Plastic fantastic

ontactless payment technology is being piloted in Europe in a bid to usurp small cash payments with plastic. Neil Davey asks ‘Is the end nigh for cash?’

This year has seen us celebrate the 40th anniversary of the introduction of credit cards to Europe – and how plastic payments have proliferated since Barclays launched the inaugural card in the UK all those decades ago! Credit and debit cards now account for around 20 billion payments in the EU annually, with an overall value of some €1.35 trillion. And according to a recent study by KRC Research almost half of European consumers believe that cash will be almost obsolete within a decade, with 52 percent of debit cardholders quizzed suggesting Europe will be cash free by 2016.

Nevertheless, there exists a last stubborn bastion of resistance to plastic – small cash payments. Historically it has been more economical to use a debit card rather than cash for transactions of €15 and above, but that still leaves nearly 80 percent of all personal payments in Europe – around 180 billion transactions – that are cash based. As such, eight out of 10 still carry up to £50 in their wallets on an average day. “The challenge the payments industry faces is increasing both merchant acceptance and the level of consumer comfort with using debit for lower value transactions, to the point where people don’t need to carry cash,” concedes Eric Tomlinson, Senior Vice President of MasterCard Europe.

But on the eve of the credit card’s anniversary, the solution may have finally arrived in Europe. Since June, the Royal Bank of Scotland has been road-testing contactless card payment technology in the UK as an alternative to low-value cash payments. Using radio frequency technology, these contactless cards enable consumers to make a payment by simply waving or tapping their cards on or near the car reader. Within half a second, the payment is verified and the transaction is completed. There is no need to sign or enter a PIN for low-value transactions (£10 or under) although higher-value purchases will still require authentication.

The pilot scheme sees some 1000 staff at the RBS head office near Edinburgh using specially adapted cards employing MasterCard's PayPass contactless technology, which they can use to pay for goods in eight retail outlets in its complex. By reducing the average costs associated with each transaction, contactless card payments can become profitable down to, and even below, €5. "Low value transactions, where consumers traditionally rely on cash, are the next frontier for debit cards,” highlights Alexander Labak, President of MasterCard Europe. “By breaking cost barriers and creating a simple alternative to cash, we're creating a more attractive situation for banks, consumers and merchants."

Cost benefit
Certainly the technology represents an attractive proposition to both consumers and retailers, particularly to those in sectors where speed is important, such as fast food restaurants, pubs and bars, convenience stores and petrol stations. Mike Bowman, Senior Consultant for Policy and Markets at the Association for Payment and Clearing Services (APACS) acknowledges the potential for customers. “We have done a number of attitudinal studies over the years looking at why consumers choose particular payment methods and convenience and ease of use is almost always the answer they give,” he explains. “This is why debit cards made major inroads into cheque use 10 or 15 years ago. Contactless payments are attractive to consumers primarily due to the ease and convenience of paying that way. With contactless payment the cardholder simply has to hold the card in the proximity of the terminal to make the payment, there is no signature or PIN involved. In terms of convenience of use, one parallel I would draw is with the Oyster card and the way in which that has made it much easier for commuters in London getting into and out of tube stations.”

Enabling rapid service and consumer throughput, studies have indicated that customers will go back into a store more frequently if they can pay by contactless technology and also spend more money each time they do so, according to Kieran Hines, Analyst, Cards & Payments at Datamonitor plc. But, as he highlights, there are other benefits for merchants. “There are ‘hidden’ costs involved in accepting cash as well as physical costs that are borne by merchants,” he explains. “If someone pays by cash, it has to be counted, stored and taken to a bank, so it has to be kept securely and then paid into an account as well. These costs add up at each stage involving the cash payment process and for that reason sometimes the cost of accepting cash isn’t very transparent for a merchant whereas the cost of accepting a card is very clear because the amount that a merchant receives following a card payment is the purchase price less percentage. What contactless payments allow the merchants to do is remove some cash from their systems, replacing some of that high-cost with a lower cost means of payment.”

Unsurprisingly, however, the biggest beneficiaries of a shift away from cash towards contactless payments are arguably the card issuers themselves. The European industry has faced unprecedented challenges in recent years. As well as meeting the costs of regulation – such as the Consumer Credit Bill in the UK – which have drained time and resources from the issuers, they have also made a huge investment into Chip and PIN migration. With these distractions now out of the way, the industry is hungry to develop new products and provide more value to consumers. Contactless payments are an ideal opportunity to leverage the Chip and PIN investment (which run on the same rails), add value to customers and seek to capture a greater proportion of the overall payments market.

“The biggest benefits are for the card issuer,” continues Hines. “At the moment cards aren’t used for very low-value payments very often because consumers have seen it as a bit of a hassle using cards for low-value payments and often merchants don’t accept cards for small payments. Cash is still very important for making low-value payments compared to cards at the moment, but contactless payments will be a way for issuers to expand their share of the overall payments market.” And Europe certainly offers great potential for the card issuers – Datamonitor estimates that the UK and Germany offer the greatest boon, with around €45 billion and €40 billion of low value cash transactions in the chosen sectors respectively. In the wake of the RBS pilot scheme at least two other banks are now also planning contactless payment trials before the end of the year.

Rapid adoption
However, whilst this is the beginning of contactless developments in Europe, elsewhere on the globe the technology has been available to consumers for some time. While European card issuers have been distracted by Chip and Pin for the last two years, the US has witnessed the beginning of the revolution. By the end of the first quarter of 2006 there were in excess of 10 million American Express, MasterCard, and Visa branded contactless devices in circulation in the US – from card-based to other form factors such as key fobs and miniature cards – with acceptance reaching over 160,000 terminals in 30,000 merchant locations. Visa has described its Visa Contactless as “one of the most rapidly adopted payment innovations in Visa history.” A rising number of banks now issue contactless products to their customers, led by Chase Bank, which began a full commercial launch of its ‘blink’ contactless technology in summer 2005.

“Chase cards with blink have been very successful,” says Tom O'Donnell, Senior Vice President of Chase Card Services. “In the past year, nearly seven million blink cards have been issued and over 25,000 merchants nationwide now accept contactless payments. In addition, we continue to see consumers using blink with double digit usage growth month over month. Because blink is a feature of the Chase card product, we continue to see increased usage and new opportunities to expand the merchant acceptance of contactless cards, including at sports stadiums, vending machines and taxicabs. Acceptance will continue to move beyond large, national merchant chains and reach into the smaller, local locations. Also, we believe contactless payments will be accepted in other places where speed and convenience are essential and become the way consumers pay for goods and services. We also continue to test other contactless payment capabilities for consumers, for example, enabling your mobile phone to pay for items.”

Whilst the United States is the biggest market for contactless payments, there is also significant activity elsewhere. In Asia Pacific, contactless payments have been deployed in Malaysia, Singapore, Japan, South Korea and Taiwan, with Japan the largest market for contactless payments in the region. Globally, the push towards contactless is gathering momentum. “You can see that there has certainly been a lot of consumer enthusiasm for it,” says Hines. “And the card issuers have invested a lot of money into raising awareness and putting the infrastructure in place for this to be accepted. So the signs are that it has been successful so far.”

Speeding up migration
The signs certainly look ominous for the future of cash. Will the card issuers get their wish and capture the last stronghold free from plastic payments? Certainly the speed that contactless payments have grown from early trials in 2002 to full commercial launches in 2005 indicates the strength of the technology’s proposition to card issuers, merchants and consumers. “The market potential is substantial – our estimates are than in 2005 in the UK there were over seven billion cash payments of value under £1, a similar number of value between £1 and £5, and another 4 billion between £5 and £10,” says Bowman.

“It also goes with the grain of the payment culture in the UK – we have very high levels of debit card holding and the strong growth in debit card use in recent years has been driven in part by cash migration. Recognising the potential for contactless, we've boosted our 10-year forecasts for card payment volumes. Last year our central forecast for debit card payments in 2014 was 6.9 billion, that has now been raised to 7.8 billion.” Nevertheless, he believes that talk of cash being obsolete in the next ten years is overly ambitious. “I wouldn't go quite as far as to say that contactless is a 'nail in the coffin' for cash – cash has a long life ahead of it,” he adds. “However, it will speed up the rate of migration away from cash.”

Hines agrees that talk about a cashless society is extremely premature. “It is certainly something that may happen but it is not going to happen any time soon,” he concludes. “There are a large number of small traders that don’t have the facilities to accept cards – for instance flower sellers by the tube station – and they are not going to accept contactless payments anytime soon. They don’t have the facilities. But certainly what we are seeing is that there is a greater volume of payments moving away from cash and other forms of paper-based transactions, particularly cheques, into electronic forms simply because they are quicker and more convenient for consumers to use and also there is a lower cost in many cases for merchants of recipients to accept.”

It seems that for the foreseeable future cash will still have a place in society. But with the creation of contactless payment technology promising big change for small payments, it may not be too long before its number is up.