Time to shine?

Depending on who you believe, contactless is either done before it even got started. Or it’s finally achieving critical mass. Scott Thompson hears the arguments for and against this new(ish) way of paying

NFC/contactless has been hyped for so long and is taking too long to scale, as the use cases are somewhat limited and the infrastructure expensive to deploy. That was the verdict of the recently issued Payments Innovation Jury Report. But hang on a minute, wasn’t 2015 supposed to be the year that contactless finally took flight? It has grown exponentially in several European countries and a tipping point is being reached, argue the banks, card schemes etc. Throw in the recent Payments Council announcement that digital payments have overtaken cash transactions for the first time and the move towards a cashless society is well and truly underway. Vive la revolution! Ah, but look beyond the grandiose predictions, self-serving press releases and flashy ad campaigns, others counter, and you’ve got a technology swamped by hype and hampered by too many shortcomings to really go mainstream.

“I would agree that widespread adoption is taking a long time and the infrastructure is definitely expensive. Other than for contactless (principally card) payments to date, the real use cases gaining adoption have been quite limited. It has felt a bit like a solution looking for a problem,” says Paul Mason, CEO at PMC. “Even contactless card payments are by no means the norm. In some ways, it could be argued that there is too much going on with lots of people driving their solutions. More focus, collaboration and standardisation around four or five key use cases might speed adoption and the clarification of business case to unlock the necessary investment. The customer needs to clearly see “what’s in it for me” and to trust the technology if adoption is to increase. Ease of use and convenience will always be important and I’m not sure that a smartphone full of digital wallets is going to be the answer. A world of constant phone alerts will also drive consumers crazy.”

With the benefit of hindsight, more time should have been spent on increasing merchant and transport adoption and then pitching it to banks. However, the real issue is a failure of marketing, not technology, argues Matt Simester, director at Piran Consulting. “The consumer value proposition was not really clear and retailers did not believe that queues would shorten. It’s only just now that contactless terminals are visible at the retailer – it won’t help future technology adoption if stakeholders are cynical about the benefits and speed of adoption,” he says. “The marketing failure was one thing. The other was a basic lack of understanding of the merchant. Merchants will not replace existing PoS infrastructure until it needs to be replaced. Contactless was just not big enough. Building on this pragmatic message is one about mobile payments – most retailers do not have phone signal in many areas of the store. There are some basic infrastructure issues that need addressing. Contactless has taken so long to adopt it’s skipping cards and moving to phones and wearables. What other deployment of technology has taken so long that the format of payment has been leap frogged?”

Not that everyone agrees with the Payments Innovation Jury Report. Contactless usage has taken off recently, notes the UK Cards Association (UKCA), with spending in 2014 of £2.32 billion, a threefold rise compared with 2013. In fact, the total spend in 2014 was more than double that of the previous six years combined. Whilst the number of transactions has also increased dramatically, moving from 100.4 million in 2013 to 319.2 million in 2014. This means that every second, ten contactless transactions are made, amounting to three per cent of all card transactions in the UK.

“It has taken some time to achieve this critical mass,” admits Richard Koch, head of policy at UKCA. “This is invariably the case in the cards market where retailers are keen to ensure that a sufficient number of their customers have access to a contactless card prior to installing terminals that accept them. In the case of very large retailers who own their own payment terminals – which are integrated into their tills and back office accounting systems – they only rarely reinvest in new equipment.”

The transport sector has played an integral part in driving its popularity, adds Koch. There were more than 17 million contactless bus journeys in 2014 and more than 14 million rail journeys. “We are now working with the card schemes, Department for Transport (DfT), the Association of Train Operating Companies (ATOC) and Confederation of Passenger Transport UK (CPT) on a project to develop a contactless transit framework for the UK, building on the successful roll-out of contactless payments across the London transport network. We expect this will drive its popularity further because, after people have used a contactless card in a transport setting, they are much more likely to use it in a retail setting. The opportunities for contactless transactions are growing too – approximately one in four cardholders had a contactless card at the end of 2013, rising to approximately one in three cardholders by the end of 2014.”

Ron Kalifa, deputy chairman at Worldpay, also concedes that it has taken time for contactless to establish itself and build momentum, but adds there is strong evidence that a tipping point has now been reached. “It took two years for us to reach the £1 billion milestone in terms of contactless transactions, but we smashed through the £2 billion mark in just six months with the number of contactless payments rising by 49 per cent in that time,” he says.

As with any new technology, it can take the actions of a major player to force the tipping point. In addition to TfL’s decision to enable contactless payments across its network last September, supermarkets have also proven effective standard bearers for the ‘tap and go’ market, accounting for 44 per cent of all contactless transactions “It is really a no-brainer for businesses that process a significant number of low-value transactions. What we’re seeing now is that smaller businesses in key sectors like hospitality, food, entertainment and retail are grasping the commercial benefits of contactless. Just look at what’s happening in the hospitality sector. Standing at a bar asking to pay by card used to provoke an audible sigh from the bar staff. With contactless, paying by card is quicker and more convenient for all concerned.”

The £20 limit on transactions has brought with it advantages and disadvantages in terms of bringing forward widespread adoption of the technology. On the one hand it has helped allay consumer concerns around fraud, but on the other it has put restrictions on the type of purchases that can be made. “We believe the planned limit increase to £30 (set to happen later this year) will play a significant role in accelerating the already rapid growth rates we are seeing around contactless.”

He continues: “Much of the hype over the past 12 months has been around NFC payments on mobile devices with major manufacturers adding payment technology onto smartphones and wearable devices. Use of NFC technology will only accelerate once innovations like Apple Pay and Samsung Pay become mainstream and it looks like a hugely exciting year ahead for contactless payments as a whole. Big brands will help put consumers’ minds at ease over security, encouraging businesses to adapt to the ever-changing payments landscape as people look for easier and more convenient ways to pay.”

What customers want
But if contactless is a no-brainer for many businesses, do consumers feel the same way? Certainly, they still see cash as a vital part of their day-to-day lives. According to the recently issued UK Cash & Cash Machines 2015 report, during 2014 over 18 billion payments were made in cash, accounting for 48 per cent of all payments made in the UK, worth around £250 billion. And it accounted for 52 per cent of the volume of payments made by consumers. Nonetheless, we’re not talking an impossible dream here, says PMC’s Mason. “Interestingly, I was recently in Australia where the adoption of contactless payments appeared to be much higher than it is in the UK,” he comments. “This was not just in major cities but also in “the sticks”. Customers clearly appreciated the speed and convenience at the point of payment and appeared to be comfortable with paying in this way. It was also clear that retailers had done a decent job of training their staff to incorporate the contactless payment option into their conversation with the customer. I can’t see why the same can’t be achieved in the UK.”

When contactless arrived, there were numerous stories about card clash and much of the consumer market viewed the technology with suspicion, observes Sage Pay’s managing director, Sean Wilson. A second issue was the value limit on payments which meant the use cases were considered to be limited to specific locations such as coffee shops. “Here in the UK though, we can see the contactless trend taking effect. For example, on the London transport system, buses don’t take cash and contactless payments cards can be used like an Oyster travel card. Over 60 million journeys have been made using contactless since last September. It’s clear that people are beginning to see the wider use benefits.”

There is also a big development happening in this space that will drive scalability further. And that’s the arrival of ‘high value’ contactless standards, where additional information can help authenticate the transaction. Apple, for example, has taken existing technology (biometrics and contactless) and bundled it in a user-friendly and attractive package (Apple Pay). Other similar propositions will soon be on offer to non-Apple iPhone 6 users as well.
All of which sounds great, but, this being contactless, the critics (much like cash) aren’t going away anytime soon; progress has been made but this is a technology still dogged by the accusation that it’s all hype, no substance and looking to solve a problem that doesn’t exist. As Piran’s Simester puts it: “It has missed its moment. I predict more user friendly payments will be launched that do not require widespread disruption to existing merchant processes. Apple Pay, for example. Contactless is a great case study on how not to do things! It is the marketing proposition around the payment which will separate winners and losers, not the technology. Winners need world class marketers leading innovation.”

PMC’s Mason, while not quite so damning, also highlights issues that need to be addressed. “It’s going to be about trust more than the technology. Trust takes time to build for mass adoption to take hold. The industry is going to have to work hard to get across the security advantages of digital options over the card, simply because consumers trust the card scenario and are used to the recovery and protection scenarios that exist when cards are lost.”
He concludes: “The potential has to be there. For the consumers, they need to see convenience, speed and security. For retailers, they need to see all of those things and lower operating costs.”

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