Contactless payments—whether they’re made using a fob dangling from a keychain at a gas station, an RFID chip embedded in a cell phone or a new contactless credit/debit card—have now moved from the experimental to the real-world stage.
This is primarily thanks to a pair of crucial developments announced in June by Chase Manhattan of JPMorgan Chase & Co.—the world’s largest issuer of credit cards—and 7-Eleven Inc., the world’s largest convenience store chain, which brings in about $41 billion a year with some 27,100 stores worldwide.
Those two coordinated announcements are part of a trend with its goal being to simplify retail transactions by allowing customers to wave identifying devices over a reader and have the amounts deducted automatically from their accounts.
Chase Manhattan and 7-Eleven are far from the only companies to investigate contactless payment systems. But together, the two announcements add legitimacy and stability to the approach, which has been used most successfully in transponder-based toll-road payment systems like E-ZPass and single-company, keyfob token-based systems such as Exxon Mobil Corp.’s SpeedPass system.
Adding a large bank and a well-known retailer to those ranks could create the kind of impact for contactless payment systems that Wal-Mart Stores Inc. made a couple of years ago by decreeing that many of its suppliers use RFID (radio-frequency identification) tags to help track inventory.
Wal-Mart wasn’t the first RFID adopter, but it was the largest and the most significant user of the technology, both because of its size and the number of companies it could draw into the RFID pool.
Chase also isn’t the only financial-services company pressing for contactless payment. MasterCard International Inc., Visa International Service Association, and American Express Co.—as well as some smaller credit card issuers—are aggressively pursuing contactless card strategies.
Several traditional retail companies have experimented with approaches to contactless payment, but so far, few other than ExxonMobil have gone further than small trial installations.
At 7-Eleven, testing began three years ago with a two-store trial in Texas. “We saw lots of positive indications from that pilot,” said 7-Eleven CIO Keith Morrow. Customers using the cards shopped at the stores more frequently than they had before, and spent more during each trip. “We’ve been very aggressively pursuing this for more than two years.”
7-Eleven has been pushing RFID for everything from backroom operations to managing temperature control for milk. To read more about CIO Keith Morrow’s views on the technology, click here.
The chain also conducted opinion surveys of the participants in those trials. “They just felt, ‘I was more in control of the transaction. I came up and, when it was time to pay, instead of swiping, waiting, signing, getting a receipt, it was one step. I had the control. I beeped at the terminal and then I was on my own way, out the door, in the normal time I would still be trying to sign the pen-pad or get a receipt,'” Morrow said.
Initially, getting existing POS systems to accept contactless payments should be relatively painless, because it only requires that a small unit be added on to a card-swipe machine to allow it to read contactless devices.
But Morrow points out that if the devices are successful, the POS hardware sophistication would likely have to improve.
“I think it’s going to impact POS if the consumer adoption drives different uses.
Especially if it drives more ways—like it has in Japan—of providing a loyalty and couponing, then I think that could drive the need for more robust transaction at the POS,” Morrow said. “At the beginning phase, it has been a very easy hardware piece to integrate in, as a reader, to get into the game. But I think as we rely on the chip to do more things for the customer, it could drive some more requirements.”
Click here to hear audio of Morrow detailing how the Japanese use contactless payment and why that might apply to the U.S. Audio 2 min., 38 sec.
But not everyone believes adoption will happen that quickly. Chase Manhattan officials, who are aggressively pushing contactless payment for their own objectives, say the rollout will be slow, with contactless cards only going out to existing cardholders as new cards are issued when the current ones expire. That could take many years before it’s a dominant force in the market, Chase officials said.
A recent Jupiter Research survey also anticipated a slow ramp up, despite consumer desires. Nearly half of the U.S. online consumers “expressed interest in the speed and convenience benefits of proximity payments,” said David Schatsky, a Jupiter research senior vice president.
“We have built a forecast model to estimate the adoption and usage of contactless–also called proximity–payments.
POS systems will have to gain power if retailers start using it for loyalty and more data-intensive uses, Morrow says. Audio 41 sec.
In the most likely of the scenarios modeled, JupiterResearch estimates that proximity payments will represent only 2.8 percent of all retail transactions in 2009. So we don’t see floodgates about to open.
A lot depends on whether card issuers and payment networks get behind the technology and subsidize its adoption by replacing cards and (adapting) POS (readers) ahead of their normal replacement cycle and market the benefits to consumers as well,” Schatsky said.
“It’s possible that some customers, empowered to make purchases more quickly than with either card or traditional credit cards, may end up spending more, but it’s hard to say for sure, and we suspect the effect on overall spending will be so slight that we did not account for such incremental spending in our forecast model.”
The trials at 7-Eleven were promising, but what made the contactless move inevitable to Morrow, he said, was a trip last December to Tokyo, where he visited some of the chain’s 11,000 stores in Japan. That is roughly twice the number of 7-Elevens that exist in the United States.
Neil McCarthy, CIO of another convenience-store chain, is also pushing RFID and related capabilities, but says he is most concerned about limiting upgrade nightmares. To read about the Wawa CIO’s experience, click here.
Contactless payment in Japan was almost nonexistent one year earlier, but by December 2004, Morrow said, he saw it as a very popular and accepted form of payment everywhere from small retail operations to mass transit. “We sell convenience, we sell speed,” he said.
Testers were impressed by the speed, control and convenience of contactless. Audio 48 sec.
Japan’s culture is extremely time-compressed, he said, and they value even relatively small improvements in productivity. “They’re a very concentrated population with a lot of mass transit, a lot of people on the move,” Morrow said. “They love electronics. They love their cell phones. Very small living spaces with very small kitchens. Some parallels certainly exist in the U.S. urban areas.”
Next Page: Miniaturization makes contactless payment viable.