Retail Banking Supplement: Set for Growth

Paying for goods with a contactless card is easy and instantaneous. No fumbling for cash, signing, card insertion or PIN is required; just wave, or tap and go. The underlying technology has been around for years, used to access buildings or public transport, but only recently have UK banks started issuing debit and credit cards with a contactless payment feature. FST examined various pilot projects and limited rollouts last year; Vivienne Rosch revisits the contactless market now to find out how it is growing

The UK Card Association (UKCA) trade body seems pleased with progress in the contactless cards market. Over the past year rollout of the technology has been gaining momentum, with substantial growth in the number of contactless-enabled credit or debit cards issued by High Street banks, using either Mastercard's PayPass or Visa's PayWave schemes. Just under 350,000 cards were in circulation when we reported last - the number has now risen to six million by November 2009. The number of retail terminals accepting contactless cards is estimated to have tripled from just over 7,000 a year ago to 21,000 now. Seven UK banks have issued contactless cards, including all the main players such as Barclays.

"This year there has been a lot of growth," says Lewis Nolan, vice president, business development innovation, Visa Europe. "We've gone from 400,000 cards at the turn of this year to over five million by the end of the year, principally with Barclays, but we've also got over half a million HBOS cards."

Jason Field, business leader, product management, Global PayPass, Mastercard, is equally positive: "It's an ever-growing brief. We've reached the one million mark of PayPass-enabled cards in the UK already, and we're seeing a lot more interest from both the merchant and consumer side."

The UK Payments Administration body reports a long-term downward trend in the use of cash in the UK, from 25.3 billion payments in 1998 to 22.6 billion in 2008. The cash element of consumers 'spontaneous' (i.e. non-regular) payments, 73 per cent in 2008, is predicted to fall to 56 per cent in 2018, while the card proportion is predicted to increase from 24 to 40 per cent, with contactless likely to be an important element in this growth, although cash may make a bit of a return on the back of the recession as it traditionally comes to the fore when times are tight. As Steve Brunswick, strategy manager at the vendor, Thales Information Systems Security, who secure many of the UK's credit and debit card transactions, says: "It's a huge prize. Even a small share of the cash market would represent a huge growth in transaction volumes for card issuers and card acquirers."

Critical mass
There is a consensus that critical mass is needed for the contactless market to take off. "Historically we've not had enough cards, and they haven't been in the right places to find readers," comments Matt Rowsell, head of business development, RBS WorldPay, one of the leading payment acquirers in the UK.

Issuers of cards aren't interested in putting cards out unless there are terminals, agrees Thales' Brunswick, and acquirers of card transactions aren't interested in putting in the terminals unless there are cards that use them. In other words, it's the classic chicken and egg situation.

In 2007, Barclaycard spearheaded the drive to contactless with OnePulse, the first publicly available contactless bank card in the UK, combining an Oystercard application and contactless payments on the same chip. Barclays and Barclaycard are also responsible for a very large proportion of the recent growth in contactless activity. This is no coincidence.

"Being both a large issuer of cards and a large acquirer, Barclays has both sides of the equation," says Brunswick. "That's probably why it is going after the market in a way that others haven't yet." It has said it will issue six million contactless-enabled cards by the end of 2009, and almost all its credit and debit cards now come contactless-enabled. Richard Mould, Barclaycard's head of card innovation says: "We're definitely leading the market. Usage is growing month on month, the feedback we get from our merchants and customers is positive, and I think we've now passed critical mass."

The first contactless pilots were London-based, with coffee shops and fast food outlets leading the way, such as Café Nero, EAT, Krispy Kreme, Prèt a Manger and Yo Sushi. "Prêt, EAT and Café Néro have moved beyond their initial deployment at launch to rollout at all of their UK stores," says Visa's Nolan. "That shows commitment." A regular award winner for its integrated contactless payment solution (developed with VeriFone and Commidea), EAT is happy with it's rollout from one store in Moorgate last March, through to 24 in central London, to 100 stores nationwide this November. EAT's head of IT, Rene Batsford: "Contactless is about throughput and speed, and suits businesses like ours particularly well."

Transport and retailers to drive uptake
With low (single) journey prices and long queues, metropolitan transport systems are a natural target for contactless. In October, Mastercard teamed up with RBS WorldPay and Stagecoach launching contactless-enabled bank cards to pay for journeys on Liverpool's buses, via specially adapted readers. Mastercard's product manager, Global PayPass, Jason Field, explains: "This was the first use of contactless payments [by bank cards] on public transport, specifically on Stagecoach buses in the UK, and the first significant extension of PayPass outside London." Oystercard has been highly successful with London commuters, but it is likely that Londoners will in future also wish to use contactless bank cards to pay for journeys on tfl.

This summer, Mastercard, RBS WorldPay and Boots announced the drug maker's introduction of Mastercard PayPass technology in selected stores in London and Liverpool. "The first tier one merchant in the UK accepting PayPass is a clear message that a number of our large retailers are seeing the benefits, helping uptake," claims Field.

Tony Saunders, marketing director for electronic payment solutions provider, VeriFone, also sees this as a break-through: "It's only when we get into the tier one sector that this technology will really take off. People will start to notice. Consumers will want to have contactless cards." And hopefully banks will then have less cash to handle in their procedures, cutting costs to them just when they need to hoard money to repair damaged capital bases.

Security
Concerns remain that consumers will not think the new payments are secure since no PIN is required and transactions happen off-line; something that banks naturally want to counter because if people remain wedded to cash then they'll have to keep running expensive cash handling operations. However, the UKCA, which receives reports of card loss, claims it has not yet received any cases of fraud occurring as a result of contactless functionality.

"Several layers of security make contactless transactions very secure," says Mastercard's Field. "Firstly, the card never leaves the consumer's hand. Secondly, it has to be extremely close to the reader to make the transaction take place. Thirdly, after a certain number of transactions the card holder is asked to enter a PIN to verify themselves. So a thief making unlimited contactless transactions can't happen. And, of course, if you have reported your card lost or stolen, there is no liability for fraud for the consumer at all."

Cards or phones to rule in future?
Will contactless payment in future come into its own as a feature on Near Field Communication (NFC)-enabled mobile telephones, rather than cards, using the same retailer terminals to process transactions? This may happen as part of a more general move towards mobility (see our mobile banking feature on page 50), but for the next year or two at least, the majority of UK consumers will use cards, not mobile telephones, for contactless payments, since NFC-enabled mobiles are not yet widely available. A mixture of the two mediums may come to dominate in future, or one may advance over the other, but it's too early to say yet.

Consumers will have a choice. "My own view is there's room for all," says Thales' Brunswick. "Digital natives will carry their method of payment on their 'phone, but we will also see card-based contactless payments, possibly key fob-enabled, and wrist bands, particularly for festival sites." As far as Barclaycard's Mould is concerned because they are based on the same technology standards, they are complimentary.

Banks wishing to add contactless functionality should have no major problems integrating the new payments. According to VeriFone's Saunders: "A contactless transaction looks exactly like a standard transaction in a bank's IT host systems. They don't have to change anything and they will probably have a little tag that identifies contactless transactions; we could provide this." Handling contactless transactions shouldn't make a huge impact on the acquiring network. Banks will need to make some changes, but these are small and shouldn't disrupt core banking systems.

Saunders thinks the current limit of £10 per transaction is one of the things limiting further contactless rollouts. "Stores will look at their average ticket price and think it doesn't fit for them." He believes it's likely to increase to £15 fairly soon; Rene Batsford of EAT thinks it'll happen in Q1 or Q2 of 2010. However, the UKCA has said that, while the limit is being reviewed, it is unlikely to change until the market is more mature.

The future
The UKCA expects there to be significant increase in contactless card activity, with over 11 million contactless cards in circulation by mid-2010, and the technology available to the majority of cardholders within five years. Transactions will likely take off first in metropolitan areas, where you have high densities of population and frequent small cash transactions - the savings available to banks in eliminating cash here could be substantial.

Barclaycard's Mould concludes: "We're at the start of a journey. A tipping point was making sure that we got national banks and retailers signed on and that's happened - personally, I can't wait for the Boots trial to start. There will be further growth in the number of cards, and then there'll be the addition of mobile."

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