Capturing Cash Transactions Via Contactless: The European Opportunity

A mere 6% are made by payment card. In most environments, card usage has not yet replaced cash for two key reasons: Firstly, for merchants a card transaction is generally not perceived as being economical or fast enough (in comparison with cash) below approximately €15, and as a result, card payments have traditionally been discouraged.

Secondly, consumers have been reluctant to use a card for transactions below this level – either because they perceive the merchant does not want to accept it, or because they simply do not associate card payments with low-value transactions.

MasterCard-commissioned research, conducted by McKinsey, has shown that around 25% of all cash transactions currently take place between 5 and 15 euros, so if the threshold of a profitable card transaction can be reduced to below 5 euros, these cash transactions can and should be targeted. A review of these transaction types, based on merchant sector analysis, shows that about 40% could potentially be converted to card transactions.

This represents an enormous opportunity for European financial institutions.

With this in mind, MasterCard has introduced chip-based solutions designed to replace cash with a payment feature that is faster, more secure and more convenient for consumers and merchants. These solutions are MasterCard® PayPass™ and Maestro® PayPass™. PayPass is a “contactless” feature that permits consumers to pay for low-value transactions with a simple “tap and go” of the card near a special reader, with no signature or PIN required for purchases below $ 25, € 25, £10. This makes it an ideal replacement for cash.

PayPass transactions are processed through the same financial payments networks that process millions of magnetic stripe and chip card transactions securely today. The primary difference is that PayPass uses radio frequency (RF) technology to transmit card information to the merchant’s RF-enabled point-of-sale (POS) terminal, instead of requiring a magnetic stripe to be swiped or an EMV card to be inserted.

For consumers, contactless payments provide a convenient alternative to cash that permits low-value purchases to be completed quickly, securely and easily. This feature has proven popular in merchant environments where speed and throughput are at a premium, such as convenience stores, sports stadiums, quick-serve restaurants, petrol stations and transit environments. Once a merchant compares the actual cost of cash to PayPass transactions – in terms of security, reconciliation, banking and theft – the benefits of contactless are clearly identifiable.

MasterCard PayPass allows merchants to function more efficiently and serve their customers better. PayPass speeds consumers through check-out, minimises cash handling and heightens efficiency. McDonald’s was the first merchant to announce its acceptance of PayPass in August 2004, and additional merchants quickly followed. As of 3Q 2006, there are 11 million PayPass cards and devices in use worldwide at more than 36,000 merchant locations, which represent the mere tip of the potential.

Though the MasterCard PayPass platform continues to gather momentum in Europe, with major new pilots in France and the extension of existing pilots in the UK, the region trails many global markets in its embrace of contactless payments. There are now PayPass-related programs under way in fourteen countries. In addition to France and the UK, PayPass rollouts and trials have been announced in the United States, Canada, Japan, Korea, China, Thailand, Turkey, Lebanon, Malaysia, Australia, Taiwan and the Philippines. These include PayPass transit applications, mobile phone trials and other non-card based devices as well as traditional card-based deployments.

The business case for PayPass is compelling. According to internal MasterCard data from the U.S., the average PayPass transaction, credit or debit, is approximately $20. Consumers also use their payment cards more frequently once those cards become PayPass-enabled, approximately 18% more often on average. Though PayPass technology can also be used for transactions exceeding the standard limit (at which point a signature or PIN is required for verification), roughly 75% of all PayPass transactions were for purchases below U.S. $25 and approximately 45% of all PayPass transactions were for purchases below U.S. $10.

According to a major PayPass issuer’s performance data of PayPass active users, based on a study of the same three-month time frame in 2006 vs. 2005, PayPass provided a:

• 36% increase in usage per account;
• 45% increase in total transactions per account;
• 230% increase in usage at PayPass merchants; and
• 270% increase in the number of transactions at PayPass merchants.

While contactless is in a nascent stage in Europe, interest among consumers is growing. Market research carried out by MasterCard subsequent to a UK contactless trial found that 80% of users expressed a wish to use it more widely, while another 80% of non-cardholders who had seen the trial expressed a wish to use this feature once it became more widely available. Also, given the feature’s appeal to consumers in cash-heavy environs, contactless represents a method of establishing a relationship with the un-banked and under-banked through pre-paid debit programmes.

PayPass technology enhances any payment account – be it a credit, debit, pre-paid/stored-value, co-brand, small business or private label account. In regions where EMV smart cards are issued, such as Europe the Asia/Pacific and Latin America/Caribbean, OneSmart MasterCard PayPass may combine both contact and contactless interfaces on one chip. Financial institutions are therefore able to capitalise on the contactless opportunity while leveraging the considerable investment they have made in EMV.

OneSmart PayPass is also available as a feature for Maestro debit cards and for Debit MasterCard. The addition of PayPass to an account provides additional flexibility for financial institutions. It permits them to offer new payment options to their cardholders and to tailor those options more effectively, resulting in top-of-wallet uplift and increased accountholder loyalty. It delivers competitive differentiation. It helps increase volume for issuers by attracting payments away from cash; a vital benefit in a region such as Europe, where cash maintains a stronghold. For acquiring banks, it opens up new acceptance opportunities in quick-pay environments.

While consumers appreciate the PayPass experience, as with all new technologies they remain wary of its potential security implications. Education is vital, to ensure that consumers understand that PayPass transactions are as secure as traditional card payment transactions, and more secure than cash.

MasterCard’s offerings and best practice recommendations, coupled with a suite of security and risk measures deployed by each financial institution, are designed to protect the cardholder from the unauthorized use of account information.

MasterCard offers a full range of sophisticated and powerful security applications to financial institutions, including sophisticated cryptography to help prevent skimming and interception risks.

Successful consumer adoption remains dependant on the global interoperability of PayPass. The importance of a common user experience at the point of sale prompted MasterCard, Visa and JCB Co. Ltd. to reach an agreement to utilise the MasterCard PayPass ISO/IEC 14443 Implementation Specification as a common communications protocol for radio frequency-based contactless payments. This ensures that cards and terminals supporting all three payment organisations’ contactless payment applications conform to the same communications protocol and undergo equivalent testing.

The global movement towards contactless would not be possible without this level of partnership. Neither would it succeed without a commitment to innovation. MasterCard is currently working with leading telecom and banking brands to integrate PayPass functionality onto mobile phones, and has unveiled an assortment of unprecedented contactless payment devices – including a wristwatch, key fob and wristband – that promise to dramatically reshape the way consumers pay at the point of sale.

MasterCard’s innovative spirit and leadership has resulted in widespread industry recognition. In 2006, MasterCard earned the “Company of the Year” designation from Frost & Sullivan, due to its pioneering role in contactless. Earlier in 2006, MasterCard received two Breakthrough Awards from Card Technology Magazine at the CardTech/SecurTech industry conference. MasterCard was honored with the “Most Significant Implementation” award for PayPass, while MasterCard Advanced Payments head Art Kranzley was named “Visionary of the Year.” MasterCard was awarded Frost & Sullivan’s “2006 Market Penetration Leadership Award,” while OneSMART PayPass was recognized by the European Payments Consulting Association as the most innovative payments product launched in 2004.

The contactless revolution is underway, and MasterCard is proud to play a leading role.