The final frontier in payments is cash replacement for small transactions, according to Mark Friedman, president and CEO of Peppercoin, a Waltham, Mass.-based small payments technology company. Every year, he says, there are $1.3 trillion in cash transactions made for purchases of less than $5, and less than 1 percent of those transactions are conducted by card. One way for banks to get a larger share of that $1.3 trillion is with contactless cards, Friedman asserts.
According to a new survey from Peppercoin and market-research consultants Ipsos Insight (Cincinnati), consumers are ready to make those small purchases with contactless credit cards. More than 50 percent of survey respondents said they would use contactless cards to buy groceries, items from fast food restaurants or corporate cafeterias, or gasoline; and more than 40 percent would use contactless cards to pay for convenience store items and transit fares, coffee or parking, Peppercoin reports.
A 'Big Year' for Contactless "This is proving to be a big year for the contactless payment industry," confirms a new report from Boston-based Celent. More than 30,000 merchant locations in the United States are now capable of conducting contactless transactions, and more than 13 million contactless devices are now in the hands of consumers, Celent says. Among the financial institutions that have issued contactless devices are American Express, Bank of America, Chase, Citibank, KeyBank and Wells Fargo.
Last year, Chase alone issued 7 million contactless devices, according to Tom O'Donnell, Chase SVP. The Chase "blink" cards - from Newark, Del.-based Chase Bank U.S.A. ($74 billion in assets), a division of New York-based JPMorgan Chase & Co. ($1.3 trillion in assets) - are enabled with RFID technology. In general, the contactless payment works the same way as a traditional credit card payment, O'Donnell explains. "Aside from the front end, the rest of the transaction works the same, and all of the associated economics are the same as it would be for a traditional credit card payment," he says. For the program, Chase partnered with Visa U.S.A. and MasterCard International, and worked closely with large merchants where consumers would be most likely to use contactless cards, including 7-Eleven, CVS and Walgreens, O'Donnell notes.
Over the past year, usage of the blink cards has increased steadily, reports O'Donnell, who says the toughest part of gaining acceptance was convincing consumers that they could use their cards in a new way. "The functionality of credit cards hadn't changed in 30 years," he points out.
In early August, San Francisco-based Wells Fargo ($492 billion in assets) became the second card issuer to get on Visa's contactless payments platform when it began to distribute 400,000 contactless cards to its customers. The initial rollout, which will be completed by year-end, includes existing Wells Fargo customers who are up for card renewal, a few key demographic areas and the bank's college population. "We definitely see this as an opportunity to make faster, more convenient and safer purchases," says Peter Ho, VP and product manager at Wells Fargo Card Services.
Merchant Buy In
In the United States, most of the focus on contactless card acceptance has been on the consumer side, but there should be equal focus on merchant acceptance, Peppercoin's Friedman says. One way to do this is to reduce processing costs for merchants. Peppercoin offers an "intelligent aggregation" program that allows a merchant to hold payments open. For instance, if a consumer buys a $2 coffee every weekday from the same store, instead of sending the $2 charge daily, the merchant can hold the transaction until Friday. That way, instead of the 25-cent processing fee on each transaction, the merchant would be charged 25 cents for the bundled transaction of $10.
Boosting customer profitability is another way to entice merchants, Friedman says. To entice customers to spend more using contactless cards, Peppercoin offers reward programs embedded within its contactless cards. Peppercoin also offers a prepaid, stored-value option that allows for a reward tie-in when consumers put money on their cards.
Celent predicts that contactless payments will capture 15 percent of the market by 2011. But while the technology behind contactless cards can be embedded in many objects, including watches, key fobs and mobile phones, "Consumers are more accepting of contactless devices if they are packaged like a standard credit card," the firm's report noted.