August 2008 Issue

The Eat sandwich shop on Old Broad Street in central London would seem an ideal spot for contactless payment. The bustling eatery lies just across the street from the Liverpool Street Underground station, one of the busiest in the city. An average 26 commuters per minute flow through gates during peak hours, tapping to pay fares with the Oyster card, part of one of the world's largest contactless transit fare-collection systems.

But contactless bankcard payment has yet to catch on with customers of this outlet of the Eat chain who touch their debit or credit cards to contactless terminals only two to three times per day, estimates store manager José Garcia.

"Banks haven't issued (enough of) the cards yet," he tells Cards&Payments. Moreover, few of Garcia's customers know about the new payment option, and many of those who do are worried about security because they do not have to enter their PIN codes to complete transactions of £10 (US$19.99) or less, he says.

Poor awareness and continued security concerns among British consumers–along with a reluctance so far by big merchants to embrace the technology–is slowing what was by now supposed to be a nationwide contactless rollout in the United Kingdom. Indeed, nearly a year after British banks and payments organizations last September launched Europe's first major rollout of contactless debit and credit in London, card issuance and transaction volume remain modest.

As of the end of May, banks had issued only 340,000 contactless cards, which consumers were tapping at any of the estimated 5,000 merchant locations about 15,000 times per month, according to UK payments association APACS See chart. About 80% of the merchant outlets are within greater London.

That is a far cry from the 5 million cards and 100,000 merchant locations APACS predicted would be in play in the United Kingdom by the end of 2008 in projections the organization made around the time of the launch.

Based on discussions with banks and other contactless players, however, APACS now believes the industry could hit the forecasts for cards and merchant locations only six months later than it originally projected–by mid-2009.

"It's almost like it's been a phony war out there," Paul Rodford, APACS's head of card payments, tells Cards&Payments. "The number of cards out there isn't where the issuers are in their thinking."

That thinking remains bullish on contactless as a means to convert many more cash transactions to cards, says Rodford. British consumers now pay for about 60% of their purchases with cash, a percentage that rises to 90% for transactions of £10 or less.

Hitting Projections
Hitting the projections will not be easy, however, given current card numbers and the ambivalent attitude merchants hold toward any type of card payment. Even in the United States, which began its contactless rollout in 2005, most estimates place merchant acceptance at less than 100,000 locations.

But proponents remain convinced the speed and convenience contactless offers for low-value transactions will win over both consumers and merchants. For example, Barclaycard, the highest-profile issuer in the London launch, is sticking by its pledge to roll out 1 million contactless cards by the end of the year.

But if banks are finally ready to begin the real shooting in their war on cash payments by rolling out millions of contactless cards over the next year, they will need help from merchants to accept the cards. The two parties are not exactly behaving like committed allies in the fight against cash, however.

Although such big British supermarket chains as Sainsbury's are reportedly planning to test the contactless waters, merchants generally are holding back, especially major chains. The only big merchant accepting contactless payment in the UK as of July was McDonald's, which had installed terminals at only 13 restaurants in central London. It has more than 1,200 outlets nationwide.

McDonald's UK and other retailers complain that banks have issued fewer cards than expected during the first year of the rollout, and the big chains that already accept conventional cards face problems equipping their integrated point-of-sale terminal systems to handle contactless.

But the biggest obstacle blocking the widespread deployment of contactless terminals is the attitude of merchants toward cash. They simply do not find it as bothersome as banks do. That is particularly true for big merchants, which generally get a good deal from banks to handle their cash.

On the other hand, retailers pay merchant fees on card transactions and, as in other countries, British merchants are fighting banks and the card brands over interchange rates.

Such rates largely determine the fees merchants pay when consumers use debit or credit cards. Merchant banks pay issuers interchange and pass the expense on to their retail clients as part of the discount rate, which also includes fees for processing and other services.

Debit card fees averaged 7.9 pence (US15.6 cents) per transaction in 2007 compared with less than 2 pence to handle cash, according to the British Retail Consortium's annual survey of the cost of payment, which it says covers merchants representing more than half of retail sales in the UK.

Credit card acceptance was even more expensive, averaging 35 pence per transaction, according to the consortium, a retailer trade association. Consumers often use credit cards for high-value transactions, and banks charge merchant fees based on a percentage of the transaction amount.

If banks were to convert all cash payments to debit card transactions, it would cost consumers an additional £450 million (US$888 million) per year, money that would go directly to banks, claims the consortium. Consumers would pay the higher costs because merchants would pass on card fees to their customers.

"If the contactless technology takes on the same interchange fees as debit transactions, then it's going to cost four times as much as cash transactions," Alisdair Gray, a British Retail Consortium director who represents member merchants in Brussels, tells Cards&Payments. "Basically, contactless cards, for us, need to mirror the low cost of collecting cash for retailers to be interested."

Cash Expenses
Banks and the card schemes, however, contend merchants do not account for the true expense of handling cash in their cost comparisons, such as securing and transporting the money.

But merchants have not made clear how much interchange would have to fall to encourage more of them to embrace contactless.

Visa Europe lowered UK interchange on contactless transactions early last year in advance of the London launch, confirms a spokesperson to Cards&Payments. Visa declined to say how much it dropped the rate, however.

Suffice it to say, the action barely caused a ripple in the market, and observers agree that any Visa rate reduction on contactless debit transactions has yet to move merchants off the sidelines.

Moreover, card companies have given no indication they are planning to subsidize the cost of contactless readers as they did to help propel the contactless market in the United States. The subsidies helped persuade such large, nationwide chains as McDonald's restaurants and 7-Eleven convenience stores to roll out contactless there.

British merchants appear to want some concessions, as well.

Ivan Brooks, a McDonald's spokesperson, tells publisher and conference organizer Contactless Intelligence the chain sees the benefit of faster transactions with contactless and, later, opportunities to offer electronic vouchers and other loyalty schemes with the technology. McDonald's could be prepared to roll out contactless acceptance by the end of the year, he says.

Funding Help
But given the higher costs to accept cards compared with cash, and the added expense for point-of-sale hardware and software–not to mention the extra marketing and maintenance tab for the new form of payment–McDonald's believes a "meeting of minds" with banks is necessary.

In other words, McDonald's is looking for help funding the contactless rollout.

Contactless backer Jeff Spencer, head of product management at Barclaycard, the issuing arm of Barclays, tells Cards&Payments that a couple of very big merchants are close to signing up to accept contactless payment. He declined to name them. Spencer does not believe lower merchant fees are necessary to sell merchants on contactless. Rather, they will respond when consumers express interest in using the new form of payment.

Spencer and APACS's Rodford agree a decision by at least one major retailer to deploy contactless readers across its chain is vital to spur banks to issue more cards. Spencer is a former executive of U.S.-based JPMorgan Chase & Co. and a veteran of the rollout of the blink contactless card, the largest U.S. contactless card program.

"We call [merchants] every day. They are trying to work through the credit [crunch] issues," Spencer said in June while speaking at the Prepaid '08 conference in London. "We need one or two of those big guys to drop; then it (a rollout) will be a lot easier."

Spencer tells Cards&Payments the bank intends to meet its goal of issuing 1 million cards with contactless technology. Not all will be "OnePulse" cards, the much-touted "three-in-one" card Barclaycard introduced last September to touch off the contactless rollout in London. The card carries three applications: Oyster fare collection, Visa payWave credit and a conventional chip-and-PIN payment feature.

With the card, the issuer is hoping to tap the popularity of Oyster by letting the fare-collection application hitch a ride on the card. Oyster runs as a separate application, using the same contactless interface on the card's chip as payWave. The chip also carries a contact interface, enabling customers to insert the card into terminals and to enter a PIN for higher-value purchases.

Transport for London since 2003 has issued 18 million stand-alone Oyster cards , which riders use to tap 10 million times per day, primarily to access and leave London buses and subway stations. Transport for London, the city's transit authority, gives riders substantial discounts if they use Oyster instead of paper tickets.

Barclaycard is paying the backers of the fare-collection scheme an undisclosed licensing fee for exclusive rights to put Oyster on its credit cards for three years. The issuer is hoping cardholders will use the card not only when they ride mass transit but also when they make purchases from merchants.

The bank has spent £5 million promoting the card, backing OnePulse with its most-expensive advertising campaign ever for a new product, says Spencer. The bank even stationed agents in London Tube stations to sign up cardholders.

"Oyster attracts the right kind of customers: People who are in a hurry. People who don't want to deal with coins in their pockets," he says.

But Oyster has yet to give OnePulse the top-of-wallet effect. Well below 10% of cardholders use all three applications on the card, acknowledges Spencer. Barclaycard declines to release card numbers.

The Oyster deal was, nonetheless, a coup for Barclaycard, stinging rival Royal Bank of Scotland, say observers. RBS was the first to test contactless payment in the UK, running a trial two years ago at its Edinburgh headquarters with MasterCard Worldwide's PayPass application.

RBS recently launched a contactless payment trial in London taxis, and a source says it may try to move the contactless center of gravity outside of central London by emphasizing other metropolitan areas in the UK.

Consumer Awareness
In any case, despite Barclaycard's expensive advertising campaign and contactless promotion from the RBS and other banks and card brands, an overwhelming majority of consumers remain unaware of contactless payment in the United Kingdom, results of a recent survey suggest. Commissioned by UK fraud-prevention firm CPP Group, the survey of 2,200 consumers throughout the country in May found six out of 10 respondents from London said they had never heard of contactless technology, or they thought contactless only referred to Oyster. That lack-of- awareness rate grew to 88% of respondents nationwide.

All told, 77% were worried contactless cards might leave them vulnerable to fraud See chart.

"First and foremost, the average consumer in the UK is not aware of a rollout because it's not taking place," Geoff Barker, CPP's head of contactless payments, tells Cards&Payments. Those who had heard of contactless were confused by all of the brands, such as OnePulse, payWave and PayPass, he adds. He says he was "somewhat surprised" by the 60% of consumers unaware of contactless bankcards in Greater London, given all the promotion there.

'Fear Of Unknown'
Barker attributes the security concerns to a "fear of the unknown" because many of the worries surrounded the possibility of a hacker stealing usable card data out of the air from consumers' pockets, which, he says, is a very low risk.

On the other hand, when told about contactless, nearly half of respondents said they thought it would shorten queues in the checkout line and would be more convenient than cash.

The slow start for contactless card payment has prompted some observers to look ahead to the rollout of Near Field Communication mobile phones, perhaps starting late next year. NFC will enable consumers to tap their phones to pay just as they do contactless cards but also to receive coupons, promotions and other offers by reading other NFC chips. They might open the network connection by tapping chips embedded in posters or other display material at the point of sale or around store shelves.

"The contactless [card] rollout hasn't gone as smoothly as had been hoped, either in the U.S. or UK; transaction levels aren't where they should be," says consultant Dave Birch, a director with UK-based Consult Hyperion. "I have certainly heard issuers say perhaps it's better to spend their investment on a more-rounded mobile proposition, of which NFC is part."

Mobile operator O2 led a test of 500 NFC phones sporting the same applications as OnePulse cards last winter and spring. The trial returned 90%-plus favorability ratings from users after wrapping up in May, say organizers.

But Guido Mangiagalli, head of new channels for Visa Europe, one of the organizers of the NFC trial, says mobile payment will complement contactless cards, not replace them. And he believes contactless card payment can stand on its own.

"When you start the rollout of a new product, a lot of hype is created by a market," Mangiagalli says. "In reality, the numbers we see in the UK are in line what we see in other countries, like the U.S. and Asia when they started."

The prospect for big merchants to take the plunge gives contactless-payment backers reason for hope. So does the strong interest by Transport for London in accepting fare payment directly from contactless banking cards, which would enable riders to tap their credit, debit or bank-issued prepaid cards or applications stored on mobile phones to board buses, underground trains and other modes of mass transit. The applications would comply with EMV standards just as contactless retail payment does.

By going to an open-loop payment system, Transport for London hopes to save £60 million per year, part of the cost associated with selling paper tickets and Oyster cards and recharging value to the cards. A largely open-loop system also would eliminate the need for banks to put a separate Oyster application on their payment cards, as Barclaycard is doing.

Accepting Visa payWave and MasterCard PayPass and other brands directly at the Underground gate or onboard buses also would make Transport for London perhaps the biggest merchant taking contactless bank payment in the UK.

But the transit authority–if it decides to go ahead with the idea–is not scheduled to begin changing its more than 20,000 ticket and card readers until late 2010. Banks also would have to go along with the plan and likely would have to help build the sophisticated back-end system to handle Transport for London's flexible transit-fare policies.

By late 2010, backers of contactless payment expect consumers to already be tapping their credit and debit cards and prepaid cards daily to make purchases in stores. If they are not, mass transit will not be enough to make contactless payment a success in the UK. CP

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry