The share of total consumer payments made by plastic card continues to grow, but both consumers and merchants still rely on cash to make low value payments. Contactless payments are aimed at removing some of these cash payments.
The new payment technology is designed to make it quicker and easier for consumers to make low-value payments by card. To make a contactless payment, the consumer simply has to tap or wave their card – or other payment piece such as a watch or key fob – on a reader at a point of sale. Within half a second, the payment is verified and the transaction is completed; there is no need to sign or enter a PIN for low value transactions.
The technology offers particular benefits to both consumers and retailers in sectors where speed is important, such as quick-service restaurants, pubs and bars, convenience stores, and petrol stations. It is aimed entirely at replacing cash. Consumers benefit from far speedier service, while also benefiting from the convenience of not having to carry as much cash.
Contactless transactions are secure. The value of a contactless transaction is capped at quite a low level, while consumers would still face zero liability for any losses due to cards being lost or stolen. In addition, programs built on EMV (chip and PIN) technology offer the same authentication security as a standard card transaction.
According to Datamonitor, the value of cash payments below $25 made in six key contactless retail sectors in 2004 was $724 billion (E582 billion). Petrol retailing (both petrol and service station convenience retailing) offers the greatest opportunity; $376.4 billion of low value cash payments were made in this sector in 2004. This is followed by convenience stores, with $168.3 billion.
US and Asia lead the way
The US is the largest contactless payment card market in the world. At the end of Q1 2006, there were over 10 million American Express, MasterCard, and Visa branded contactless devices in circulation in the market (card-based, and other form factors such as key-fobs and miniature cards), and these are accepted at over 30,000 merchant outlets. Several banks now issue contactless products to their customers, led by Chase Bank, which began a full commercial launch in summer 2005.
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Unsurprisingly, the largest opportunity for contactless payments is in the US. The potential for contactless payments in this market is $226 billion, of which close to half is accounted for by petrol retailing. Interestingly, the fast food sector is the second most important in this market, which differs from the global average.
In the Asia-Pacific region, contactless payments have been deployed in Malaysia, Taiwan, Japan, South Korea, and Singapore. Japan is the largest market for contactless payments in the region. It is estimated that $71 billion of low-value cash transactions were made in the six selected sectors in 2004, greater than both the UK and Germany. Again, petrol retailing is the most important sector, followed by convenience stores.
UK and Germany greatest opportunities in Europe
There has been little activity in Europe to date, largely because issuers have been focused on the migration to EMV, but it is understood that developments are only around the corner. Indeed, Royal Bank of Scotland has already announced a trial of contactless payments in the UK for summer 2006.
The UK and Germany present the greatest opportunity for contactless payments, with $59 billion and $51 billion of low-value cash transactions in the chosen sectors respectively. Again, petrol retailing is the most important sector in both of these markets, but it is interesting to note that pubs & bars is the second most important merchant area in the UK ($18.6 billion), while in Germany the second largest is convenience store retailing ($11.5 billion).
