Jul 28, 2009A cluster of contactless payment deployments this summer are pointing to some growth in the industry, in which credit and debit payments are made with cards enabled with Near Field Communication (NFC) RFID technology. This progress includes the adoption of contactless payment systems at such stores as Sports Authority and Home Depot in the United States, and M&M Meat Shops in Canada. Obstacles remain, however, that must be addressed before there can be a broad deployment over a majority of merchants, including the question of a transaction fee for PIN-based contactless debit card payments that could cost merchants money they would not have otherwise spent if a customer paid with cash or a traditional magnetic-stripe debit card.
This summer, Sports Authority and Home Depot have announced contactless deployments, using MasterCard's contactless PayPass program, while M&M Meat Shops is accepting Visa contactless payWave cards. Additionally, electronics retailer Best Buy, which had been trialing a Visa contactless payment system at some of its stores, has pulled away from its commitment to deploy contactless technology in its stores nationwide. The retailer, which did not respond to requests for comment, has objected to Visa's blocking of debit transactions that normally require a PIN, which means each transaction requires the merchant to pay a credit card transaction fee that, in a debit transaction, would otherwise be circumvented.
That may not be the end for Best Buy's and Visa's contactless plans, speculates Bruce Cundiff, director of payments research and consulting at Javelin Strategy and Research, a Pleasanton, Calif., market research firm. He describes Best Buy's withdrawal from the contactless program as a temporary setback, and says he thinks Visa and Best Buy can continue to work on finding a solution. "Best Buy is a very important merchant, and one of the first high-profile national merchants that got behind NFC technology," Cundiff notes, adding that he expects Visa will continue working to make a contactless payment solution palatable for the retailer.
"There is a constant interplay between retailers and credit card companies and issuers regarding interchange rates," says Jonathan Collins, a principal analyst at ABI Research. Best Buy's failure to move into a full-scale deployment, he explains, "is another aspect of that dialogue." While contactless transactions serve to shift cash payments into card purchases, the interchange rates merchants pay for each transaction create an additional expense for those retailers for payments of under $25. Although card associations and issuers view contactless payments as an important new revenue stream, he says, "they can't get to it without retailers deploying contactless terminals at their points of sale—and to do that, retailers want assurance that any interchange fees will either be lower than that for higher transactions, or offset by increased sales."
Collins predicts the debate will continue between merchants and card providers over interchange rates. "As contactless rolls out," he states, "there will be solutions and agreements that will have to be developed to the satisfaction of all parties in order for contactless to grow quickly and successfully."
In the meantime, Home Depot has begun deploying MasterCard's PayPass system at 1,974 of its 2,242 retail locations across the United States. This includes 20,000 Ingenico contactless readers at point-of-sale (POS) terminals throughout those stores.
M&M Meatshops has begun employing the Visa payWave system, in which customers use their Visa card to pay more quickly for their purchases than they would by utilizing traditional credit or debit cards. More than 470 participating M&M Meat Shops across Canada will be equipped with payWave-enabled terminals this summer, says Shirley Matthew, Visa Canada's head of chip platforms. M&M piloted the system in several stores before rolling it out at all of its locations in early July 2009. PayWave cards are provided by two major issuing banks in Canada, TD Canada Trust and Royal Bank of Canada, and are used by 17 million cardholders worldwide.
Canadian companies are poised to launch further pilots of NFC debit and credit cards, as well as NFC-enabled mobile phones, as banks and other financial institutions prepare to move forward with the contactless card's EMV standard—a global standard for credit and debit payment cards that defines the interaction between IC cards and the reader devices for financial transactions.
"We believe the timing is right [for contactless deployments]," Matthew says, based on the EMV standard. The interchange rate in Canada is still under discussion for debit transactions, while Visa payWave does not require an interchange fee for transactions conducted in that nation—these payments act as a credit card transaction, as opposed to a PIN debit transaction.
In the meantime, Interac Association, a Canadian payment business group formed to drive a national payment network, has developed a partnership with contactless chip technologies provider Inside Contactless to develop chips containing the specifications for Interac's contactless payment service. This partnership will enable Interac members who supply contactless services to offer debit card users a "next-generation" retail payments solution. Pilots are scheduled for 2010, to include several thousands Canadian merchants in locations yet to be determined.
Globally, contactless payments "are running like a gazelle," says Allen Wright, Interac's VP of product management. But in North America, he adds, "the approaches have been fragmented," with pilots and deployments being undertaken one merchant at a time.
MasterCard continues to target markets with a traditionally high percentage of cash transactions, such as convenience stores and restaurants, in addition to merchants of larger-ticket items—such as Home Depot, Petco and Sports Authority. "We believe that consumer preference for electronic forms of payment will continue to drive usage of contactless payments," Conforti states.
Merchants find that the immediate benefit is in shortened transaction times, but they are also considering other gains that could come from integrating transactional data from contactless payments into their internal processes, such as offering rewards programs to customers based on the spending habits tracked using the contactless system. Any significant contactless payment growth in North America, however, would require more involvement by both retailers and mobile phone providers, in the case of RFID-enabled phone payment transactions. "We need a critical mass of merchants, and we're still not there," Cundiff says. "Growth is slow and steady, but it's going merchant by merchant right now."
Regarding the slow adoption by merchants, Conforti comments: "For retailers, consumer education and awareness of the benefits of contactless payments is still crucial."
With each new adoption, MasterCard is working closely with PayPass-enabled retailers to promote general consumer awareness and understanding of PayPass contactless payments through marketing. "The continued momentum of PayPass issuance—whether in the form of a card, key fob or even a sticker for a phone—and merchant acceptance worldwide, will organically drive increased awareness and usage of contactless payments," she says.
