been reported. "Contactless Payment
and the Retail Point of Sale: Applications, Technologies and
Transaction Models,"Smart Card Alliance white paper, March 2003
- Improved access to customer data. Cash sales are anonymous, providing the
retailer with no information about their cash customer. Using RF-based
contactless payment, retailers can collect data about customer buying habits
and preferences and better understand customer behavior.
The major international card associations -- MasterCard, Visa, and
American Express -- have launched initiatives to offer RF-based
contactless payment devices based on technology complying with the ISO
14443 standard. This strong financial industry support, coupled with
the favorable consumer reaction and strong retailer benefits that have
been demonstrated in early implementations, is expected to motivate
issuers to offer new RF-based payment cards to take advantage of this
new business opportunity.
Loyalty and Prepaid/Gift Cards. Retail
transactions include more than just payment. Loyalty cards and
prepaid/gift cards deliver significant value to retailers. While both
prepaid cards and loyalty cards have been implemented most often with
magnetic stripe cards, contactless smart cards offer new benefits to
- Transaction time is reduced. The consumer waves the
payment card at the POS terminal without needing to hand it to the
retailer to swipe. Since loyalty information or card value can be
stored on the card itself, online access to a central database is not
required, allowing information to be available at all retail locations
and enabling instant reward redemption at the POS.
- Multiple loyalty
programs or multiple retailer prepaid/gift programs can be implemented
on a single card, improving consumer convenience. A multi-retailer
loyalty card offers opportunities to mall operators or other merchant
coalitions that collaborate on cross-promotion.
- A combined
prepaid/gift card and loyalty card can be issued, providing increased
information on customer purchasing behavior and allowing retailers to
offer other promotions to customers that they know.
security is improved, with data securely stored in the on-card chip
and securely transmitted from the card to the terminal. RF-based smart
cards are extremely difficult to counterfeit and can include features
that make them resistant to tampering reducing the potential for
loyalty or prepaid card fraud.
Retailer Private Label Payment Cards. While private label card usage
is declining, over 600 million private label cards were in circulation
in 2000, Kelly Hlavinka, "Fostering a Renaissance in Private-label
Loyalty," CREDITtalk, Frequency Marketing, Inc., August 2002.
Approximately 35% of cards, issued are private label cards. James
Crawford, "Identity: The Changing Relationship between Consumers and
Retailers," presentation at the Smart Card Alliance Mid-Winter
Conference, Forrester Research, February 13, 2003.
Private label cards
can be implemented with RF-based contactless smart card technology and
offer benefits above and beyond traditional bank cards. Retailers and
private label card issuers can easily couple payment and other
value-added applications on a single card. By increasing the value of
the private label card to the consumer, retailers can increase usage
of their card, gain access to information about customer buying
behavior, and use the card to implement programs that solidify
relationships with their best customers.
Credit Cards. RF-based contactless smart cards can also increase
cardholder convenience and usage of a co-branded card and support the
implementation of multiple applications. Using the secure on-card
chip, retailers and issuers can offer payment, loyalty, prepaid and
other applications on a single card. RF-based contactless smart cards
can also support multi-retailer loyalty and promotion programs for
example, allowing cross-selling and common loyalty programs among
complimentary retailers. By integrating applications through a common
infrastructure, retailers and issuers can leverage investment across
applications and across retailer participants.
Easy Retailer Implementation of Contactless Payment
Retailers can quickly and easily implement contactless payment and
start accepting the contactless payment cards and fobs that are being
issued by card associations.
- The current US pilot implementations of
contactless payment require no change in the payment data (as compared
to a magnetic stripe transaction), so that retailers and acquirers do
not need to make changes to POS systems or processing infrastructure.
- Vendors are offering RF-based terminals that can be installed quickly and
easily with existing POS systems. For example, the ViVOtech RF terminal,
ViVOpay, has Dynamic Strip interface technology that is being used in the
MasterCard PayPass pilots in Orlando and Dallas. The Dynamic Strip is a
simple insert that can be installed in minutes in a POS system's magnetic
The data from the ViVOpay RF reader is transmitted through this insert,
simulating a magnetic card swipe, with no software changes required. The same
RF reader can be connected through a serial communications cable when the
retailer is able to make a POS system software change.
By basing contactless payment on the magnetic stripe payment
infrastructure, the card associations have launched programs that have
the potential to drive rapid acceptance of contactless payment cards
by retailers similar to the rapid growth seen by gift card programs
that used the existing infrastructure. This approach, plus the
innovative products being offered by terminal vendors, allows
retailers to realize the significant benefits of accepting contactless
payment cards, with minimal investment.
A Wealth of Opportunities for Acquirers and ISOs
The emergence of RF-based contactless payment technology provides
acquirers and ISOs with the opportunity to differentiate product and
service offerings and gain additional revenue.
- Increased revenue.
Early market results show that retailers can easily decide to start
accepting MasterCard PayPass contactless payment cards. By offering
low-cost terminal adapters and helping retailers with the
straightforward POS installation, acquirers and ISOs can quickly
increase revenue from equipment sales and monthly leases/rentals and
gain share in this emerging market.
- Increased transaction volume.
The almost immediate increase in transaction volume that retailers
have seen when implementing RF-based contactless payment translates
directly into increased transaction revenue for acquiring processors.
- Improved penetration of traditional cash-only retail segments. By offering
RF-based contactless payment solutions, acquirers and ISOs can better serve
traditional cash-only retail segments that need fast transaction processing.
By upgrading payment systems at quick serve restaurants, parking facilities,
movie theatres and other retailers to accept RF-based contactless payment,
and ISOs can increase transaction volume (converting cash to credit
transactions) and gain additional revenue from equipment purchases.
- New value-added service portfolio. The emergence of this new technology
provides opportunities for acquirers and ISOs to add new services to their
portfolio that can differentiate their offerings with retailers. Offering
outsourced loyalty, prepaid card or electronic coupon services can help
acquirers and ISOs develop new sources of revenues.
- Better return on existing POS investment. Acquirers and ISOs will be able to
enjoy an extension in the lifetime of their existing POS terminal installed
base providing revenue over a longer period of time.
Acquirers and ISOs can quickly and easily capitalize on this new
market opportunity by offering retailers a straightforward upgrade to
their POS equipment to accept RF-based contactless payment devices.
With all of the major card associations launching contactless payment
initiatives and with the positive results achieved in early
implementations, RF-based contactless payment solutions are expected
to deploy quickly in many geographic markets. According to Ed Kountz,
a senior analyst at Tower Group, "Broadly speaking, the arrival of
contactless payments is a matter of when rather than if. In
environments where speed and convenience is important, or where handing over cash or a traditional payment instrument is difficult,
contactless payments can add demonstrable value." "New Generation of
Payments Calls for Proximity," Visa International web site.
The value proposition for all participants in a contactless payment transaction
is clear. Consumers enjoy increased convenience and faster checkout
times. Retailers can quickly and easily take advantage of this
emerging new payment technology to speed transaction processing,
increase revenue, and better understand customer buying behavior. With
RF-based contactless smart cards, transactions are more secure and the
technology's multi-application capability allows retailers, acquirers
and issuers to implement creative new programs. The replacement of
cash with RF-based contactless credit card payment also allows
acquirers and issuers to increase transaction volume and revenue.
The business case for the payments industry is clear. Contactless payment
is creating a payment revolution and has the potential to bring in a
whole new wave of opportunities and revenue for the payments industry.
Benefits of RF-Based Contactless Payment
- Faster payment
- Shorter checkout lines
- Less need for cash
- Replacement of cash
- Faster transaction processing ability to handle a higher volume of customers
- Increased revenue from increased transaction size and
more frequent transactions
- Fewer checkout lanes
- Better access to customer data and improved knowledge of customer buying behavior
- Low investment to accept RF-based contactless payments, with
straightforward upgrade of existing POS terminals
- Improved transaction security
- Ability to implement payment, loyalty,
prepaid/gift and other applications on a single card
- Ability to participate in multi-retailer loyalty and cross promotion programs
- Increased credit card transaction volume and higher penetration of cash transactions
- Ability to gain market share with traditional cash-only retailers
- Increased revenue from equipment sales and monthly leases
- Ability to offer new value-added services that capitalize on the
increased functionality of RF-based contactless smart cards
- Deeper penetration of cash transactions in traditional cash-only retail
segments (e.g., QSRs)
- Increased usage of credit cards at high
traffic retailers, further increasing transaction volumes
- Increased revenue through enhanced co-branded cards
- Reduction in counterfeit fraud
- Ability to implement multi-application cards, incorporating payment,
loyalty, prepaid/gift and other applications
- Ability to offer multi-retailer programs