Back to basics: contactless payments

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If you thought Chip & PIN was the newest thing in customer transactions, think again. 'Wave and pay', or 'contactless payments', has arrived and...

If you thought Chip & PIN was the newest thing in customer transactions, think again. 'Wave and pay', or 'contactless payments', has arrived and is about to hit the big time. Ticketing may have brought the technology to public awareness but pubs, bars, cafés and shops will help take it into everyday life for more people.

Contactless payments use the same chip-based technology as London's public transport Oyster Card. Paying by contactless card means there is no need to enter a PIN for most low-value transactions. The process is quick, simple and secure and customers and merchants in markets where contactless is established - notably the USA and Japan - love it. But contactless technology offers more than just a payment option and it could change the way drinks brands and pubs market themselves.

So when will we be routinely paying for smaller purchases using such technology? The answer is sooner than you might think. Fans at Manchester City and Reading football clubs can already do so thanks to the extension into retail of the clubs' contactless ticketing system. Cardholders can top up the 'e-purse' on their club card by direct debit, by phone when they book match tickets or at kiosks around the stadium.

While it is currently switched on at only two Premiership stadiums, this e-purse facility is on members' cards at another 11 and the idea is likely to gain momentum quickly as fans and clubs enjoy the benefits of cashless venues. However, the really big push for contactless starts later this spring when Oyster joins Barclaycard and Visa to create an all-in-one payments and travel card. The new cards will have a dual interface chip to store data on traditional Chip & PIN transactions and contactless payments, while a second chip stores Oyster pre-pay and travelcard data.

Meanwhile, the UK payments association APACS, in conjunction with Visa, MasterCard, Royal Bank of Scotland and Barclaycard Business, is rolling out a nationwide scheme kicking off in the City and Canary Wharf in September. The first phase will last until April 2008 and involve 4,000 receiving terminals and more than 500,000 new cards.

Pubs are being introduced to the concept via their banks. And there are many benefits. Shorter queuing times, reduced cash handling and shrinkage costs and larger customer spend are all typical of contactless payment.

However, the appeal is more compelling for some outlets than others given the spending limit - typically £10 - above which the card issuer will ask for the card to go online for authentication through the traditional Chip & PIN mechanism. Pubs with high footfall and lots of lower-value transactions will see most benefit.

As with any new payment product there are concerns among retailers and pub and bar managers - namely over costs and security. Because contactless card technology is compatible with the infrastructure used for Chip & PIN, the changes at point-of-sale will not be anywhere near as complex as we saw with the migration from magnetic stripe payments - or as expensive. At the Manchester City and Reading stadiums it has been as simple as attaching a radio frequency identification (RFID) reader the size of a calculator onto the tills.

In terms of security, customers could not inadvertently pay for things if their bag or pocket accidentally brushed a terminal at the front of the bar, as cards need to almost touch the reader to activate a payment - as is the case with Oyster. A staff member also needs to process the transaction.

Theft, on the other hand, does present a problem and that is why card schemes plan to ask cardholders to enter a PIN after a certain number of transactions or if they are making a payment above a certain threshold.

Unlike some other new banking technologies, contactless is popular on all sides. Consumers love it because it is quick, simple, easy to understand and solves the age-old 'right change' problem. Unlike Chip & PIN, merchants typically love it too, as it reduces cash handling overheads and loss, and increases customer traffic and spend.

It is also good news for banks as it is a new, differentiated, popular payment product which takes them into the low-value transaction arena, which is both auditable and secure. They do, however, have to think about the fees they have to charge retailers, pubs and bars in order to make it a compelling story in the lower-value payment market.

Confident of a solution, Visa predicts that the benefits for merchants will in time become so compelling that they will surcharge customers who choose to buy with cash.

As for the future, the most significant driver in the expansion of contactless payments will come in the shape of the ubiquitous mobile phone. The phone as a payments device is already well established in Japan, with more than 10 million Near Field Communications (NFC) enabled mobiles used for credit and debit payments.

NFC-enabled phones will become mass market next year, with 50 per cent of mobiles expected to carry the enabling technology by 2010. Manchester City fans are at the forefront of this development right now, with 200 season ticket holders currently trialling a system through which they 'show' their Nokia 3220 handset to an automatic reader to get into a game.

Although other devices are used for contactless payments - the watch is popular with Hong Kong's Octopus public transport cardholders, for example, and the key fob works well in other markets - the phone has the advantage of being an internet-enabled device.

NFC phones can also initiate communications with other smart chips - for instance, embedded in posters, beer mats, vending machines and so on. And this is where it gets really interesting, opening up a whole host of new interactive, immediate and personalised marketing opportunities for brands and pub owners alike.

Promotions get a real boost when they are personalised and traceable and NFC offers that. For instance, a customer could collect three 'tokens' by touching three different smart posters in different venues in order to earn a free drink - a great reward or sampling mechanic. These vouchers can then be processed through the financial networks to uniquely validate and redeem each coupon.

The world's first mobile voucher drinks service is It uses a mobile voucher redemption system from Eagle Eye Solutions and already supports NFC-triggered mobile vouchers using Glue4 technology. In this case the pub benefits from extra footfall plus an easy, cheap way to manage promotions, the drinks brand knows exactly where and when its voucher was redeemed and the punter gets something for nothing - a treble win in anybody's book.

Neil Garner is managing director of Glue4, which provides the technology that links contactless payments with mobile phones

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