Success Factors for Replacing Small Cash Payments with Plastic

Similarly, the cost of cash to the payments industry has been studied many times, and it is no secret that all parties would prefer an alternative. Indeed, the world’s Financial Industry spent a very large fortune on electronic cash schemes including Mondex and Visa Cash in vain bids to solve this problem. Many are now saying that contactless cards are the answer. Unfortunately, the contactless products today only solve one aspect of the issue (speed and convenience), and have a financial model that is not viable for smaller purchases that represent the majority in this segment. For example, it is estimated that in 2005 in the UK, there were over seven billion cash payments of value under £1, about seven billion between £1 and £5, and four billion between £5 and £10.

Any payment system must satisfy the requirements of all four stakeholders: consumers, retailers, acquirers, and issuers. This case study will: (a) identify the key requirements for a successful low value payment product; (b) review the existing low value payment products (including contact and contactless form factors); and (c) review the Cardis Solution which aggregates small cash payments into larger value debit/credit card transactions that can be cost effectively processed through the existing infrastructure.

Requirements for a successful low value payment product

There are six key requirements for a successful low value payment product:

1. Transaction Speed
   Transaction speed is vital for consumer convenience, and for low-ticket merchants.
2. Ubiquity
   The main attribute of cash is ubiquity - universal acceptance by all merchants. This is essential for consumer acceptance. Consumers need a payment method that is widely accepted at locations where they make their everyday small cash purchases.
3. Failure and Maintenance Free
   Consumers should never fail to make a purchase because of an insufficient amount of cash in their wallet. Also, they should not worry about the cash balance in their wallet and visiting ATM’s to maintain it.
4. No charge-backs and onerous paperwork
   Merchants do not want charge-backs and time consuming/expensive transaction records paperwork.
5. Transaction Economics
   A low value product must provide profitability for both the issuers and the acquirers, with fees acceptable to the merchants. This is essential for wide acceptance by low-ticket merchants (ubiquity), which is the key requirement for consumer acceptance.
6. Aggregation
   Issuers do not want a large number of low value payments on monthly statements because of the additional costs (more paper, postage, customer service calls…). Likewise, consumers want to avoid clutter on monthly statements.

Existing Transaction Based Card Products

PayPass, Pre-Authorized Debit, Visa Wave and similar low value payment products address the transaction speed requirement by not requiring a PIN or signature, and by offline authorization or online authorization using high speed terminals. The “no charge-backs” requirement is met by the issuers waving the charge-back rights for low value transactions.

However, none of these products address adequately the crucial transaction economics and aggregation requirements. They are all transaction-based, just like debit and credit cards. This means that for each card there is always an account on the issuer's backend system, and that each transaction authorized at a POS terminal (online or offline) has to clear and settle through this account. In the case of PayPass and Visa Wave, this account is a regular debit or credit card account. In the case of Pre-authorized Debit this is a new shadow account for each card. For small purchases, this fixed cost per transaction represents a zero sum game, which results either in fees that are unacceptable to the merchants, or profit/loss unacceptable to the issuers and acquirers. Because of high transaction fees, the majority of low-ticket merchants do not accept cards. This creates a major problem for consumer acceptance. Wide acceptance at retail outlets is critical for consumer acceptance of a product that targets everyday cash purchases. A product that does not provide for transaction economics with fees acceptable to the merchants will not be successful.

Transaction based products result in all transactions being posted on the monthly statement. Aggregation of low value payments is possible only at the issuer’s backend system by adding up all low value payments and posting one aggregated amount on the monthly statement (or doing it per category like parking, etc.). This amount would be different from month to month, and since it was not approved by the consumer (using signature or pin) and cannot be reconciled by the consumer, it would be subject to costly customer service calls and inevitable charge-backs at the issuer’s expense.

The Cardis Solution and Front-end Aggregation

The Cardis Solution provides for unparalleled transaction economics and convenience in making small payments. Unique technology aggregates small value cash transactions into larger value debit/credit card transactions, which can be cost effectively processed through the existing infrastructure. It allows for a contact or contactless EMV payment system to replace cash transactions in a broad spectrum of merchant segments delivering significant cost reduction to the retailers. The consumers enjoy speed and convenience with small payments processed offline, without PIN.

The Cardis Solution is implemented as an added value application for EMV cards and POS terminals. The card application uses a small stored-value purse to hold the unused portion of a previous debit or credit transaction.

At the point of sale, if the purse balance on the card is higher than the purchase amount, the transaction is completed by transferring the stored value from the card to the POS terminal (off-line, no PIN, optional receipt). If the purchase amount is higher than the purse balance, the consumer is prompted to authorize a credit/debit load transaction (e.g. €40) with his/her PIN, and the difference between the load amount and the purchase amount is returned to the purse.

Example

If the purse balance is €3 and the purchase amount is €5, a debit load transaction for €40 is completed and a stored value of €35 (€40-€5) is returned to the purse. As a result, the ending balance in the purse is €38.

The Cardis Solution provides for speed and convenience in processing small payments. Most transactions are off-line stored value transactions and the purse is reloaded at point of sale, when needed, while making a purchase. The consumer never fails to make a purchase due to insufficient stored value balance on the card. It is form factor agnostic and supports both contact and contactless cards.

The economic effect of the front-end aggregation is distribution of the fixed transaction costs over the load amount (e.g. €40). The issuers and acquirers experience the low-value payment volume on aggregated basis through standard debit/credit load transactions. Individual low value transactions are local stored value transactions between the POS terminal and the card. They are aggregated offline, and are not part of any processing or settlement in the backend system (settlement in the Cardis System is based on totals and does not require processing of individual transactions in the backend system). Accordingly, a stored value transaction carries only a portion of the processing cost of the original load transaction. For example, a €4 stored value transaction bears only 10% of the transaction processing cost of the original €40 load transaction, while a €0.40 transaction bears only 1% of the processing cost of the original €40 load transaction. As a result, processing of even the smallest transaction is profitable for issuers and acquirers with fees acceptable to the merchants. With average ticket in this segment below €4 and the average load of €40, the cost structure is reduced by order of magnitude (10 times) enabling fees that allow for wide acceptance by low-ticket merchants.