Paying with a Wave

A Payment Revolution
by Mohammad Khan

   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 geographic markets.
   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 chip.
  • 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 checkout process.

   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 transactions.
  • 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).
  • Orlando 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 time.

  • 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 retailers.

  • 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.
  • Transaction 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.
   Co-branded Multi-Application 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 stripe slot. 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, acquirers 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
  • Convenience
  • 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