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Contactless technology waves goodbye to cash

This blog was created while Mark was working at The Logic Group.

Contactless payment technology continues to develop; it is a hot topic of discussion as Barclaycard rolls out an update to its TV advert demonstrating the ease of contactless technology –  but will its implementation become a rollercoaster ride for retailers and will hard currency become harder to find in the future?

Cash will always be necessary; it is something that we all carry in our pockets for quick and easy small-scale purchases and a whole industry exists purely to handle and transport it. Indeed, many supermarkets and retail chains offer their customers the opportunity to get ‘cash back’ as they buy produce via a debit card. Consumers view it as a convenience yet the reality is that it saves the retailer a considerable amount of ‘cash’ in money management fees. 

 

Card fraud always makes the headlines, yet cash is equally, if not more vulnerable to theft and fraud. Consider just how many fake notes there are in circulation and the amount of money which is lost through theft or damage – The European Central Bank, which is responsible for identifying fake notes, reported that over 860,000 faked Euro notes were withdrawn from circulation in 2009, and the amount of faked Euro notes has been on the rise since 2004. When you compare this with the amount of transactions that huge retail chains process electronically, then the occurrence of card fraud is relatively low, aided by the enforcement of security schemes such as the Payment Card Industry Data Security Standard (PCI DSS), which is a set of comprehensive, mandated requirements designed to enhance the security of account data on a global basis.

The overriding incentive for retailers to embrace electronic payment methods is the low cost of processing card transactions. Consumers require a payment method which they are comfortable and familiar with using. Contactless technology is speed and convenience driven, if it is widely adopted could we see an end to fumbling for change in your pocket?

A contactless payment system allows consumers to use their card or payment device up to four or five times, before they will be prompted to input their PIN number. A transaction limit will be set, for example £15, then the consumer could purchase items of this value without needing to input their PIN, until the set number of transactions has been reached. If a consumer were to lose their card, then the bank could only lose a maximum of £75 working with this limit. However this does suggest that paying for high value items using contactless technology may not come to fruition, as should the card be lost or stolen then the bank would stand to lose more money. Trials have shown that consumers will tend to use a blend of transaction types, which means that cardholders will rarely have to input their PIN number for contactless transactions as their identity will be verified by regular Chip and PIN transactions.

Barclaycard reports that there are now 25,000 terminals, the majority being based in the capital which are able to accept contactless payments. Back in September 2007 it signed up more than 1,000 London outlets to accept its touch and pay credit card, which was inspired by the technology used in the Oyster card. Three years on the pick-up of the technology has been relatively slow, however this is more likely to be a result of the tough economic climate during that period rather than consumer resistance to the technology.

If the technology is to be widely adopted then many more businesses will need to invest in the system, but as the country rises out of the recession, the business case for investment in the technology is strong and with the potential to reduce transaction times and increase the average spend of more customers, we could see the technology being widely used in around 18 months; although the necessary infrastructure will take time and investment to set up. The Logic Group handles transactions across more than 250,000 points of sale and clients are already discussing the benefits of adopting the system now.

However, a surprising number of people still do not have access to credit or debit cards. The latest figures from the Financial Services Authority report that six out of 17 basic bank accounts – about a third – do not offer a debit card, in contrast it is estimated that over five billion people across the world have access to a mobile phone. Contactless technology therefore could be incorporated into a mobile phone cover or attached to the phone itself; allowing people that do not have a high credit rating to access the technology without having to use a bank card.

Many different ideas are being discussed regarding the most effective way of making contactless a mainstream technology. Barclaycard, the ostensible pioneer in this area, has made use of a system that people are familiar with, piggybacking on the success of the Oyster card, it launched its contactless system in London where there is less resistance to adopt technology that people are already comfortable using.

Although society will probably never be entirely cashless, by the time the next Olympics is underway people in the UK may well be actively making contactless payments and will certainly be using much less hard cash overall on a daily basis. Barclaycard is planting the seeds in consumers’ minds and by pioneering the technology it will inspire other companies to innovate ideas. The infrastructure to allow contactless payment to become widely adopted will be eventually put in place, but this will take considerable time and investment. So although cash is still king, for now at least, it may not be too long before we see contactless cashing in.

Contactless payment technology
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Comments: (1)

A Finextra member
A Finextra member 23 July, 2010, 10:53Be the first to give this comment the thumbs up 0 likes

I am a huge supporter of the potential of contactless payments, but would take issue with many of the facts within the above article. First, cashback is only allowed on debit cards and not on credit cards. Second, card fraud is not "relatively low" compared to counterfeit banknotes - looking at the latest figures from the ECB there was €812 billion of euro banknotes in circulation at the end of Q2 2010 yet the value of withdrawn counterfeit euro notes in the first six months of 2010 was €18.3 million (or roughly 0.002%), compared to around 0.07% fraudulent turnover on payment card purchases. And the number of counterfeit notes decreased in H1 2010 compared to 2009. Third, the business case for investment in contactless technology is not strong except for certain specialised outlets; numerous European studies have shown that the cost of a cash transaction is lower than that for a payment card purchase, and with an ATV of £4.30 (say €5.10) in the UK the business case for a retailer is critically dependent upon the MSC it is charged for a contactless transaction. Lastly, I estimate that only around 5% of UK payment cards and 2% of UK POS terminals now have contactless technology, with virtually all of these cards issued by Barclays/Barclaycard, so we are a long way from achieving the critical mass that the author implies is imminent.