Magazine Article | April 19, 2006

Contactless Payments Offer Advantages For Retailers, Customers

Source: Innovative Retail Technologies

New advances in contactless payment cards are allowing customers to use their cell phones to pay for purchases. What does this mean for retailers?
New advances in contactless payment cards are allowing customers to use their cell phones to pay for purchases. What does this mean for retailers? 

Integrated Solutions For Retailers, May 2006

Can retailers keep up? Many merchants haven’t yet converted to customer-facing payment terminals, yet newer, more innovative payment methods are already popping up everywhere. Is it worth the expense to modify POS systems for new payment types and install new payment terminals, or will these futuristic payment methods disappear like a dreadful fad? With RFID (radio frequency identification) tag costs falling, NFC (near field communications) standards set, the plastic generation spending like crazy, a focus on speedy transactions, and support from the credit card associations, it appears these new payment methods are here to stay.

The generation gap among consumers today is vast – ranging from retirees and baby boomers (some also young retirees), to Gen Xs and Gen Ys – the latter also members of the ever-impatient plastic generation shoppers. Targeting consumers’ preferred method of payment is tricky for retailers, considering some retirees have not yet fully transitioned to the use of ATMs (automatic teller machines), much less waving a device near a reader to pay for items. As a result, current payment methods will not disappear for a while; retailers must simply expand payment options to meet consumers’ needs.

Several manufacturers of payment devices are continuing to enhance customer-facing terminals. These devices originated with the use of debit card processing, which requires consumers to enter a pin number for authorization. “Manufacturers and retailers are realizing these devices capture the consumer’s attention while merchandise is rung up,” says Bill Pittman, president of TPI Software. “As a result, the device provides more control for consumers, including deciding how they’ll pay for merchandise, and they like it.” Retailers have begun to use these devices as marketing tools, with the addition of color and multimedia to introduce new merchandise, provide coupons, and display sale items while payment transactions are completed.

The primary aversion to the adoption of customer-facing devices is the IT infrastructure and integration with POS systems in smaller retail environments. “Once 60% of retailers adopt a new technology [which is the case with customer-facing devices], the smaller shops have to support it to retain customers,” says Pittman. Some POS developers now offer a middleware component that allows lower-tier POS systems to handle the integration with customer-facing payment devices without a major infrastructure overhaul. The widespread adoption of customer-facing payment terminals appears to be paving the way for faster, more secure contactless payment methods that leverage those terminals.

NFC Enables Contactless Payment Options
NFC is a broad technology that allows wireless communication between two devices (one containing an NFC-enabled chip and the other a reader) or even between two devices that contain NFC-enabled chips. It is designed to work over short distances, passing a small amount of data back and forth between enabled devices or between a device and a reader. The chips, with a price tag of 20 cents per chip, are rapidly becoming affordable. While the technology sounds similar to RFID, it is not limited to reading a tag and tracing information as passive RFID typically is. Instead, it sends information in both directions, similar to transferring files to and from a PC. This communication is not designed to compete with Bluetooth or Wi-Fi, as it cannot handle the bandwidth or speeds found with those technologies. Several electronics manufacturers and credit card companies are proponents of this technology, which may very well drive the acceptance and use of contactless payments. MasterCard, Visa, and Amex each have versions of smart cards that use NFC, such as MasterCard’s PayPass and Visa’s Blink, which target convenience stores and stores where smaller purchases (e.g. those less than $25 that do not require a signature) are made. These cards are an example of contactless payments compatible with NFC technology, using one-way communications initiated when the customer taps the card or fob near the reader at the checkout line. The card issuers are deploying these new cards in certain geographic areas and working with convenience stores, pharmacies, and fuel stations to deploy terminals capable of accepting this payment type, with positive results so far. Cards currently have both the traditional magnetic stripe, as well as the embedded chip in them, so the same card can be used at any retailer.

This card-based form of payment is expected to be the first contactless method to become widely accepted, and it’s well on its way. “Once consumers understand the encryption and safety built into transactions, they benefit from the speed and convenience and enjoy the ‘wow’ experience of using the technology that chirps and emits a light when activated as the chip is read,” says Tony Abruzzio, VP of the product department at Global Payments, Inc. “In addition, consumers like the fact that they never relinquish their card to the cashier, maintaining control of it throughout the transaction. Everyone seems to be behind the expansion of this technology. The retailers are in favor of it because of the speed in which transactions can be completed, meeting customer service demands for fast service; card issuers like it because consumers are using their cards more often; and the plastic-generation consumers like the fast service. This widespread convergence of agreement hasn’t occurred since the early 1980s when the magnetic stripe was adopted.” Additionally, once the magnetic stripe is no longer used, it will make it impossible for skimmers and card copiers to steal card information as they do today.

Another way NFC technology provides secure payment transactions is by taking advantage of the CVV (card verification value – usually a three- or four-digit number on the back of credit cards). “A more secure transaction can be completed by using a unique, dynamic CVV at the time of authorization that is only valid for the life of that specific transaction,” states Paul Rasori, VP of marketing and product management at VeriFone. “The CVV in contactless transactions verifies that the payment is coming from a valid terminal and device.” Visa recently estimated that credit card counterfeiting could be reduced by at least 70% with a switch to devices using chips instead of magnetic stripes.

A Convergence Of Technologies – Cell Phone Or Electronic Wallet?
NFC technology is the catalyst for cell phones becoming electronic wallets. The cell phone chip can be preset with several valid payment methods, including credit cards, debit cards, and entry of electronic routing numbers (providing automatic withdrawals from any bank account). When the phone is passed near a reader, the consumer selects an account and verifies the transaction by entering a personal verification code into their phone. If the phone is lost, one command sent to the phone will reset the phone and destroy access to all payment methods. That is certainly easier than calling several credit card companies to notify them of lost cards. Philips Electronics sees NFC-enabled devices communicating with a myriad of passive devices, such as watches, cell phones, and PDAs. The electronics manufacturer recently collaborated with Sony and Samsung to embed chips into cell phones and PDAs for distribution this year. Philips is working with several partners to use NFC technology in movie ticketing (e.g. a consumer could buy several tickets and distribute them to friends using NFC transmission via phones), kiosks (e.g. selling downloadable songs), airline and hotel check-ins, and home shopping. Will this technology really rid consumers of the need to carry wallets and enable a faster-paced lifestyle? Time will tell.