It is early days for contactless and mobile
payments in the UK, with most programmes only a few months old. But
figures released by some of the UK’s leading players in the field
indicate the technology is starting to catch on. William

Mobile payments and contactless technology trials
launched by UK card issuers, Visa and telecommunications provider
O2 are off to a promising start, with retailers snapping up the
chance to offer the service.

Figures obtained by CI from Visa and acquiring
banks indicate merchant acceptance of Visa contactless payments, a
core measure of the trials’ success, had jumped 50 percent in two
months. A Visa spokesperson told CI Visa estimates the number of
terminals that accept contactless Visa payments increased from
2,000 to 3,000 in November and December. Card companies are keen to
push contactless payment because it could allow them to capture a
share of the £250 billion ($497 billion) of transactions made in
cash, most for purchases of £10 or less.

Separate figures issued by Barclaycard, whose
OnePulse contactless programme was launched in September, showed a
150 percent jump in merchant acceptance from 1,000 terminals to
2,500, between January and June 2007. Barclaycard said that it had
been giving incentives to some retailers to sign up, but added it
had also been approached independently by other interested

Visa is working with HSBC, Lloyds TSB, Barclays
and HBOS in a series of contactless credit and debit payments
trials, launched towards the end of last year. MasterCard is
working on a similar programme with RBS in the UK, but said it did
not want to give figures because of stock market regulations. In
the trials, customers were issued with the new cards and merchants
around London were signed up to accept contactless payments.

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Contactless card technology functions by adding radio frequency
identification (RFID) capability to a payment card, which can then
communicate with a card reader when placed within a few centimetres
of it. This enables quick transactions and reduces queuing times
for customers, which gives it an advantage anywhere retail volumes
are high and transaction values are low.

The technology makes particular sense in
transport networks, where queuing for tickets at peak times can be
exacerbated by comparatively lengthy chip and PIN card

Barclaycard’s OnePulse is the most integrated
contactless offering currently on the market. It offers
conventional credit card functions, compatibility with public
transport network Transport for London and contactless technology.
The credit card company claims that three times as many passengers
per hour can pass through a London Underground payment gate using
Oyster than can those using printed tickets.

Contactless also makes business sense at fast
food chains, coffee shops and newsagents, areas where payments are
typically still made in cash. Figures from UK payments association
APACS show consumers made more than 27 billion cash transactions in
2006, worth a total of £250 billion. Around 80 percent of those
were for less than £10. Around 96 percent of payments under £5 were
made by cash in the same year.

Card payments in the UK make up over 60 percent
of consumer spending, and contactless is seen by card issuers as a
way of further replacing cash with card payments and boosting
revenue. APACS estimates that over 5 million contactless cards will
have been issued in the UK by the end of 2008 and more than 100,000
retailers will offer the service.

On the merchant side, the technology works the
same way as a credit or debit card transaction, except that a
contactless reader is required. Transactions are processed in the
same way and are subject to the same level of interchange.
Barclaycard said installing the hardware has proved easier at
smaller retailer locations such as corner shops because it can be
plugged into an existing terminal and used immediately. For larger
organisations, the installation is more complex and requires an
overhaul of systems.

Mobile payments encouraging

The news on increasing merchant acceptance is also encouraging for
Visa’s collaboration with O2 and Barclaycard to offer m-payments,
which is compatible with contactless POS devices. Anecdotal
evidence in the first phase of the O2 wallet programme has been
promising among the 225 trial customers using the mobile
contactless Barclaycard product.

People participating in the trial – customers of
O2 – have been issued with a phone that features Visa’s contactless
payment application embedded in the SIM card. It allows them to
touch the phone against a reader to pay for goods up to the value
of £10, without the need to enter a PIN. Participants have been
given £200 in credit from Barclaycard which can be used at retail
chains taking part in the contactless trial, including Threshers,
Books Etc, Coffee Republic and Eat.

Smart posters

The service also offers entertainment information through touching
the handset against ‘smart posters’ and a Barclaycard
balance-checking facility. Customers can touch their handsets
against promotional posters designed for the trial, which contain
embedded tags. They communicate with the mobile phone, sending it a
text message or providing a shortcut to a mobile internet site with
services such as schedule or booking information.

A Barclaycard spokesman told CI that initial
findings were encouraging, but the company would wait for the trial
to run its course before drawing any conclusions. A spokeswoman for
RBS, which is involved in a separate, internal mobile trial with
MasterCard, said the project would soon be expanded and that plans
for a public trial are “well advanced”.

One participant in the Barclaycard trial said:
“Personally, I’ve been using it for Oyster and payments in shops
and it’s fast and efficient. It’s convenient paying using a mobile
phone and moving around the transport network, and I haven’t
encountered any teething problems.”

The system uses near field communication (NFC), a
short-range wireless technology that connects electronic devices.
The service works in a similar way to contactless, as it is
compatible with contactless card readers and transactions are
processed in the same way. Retailers are charged the same
interchange fee as for contactless, a balancing charge paid to
banks that reflects the cost of offering card facilities.

Guido Mangiagalli, Visa Europe’s head of new
channels, told CI: “The technology works, it’s just a question of
how people are finding using their mobiles for payment. The early
signs are encouraging, but we aren’t in a position to give any more
details yet.”

The O2 trial is primarily designed to gauge
customer opinion on the technology, but it will also provide an
important study into how the collaborators will divide up any
future revenue. Negotiations are under way, with the current scheme
running like a conventional contactless programme. The systems and
infrastructure are largely the same as for contactless payments,
the only difference being that payment comes from a mobile phone
rather than a card.

Payment Methods

Telecoms move into payments

If mobile payments take off, telecommunications companies will
become increasingly important players in the payments industry and
would want a fair slice of profits. That would require a revision
of the existing interchange fee-based system, or telecoms providers
finding some other way of generating revenue from the system.

O2’s Mary Carol Harris, head of NFC, told CI one
of the things O2 was looking at was charging “rent” to banks to
carry the payment application on customers’ SIM cards. She said:
“We are definitely looking at that – it is one of the ideas for a
business model, but there is still a lot of work to be done on it.
We have to work out what new value it [the technology] adds and
what it would be worth to banks, but the key thing about the trial
is customer feedback.”

While the idea of mobile payments is still in its
infancy, it presents some interesting questions about the future of
the payments industry. One of those is the potential for
telecommunications operators themselves to start offering financial

Harris said: “I cannot comment on whether we are
looking at that. I would not say it’s in our strategy right now. We
are not looking at trying to process payments or transactions, but
at this stage the market is so early in its development and
anything is possible.”

Cash Payments