Stepping off the Tube at the major financial outpost of London’s Canary Wharf, commuters in recent weeks have been assaulted by a marketing campaign of military proportions. From the underground exit gates to the top of the vertiginous escalators and on to the pedestrian forecourt, every available surface is plastered with advertisements for a new, “revolutionary” technology that promises to transform the world of cash payments: the contactless card.
Though brimming over with hyperbole, the fanfare is not without some justification – and indeed some necessity. For the contactless card aims to fulfil predictions, made by visionaries more than a decade ago, of the widespread use of on-the-go, contactless payments – a vision often touted under the headline ‘The end of cash’.
While chip and PIN technology, which was built on a standard developed by payment system giants Europay, MasterCard and Visa known as EMV, was designed to securely automate high-value transactions, the contactless chip card has been specifically designed to capture many of the 20.7 billion low-value cash transactions that are made every year in the UK – transactions that cannot justify the processing costs of EMV.
Equipped with an in-built chip and antenna, contactless cards use a short-range wireless technology – similar to RFID – to transmit payment information to a contactless-enabled point-of-sale terminal. Unlike RFID, however, contactless chip technology possesses processing power, allowing data in transit to be safely encrypted.
Because the contactless payment is today capped at £10, no authentication is required. In order to debit their accounts, users simply waves their card across a contactless enabled reader, creating an electronic transaction that is considerably slicker and faster than using either chip and PIN or, indeed, cash. According to Visa, for example, it typically takes 162 seconds to purchase a cup of coffee in a normal cash transaction; using its recently launched ‘payWave’ technology, this transaction time is slimmed down to a single second.
A poster-worthy proposition
While some evidence suggests that is truer in theory than in practice, the prospect that contactless technology could effectively digitise large parts of the UK cash economy by serving as a super-fast, hyper-convenient electronic substitute is a highly poster-worthy proposition. In the US market, for example, where 40 million contactless devices are currently in circulation, serviced by 400,000 point-of-sale terminals, the ‘case for cashless’ has more or less been proved.
But we shouldn’t get ahead of ourselves, warns David Rockcliff, head of personal cards at the Royal Bank of Scotland (RBS) which, prompted by the technology’s performance in the US, launched the first UK contactless trial last year using MasterCard’s PayPass technology. “Not everything that works in the US works in the UK,” he counsels.
Nevertheless, RBS, along with several of its peers, in particular Barclaycard, Visa and MasterCard, are now willing to test the technology in the UK market. This autumn consequently marks the first co-ordinated, large-scale roll-out of contactless cards and their supporting point-of-sale infrastructure in the UK, by a number of major financial services players. The initial push to sign up consumers and retailers, dubbed the ‘London Launch’, aims to issue 200,000 contactless cards by early 2008 – to create what Dave Wentker, vice president of Innovation at Visa International, dubs “critical interest”, if not critical mass.
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Barclaycard is the testbed for contactless commerce in the UK, with its OnePulse card representing the first large-scale roll out of such cards.
In December 2006, it signed an agreement with Transport for London (TfL) that allowed the credit card provider to include TfL’s Oyster cashless ticket functionality on the OnePulse card. The Barclaycard team subsequently joined forces with Visa, the Oyster team and its technology partner, TranSys, to develop an embedded chip on which the two applications – for both travel and payments – could be hosted, without the functions interfering with each other. At the outset, says Stewart Holmes, head of OnePulse, the technologists “were rightly sceptical”.
We were playing with two highly volatile actions: the act of getting from A to B under stress, and the act of managing money. The risks of failing, technically speaking, were quite significant,” he says. With the help of 1,000 staff from Barclaycard, Visa and TfL, Holmes and his team began a six month trial of an early prototype, during which several upgrades were made to the financial application in order to ensure the contactless Visa ‘payWave’ experience was as fast as possible.
A further important purpose of the trial was to undertake a security assessment. In addition to encrypting the information transmitted between the card and readers, OnePulse requires users to authenticate using the chip and PIN if a low-value cashless transaction is deemed irregular or gives any other cause for concern. This stops the card being used fraudulently for multiple low-cost purchases. In September, backed by £4 million marketing campaign, the integrated cashless, chip and PIN, and Oyster card was unveiled. And early feedback gives Holmes confidence to predict the total number of users will reach tens of thousands by year-end.
Commute and compute
Of course, it is not a coincidence that it is the commuter at whom the preponderance of the scheme’s marketing spend is initially targeted. Commuting currently serves as the chief context in which the average European consumer is likely to have become familiarised with the ‘touch-and-go’ experience. In cities such as Brussels, Amsterdam, Paris and, of course, London, public transport systems have all moved to the proximity payment model, creating the momentum necessary to launch several contactless payment trials across Europe.
It was therefore hailed by many commentators as nothing short of a stroke of genius when, in December 2006, credit card giant Barclaycard announced its partnership with Transport for London, whose contactless Oyster smartcard travel pass boasts a circulation of around 10 million. The fruits of this partnership were unveiled in September 2007, when Barclaycard launched its OnePulse card, in which EMV-based chip and PIN credit card functionality, low-value cashless functionality and the Oyster travel pass are all uniquely integrated.
But the conjunction with Oyster was not chiefly about creating multiple-functionality – convenient and novel as this might be. In fact, its real importance was far more strategic. First, it allowed the credit card giant to capitalise upon a trusted brand already associated with the contactless experience. But, even more crucially, says Stewart Holmes, head of Barclaycard OnePulse, Oyster provided Barclaycard with the basic infrastructure necessary upon which to build a contactless product.
“If you’re a merchant you’re not going to invest in new terminals if there are no cards in the market. But if you’re an issuer bank, you’re not going to invest in the cards if they can’t be used anywhere,” Holmes explains. “So we identified Oyster as a strategic opportunity, because it broke that cycle and allowed us to justify offering additional functionality to new and existing Oyster customers.”
For organisations like Barclaycard, however, the movement to contactless cards represents a more natural transition than this dilemma might suggest. Contactless payments have been made possible by the EMV chip and PIN infrastructure that was rolled out, at vast expense to the banks, between 2003 and 2006.
In putting more applications on the same card, says Alastair Newton, an analyst at Gartner, the banks are able to recoup some of this earlier investment by creating more usability and encouraging the consumer to spend more through them. Indeed, according to Visa, when unconstrained by coins and notes, consumers are likely to spend a fifth more.
“From a cost and revenue point of view, centralising everything around the card makes a lot of sense – especially in the UK, where the current account is a central part of the banking relationship,” adds Newton.
In addition to such positives, there is also the small matter of the £268 billion in cash transactions made in the UK every year, which remains untouched by lucrative transaction fees. Contactless payments offer financial services groups a means of extracting this money from the cash economy and funnelling it into profitable credit-based systems.
But the model goes further than this. In Holmes’ view, OnePulse’s primary proposition for the consumer is technology-driven convenience, not – he stresses – credit. “It is a reflection of the fact that, ultimately, satisfying the customers’ needs is what makes your business profitable,” he stresses.
In this respect, OnePulse is an exercise in branding. Indeed, says Holmes, Barclaycard does not necessarily expect OnePulse to be a highly profitable product in itself – because it is not aimed at heavy credit users. “It’s about being the card that your customers have at the front of their wallet, about being their card of choice.” Brand differentiation of this kind, he argues, is a “more realistic view” of how companies really make money in the long term from technological innovation.
Research conducted by the RBS team on the way in which contactless cards are used by consumers seems to bear this out. RBS began trialling credit-based contactless cards initially, but later rolled-out debit cards. When presented with the choice of either contactless card, consumer spending habits fell back in line with their previous behaviour.
“If you’re a natural debit card user, that’s what you’ll use; if you’re a natural credit card user, then that’s what you’ll use,” believes Rockcliff. It seems unlikely, therefore, that consumers will switch to using credit, or change providers entirely, for contactless capability alone. But providing the convenience of contactless technology does play an important role in sustaining customer loyalty – itself a crucial lever by which all retailers cross-sell additional products and services.
Consumers are not the only party in need of convincing. On the other side of the transaction are retailers, many of whom will have to weigh-up the business case before participating.
Few retail partners could be more appropriate than McDonald’s, though, who practically invented the low-value, high-frequency, high-speed, cash-only business model. In August, the fast food giant launched its contactless card initiative, in conjunction with RBS, at two of its London outlets – an initiative that grew out of the fast food giant’s existing banking relationship with RBS, says Ivan Brooks, CIO at McDonald’s.
McDonald’s was particularly receptive to RBS’s approach because the fast food giant happened to be engaged in a nationwide infrastructure technology upgrade, a chief component of which is the roll-out of debit and credit card payment platforms. Because McDonald’s has come relatively late to card payments, Brooks has been able to implement an agile infrastructure which can be easily modified in line with future card developments. “So for us, contactless was always the next-generation of payment, after chip and PIN,” he explains.
Far from ideal
But at present, Brooks continues, the point-of-sale proposition is “far from ideal” – even for his company. All retailers currently signed up to Autumn’s contactless roll-outs have been issued with standalone contactless readers by their acquirer banks. These are not integrated with the point-of-sale system, meaning that, at many retailers, the order is processed on the till and then the sum has to be rekeyed into the contactless terminal – meaning the entire process is not, in reality, as seamless as the banks claim.
“You need a contactless reader integrated into your point-of-sale system, where your chip and PIN card is at the moment, to eliminate that manual step in the middle,” says Brooks. The “end game”, he adds, is delivery of integrated contactless payments, which will naturally require hardware investment at the point of sale.
Elsewhere, in retail organisations with less budget and less in-built agility, this prospect is understandably unpopular. Indeed, among members of the British Retail Consortium (BRC), the costs associated with the roll-out of contactless has been a major sticking point. According to Dale Atkinson, a spokesperson at the BRC, many retailers are “reluctant” to accept the per transaction, ad valorem charge on contactless transactions proposed by the acquiring banks.
Even their flagship partners, such as McDonald’s, have expressed reservations on this issue. “For the banks, it’s clearly about increasing the number of cards,” Brooks told Information Age. “From McDonald’s point of view, however, you have to be mindful of the fact that it might be more expensive to provide contactless than using cash.” If retailers as powerful as McDonald’s have doubts about the costs, then smaller players, who do not possess the same bargaining power when it comes to negotiating favourable fees, will be even more circumspect.
For this reason Barclaycard’s Business division has been negotiating deals with a range of mid-sized retailers on an individual basis. More than 1,000 outlets are now signed up, with more to come, says Holmes. “But the big question,” he adds, “is how quickly the bigger brands will adopt the technology?”
Arguably, this is as much a question for Holmes himself to answer, than for OnePulse retail partners. It is in the financial service players’ long-term interests to ensure that the contactless proposition is as commercially compelling for retailers as it for the banks: without the necessary point-of-sale infrastructure, the technology could die an early death.
Behind the scenes, the banks will be working frantically to create the critical mass necessary for the scheme’s success. After all, the electronic-wallet is now far too profitable a prospect not to realise.