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Retailers Likely to Wed RFID to Loyalty

A report from Javelin Research & Strategy urges card associations and issuers to get a jump on co-branding contactless payment cards, in order to drive acceptance and benefit from loyalty-based card programs.
By Mary Catherine O'Connor
Apr 13, 2006Retailers most likely to begin accepting RFID-enabled payments in the next six months also consider branded, private-label payment cards the best way to drive revenue, according to a study just released by Pleasanton, Calif., market research firm Javelin Strategy & Research. Javelin's research analyst, Bruce Cundiff, says this should be a clarion call for the banks that issue RFID-enabled credit cards, as well as the card associations—such as American Express, MasterCard and Visa—that developed those RFID-enabled cards to begin working closely with merchants to develop co-branded versions.

A private-label credit card is one issued by and accepted only at specific merchant locations. Retailers generally provide incentives or discounts to consumers when they use private-label cards. A co-branded card is one branded by both a specific merchant and a major card association. Unlike private-label cards, those co-branded, for example, by Visa and a specific retailer are accepted by any merchant that accepts Visa. According to Cundiff, cardholders get incentives and discounts from the merchant co-branding the card; the credit card association and issuing banks benefit from any transactions made with the card; and the co-branding merchant receives a share of the revenue generated through all such purchases.

"Card issuers and card associations can use this information [from the study] to better understand the relationships that they must develop with these merchants to really effect mass acceptance of contactless [RFID] payments," says Cundiff, "and avoid the disintermediation—the conversion of contactless payments from association-branded transactions, such as those made with Visa or MasterCard cards, to private-label transactions—that could result."

The study is based on the findings of a December 2005 survey Javelin conducted, involving 900 merchants of various sizes and in seven different industry categories, such as grocery, specialty retailers and gas station/convenience stores. The survey was designed to examine merchants' propensity toward accepting RFID, non-RFID smart cards, biometrics and other technologies being deployed in payment systems. The report was written to help card associations, issuing banks and other companies derive more value and efficiency in contactless payment implementations by better understanding retailers' interests and attitudes.

Cundiff points to Starbucks' codeveloped Visa Duetto card as an example of how a merchant and a card issuer—in this case, Chase—can share the benefits of a payment card. This type of card—half loyalty card, half general-use credit card—could be RFID-enabled, he notes.

If issuers and card associations don't work with merchants to co-develop RFID payment cards, Cundiff points out, they will not benefit from the transactions made with private-label cards. For example, he says, since Macy's uses its own issuing company for its Macy's credit cards, transactions made with Macy's credit cards do not benefit card associations or their issuing banks. If the Macy's card was co-branded by a card association, such as Visa or MasterCard, and was also RFID-enabled, this would enable the card associations to drive acceptance of contactless cards—Macy's would be able to upgrade its point-of-sale terminals to accept RFID-enabled cards, as well as increase the number of cardholders using Visa or MasterCard cards, which would benefit their respective issuing banks, as well.

The survey revealed that merchants most interested in accepting RFID payments also feel strongly that cash-based transactions are among the most costly because of the extra time it takes to process a cash transaction, relative to a credit or debit transaction. Therefore, they want to begin accepting RFID-enabled cards to steer customers away from paying with cash. The majority of merchants surveyed, however, are not planning to accept of RFID-enabled cards, and those merchants tend to identify credit and debit transactions as more expensive to their businesses than cash sales, due to the fees they must pay for each credit or debit transaction. The faster transaction speeds and volume RFID payments could provide are not influencing these merchants to begin accepting RFID payments, the report states, because these transactions also generate credit and debit card fees.

Therefore, Javelin advises card associations and issuers to highlight the opportunities merchants have to increase loyalty and patronage, as well as transaction speed and volume, through co-branded RFID-enabled cards.

"There are a number of high-transaction-volume and high-profile merchants, such as Wal-Mart or Best Buy, that are very important to card associations, but the promise of shorter lines alone will not drive them to update their point-of-sale systems to accept contactless [RFID-enabled] cards," says Cundiff. "So the card associations and issuers need to show them how co-branded contactless cards can also drive repeat transactions and increase customer loyalty." This, he says, can help drive contactless acceptance while also mitigating the threat of merchants pulling revenue away from the payment networks through the issuance of private-label cards.

The report is currently available on the Javelin Web site at a cost of $950.
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