Absence of Fee Break Could Hinder RFID’s Penetration of Cash

The U.S. cash-payment market is enormous, but banks' hopes of penetrating it with so-called contactless technology could falter if high acceptance costs spur merchants to look at alternative electronic payment methods. That's one among a number of findings in a new study released this week on the market for transactions below $10, sometimes called the low-value or micropayments market. “In the long run, high merchant fees are likely to impede bank cards' cannibalization of low-value cash transactions and advance the cause of alternative payment mechanisms,” says the report, authored by Gwenn Bezard, research director at Aite Group, a Boston-based payments-research firm. Such alternatives, the study notes, could include stored value cards, biometrics, universal aggregation, and virtual prepaid cards. This has been a breakthrough year for contactless cards and key fobs. These devices, issued by banks, replace conventional card swipes at the point of sale with radio-frequency signals that send account data embedded in a chip from the device to a transceiver linked to a POS device. This allows consumers to perform transactions with a wave or tap of the device near or on the transceiver. The card companies' waiver of their signature requirements on payments under $25 makes transactions flow even faster. Major banks, including JPMorgan Chase & Co., Citigroup Inc., MBNA Corp., HSBC Bank USA N.A., and KeyBank, have launched or announced contactless programs this year based either on plastic cards or other tokens. Aite projects there will be 6 million contactless devices in circulation by year's end, with 20,000 merchant locations equipped to accept them. The technology allows bank card issuers?as well as American Express Co., which has also introduced a contactless card?to go after cash transactions for the first time, most especially those under $10. Aite estimates there are 69 billion of these annually in the U.S., or half of all cash transactions in the country. Currently, only about 3% of these have been converted to cards, leaving a potential market of some 67 billion transactions. The appeal of contactless technology to merchants is its speed, which allows more transactions to be processed over a given time and frees high-throughput merchants to accept credit cards for the first time. Aite reports CVS Corp., a pharmacy chain accepting contactless AmEx cards, has found the average contactless transaction takes 12.5 seconds, compared to 26.7 seconds for conventional swipe cards and 33.7 seconds for cash. At the same time, CVS reported its average contactless ticket is 20% higher than for cash. But the card networks so far have shown no willingness to reduce interchange fees for contactless, which means the transactions have no benefit to merchants looking to cut acceptance costs. “Pushing swipe-without-signature and contactless payments without any interchange break is a deal killer for a number of merchants,” says Bezard in the Aite study. Merchants looking for both lower acceptance costs and better transaction speed, the report says, may turn to alternatives like stored value cards and biometrically secured payments cleared through the automated clearing house. The study points to a stored-value program at Starbucks Corp. as an example. Transactions on the coffeehouse chain's stored-value card, Aite says, are growing faster than on bank cards, chopping overall acceptance costs. “At Starbucks U.S., between 2005 and 2010, we expect stored value cards' share to grow 54% [compound average growth rate] compared to 14% for regular bank cards,” says the report. Aite projects that, between 2005 and 2010 at Starbucks, the share of transactions on the stored-value product will go from 11% to 30%; that on bank cards from 22% to 42%; and that on cash from 67% down to 28%. Other merchants may find a POS biometrics technology, such as those offered by Pay By Touch Solutions and BioPay LLC, could cut both tender time and payment cost. “For merchants, alternative payment options, such as biometrics ACH-based payments (e.g., Pay By Touch), are appealing because they can deliver benefits similar to those offered by contactless bank card payments, such as increased transaction speed at the checkout,” says the report. Reporting results drawn from a number of sources, including the CVS study, the report says average transaction times for checks are 64 seconds; for credit/debit, 48.4 seconds; for PIN debit, 44.4 seconds, for cash, 28.5 seconds; for Pay By Touch,15.6 seconds; and for contactless,12.5 seconds. Aite wraps up by advising banks that want to use contactless cards to increase penetration in the cash market to cut interchange. “We recommend that issuers encourage a sharp reduction in small-ticket interchange to ensure the widespread adoption of swipe-without-signature and contactless payments, thereby discouraging large merchants to look for alternative payment schemes,” says Bezard in the report.