BY MOHAMMAD KHAN, President, ViVOtech
Radio frequency (RF)-based contactless technology is enabling faster, more convenient payment in a wide variety of payment applications, from transit systems in Hong Kong, Japan and North America to new retail payment systems in the United States. This new wave of RF payment technology is offering value and convenience to all parties in a payment transaction.
American Express, MasterCard and Visa have all launched initiatives to offer contactless payment devices to their cardholders. The financial industry sees RF-based contactless payment as a means to increase credit card transactions in traditional cash-only retail segments and enable new customer-facing programs and services. Consumers find RF-based contactless payment devices easy to use and like the increased speed and control of transactions. Retailers are seeing increased revenues, as consumers spend more per transaction and transact more frequently and as faster processing allows a higher volume of customers to move easily through checkout lines.
From the positive results achieved in early implementations, market momentum is building, with widespread deployments of RF-based contactless payment starting in many geographic markets.
This article describes how contactless payment works, discusses the benefits that contactless payment delivers to retailers and summarizes the key technology choices.
The Contactless Payment Process
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.
Moving Retail Transactions
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. 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.
- 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.
Strong financial industry support, favorable consumer reaction and strong retailer benefits are 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 and approximately 35% of cards issued are private label cards. Retailers and private label card issuers can easily couple payment and other value-added applications on a single contactless smart 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 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.
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.”
As reported from early contactless payment implementations, RF-based contactless payment delivers value to all participants in a payment transaction. 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 has the potential to bring in a entire new wave of opportunities and revenue for the payments industry.
Thanks to Mohammad Khan for this article. You can download a full version of the white paper, The New Wave of Contactless Payment Technology, at the ViVOtech web site, www.vivotech.com.
About the Author
Mohammad Khan is president, chief operating officer, and co-founder of ViVOtech. Khan’s career spans more than 20 years in the payment industry, including 15 years at VeriFone where he held several engineering, marketing, and business development management positions. Joining VeriFone in its infancy, Khan was instrumental in the development of VeriFone’s payment automation systems, including the smart card and other security payment products. Khan was also co-founder of Sparkice, Inc., China’s e-Hub for global commerce. Khan earned a master’s degree in electrical engineering from the University of Hawaii at Manoa.
Contact information: ViVOtech, Inc.; 451 El Camino Real; Santa Clara, CA 95050; 408-248-7001 ext. 103; [email protected]; www.vivotech.com.