Contactless payment - Gavin Harding, MasterCard

Given the relative costs for business of handling such payments it is no surprise that across the financial industry there is a growing interest in developing more efficient payment structures to offer customers. While it might be a little early to write the obituaries of hard cash just yet, the success of schemes such as the Oyster card on London's tube network show that there is huge potential in so called contactless payment systems. FST spoke with Gavin Harding from Mastercard to find out more.

FST. Contactless technology has been present for some time in the US and Japanese markets. Why is it only just penetrating Europe?

GH. Though still in a nascent phase, MasterCard’s contactless platform continues to gather momentum in Europe, with the announcement of two major new pilots in France and the extension of an existing pilot with the Royal Bank of Scotland Group (RBS) in the UK. The French projects, in Strasbourg and Toulouse, will be the first trials of contactless EMV chip-based MasterCard credit payments in Europe, while the flagship project with RBS is the first trial of contactless debit payments in the region.

In Strasbourg, MasterCard will support a seven company-strong consortium, including Groupe Crédit Mutuel, CIC and NRJ Mobile, to enable 200 residents to make contactless payments via mobile phones at 50 retailers in the city. In the first EMV-enabled mobile commerce trial of its kind, the specially designed phones from Sagem Communications will contain EMV-compatible SIM cards from Gemalto, contactless readers from Sagem Monetel and near field communication electronic chips designed by Inside Contactless.

In Toulouse, MasterCard will work with LaSer Cofinoga, the consumer finance arm of Groupe Galeries Lafayette, to enable a thousand of the latter’s customers to test a contactless payment card at participating Galeries Lafayette and Monoprix stores throughout the city. It will be the first contactless EMV-enabled multi-application card in Europe, for use in retailers and for public transport in the city.

In the UK, RBS, which is currently undertaking the first Maestro PayPass trial in Europe at its Edinburgh headquarters, will be extending the project to its London offices, in order to showcase its contactless low value payments experience to the UK’s retail community. This follows a time-and-motion study of the Edinburgh experience, in which the six participating merchants – including Starbucks, a restaurant, a delicatessen, a chemist and a social club – found that Maestro PayPass could halve the time taken for a cash transaction, making a payment possible in less than 5 seconds.

FST. Chase Bank has been issuing cards with 'blink' contactless payment technology for over a year now and Citibank are getting on board. Could you tell us a little about MasterCard¹s involvement and progress with contactless payment technology to date?

GH. MasterCard is the leader in contactless development and deployment worldwide, with more than 11 million PayPass cards and devices in use at more than 36,000 merchant locations worldwide. 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.

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.

In addition, MasterCard has played a key role in making contactless payment globally interoperable. MasterCard developed the ISO14443 specification PayPass application over the last few years. This has subsequently been licensed by Visa and JCB. In the interest of industry development, MasterCard has recently announced that this specification will be transferred to the ownership of EMV Co for future development across the industry.

FST. In your experience, how popular is it with consumers? What is it that is most appealing to them about this technology?

GH. Consumers appreciate the speed, convenience and security that contactless payments deliver. While contactless is in a nascent stage in Europe, interest among consumers continues to grow. Market research carried out subsequent to a UK contactless trial found that 80 percent of users expressed a wish to use it more widely, while another 80 percent of non-cardholders who had seen the trial expressed a wish to use this feature once it became more widely available. This demonstrates that any technology that minimises queue times will be embraced by consumers.

According to internal MasterCard data from the US, consumers use their payment cards more frequently once those cards become PayPass-enabled, approximately 18 percent 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 percent of all PayPass transactions were for purchases below US$25 and approximately 45 percent of all PayPass transactions were for purchases below US$10.

FST. Has it been a hard economic proposition to convince merchants that credit cards or debit cards and contactless cards are an economically viable proposition for them and their business in light of interchange fees, which are charged on these payments and not on cash? Surely they would rather not see small cash payments replaced by card payments such as contactless?

GH. In fact, PayPass has proven very 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 comes to appreciate the actual cost of cash to PayPass transactions – in terms of security, reconciliation, banking and theft – the benefits of contactless are clearly identifiable.

FST. How are card issuers expecting to benefit from increasing adoption of contactless payment technology? Is a motivation for banks/card issuers to roll-out contactless payments the fact they will be getting fees that they wouldn’t on cash payments?

GH. Experience to date demonstrates multiple benefits for Issuers. Typical advantages can include:

• Top of wallet uplift in frequency of use.
• Increased volume of transactions.
• Less ATM usage and cost of support.
• Less cash management and reconciliation costs internally to bank (staff savings).
• Increased customer loyalty.
• Competitive differentiation.

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 percent increase in usage per account.
• A 45 percent increase in total transactions per account.
• A 230 percent increase in usage at PayPass merchants.
• A 270 percent increase in the number of transactions at PayPass merchants.

FST. Overall, how successful do you believe contactless technology has been to date? What do you expect it to achieve in terms of consumer/merchant popularity in the next five to ten years?

GH. MasterCard is very pleased with the acceptance of contactless on a global scale. Given the benefits that contactless payments deliver to issuers, merchants and consumers, we anticipate that the popularity will continue to grow.

FST. Across all payments venues (in-store, internet payments and bill payments), consumers are continuing to migrate towards electronic payment methods. With the growing popularity of contactless technology do you think that we are moving towards a cashless society?

GH. The success of contactless payments is spurred in part by growing consumer comfort with electronic payments rather than cash. The issue is not so much whether consumers will migrate away from cash entirely, but the value they perceive in being able to make payments in whatever manner they choose.

MasterCard PayPass users have demonstrated a marked change in their behavior while making their small, everyday purchases. The results of internal MasterCard data, dating back to September 2005, coupled with performance data provided by a major PayPass issuer, showed that consumers are loyal to PayPass merchants, use their PayPass-enabled cards more often than traditional payment cards and have an overall preference for electronic forms of payment rather than cash. As the contactless payment feature becomes available in more regions around the world, we expect this trend to continue.

Gavin Harding is a Product Manager within the MasterCard WorldWide, Chip Centre of Excellence. He is responsible for the promotion and implementation of Advanced Payment solutions across Northern Europe. These include contactless payments – MasterCard PayPass and Maestro PayPass, the London launch of PayPass in 2007, the Chip Authentication Programme for two factor authentication, EMV Migrations and standards and other advanced payment tools emerging within the MasterCard portfolio. He joined MasterCard in 2006 after 19 years with the Royal Bank of Scotland, 17 within the RBS Cards Business.