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  1. Analysis
February 10, 2009

Payment innovation – who needs it?

Payment industry players point to the need to innovate to attract and retain customers and to fight the war on cash Although some propositions such as mobile, prepaid and contactless are gaining traction, it appears that the tipping point towards critical mass is still far away

By Verdict Staff

Payment industry players point to the need to innovate to attract and retain customers and to fight the war on cash. Although some propositions such as mobile, prepaid and contactless are gaining traction, it appears that the tipping point towards critical mass is still far away. Divya Guha and Victoria Conroy report.

Payment innovation. Average spend using payment devicesMost sharks need to keep swimming in order not to sink to the bottom. But if stagnation were plastic’s end, we wouldn’t know it, as right from the emergence of the first Diner’s Club credit card in the 1960s, the payments and card market has not stopped reinventing itself to become the multi-billion dollar source and driver of revenue that it is today.


Growth and innovation have brought riches to the cards and payment industry as well as banks, lenders and retailers. Many initiatives have been rolled out on the back of new regulation that is largely out of the hands of financial institutions to influence, and at other times initiatives have been novel ideas to make payments quicker, safer, easier and more profitable, while answering specific needs of given customer bases.

Take for example mobile payments in India, which could offer financial inclusion to the 41 percent in the country who are still unbanked – making inroads where a commercial infrastructure has not. The potential for the growth of mobile payments among the billion-strong population is incomparable.

In the developed world, however, opportunity has a different face. The cards industry has rolled out a number trials and tests with contactless and mobile payments, but very few initiatives have so far had real success.

It has been tough trying to convert cash-centric consumers and reluctant merchants who are concerned that the costs of installing the infrastructure for any new payment technology, like say contactless payments, may be more expensive than handling cash.

Innovation for innovation’s sake?

E-invoicing has been one innovation that has accomplished some success in paperless billing and of course there is the Oyster card on the London transport network, which industry players say has done a great deal in increasing awareness of technology among consumers. But the picture is not as clear in the field of contactless or mobile payments.

The availability of partners to share the big investments and risks involved will naturally spur banks on to facilitating such innovations for their customers.

And if contactless were to exceed its current remit of small purchases, the most visionary among the banks may even have to look beyond the current trends towards the next generation of innovation such as biometric authentication.

The investment takes major commitment and banks are not yet ready to change what they offer customers, seeing that the old offerings seem to work just as well and that there has been unwillingness from both merchants and consumers to adopt new payment methods.

Louise Brett, the head of UK customer and channel strategy at advisory firm Deloitte, has in the past lamented the slow take-up of new innovations. Even if the regulatory or economic climate is right for brewing ‘the perfect storm’ for new technologies to thrive, she says, unless rules of the game are sometimes broken, new products will fail.

However, the marketing manager for Northern Europe at contactless terminal manufacturer Ingenico, Gregor Rankin, is a self-confessed contactless ‘evangelist’ who is very clear as to the potential of contactless.

“I see 2009 as the big year for contactless, certainly in the UK. I think the way it’s deployed in the UK will accelerate its adoption in other areas, particularly in other parts of Europe. The reason I think 2009 will be the big year is that obviously we’re seeing a phenomenal push from the banks now. Nearly all debit cards issued by Barclays this year will be contactless, and we’ve also seen a lot of issuance activity from Royal Bank of Scotland. Contactless issuance will be very significant – certainly well over 5 million issues this year alone,” he told CI.

Rankin is adamant that the push for innovation is coming from consumer desire, and not from payment players innovating just for the sake of it.

“My belief is that what is really going to drive contactless adoption is cardholders themselves,” he says. “We can talk until we’re blue in the face about the benefits to retailers and the benefits to the bank and acquirers, and some of the figures we have from some of the pilot projects already rolled out in places like France suggest double-digit growth in footfall and revenue. But the increase in convenience for the cardholder drives the increases and benefits for the actual retailer.

“With what’s going on in retail at the moment it could become quite an exciting opportunity in 2009, and I think retailers who adopt it early will see the benefits quite quickly.”

Critical mass for contactless

Ingenico recently released the results of a survey conducted on its behalf by consultancy Loudhouse Research, which examined 1,000 UK consumers and their attitudes towards cash usage and their willingness to use contactless payments.

While only 8 percent of people surveyed were already using contactless debit or credit cards, 33 percent of those surveyed said they would consider using the technology, indicating that the lack of consumer education and awareness of contactless is hampering uptake – along with merchant reluctance over its long-term viability. But Rankin is confident that consumer desire and subsequent satisfaction will spur more retailers to accept contactless.

“The major retailers are very much waiting to see what will happen and not making a commitment to contactless right now. When the word of mouth goes around about the convenience and usefulness of contactless, the awareness and usage levels will go up exponentially over the course of this year as more retailers begin to accept contactless and more cards are issued by the banks,” he says.

One other issue that may be a hurdle to greater adoption of contactless is transaction limits. Contactless has been designed to replace low-value cash purchases. Although the current limit for contactless payments in the UK is set at £10, the survey found that shoppers are happy for this figure to rise to an average of £35.10. Retailers such as the big supermarkets have also questioned the need for them to sign up for contactless when the bulk of their customers spend far more than the £10 limit.

Rankin says: “We’re often asked by customers if that £10 limit will ever change. The survey showed that 37 percent were prepared to spend between £10 to £40, which is well over the existing limit. The average amount that people are happy to spend with cash was £48, the average with a contactless credit or debit card was £35, again well above the actual current contactless transaction limit, and not a million miles away from what people are prepared to spend with cash.

“That would certainly support the argument that further down the line we’ll see a relaxation of what initially seems like a small limit. Some retailers come to us saying that their average basket is over £10, so they don’t see the benefit. But then other retailers actually want to deploy it. I don’t think retailers have come to a shared mindset yet over how they want contactless to work, which is I think quite interesting.”

The advent of multi-function cards, which can combine different payment applications, or payment applications with other applications such as loyalty schemes or security access functions, is another innovation that has the potential to transform consumer payment trends.

Already in existence in countries like Finland (see Finland plays its cards right), and in Asia-Pacific countries where they are typically payment/transit cards, multi-function cards could prove to be the payment industry’s ‘holy grail’, according to Dr Hermann Sterzinger, group vice-president and head of business development at German card technology provider Giesecke & Devrient.

“Bundling payment and transport ticket functionalities in a single card is an important step in the right direction and all the technology for these multi-function cards is already in place. It is now more a question of acceptance by partners,” he told CI.

Ingenico’s Rankin says that payment/transit cards, such as the Octopus card in Hong Kong, and the Oyster card in London, have done a great deal in raising awareness of contactless technology with consumers worldwide. With the September 2007 launch of the Barclaycard combined Oyster, contactless and credit card, UK consumers have now been introduced to an example of a multi-function card that could replace the cash in their pocket. The announcement that Barclays is to start rolling out contactless technology on its debit cards this year will also spur consumer uptake, according to Rankin.

“The Oyster initiative obviously generated quite a lot of press and initial awareness of contactless, and obviously it resonated heavily within London,” he says. “For obvious reasons within the London zone, people get the concept of contactless credit and debit cards pretty quickly because of the Oyster scheme.

“At the end of the day, when you look at the way people will use contactless, they’re using it for cash replacement, they can use it for all of the small quick purchases they need to make for lunch, for coffee, for train tickets and so on. I believe the contactless shift to debit will fit really neatly with cardholder desire, that will really be the sweet spot and perhaps where we will see a massive amount of acquiring on the contactless side.”

However, it may not be long before the widely accepted card format may give way to mobile-shaped wallets.

Payment innovation. Approach to payment methods (%)

Mobile payment momentum

Near field communication (NFC) is being touted as the replacement for contactless cards, or potentially even the wallet. It is a short-range wireless technology that evolved from existing contactless technologies, and is supposed to simplify the way consumer devices interact with one another.

However, it is attractive because of the wide range of uses it can be put to – from paying hotel bills to opening a door or linking up to city guides for tourists. Payments seem to comprise only about 15 percent of the total scope that the NFC technology offers. Another one of its advantages is that it can run on the same infrastructure as contactless cards technology.

Pascal Metiver, president of the EMEA region at VingCard, a manufacturer of NFC-enabled hotel locks, says that on the whole, NFC acceptance has been slow.

“If you take a normal technology cycle, it’s typically seven years. We’re probably reaching year three-and-a-half to four years now on a global basis,” he says.

But this could change as NFC-enabled mobile phones become ubiquitous.

Ingenico’s Rankin is also optimistic about the prospects for mobile payment. The Ingenico survey revealed that around 20 percent of people had heard about mobile phone payments compared to the 12 percent aware of contactless technology. This is odd because contactless cards have been around and promoted a lot more aggressively by issuers than NFC technology so far.

“We’re expecting all of the major handset manufacturers to have NFC-enabled mobile phones by the end of this year, and the number of phones in the market to reach something like 450 million in the next two years after that,” he told CI.

“Within the UK, we expect a fairly high adoption rate in comparison with other parts of the world. Supermarkets could put their loyalty programmes directly onto people’s phones, and as an always-on item it can link directly into the internet. It provides the ability to close the loop with customer loyalty schemes and provide a lot of value of interaction with customers.

“Obviously NFC can replace your contactless credit or debit card or if you want to get around the limitation on a contactless purchase of £10 or whatever it may be in the future, but there are models which Visa have demonstrated to us, which allow your actual credit card to exist on your NFC phone. By using an identification method such as entering a PIN on your phone itself and representing your phone to the contactless terminal, you could make a transaction that would be a credit card transaction rather than the contactless limit of £10.”

Mobile payment may also prove to be the ‘virtual wallet’ of the future. Ingenico’s survey found that of the 41 percent of people who would consider using or would definitely use the technology, the top three benefits were cited as convenience, a reduction in queuing times and a preference to carry less cash and cards around.

Interestingly, only 12 percent of respondents saw the improved security of mobile payment as a benefit.

“At least a third of people surveyed want fewer cards in their wallet,” Rankin says. “There is the idea that potentially you could have all of your cards existing in a virtual wallet in your phone – there are some stats around to suggest that if you lose your phone you will realise much more quickly than if you lose your wallet.

“You can already protect your phone with a PIN, in a way that most people don’t protect their wallet, so there are some additional layers of security which can be enabled there which a lot of cardholders would find quite attractive.”

The issue of consumer education

Major industry players, while welcoming the emergence of mobile and contactless payment technology, are also frustrated that what seems to be slowing adoption is the fact that there has been no clear, cohesive strategy among the payment industry around educating consumers.

Obviously different banks are rolling out their various propositions at different times, and those propositions may also have different customer targets. But there have been calls for Visa and MasterCard, the two driving forces behind contactless and mobile payments, to do more to promote them among consumers, instead of expecting banks and third-party players to do the educating for them.

Rankin says: “It’s surprising how little activity there’s been in terms of promoting contactless. If you look at the push we had for chip and PIN, admittedly a lot of that was around the whole chip and PIN campaign, and a lot of that came from government funding. On contactless, the major schemes have been surprisingly quiet.

“I think a lot of awareness will be spread by word of mouth. It could just be the case that Visa and MasterCard have been very canny in keeping their powder dry, and letting that word of mouth do the job for them. It may mean that the initial adoption is a bit slower and certainly in the industry there are probably people who feel a little bit impatient because they’ve been talking about contactless for a couple of years now.

“It’s only really now that we’re starting to see significant ramp-up of deployment on the initial device side from the banks. But I really do believe that word of mouth and usage by cardholders is going to really spur adoption and enthusiasm and make adoption of the technology go exponential this year.”


The wacky world of card innovation

Other kinds of innovation may not be getting the attention that mobile and contactless have received, but nonetheless they are noteworthy for their forward thinking.

Vending machines that can dispense marijuana with the swipe of a card have cropped up all over Los Angeles. But it’s not for everyone, just those with medical prescriptions who need to first undergo a process more familiar to those caught using drugs illegally – providing fingerprints and being photographed. They then receive a prepaid card containing their profile.

The machines first verify fingerprints and the card before dispensing the drug in a bright green envelope.

Auto manufacturer BMW has teamed up with NXP to device a car key that doubles up as a credit card. Of course, this also means that BMW drivers can now lose their car keys and their credit cards simultaneously.

Meanwhile, technology giant Apple is reviewing a new application that will turn the iPhone into a credit card terminal.

Biometric and smart card technology developer SmartMetric is pushing a credit card that is fitted with a processor with more than a gigabyte of memory, a rechargeable battery and a fingerprint sensor – the only card that can be used for POS and online authentication via a USB adapter.

Meanwhile, Visa has rolled out a card with an embedded battery circuit and chip. When making a transaction, the cardholder enters their PIN, and a code is generated by the card that appears on its keypad which can be used for making a purchase. This is the next step towards guarding against fraud.

Lastly, Fashion Fever is a toy credit card that allows children to set up their own store and buy outfits for a Barbie doll and check their account’s balance. Once the balance hits zero, it automatically resets, and the cardholder can continue shopping.

An innovative way to teach the young about credit?

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