November 16, 2007
Who’s Ready to Go Contactless?
By Brian Waldman, Vice President of Marketing and Strategy, Merchant Warehouse
For many years now, c-stores and other quick service retail (QSR) outlets have been hearing about the promise of contactless payment processing. You have probably seen the commercials by now: customers can fly through the payment lines with a simple RFID card reader and enabled credit card. When connected to a high-speed credit card processing system, this can cut customers’ wait times, encourage more spending and improve loyalty.
For years it seemed like this technology was more wishful thinking than anything else. Believe it or not, the time may have actually arrived. Contactless credit cards are beginning to reach widespread penetration within many major markets and the readers are less expensive and easier to deploy than you probably imagine.
As evidence of this trend, more and more issuers are sending their customers contactless-enabled debit and credit cards. Tens of millions of contactless-enabled cards have already been issued with technologies from MasterCard (Paypass), Visa (payWave) and American Express (express pay). The numbers will continue to grow as more banks join in and their customers’ cards expire and are replaced with contactless-enabled versions. Retailers are following, but the adoption seems to primarily be within the big chains.
Another influence in the increased adoption is the continued integration of contactless technology into different, and unexpected, locations, devices and card forms. There are already cell phones with imbedded RFID payment chips, cutting out the card entirely. There are key fobs with imbedded chips and the New York subway system and taxicabs are being fitted with contactless readers.
Considering these developments, many small to mid-size retail companies are likely wondering if it’s time to “go contactless.” Concerns we’ve seen: Is the technology proven enough? Do we have the POS infrastructure to take advantage of the benefits the technology offers? Are our customers knowledgeable and confident enough to use it?
Discussion Questions: What types of businesses can truly benefit from contactless payment? How much benefit will even a great prospect for contactless technology gain from implementation?
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The technology is here, so use will grow and probably at a rapid rate. The proliferation issue will have to be addressed (how many key fobs, etc, is the consumer willing to carry?). Some of the interesting issues will be security (not the technology, the person–how many times does your child have to misplace a cell phone with the embedded technology before you decide the human element has not evolved to the technology level?), and the desire for simplification (so now I have to carry one or more of these in addition to my credit cards until there is convergence).
When you really start thinking about contactless payments there are a lot of issues. The first thing is the average transaction size. This cuts both ways. Too small and the fees associated with the transaction make it too expensive for the retailer. Too large, and the additional fees associated with an “undocumented” transaction that does not include a signature come into play. So it seems there is a very small “sweet spot” for these transactions.
The nature of the environment is a factor. One of the great applications I have heard considered are ski lift tickets that would charge by the ride. The lift area would accumulate the number of rides and submit them to the credit card company as a single charge. I don’t know how this would work out economically for the ski areas, but at $79 a day for lift tickets I think they have gone beyond the casual skier’s price point for a day out. Environment continues to play a role in gasoline purchases, especially in seasonal self serve states where the driver has to get out in the cold to pump the gas. The taxicabs and other transportation providers also make sense. And of course everyone has experience with auto toll collection.
So what are the other situations where it may make sense? I think scheduled events, where lots of people show up at once such as sports games or theater tickets make a lot of sense. This creates an interesting challenge for the scalpers and season ticket holders. Maybe season ticket holders would not be the first customers and only single events would be sold by the contactless method. I guess the other challenge is that each person for whom a ticket is purchased has to have their identity registered. Another way to do this might be to have kiosks where the contactless tickets can be issued before the event. This same rational might work for transportation passes.
As far as everyday transactions at the checkout counter, I am not sure there is a lot of convenience benefit and the transaction costs are probably still too high. Most places have moved the data collection terminal to the customer area so while you are swiping the card you also enter your signature so the retailer has a documented charge. The advantage of not having to reach in your wallet or purse seems to be canceled out by the fear you will be charged when you walk by a terminal or lay your keys down while reaching for cash or a different credit card.
RFID Debit Cards?–identify theft will run rampant. I have been playing with RFID for loyalty cards, and unless you line your wallet with aluminum foil you are a potential victim for a hacker. Passive and active have the same drawbacks. Sure, the data is encrypted, but that can be captured and hackers will eventually reprogram the encrypted data into a fake card. This is going to turn into the Satellite smart card with weekly updates to beat the hackers. Almost all the security is built around protecting the data, and very little around protecting the radio signal from unauthorized capture and duplication. You might as well tattoo your Visa number on your forehead. There are electronic newsgroups publishing designs for RF duplicators already.
Certainly, chain restaurant operators will see value in contactless, but not all segments. It makes sense for the quick-serve (including sandwich chains) and fast-casual segments, but not necessarily the casual and family chains. The same goes for certain segments of retail. Most will benefit from contactless payments, especially the convenience store segment. For jewelry and home furnishing retailers, it doesn’t make much sense to rush adoption.
That said, unlike biometric this technology has legs and is a good fit for consumers. It will eventually be adopted across all of these channels. I’m not convinced that this payment option will encourage customers to spend more. It will cut wait times, but may or may not increase loyalty.
Exciting times!
Consumers dream of the day they can stop at the grocery store, make their item selections, pass through an RFID terminal that not only collects and totals their bill, but signature for payment as well. In other words, pull your full shopping cart into line, (scan coupons) sign and go–saving a tremendous amount of time.
Fewer checkout lanes and shorter lines means fewer trips to fewer channels. Less front-end people means more stockers and people on the floor to help shoppers and add service.
Customer loyalty?
Imagine if your time as a consumer in the busiest societies in history is so respected, where would you belong?
Blurring has forced the smaller Independent retailers to stop trying to be all things to all people like only the big boxes can afford to do, and stay focused on their niches in their limited space. It would be great if the Independents, who have their “skin invested in the game,” came together to champion this vision by acting as a chain and become the founders of this innovation. This type of thinking work’s in Australia….
Remember yesterday’s grocery store, that’s today’s dollar/mass/drug store. Four shopping trips to fulfill your needs is too much at +$3 a gallon for gas for an average consumer.
The remaining question is how close are we to leveraging what everyone knows is the Utopian shopping trip, and who will be first to overcome the remaining challenges?
“To the victor goes the spoils.”
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The technology is here, so use will grow and probably at a rapid rate. The proliferation issue will have to be addressed (how many key fobs, etc, is the consumer willing to carry?). Some of the interesting issues will be security (not the technology, the person–how many times does your child have to misplace a cell phone with the embedded technology before you decide the human element has not evolved to the technology level?), and the desire for simplification (so now I have to carry one or more of these in addition to my credit cards until there is convergence).
When you really start thinking about contactless payments there are a lot of issues. The first thing is the average transaction size. This cuts both ways. Too small and the fees associated with the transaction make it too expensive for the retailer. Too large, and the additional fees associated with an “undocumented” transaction that does not include a signature come into play. So it seems there is a very small “sweet spot” for these transactions.
The nature of the environment is a factor. One of the great applications I have heard considered are ski lift tickets that would charge by the ride. The lift area would accumulate the number of rides and submit them to the credit card company as a single charge. I don’t know how this would work out economically for the ski areas, but at $79 a day for lift tickets I think they have gone beyond the casual skier’s price point for a day out. Environment continues to play a role in gasoline purchases, especially in seasonal self serve states where the driver has to get out in the cold to pump the gas. The taxicabs and other transportation providers also make sense. And of course everyone has experience with auto toll collection.
So what are the other situations where it may make sense? I think scheduled events, where lots of people show up at once such as sports games or theater tickets make a lot of sense. This creates an interesting challenge for the scalpers and season ticket holders. Maybe season ticket holders would not be the first customers and only single events would be sold by the contactless method. I guess the other challenge is that each person for whom a ticket is purchased has to have their identity registered. Another way to do this might be to have kiosks where the contactless tickets can be issued before the event. This same rational might work for transportation passes.
As far as everyday transactions at the checkout counter, I am not sure there is a lot of convenience benefit and the transaction costs are probably still too high. Most places have moved the data collection terminal to the customer area so while you are swiping the card you also enter your signature so the retailer has a documented charge. The advantage of not having to reach in your wallet or purse seems to be canceled out by the fear you will be charged when you walk by a terminal or lay your keys down while reaching for cash or a different credit card.
RFID Debit Cards?–identify theft will run rampant. I have been playing with RFID for loyalty cards, and unless you line your wallet with aluminum foil you are a potential victim for a hacker. Passive and active have the same drawbacks. Sure, the data is encrypted, but that can be captured and hackers will eventually reprogram the encrypted data into a fake card. This is going to turn into the Satellite smart card with weekly updates to beat the hackers. Almost all the security is built around protecting the data, and very little around protecting the radio signal from unauthorized capture and duplication. You might as well tattoo your Visa number on your forehead. There are electronic newsgroups publishing designs for RF duplicators already.
Certainly, chain restaurant operators will see value in contactless, but not all segments. It makes sense for the quick-serve (including sandwich chains) and fast-casual segments, but not necessarily the casual and family chains. The same goes for certain segments of retail. Most will benefit from contactless payments, especially the convenience store segment. For jewelry and home furnishing retailers, it doesn’t make much sense to rush adoption.
That said, unlike biometric this technology has legs and is a good fit for consumers. It will eventually be adopted across all of these channels. I’m not convinced that this payment option will encourage customers to spend more. It will cut wait times, but may or may not increase loyalty.
Exciting times!
Consumers dream of the day they can stop at the grocery store, make their item selections, pass through an RFID terminal that not only collects and totals their bill, but signature for payment as well. In other words, pull your full shopping cart into line, (scan coupons) sign and go–saving a tremendous amount of time.
Fewer checkout lanes and shorter lines means fewer trips to fewer channels. Less front-end people means more stockers and people on the floor to help shoppers and add service.
Customer loyalty?
Imagine if your time as a consumer in the busiest societies in history is so respected, where would you belong?
Blurring has forced the smaller Independent retailers to stop trying to be all things to all people like only the big boxes can afford to do, and stay focused on their niches in their limited space. It would be great if the Independents, who have their “skin invested in the game,” came together to champion this vision by acting as a chain and become the founders of this innovation. This type of thinking work’s in Australia….
Remember yesterday’s grocery store, that’s today’s dollar/mass/drug store. Four shopping trips to fulfill your needs is too much at +$3 a gallon for gas for an average consumer.
The remaining question is how close are we to leveraging what everyone knows is the Utopian shopping trip, and who will be first to overcome the remaining challenges?
“To the victor goes the spoils.”