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January 8, 2008

Merchant acceptance jumps in UK trials

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 UKs leading players in the field indicate the technology is starting to catch on.

By Verdict Staff

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 Cain reports.

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 retailers.

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.

How it works

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 payments.

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.

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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 services.

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.”

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