November 5, 2010

A Cashless Society: The Electronic Payment Revolution Gathers Momentum

In 2003, for the first time, Americans used cards — credit, debit and others — to buy retail goods and services more often than they used cash or check. We are fast becoming a cashless society. The movement away from cash and checks is being facilitated by the reduction of bank fees charged to merchants for small-payment transactions using debit/credit cards, the elimination of the signature requirement for purchases under $25 on debit/credit cards, the proliferation of contactless payments with smart cards (especially for public transit), and the introduction of smart phones for contactless mobile payments. We are being conditioned, especially our youth, by the financial giants to use electronic currency, with emphasis on small-value purchases (in particular, public transit) that make up a large percentage of cash transactions.

Card Displacement of Cash for Small Purchases Set to Explode

Gerson Lehrman Group
Originally Published on September 5, 2006

Card payment product use in lieu of cash for small purchases is likely to accelerate, feeding payment network transaction growth.

The U.S. is considered a mature card payments market. Nevertheless in spite of widespread general-purpose card adoption by consumers and merchants, a majority of payment transactions are still cash and paper check based.

Small purchases have long been the realm of cash. There are 350 to 400 billion cash transactions under $25 annually in the U.S. However, credit, debit and prepaid electronic payment products are starting to whittle away at cash's small-purchase-transaction share.

In the last several years there has been a sea change in consumers' and merchants' attitudes.

According to Ipsos research conducted for Peppercoin, from September, 2004 to October, 2005, Northeast consumers' willingness to use credit cards to buy a cup of coffee doubled.

MasterCard, Visa and First Data all adjusted transaction small-payment pricing, significantly reducing the fixed component of interchange, making their products more palatable for merchants. The payment networks and banks long resisted pricing adjustments necessary to win a greater share of small transactions, viewing them as not being economically attractive.

For merchants, card use increases consumer spend and reduces breakage.

For small purchases, cards are more convenient and faster than cash.

MasterCard and Visa eliminated signature requirements for most purchases under $25.

Contactless cards are enhancing cards' ease of use for consumers and merchants.

Using a contactless or mag stripe credit card for a fast-food purchase is faster and more convenient, and arguably less expensive for the merchant, than cash.

Consumers are increasingly rewarded and habituated to using cards to earn rewards, and to avoid the need to carry cash.

Sectors such as vending machines and parking meters, long the exclusive domain of cash, are being card enabled.

For small Internet transactions such as online gaming, music downloads, and content, cash is not an option. According to Ipsos the number of Americans between 18 and 34 making online purchases under $2 between 2003 and 2005 increased 250%, albeit off a small base.

Electronic payment products should enjoy heady small payment transaction growth.

Debit Card Use Remains Robust in Midst of Economic Downturn

Business Wire
June 14, 2010

The 2010 Debit Issuer Study, commissioned by PULSE, reveals that the debit market remained robust during the second year of the economic downturn and is projected to grow strongly in 2010. The study finds that much of the growth in debit use is in small-ticket transactions, suggesting that more consumers prefer debit over cash.

Issuers surveyed experienced overall debit transaction growth of 10 percent between 2008 and 2009. Much of this growth was with small-ticket transactions. In 2009, 58 percent of all debit transactions were less than $20.
"The debit market has continued to weather the economic storm as a result of consumer preference for debit and increasing merchant acceptance of small-ticket debit transactions," said Cindy Ballard, PULSE executive vice president. "As consumers scaled back spending during the recession, they embraced a pay-as-you-go approach and are keeping their debit card top of wallet."
Furthermore, the study found that year-over-year PIN debit transaction growth outpaced that of signature debit transactions. Between 2008 and 2009, the use of PIN debit grew by 13 percent with an average ticket size of $41; signature debit transactions increased by nine percent with an average ticket of $35. Both figures for average ticket have declined by roughly $1 to $2 compared to the previous study. In addition, active debit cardholders, those who conducted at least one PIN or signature POS transaction within the last 30 days, performed on average 17.3 POS transactions per month, also flat compared to 2009.

The 2010 Debit Issuer Study found that debit card penetration — the percentage of eligible accounts that can be accessed by a debit card — has remained steady at 73 percent since 2007. Sixty-four percent of consumer debit cards are active, largely unchanged from 66 percent in 2008.
"As evidenced by the performance of best-in-class issuers who have managed to significantly outperform the market, there is clearly an opportunity to enhance the debit experience with existing customers and create interest with potential customers," said Ballard. "Increased interest from debit card issuers to explore programs such as instant card issuance will continue to promote further growth in the debit industry."
As debit card transactions continue to increase, issuers are becoming more concerned about how fraud and government regulation could impact profitability. In 2009, 95 percent of debit card issuers were affected by data breaches, making fraud mitigation a top challenge for issuers. Issuers' average signature POS fraud losses increased 43 percent last year from 5.2 basis points (bps) to 7.5 bps, and PIN POS fraud losses rose by 24 percent from 0.8 bps to 1.0 bps.
"Despite the uptick in fraud, growth in the debit market remains solid, and the 2010 study identified specific areas of opportunity for sustaining momentum, such as business debit and rewards programs that are more integrated with checking accounts," said Tony Hayes, an Oliver Wyman partner, who served as project lead on the study. "The debit market has shown resiliency despite the economic challenges, as consumers turn to readily available funds over other payment methods."
Regulation E changes

Government regulations were cited by issuers as a major challenge for their institutions. Changes to Regulation E (Reg E), which will take effect this summer, will require opt-in consent before consumers can incur overdraft charges. Overall, issuers expect 30 percent of consumers to opt in to overdraft services, but expectations vary according to institution size. Large banks expect 20 to 40 percent of their customers to opt in, while many credit unions and community banks expect a much higher participation rate, with many forecasting that more than 70 percent of customers will opt in.

With interchange and overdrafts producing approximately $118 of annual revenue per active card, financial institutions expect that the changes to Reg E will result in fewer approved transactions, lower interchange income and less profitable debit card programs, impacting debit card profitability over the next two years. In an effort to counteract potential decreased fee income, 45 percent of issuers have already created a plan in response to the changes.

Congress Approves Interchange Regulation Amendment

The Green Sheet
July 12, 2010

As the details of the Restoring American Financial Stability Act of 2010 continue to be hammered out, an amendment introduced by Sen. Dick Durbin, D-Ill., to regulate fees levied on merchants for card transactions appears to have secured its place. On June 21, 2010, both houses of Congress agreed on a provision to regulate debit card interchange.

The reconciled amendment allows the Federal Reserve to cap debit card interchange at a level that's "reasonable and proportional" to the cost of processing debit transactions; it gives the federal government a year to determine what that rate is; and it exempts debit cards issued by banks with assets under $10 billion.

Patricia Hewitt, Director of the Debit Advisory Service for Mercator Advisory Group, said the impact of interchange regulation is potentially significant, though difficult to predict.
"Debit cards represent the majority of transactions in the United States, so from a card perspective, I think we have to look at it at a very macro level," she said. "We don't know what the ripple effect is going to be when we potentially radically change a pricing model connected to the majority share of payment transactions in the United States. But that's going to have an impact."
More options for retailers

The amendment also allows merchants to decline credit and debit cards for purchases below $10 (on which interchange sometimes exceeds the retail profit margin). And it prohibits the monopolization of debit card processing — meaning debit cards must link to at least one other back-end processing network besides the one owned by the card's brand.

So Visa Inc.-branded debit cards that connect only to the Visa-owned debit processing network Interlink will be required to connect to another back-end system as well; the same goes for MasterCard Worldwide-branded cards that currently use only MasterCard's debit processing network, Maestro.
"Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high 'swipe fees' charged by Visa and MasterCard," Durbin said in a statement on his website. "It will prevent the giant credit card companies from using anti-competitive practices ... and restore common sense and fairness to this broken system."
A few concessions

The finished amendment largely resembles the one Durbin introduced to Congress in June 2009, but it does make some concessions to the issuing banks and card companies that lobbied fiercely against it.

Among them are the exclusion of a provision that would have allowed merchants to offer discounts to consumers who pay with cash (something they are already allowed to do under card brand rules as long as disparate retail prices for the same item are not posted based on payment method); the exemption of government-administered cards and reloadable prepaid cards from regulation; and the consideration of fraud prevention in determining a "reasonable and proportional" debit interchange cap which, according to industry analysts, may yield interchange caps that vary depending on merchant type.
"By factoring in risk, they're allowed to set different card expenses based on historical risk factors for certain types of merchants, as well as the usage of the cards," said Jeff Fortney, Vice President of Clearent LLC, an ISO.
Fortney said the provision calling for "reasonable and proportional" debit rates leaves the issue "wide open." He believes Durbin's interchange amendment is a political move to assuage the retail industry and that it's unlikely to carry much weight.
"I think it's much to do about nothing right now," Fortney said. "I don't think the Feds are going to waste their time on this. Given a year to come up with a fair and reasonable rate, do you think they're going to spend much time analyzing this? I don't. I think they're going to contact the networks and say, 'OK, guys, show me why you're charging this.'"
Fortney added that ISOs could benefit from the requirement that debit cards connect to multiple processing networks.
"Let's say I'm charging a fee for accepting PIN-based debit," he said. "I'm going to charge 20 cents plus network fees. My merchant could gain by being tied to a network that has a lower cost, but I could gain, too, because maybe I could charge 25 cents instead of 20, since I know everything's going to a lower cost, and PIN debit network fees aren't going to be so high."
But others anticipate negative repercussions. A report from Mercator, "The Durbin Amendment: Impact Analysis," predicts issuing banks will compensate for reductions in interchange by charging new fees to consumers or by increasing existing ones.

Such fees would offset any possible savings to consumers from lowered retail prices that may stem from regulated interchange rates, the report indicates.

Potential problem for smaller banks

The paper also predicts that community banks could suffer if merchants steer customers away from debit cards issued by smaller banks (those with assets under $10 billion) that aren't regulated and charge higher interchange.
"Should interchange differential between the two tiers [of banks] be significant enough, merchants would have a strong motivation to 'steer' consumers away from using their community bank or credit union cards," the report states. "Large merchants have been very successful in incorporating technology into their point of sale systems to steer consumers to use sometimes cheaper PIN debit transactions ... such systems could easily be engineered to identify cards from more expensive small issuers and to prompt consumers to use some other tender type."
The Electronic Payments Coalition expressed displeasure with Durbin's amendment.
"Consumers will pay higher fees, lose rewards programs and have limited choices for debit cards due to the disruption this amendment will bring to the economics of the debit card market," the coalition said in a statement.
According to the National Retail Federation, debit card interchange accounts for $20 billion of the approximately $48 billion banks generate in swipe fees each year.

But for Adil Moussa, Analyst for Aite Group LLC, the effect on revenue is not as important as the fact that debit card interchange regulation opens the door to regulation of credit transaction processing, thereby cutting into an even more important source of revenue.
"For banks, revenue from debit isn't really the first money maker," Moussa said. "It's the lending they do ... the interest rates and the fees they're able to charge people for having [credit card] accounts. Those are really the first two main ones.

"We've already seen some regulation against charging outrageous fees on those accounts, so this is chipping away some more at bank revenues. What that's going to do is put a lot more pressure on the banks to come up with new fees that they will charge the consumer."

Contactless Payments: Out of Contact

October 8, 2010

Contactless is approaching tipping point, but concerns remain about costs and whether shoppers will embrace the system without a national consumer awareness campaign.

PIN-free paying is almost here. More than 9.6 million UK consumers now own contactless payment cards. This will reach 14 million by the end of the year, and 25 million by the end of 2012, according to the UK Cards Association.

A handful of retailers — including Boots, Spar, Co-op, Poundland , plus many cafes from Eat to Subway — are early adopters, already serving customers with contactless terminals in their busiest stores. Tesco says it has installed contactless terminals in "a handful of stores" while Wilkinson is believed to be making headway too.
'Tap and go' payments for transactions under £15 are part of everyday service in central London and Liverpool, but millions of consumers haven't heard of it yet.

"We'd like to see a couple of big issuers increase their rate of roll-out so that the momentum for merchant adoption can really get going," says Barclaycard head of payment acceptance Stuart Neal. "At Barclaycard we're leading the way and are issuing a large number of contactless cards every month, but we can't do it on our own. Many retail IT directors tell us they're keen, but it's often a matter of fitting contactless into their wider EPoS development schedule, and getting the business case approved."
Basket case

Retailers dealing with larger basket prices certainly aren't in a hurry.
"Contactless is limited to transactions under £15 so it wouldn't be relevant to us until we're more involved in the convenience market," says Morrisons group treasurer Paul Coyle.
Bob Jarrett, professional services director at independent retail trade body BHF-BSSA, says not all smaller retailers are convinced of the business case yet.
"Some retailers will compare the cost of switching to electronic payment with cash handling, and even though low interchange rates have been set, contactless will nevertheless be perceived as an increase in cost by some."
BRC director-general Stephen Robertson argues that banks charges on card payments are too high generally, and "they can't expect to maintain those excessive charges as numbers of non-cash payments grow."

Visa and MasterCard insist they are incentivising retailers to offer the Visa payWave and MasterCard PayPass cards by setting low interchange fees for contactless transactions — just 4p for purchases below £10 and 1p for purchases below £2, says Visa. And there are a long list of benefits. Once in mass use, stores can capitalise on consumers' apparent love for the speed and convenience of contactless payment, and see their throughput greatly improved. Queuing times can be reduced by 15% to 20%, and average transaction times cut by 40% if MasterCard is to be believed.
"The real tipping point will come next year when tier one retailers including the big grocers start to implement contactless," says MasterCard general manager for business development Alan King. "There's been a realisation now that the benefits just can't be missed," he says.
There is evidence from the US market — several years ahead of the UK in regard to contactless — that spend goes up when people use contactless cards.
"The theory is that previously people paying for items in a sandwich bar, convenience store or newsagents were reliant on whatever change they had in their pocket," explains King. "With a contactless card the opportunity is there to pick up that extra magazine or packet of biscuits because you're not restricted to the spare cash you are carrying."
Efficiency savings

The banks are keen to remind retailers that cash handling is not cost-free, so switching to contactless secure payment could save money and improve efficiency.
"Retailers need to think carefully about the fixed and hidden costs of cash," says Darren Wilson, chief executive of HSBC Merchant Services. "There is staff time spent cashing up, secure bank runs, night safe costs. If you hold large amounts of cash in store it's a security risk."
Staff theft from the till is less likely with less cash around. And reconciliation can be quicker when the trading day ends if the majority of payments have been electronic.

Co-op wants to improve the in-store experience for customers across its 3,000 store network says director of food IS Mark Hale, but is also looking for evidence of increases in average transaction values as its trial progresses.
"Industry research shows contactless transaction times to be significantly faster than cash payments and also quicker than standard Chip and PIN payments," he says. "We're confident we will see transactions speed up and we will carry out our own measurements to ascertain the exact benefit. Industry analysis shows a potential for an increase in average transaction too."
Co-op's trial, in partnership with Barclaycard, began in June this year and contactless is expected to be rolled out to 100 food stores in 2011 and all stores by 2012, if things go smoothly.

Hale says he's aware that some customers have been nervous about the security and risk of contactless payments until they fully understand how it works.
"Our communications plan, developed following customer research and focus groups, will seek to allay any fears that our customers may have. The aim is to offer choice and convenience for our customers, as contactless will be just one option for payment," he explains.
A lack of awareness

With no big national consumer awareness campaign planned to help ease shoppers into the routine of using their contactless cards, some retailers are worried that it falls to them to educate customers on the payment system. Barclaycard has been a pioneer of contactless and invested in a massive TV ad campaign — notably the 'waterslide commuter' — depicting the ease of cash-free living, but as one retail IT director put it:
"They're great ads, but they don't explain much about how the system works, where cards should be used, and key points such as warning people they might still be asked for PIN verification sometimes."
King at MasterCard says the gradual adoption of contactless is very different from the 'big bang' of Chip and PIN when people needed to know their PIN from a certain date.
"There's no need for a ubiquitous campaign this time, and we're finding localised education days are very useful."
For instance MasterCard and merchant acquirer RBS Worldpay demonstrated the technology to consumers and retailers in Williamson Square, Liverpool, last year, when a city-wide trial was being launched.
"As critical mass develops we will see more people exploring that way to pay for themselves," says King. "When I visit the Canary Wharf Boots, which was one of the first stores to install contactless terminals, shop staff seem very comfortable in prompting customers to pay that way."
And of course issuing banks are sending out leaflets explaining contactless whenever new cards are distributed.

Barclaycard and mobile phone operator Orange are close to launching a phone that facilitates contactless payments, and there's little doubt that this way of paying will become important in the near future.
"Retailers are starting to realise that if they make the investment in contactless now, they'll be well positioned to help consumers jump from plastic to mobile phone payments," says Neal. "It will happen sooner than we think, opening up really exciting marketing opportunities."
Make Contact: Cutting costs at SPAR

The business case for contactless was easy for SPAR UK to make, because the convenience store operator needed to update its EFT terminals to meet PCIDSS compliance anyway, says Spar UK IT controller Roy Ford. Busy Spar stores in central London and Liverpool are already serving customers faster since introduction of the integrated contactless EFT payment solution that the company developed with IT partner Business Computer Projects.
"A major benefit for us is reduced transaction costs for debit cards too because contactless charges are up to 40% cheaper than standard debit transactions," says Ford.
He says that from November the terminals will be rolled out to more stores within the M25 and around Liverpool. Spar has paid for the technology update itself, but had "assistance" from its acquiring bank.
9.6 million
Credit and debit cards issued with contactless functionality

Contactless terminals in place

UK cardholders with contactless functionality on at least one debit or credit card

UK cardholders expected to have at least one contactless card by the end of 2012

Source: The UK Cards Association

A New Way to Play

Originally Published on December 9, 1997

The vast quantity of physical cash in circulation around Australia is targeted for rapid reduction as the electronic payment revolution gathers momentum.

Liberalisation of access to the payment system — which paves the way for participation by telecommunications carriers and retailers — and the related pressure on financial institutions to reduce the considerable overheads involved in handling cash and cheques is driving the rapid introduction of smart cards.

While the widespread delivery of smart cards is expected to give birth to a range of applications related to information storage and retrieval, stored-value is the prime driver to the roll-out of these systems. According to a recently released study from market research company Killen & Associates, smart cards worldwide are expected to be recharged more than 27 billion times — an amount roughly equal to 80 per cent of the total number of credit card transactions in 1997.

The study also says consumers will elect to charge their smart cards at public telephones, gas stations and ubiquitous merchants such as McDonalds, as well as at home, using personal automatic teller services. This behavioural change, the report claims, launches a huge market for financial institutions, telecommunications and entrepreneurs that can provide card charging infrastructure and capabilities for multiple use and clearing. Existing credit card specialists MasterCard and Visa are already conducting trials of rival smart card products ahead of national roll-outs in Australia scheduled for the new year.

MasterCard acquired in February this year a 51 per cent shareholding in Mondex International — the parent body of Mondex Australia, which is owned as a franchise by Australia's Big Four banks — the National Australia Bank (NAB), Westpac, the Commonwealth Bank of Australia (CBA) and the ANZ. Westpac is currently trial-ling Mondex smart card-based electronic cash ahead of the large-scale roll-out, which is scheduled for July-December 1998. The trial — which started mid August — involves more than 200 Westpac employees utilising the bank cafeteria at Epping in Sydney's north-west.

However, introduction of the Mondex Australia system has not been without a number of headaches. The franchise-holders of Mondex Australia have been forced to issue a public guarantee that they will back the entire value of the scheme, even to the extent of repaying counterfeit value that may enter the system.

Mondex and its partners are continuing development of a multi-application operating system — known as Multos — which allows third parties to write applications onto smart cards. A number of parties — allied under the banner of MAOSCO — are seeking to progress Multos as an open smart card industry standard. These include Dai Nippon Printing, Gemplus, Hitachi, Keycorp, MasterCard International, Motorola and Siemens. The standard is designed to allow the secure downloading of applications to the card from a remote location by going online to the issuer via the telephone, automatic teller machine or in-branch, or via a PC across the Internet.

Visa International is set to launch its own smart card scheme in the second half of the year. The card specialist recently wound down a trial of Visa Cash on the Gold Coast after almost two years of offering the product as an alternative to notes and coins to Gold Coast residents and visitors for their small value purchases. Visa executives said recently that the program was already gearing up towards the next phase "and there are a number of developments under way which will extend the cards' functionality into areas such as mass transit, access security and loyalty programs via use of an open chip technology platform."

According to Visa officials, since the inception of Visa Cash, over 225,000 disposable cards have been issued, more than double the original expectation of 100,000. In addition, more than 8000 reloadable cards were issued. The number of transactions passed the 500,000 mark recently, bringing the total value of all transactions to over $4 million, with an average value of $7.70.

The Visa trial in Australia follows a recent agreement between the Bank of America and Visa to conduct tests of stored value chip card transactions on the Internet.

The trial involves several hundred employees of the Bank of America using reloadable Visa cash cards and their personal customers to conduct low-cost, cash-like transactions from participating merchants on the World Wide Web with their virtual "Visa Cash."

American Express recently signed an agreement with card systems supplier ERG allowing Amex to issue cards incorporating the BankSys Proton e-purse and use the Proton network in Australia and New Zealand. Amex executives indicated the company had plans to deliver a range of smart card applications to the marketplace, including network and Internet access, identification and security access and ticketless travel.

Telecommunications specialist Telstra — spurred by the Federal Government's recent decision to liberalise access to the nation's payment system — is also seeking a role as a key player in the smart card arena. The Australian telecommunications carrier recently announced the selection of the multi-functional Chipper card system — licensed from Chipper International, a 50:50 joint venture between the Dutch bank ING Bank and carrier PTT Telecom — to deliver a smart card system for a customised pay telephone network. Some 29,000 to 35,000 pay phones are expected to be customised to accept up to a maximum of four brands of cards, including the Telstra cards.

According to Telstra's national sales and customer service manager, Grant Burtenshaw, the carrier is rolling out disposable smart phone cards to customers ahead of the late-1997 distribution of multi-application functions.

Completion of national roll-out of the smart phonecard to retailers is scheduled for mid-1998, according to Burtenshaw, with the sealing of partnerships between Telstra and third parties scheduled for the end of next year.

Burtenshaw unveiled the reasons for Telstra's unwillingness to participate in either the Mondex or Visa schemes.
"The biggest problem [with Mondex] is that there's not a disposable [card] option; [and] a large proportion of the community is not going to get access to the Mondex reloadable card, while Visa said their Gold Coast trial was not a success without multi-functionality."
He also nominated the ownership of Mondex Australia by the Big Four banks as a further obstacle to participation in the franchise.

Several other government or quasi-government agencies are sufficiently convinced of the prospects for smart cards that they are already commencing projects in the area. Queensland Rail and Card Technologies are undertaking a one-year trial of smart card technologies on the Gold Coast rail corridor. Card Technologies also has arrangements with Cabcharge Australia, the largest taxi payment processor in Australia and Westbus, which operates the largest private commuter bus fleet in Australia. The Sydney metropolitan commuter rail network, CityRail, has entered into a memorandum of understanding for a trial in Sydney.

Under the arrangements, CityRail will install smart card readers in Western Sydney and the Sydney Central Business District.

However, despite the market bullishness about the future of smart cards, not everyone believes consumers are likely to embrace the technology with open arms. A major report from global market intelligence and forecasting specialists BIS Shrapnel has warned that overcoming customer inertia could be a major problem.
"Current cards are working well and the customer does not see the need to upgrade," the report, entitled The Smart Card Game in Australia, claims. "The latest co-branded cards, for example Telstra, Qantas and Visa, are already providing the many applications which appeal to those users seeking to reduce the number of cards in their wallets."
The report said the introduction of smart cards to Australia would have to be carefully managed as "consumers remember the initial introduction of cards as one where they had no choice."
"No-one canvassed consumers as to whether the plastic card was wanted or acceptable," the BIS Shrapnel report said. "They were simply sent the card, unsolicited and unexpected."
The consultants warned that unless there was "at least an appearance of" choice, consumers would regard a card as being "forced upon them" and consequently react negatively to a smart card initiative.
"Smart card suppliers will need to build confidence and this will require that: the consumer is informed of the benefits, security of the technology is explained, consumers become aware of the convenience, applications are understood, outlets are clearly identified, and processes involved in using the card are simple."
The study also found that consumers wanted to manage their cards so as to avoid interest and maximise benefits, taking advantage of interest-free periods and seeking additional benefits through incentives.
"It will be vital, therefore, that any fees and charges for new cards be held to acceptable levels — consumers expect to be encouraged to take up smart cards with an incentive in the form of a waiver on fees and charges in the introduction phase — most consumers prefer a one-off fee and would accept an annual charge where costs are known up-front.

"The second most popular option," according to the report, "would be a low charge per transaction, no annual fee and no charge for reloading. Nonetheless, consumers expect that card providers will collect fees at several points: on issue of the card, on reloading, and as a monthly administration charge."
Interestingly, in light of the competitive threat to the banks posed by market liberalisation and general poor public perception of the banking industry, most consumers expressed a preference for smart cards to be introduced by one or all of the Big Four banks as opposed to other suppliers.
"Banks are perceived as well-established, experienced in financial transactions and providing the best guarantee of performance and security," the report said.
Another interesting point derived from the research — particularly in the light of the Mondex consortium's problems — was the expectation that smart cards were viewed as "less private" than other options (due to concerns over chip technologies) and also "more expensive". Still, consumers generally believe the cards would be more convenient than current options — due to their multi-functionality — and more flexible.

However, the report revealed that resistance to any move to completely dispense with cash remains high.
"Most consumers will still require both cards and cash," it said. "Australians do not want to move to an entirely cashless society."
The penetration of electronic cash, stored value and smart card systems into Australian society is likely to ramp up dramatically in 1998. However, questions remain over key issues associated with such roll-outs, with the nation's privacy commissioner warning of the privacy of individuals represented a core concern.

Also in question is the consumer's willingness to accept smart cards, given that market's natural suspicion and resistance to radical change and the more specific concerns about privacy and security. Big dollars are likely to be spent by commercial interests backing smart cards over the next few months to ensure these perceptions are eroded.

Paper to Plastic: Checks and Cash Losing to Debit and Credit
Originally Published on October 3, 2007

Paper may always beat rock, but plastic is increasingly overpowering paper.

As debit card and credit card purchases become increasingly popular, check and cash payments continue to lose out. These traditional payment methods now account for less than half of all transactions, and a recent rule change by the Federal Reserve Board should tilt the balance even further away from paper transactions and toward plastic payments.

Debit, credit and gift cards have surpassed paper

Under a June 2007 change in the rules of Regulation E of the Electronic Funds Transfer Act, merchants no longer need to give shoppers a receipt on debit card electronic fund transfers (EFTs) of $15 or less at electronic terminals. The change took effect in August. Previously, banks and merchants had to give receipts for all transactions, no matter how small.

Debit train speeds up

The rule change should make plastic even more popular by enabling debit transactions in places where it was formerly not practical (such as the subway station, where waiting for a receipt could mean a missed train) or not cost-effective (the prohibitive cost for a snack company to install and maintain printers on its vending machines) to provide paper receipts.

The no-receipt exception is especially beneficial in places where low cost and quick turnaround are key ingredients, says Theodore Iacobuzio, managing director at research and advisory services firm TowerGroup.

There has to be "a combination of a low ticket with velocity — getting people in and out quickly," he says, such as in mass transit situations including tool booths and quick service restaurants.
Credit card transactions, which are addressed under Regulation Z, were already free from any requirements surrounding receipts. The change to Regulation E makes it possible for debit card payments to be accepted for those same small-dollar transactions where credit cards were already in use.

Although they are no longer required to supply a receipt on plastic payments of $15 or smaller, retailers may provide receipts if they choose. Whether a business offers receipts for transactions at all levels in part depends on its individual practices.

Fly the paperless sky

Consumers aren't just seeing greater acceptance of plastic on the ground. Airlines may be getting in on the cashless trend, too. A test currently sponsored by American Express has made some American Airlines flights plastic-only. On certain flights, passengers pay for their in-flight food, drinks, and headsets with credit cards and debit cards swiped through hand-held digital readers carried by flight attendants.

Other payment card developments, such as the introduction of RFID "contactless" cards, are also helping spur the move away from paper. RFID (radio-frequency identification) tags are built in to credit cards to enable a contactless transaction by just waving the plastic in front of or tapping a card reader, with no swipe needed.

When it comes to RFID, "it's going to enable debit cards to expand their universe into cash," says TowerGroup's Iacobuzio. "Nobody knows how big the universe of cash is."
According to recent data, fewer than half of all in store transactions are made using paper payments — cash or checks. Their combined proportion of in-store purchases fell from 57 percent in 1999 to 44 percent in 2005, based on the nationwide 2005/2006 "Study of Consumer Payment Preferences" conducted by the American Bankers Association and consulting group Dove Consulting.

Much of that shift away from cash and checks has stemmed from the popularity of debit cards. The percentage of in-store payments made with a debit card was 21 percent in 1999. It rose to 33 percent in 2005. Meanwhile, over that same time period, in-store credit card use actually edged lower, according to data from the ABA/Dove study.

Plastic gains speed

Plastic is not only more popular than paper, but it's often faster, too, according to a 2002 FMI Study, Pay By Touch, CVS, Aite Group analysis. The average tender time for check-based transactions was slowest, coming in at 64 seconds. Credit and debit card transactions completed with signatures came in second, at 48.4 seconds. It took 44.4 seconds for PIN debit transactions. Those old-fashioned greenbacks are still speedier at 28.5 seconds. However, new card payments technologies trump cash, with contactless bank card payments zooming in at 12.5 seconds per transaction.

Not surprisingly, the credit card associations benefit from increased debit card acceptance. MasterCard's second quarter 2007 earnings report showed that gross dollar volume for all transactions (credit, charge, and debit programs) climbed 13.3 percent from the year-ago period alongside a 14.8 percent jump in worldwide purchase volume. But debit card growth was even more impressive. MasterCard's GDV for debit transactions surged 19.3 percent year-over-year and worldwide purchase volume leapt 21.2 percent.

Additionally, MasterCard said it processed 5.868 billion transactions in the quarter compared with 5.062 billion the year before. Of those, 1.997 billion debit transactions were processed, versus 1.604 billion one year prior.

Contactless Payments Aim to Take a Bite Out of Small Cash Transactions

Chase blink, Wells Fargo are early leaders in a growing market.

Originally Published on October 1, 2006

The final frontier in payments is cash replacement for small transactions, according to Mark Friedman, president and CEO of Peppercoin, a Waltham, Mass.-based small payments technology company. Every year, he says, there are $1.3 trillion in cash transactions made for purchases of less than $5, and less than 1 percent of those transactions are conducted by card. One way for banks to get a larger share of that $1.3 trillion is with contactless cards, Friedman asserts.

According to a new survey from Peppercoin and market-research consultants Ipsos Insight (Cincinnati), consumers are ready to make those small purchases with contactless credit cards. More than 50 percent of survey respondents said they would use contactless cards to buy groceries, items from fast food restaurants or corporate cafeterias, or gasoline; and more than 40 percent would use contactless cards to pay for convenience store items and transit fares, coffee or parking, Peppercoin reports.

A 'Big Year' for Contactless
"This is proving to be a big year for the contactless payment industry," confirms a new report from Boston-based Celent.
More than 30,000 merchant locations in the United States are now capable of conducting contactless transactions, and more than 13 million contactless devices are now in the hands of consumers, Celent says. Among the financial institutions that have issued contactless devices are American Express, Bank of America, Chase, Citibank, KeyBank and Wells Fargo.

Last year, Chase alone issued 7 million contactless devices, according to Tom O'Donnell, Chase SVP. The Chase "blink" cards — from Newark, Del.-based Chase Bank U.S.A. ($74 billion in assets), a division of New York-based JPMorgan Chase & Co. ($1.3 trillion in assets) — are enabled with RFID technology.

In general, the contactless payment works the same way as a traditional credit card payment, O'Donnell explains.

"Aside from the front end, the rest of the transaction works the same, and all of the associated economics are the same as it would be for a traditional credit card payment," he says.
For the program, Chase partnered with Visa U.S.A. and MasterCard International, and worked closely with large merchants where consumers would be most likely to use contactless cards, including 7-Eleven, CVS and Walgreens, O'Donnell notes.

Over the past year, usage of the blink cards has increased steadily, reports O'Donnell, who says the toughest part of gaining acceptance was convincing consumers that they could use their cards in a new way.
"The functionality of credit cards hadn't changed in 30 years," he points out.
In early August, San Francisco-based Wells Fargo ($492 billion in assets) became the second card issuer to get on Visa's contactless payments platform when it began to distribute 400,000 contactless cards to its customers. The initial rollout, which will be completed by year-end, includes existing Wells Fargo customers who are up for card renewal, a few key demographic areas and the bank's college population.
"We definitely see this as an opportunity to make faster, more convenient and safer purchases," says Peter Ho, VP and product manager at Wells Fargo Card Services.
Merchant Buy In

In the United States, most of the focus on contactless card acceptance has been on the consumer side, but there should be equal focus on merchant acceptance, Peppercoin's Friedman says. One way to do this is to reduce processing costs for merchants. Peppercoin offers an "intelligent aggregation" program that allows a merchant to hold payments open.
For instance, if a consumer buys a $2 coffee every weekday from the same store, instead of sending the $2 charge daily, the merchant can hold the transaction until Friday. That way, instead of the 25-cent processing fee on each transaction, the merchant would be charged 25 cents for the bundled transaction of $10.
Boosting customer profitability is another way to entice merchants, Friedman says. To entice customers to spend more using contactless cards, Peppercoin offers reward programs embedded within its contactless cards. Peppercoin also offers a prepaid, stored-value option that allows for a reward tie-in when consumers put money on their cards.

Celent predicts that contactless payments will capture 15 percent of the market by 2011. But while the technology behind contactless cards can be embedded in many objects, including watches, key fobs and mobile phones,
"Consumers are more accepting of contactless devices if they are packaged like a standard credit card," the firm's report noted.

Regulating Electronic Money in Small-Value Payment Systems: Telecommunications Law as a Regulatory Model

By Randall W. Sifers
Part II: Electronic Money Payment Mechanisms for Small-Value Transactions

An important emerging mechanism for enabling small-value payment systems is electronic money. Electronic money is a payment mechanism that is a direct substitute for traditional cash; value is transferred electronically to pay for goods and services at vending machines, retail establishments, over networks, or through direct person-to-person exchanges.

It has been suggested that electronic money is likely to "lead to a new concept of pocket money, give birth to a new commercial payment system for the Internet, change the way governments pay out benefits electronically, and revolutionize the movement of value over telephone lines and airwaves."

Imagine the convenience of not having to carry around coin or currency to pay for parking, newspapers, or other small-value transactions. The use of electronic money in low-value, high-volume transactions opens up a wide variety of new services and changes the way in which old ones can be delivered.

Using electronic money for payment increases the efficiency of transactions by reducing the amount of time and number of independent steps it takes to complete, verify, and settle a transaction. This is because existing payment mechanisms either assume that parties will at some time be in each other's physical presence or that there will be sufficient delay in the payment process for frauds, overdrafts, and other undesirable transactions to be identified and corrected. With electronic money, the same information that is transmitted over a telecommunications network can serve to initiate payment, verification, and settlement.

Because the entire transaction is effected electronically, rather than by using paper exchanges, the various components of a transaction are streamlined and simplified. Although electronic payment systems allow transactions to occur in real time, other options are available. For example, transmitting information electronically also permits parties to track individual transactions and later compile them into aggregated figures. These compilations can then be settled periodically according to business needs. As a result, there is no need to follow each transaction by complex settlement procedures.

Electronic money offers some features that make it an attractive alternative over other payment mechanisms. Electronic money does not have to be designed to faithfully emulate all the properties of paper cash. It can be implemented to preclude some features of paper cash, such as complete anonymity, while including other desirable attributes of paper cash, such as full divisibility, assignment of limits and constraints, and links to the current owner.

Stored Value Card Scheme

Under this scheme, credit card-sized devices, also known as "smart cards," are electronically encoded with value using an integrated-circuit chip embedded within the card. The stored value may then be drawn down at will, by the user, to effect purchases.

The smart card concept is the electronic equivalent of carrying a wallet full of cash. A personal identification (PIN) number may or may not be required. The card may be disposable or capable of being replenished with value.

Current technology enables value to be replenished through an ATM terminal, a telephone equipped with a card reader, or a personal computer equipped with a card reader. Consequently, stored value cards provide a secure offline transaction alternative in environments where online processing is time consuming and expensive. The strength of this scheme is that it avoids the need to identify the user and access the user's bank account or credit card in order to verify funds availability because the only funds available are those that are on the card. This eliminates the problem of retailers who are reluctant to accept payment by check due to concerns about funds availability.

Unlike existing prepaid payment cards (such as phone cards or transit cards), stored value cards may be used to purchase an unlimited range of goods and services. Proposed systems allow card value to be transferred to other persons without involving an intermediary in what has been termed "peer-to-peer transactions." Peer-to-peer transactions can also occur over a network.

Those who object to visions of a cashless economy often stress the continuing need for currency. The advent of smart cards makes this argument less tenable. Indeed, low-value, frequent transactions are those for which stored value cards are ideally suited.

Existing card-based payments technology uses magnetic strips. These cards suffer several weaknesses, including poor security. The greatest detraction from their use lies in the requirement of balance verification. This involves online interaction with the service provider's host computer that, in the case of small-value, high-volume transactions, is both a physical and financial burden. Smart cards, on the other hand, are free of such drawbacks.

Many electronic devices currently in use are readily convertible to the acceptance of smart cards. However, most existing implementations depend on proprietary systems that do not easily interoperate, if at all. Interoperability of payment and communications systems is necessary in order that a single terminal will be able to process any card. However, this can be self regulated.

Already, a group of cross-industry participants have become engaged to develop uniform standards. MasterCard, Visa, American Express, and Mondex--all major competitors--are committed to a single transaction device. Eurocard, Mastercard, and Visa have been involved in efforts aimed at specifications known as EMV which seek global interoperability.

A truly interoperable electronic payment infrastructure would facilitate private transactions, reducing the need for intermediaries unless they provide some real added value, such as credit services.

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