Lately I’ve read many articles about Contactless and Near Field Communication (NFC) payments, the prospects for merchant and consumer adoption, bridge technologies and market trials. Contactless payments, which feature speed, convenience, security and more functionality that leverages the mobile network, can outperform legacy mag-stripe payment technology. NFC promises smart phones as payment devices, which in turn promise to change consumer expectations about buying everything from mass transit, fast food and concert tickets, to the retail brands themselves.
At the same time, U.S. cardholders increasingly find it difficult to use mag-stripe cards outside the U.S. As we discussed here, the U.S. EMV strategy hinges on contactless / NFC adoption. Some believe EMV 2.0 in the U.S. will be contactless and mobile payments and serve as a disruptive technology that will usher in even more payment players from mobile carriers to Apple and Google.
Yet contactless and NFC payment technologies face the classic “chick or egg” dilemma. Payments is a platform business and the principal of network effects is required to build a two sided market where both card issuing and merchant acceptance must compel each other forward with the prime objective to encourage use.
So what will be required to advance contactless payments? Will it take millions of additional contactless cards to be issued (or will it take NFC smart phones to replace cards) or will it take hundreds of thousands of U.S. merchants installing devices to accept contactless payments?
From most accounts the lack of merchant acceptance of contactless payments is a key barrier blocking NFC contactless payments. Without the widespread installation of readers, contactless is stalled. A Javelin Strategy & Research report estimated the basic cost to deploy EMV POS terminals at $6.75 Billion, not including the cost of implementation. The low percentage of merchants that accept contactless payments (I’ve seen figures from 70,000 to 200,000 U.S. merchant point of sale payment terminals that accept contactless payments) reduces the incentive for banks to issue chip cards, NFC phones, tags, stickers, etc.
What will it take to get merchants to upgrade, replace or add devices to their existing terminals and POS systems to accept contactless payments? What’s the incentive for merchants to invest in contactless readers? The business case has evolved over the years from faster lines and replacing cash, to enabling no signature required and chargeback liability, to loyalty programs that create a more informed shopping experience. But the real fuel that contactless payments needs is in the form of incentive Interchange rates. Nothing works like financial incentive.
Another main problem is the lack of consumer awareness, with no aggressive campaign by merchants to steer consumers who have contactless cards to use them. The presence of contactless devices alone will not guarantee usage. Merchant staff must become more adept at facilitating contactless transactions. Merchants must support effective training of employees who can in turn show and tell consumers how pleasant and easy contactless purchases can be. Think about how merchants installed PIN pads and were instrumental in steering consumers to enter their 4 digit secret PIN by asking credit or debit? Why did they do this? There was a financial incentive to do so.
Contactless payments derailed by government intervention
The Senate passed S. 3217, the "Restoring American Financial Stability Act" on May 20, 2010. This legislation attempts to overhaul the regulatory structure of America's financial system through increased regulations and the restructuring of our financial regulators. Then along comes the Durbin Amendment. The Durbin Amendment attempts to impose government regulation of Interchange, setting different pricing for the same service and then trying to legislate out competitive market pressures that would naturally bring these together. Considering the importance of the payment system to our economy, consumers, businesses and banks, I feel any Interchange regulation should warrant a stand alone comprehensive approach and its own legislation (if any), not a last minute political earmark amendment.
The unintended consequences of Interchange legislation should be a concern for all parties, but particularly for small businesses as I’ve discussed here. As it relates to disrupting contactless payments, the Durbin Amendment provides for the setting of minimum charge amounts and challenges the business case of banks issuing and managing debit card programs.
A preemptive strike by the card companies could change the debate and advance the next generation payment technology. Instead of solely a defensive strategy against legislation and litigation, Visa and MasterCard should set a voluntary and substantial reduction in Interchange in exchange for contactless payment acceptance.
This was the strategy in the late 80s when I first entered the payments industry. Back then merchants were using a knuckle buster to manually imprint cards and paying a 4% paper draft rate to carry them into the bank teller. We would reduce a merchant’s rate to 2% by investing in a VeriFone Zon electronic draft-capture (EDC) terminal. Sure the terminal was faster and more efficient but that’s not why merchants adopted them, they adopted them for the savings.
Before government or court ordered Interchange intervention, the card companies would be wise invest in contactless. Visa and MasterCard could make the case that continuing to use old payment technology (mag-stripe cards) carries more risk; and therefore, justifies higher Interchange. And merchants should realize that mag-stripe payment technology will not serve their best interest in the future and that issuers who rely on Interchange income will play an important role in advancing the next generation of payments in the U.S.