Multiple applications on one card bode well for the technology’s future
By Andy Williams, Associate Editor, Avisian Publications
It’s an interesting time for contactless smart card technology. The payment cards are in the hands of consumers but now it’s a matter of getting them to use them.
The next year may be tough in terms of numbers but there also may be some important developments as more readers are deployed and different form factors released. Beyond that it’s a matter of adding additional functionality to the card.
Last year was a good one for some supplying the payment cards technology. “We saw a market growth in issuance and demand in 2008,” says Charles Walton, executive vice president for payments for INSIDE Contactless. “For INSIDE, it was a good year, as we shipped 65 million chips for Visa- and MasterCard-branded cards” with about 90% going to North America. In the U.S. the company has shipped 110 million chips since 2005, he adds.
Randy Vanderhoof, executive director of the Smart Card Alliance, says the industry is expecting 80 million cards to be issued through 2009 and up to 120,000 merchant locations. “Deployment hasn’t slowed down and plans are still underway to continue the roll-out of the infrastructure.” He sees more roll outs in Europe and Latin America. Still, the biggest population for contactless cards resides in the U.S.
While the economy may put a damper on some of these growth plans, says Vanderhoof, analysts he’s talked with indicate an increase in the next five years.
Walton says INSIDE has downgraded projections for 2009. “I imagine it could be a fairly flat year because of the economy and we could see smaller quantities deployed.”
Vanderhoof says the U.S. will continue to lead the way with contactless card issuance. “The merchant infrastructure is already in place. Even though you see cards being issued in the UK, Singapore and other locales, the number of merchants they have configured to accept contactless payments is low. We’ll likely see some significant card volumes but the actual number of merchants and likely volume of transactions will be fairly small.”
Urs A. Lampe, vice president of product marketing and new business for contactless smart card provider Switzerland-based LEGIC Identsystems, agrees that contactless will continue forward. “We’re getting huge acceptance in several markets. LEGIC has been in contactless since the early 90s and I see contactless gaining vast acceptance as standardization drives interoperability.”
However, some changes may be afoot, which has less to do with the economy and more towards producing a profitable business model.
Walton says he sees a shift away from the credit card giants subsidizing terminal deployment. While the number of cards in use has grown, there hasn’t been a corresponding growth in contactless terminals. “Visa and MasterCard have invested in terminal deployment for several years but in 2008, I think they realized they couldn’t continue to pay for terminals forever and that the merchant community will have to stand on its own,” says Walton.
What’s starting to happen now, since those merchant subsidies have been eliminated, is that retailers are replacing point-of-sale systems though natural turnover and adding contactless, says Vanderhoof.
He says merchant terminals last anywhere from five to ten years. “Folks in that renewal cycle are now making that small incremental investment even if they’re not seeing significant numbers in contactless use, knowing that in a few years those numbers will increase, and certainly with NFC as a driver that could accelerate that.”
Walton sees fully integrated contactless terminals increasing in 2009 and more self-service readers, such as those on vending machines or in taxi cabs.
Vanderhoof says the merchant climate is changing as well. “Fast food restaurants were early adopters and were supported by financial incentives,” he says. While the quick service segment will remain the primary driver for low-value transactions (less than $25 where no signature is required) he’s seeing more retailers who don’t fit that normal low end, such as the larger box stores like Costco.
Debit surpasses credit
Vanderhoof is also hearing that contactless debit card usage has now become equal with, and in some places, exceeded credit card usage.
Case in point: Wells Fargo is replacing all debit cards with contactless, says Vanderhoof. “It’s going to be different strategies with different issuers. American Express has five or six different cards they offer, but only a couple are contactless.”
JP Morgan Chase is targeting specific regions of the country, adding contactless technology to some, says Vanderhoof. “The issuers we’ve heard from are satisfied that the incremental transaction value increases and customer retention and activation rates makes good business sense,” he adds.
Next contactless killer app?
Walton sees transit carrying the heaviest load in future contactless deployments. “Globally, transit systems are predominantly using contactless. And most of the major U.S. cities that have transit systems are using contactless–Atlanta, Washington D.C., New York, Los Angeles.”
These transit cards could be used for transactions other than boarding a train or bus. “Those are the places where you might also grab a coffee or a newspaper,” Walton says. “These become natural places to offer converged contactless applications, such as payment plus transit on a single card.”
Walton compares contactless transit to building a mall. “If you think about retailing and you try to start a mall, you need an anchor client. So it is for contactless. You need some anchors. I think transit is a good anchor for a lot of cities around the world.”
Another change is bypassing transit tickets completely, allowing Visa or MasterCard acceptance at the train. “This is a fairly significant trend that we see,” says Walton. He also sees a greater interest in using contactless on both student and corporate campuses for building access. “There’s a lot of interest in combining a payment card with an access card.”
Retail loyalty is another area where contactless can shine. “Being able to present my AAA card or Barnes and Noble discount number and receive discounts automatically, or a co-branded card from a bank or airline where you’re able to put frequent traveler numbers on the card,” says Walton.
For Vanderhoof, couponing will gain a larger foothold. “As more merchants start to accept contactless, they’re able to target specific customers with electronic couponing or a marketing program tied to the card,” he says.
“We’ve seen a few pilots, such as BART in San Francisco with Jack-In-The-Box. I expect others will follow. With payments processors, who are all seeing their profitability shrink as the transaction value shrinks, they will be looking at ways to promote any value-added service.”
For LEGIC, which views contactless from more than just a payments perspective, there’s a network of possibilities available for the technology. This would include contactless use in access control–logical and physical–and mobile.
Contactless cards for originally intended single applications are now handling multi-applications for multiple purposes. “Contact cards are going contactless; the contact based login cards for PCs become multi-functional credentials offering contactless applications such as opening a locker, accessing company facilities or using copy machines,” says Lampe.
Lampe also sees mobile applications converging with the contactless cards, “or the other way around, cards becoming virtual and moving to the phone, or my transit ticket moving into the phone.”
I have what in my wallet?
Still, many people are carrying a contactless card in their wallet or purse and don’t even know it. “There’s been quite a bit of discussion about getting people used to contactless,” says Vanderhoof. “We did a survey of issuers and asked them how they are marketing or promoting their contactless features. The majority of issuers felt the more effective way was through targeted marketing programs directed to their individual customers rather than broad TV advertising,” adds Vanderhoof.
“The types of programs they felt were more effective were inserts with the card. Also, when customers call to activate their cards, the script or recording used alerts the customers of the feature and those programs have resulted in higher awareness,” adds Vanderhoof.
“Over time, people’s habits begin to change and those with cards in their wallets will become aware more and more about merchant locations where their contactless cards can be used. It’s an escalating curve that will keep going up,” says Vanderhoof.