Cashless payments can be made in many ways, but the most common is by loading credit onto a smartcard. A smartcard is one that contains at least one electronic chip, which can hold data or software programs.

There are two types of basic smartcards: contact and contactless. Contact cards require physical contact with a card reader, and are often sucked into a reader and then ejected out when the read/write operation is complete. Contactless cards have hidden chips and aerials. The aerial is usually placed around the perimeter of the card. These can be read by being placed on top of or very close to a reader. They can offer very efficient processes, and their readers suffer fewer mechanical failures than contact card readers.

However, contactless cards are more expensive, and can create problems of their own. Often cardholders do not hold the card close to a reader for long enough for the transaction to complete. This can lead to data corruption, and occasionally render the card useless.

Smartcards are expensive, with a minimum price of circa GBP1 for the cheapest blank card. To this needs to be added the cost of the software application that is used to operate the scheme, and the hardware (servers, connections, card readers). Ongoing costs would include cardholder data capture, personalization/printing, postage, data maintenance and replacement of lost or stolen cards. These can add up to GBP10 per annum or more per card, depending on the requirements of the scheme.

Another important factor to consider is government regulations that would apply to the scheme. In the UK, the Financial Services Authority (FSA) has strict rules and guidelines that apply to issuing e-money. An organization cannot just go ahead and set up an e-cash vending machine payment system without first obtaining a small e-money issuer certificate from the FSA.

A more extensive set of rules apply to larger cashless payment schemes, where the value of transactions is expected to be above E5,000,000. In those circumstances, the e-money issuer has to obtain a different type of license from the FSA, and has to comply with requirements similar to those of a retail bank.

The cost of smartcards, and the financial regulations on issuing e-money means that cashless payment schemes have to be very carefully planned and implemented. Many organizations find that there is simply no business case for a smartcard-based cashless payment scheme.

However, the situation changes when a scheme operates multiple applications using the same smartcard. Then economies of scale kick in, as do improved processes, and automated data capture. Added together, these bring about process-related cost savings, and speed up return on investment.

Take the case of the Octopus Card in Hong Kong. It gained mass market penetration from its transport ticketing origins, thus benefiting from economies of scale from the start. It is now used for a variety of other purposes too, including cashless payments. Organizations that are interested in using smartcards for cashless payments should therefore investigate other uses of smartcards: building and car park entry/exit controls; computer user account identity management; authenticated logins to hot-desk workstations that automatically divert telephone extensions to the chosen hot-desk; and then vending machine and staff canteen cashless payments.

Therefore, the answer is to think big, as size matters when it comes to smartcard schemes, and so does the number of applications that are served by the same smartcard. A cashless payment solution should be just one among a number of others operated by a smartcard scheme. Otherwise, the single application may appear low-cost and affordable, but in practice would make no economic sense.

Source: OpinionWire by Butler Group (www.butlergroup.com)