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Popular Smart Card Tutorial By Dr. David Everett
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Nick Holland, Director of Emerging Technologies Advisory Service, Mercator Advisory Group

MasterCard has finally bit the bullet and decided to go ahead with a mass rollout of their PayPass contactless smartcard in the US is significant news. It shows a commitment to a new payment paradigm and more importantly a realization of the business case for smartcards in the US; Speed.

Prior rollouts for smartcards have been associated with either online fraud prevention or customer loyalty initiatives. The former has been sufficiently mitigated by 3D Secure, while e-couponing and other chip related loyalty initiatives haven't provided anywhere near the level of ROI that participating merchants expected. The news that Target is dropping its Smart Visa card is still going through a post-mortem, but the general consensus is that the cost of card issuance and the lack of use of the chip's functionality led to the program's demise. Target's smartcard program was heavily subsidized by Visa which no doubt softened the blow and it wasn't all bad for them. Since smartcards appear to the US public to be a relatively new technology, Target (or ‘Targeé' as they are often pronounced in the US for their ‘Euro' style pretensions) got the gold medal for ‘First US Merchant to Mass Rollout Smartcards'.

With card fraud adequately controlled by cheap real-time authorization of all card transactions, the security argument for smart cards in the US just doesn't apply at the present time. And the benefits of the marginally used e-couponing application hardly justifies the cost of a card several times that of a mag stripe. Target's decision doesn't herald the end of smartcards in the US. As smart card costs come down, the benefits of extra authentication of the cardholder along with a platform for decentralized multi-application storage will become more compelling to merchants. But not yet. What is needed is a revision of the business case. Why would customers and merchants adopt an alternative payment medium? Any new payment paradigm will have to significantly surpass existing, entrenched vehicles on one or more of these characteristics:

1. Speed – Will I be able to get through the checkout faster? Will I be able to process more customers per day?

2. Security – Will I be more confident and comfortable in my shopping experience? Will my fears of being ‘body snatched' by identity thieves be significantly reduced? Is the new technology so difficult to counterfeit that my customers will be unable to defraud me?

3. Convenience – Is it easier to use than card, cash or check? Do I need to do less to complete a transaction than with other methods of payment? Will I need to visit the bank less often?

4. Loyalty – Will I be rewarded for paying with this technology? Will the technology increase the adhesion of customers to my particular products and / or services?

5. Cost – Can I drive customers through the cheapest channels possible with this new technology? Will the cost of necessary upgrades for the technology more than pay for itself? Will I lose business if I don't accept this card / keyfob / barcode / finger?

So, how do contactless payments measure up? If the success of the Exxon Mobil Speedpass is anything to go by (and it is), they measure up very nicely, thank you. This inch long RFID device that attaches to your key ring surpasses existing payment mechanisms on a number of criteria:

• It is quick and convenient to use - you can pay for petrol quickly and efficiently in foul weather without removing your gloves by tapping the device against the corresponding reader on the pump.

• It is secure – the card number isn't broadcast or exposed at any point in the transaction since the RFID fob is linked at a network level to a credit or debit card of your choice. The broadcast message is also encrypted. Okay, a lost set of keys with an RFID fob causes the same problems a lost credit card, but there's probably a finite amount of petrol, pine air fresheners and sparkplugs that a master criminal can sell on before the Speedpass is reported missing by the cardholder.

• The combination of speed, security and convenience promote loyalty. In Exxon Mobil's case, the system is proprietary and no competitors offer rival products, so locking users in to Exxon or Mobil gas stations.

• It is relatively cheap (free in fact to the consumer). For Exxon Mobil, there were obvious upgrade costs at the pump and at the POS, but the convenience of use has been proven to drive repeat business. Where Speedpass readers were installed, locations saw on average a 15% increase in sales. Other savings can be made by pushing transactions through the cheapest channel possible. In the Boston area, Speedpass has been quietly rolled out at a number of Stop and Shop supermarkets in the area. To register for use in these supermarkets, you have no choice but to enroll with electronic checking data. So, any Speedpass payment made in a supermarket goes through ACH networks, bypassing completely the punitive fees associated with debit and credit card transactions.

Speedpass has demonstrated something else of importance… that the traditionally conservative American public can embrace a new payment vehicle, and they have done in large numbers; there are 6 million Speedpass customers in the US.

It's not hard to understand why the card associations have been pursuing their own contactless payment solutions. MasterCard has been the most prominent advocate of the technology and has run a series of trials in 2002 / 2003 for their PayPass contactless product. The first trial in New York in July 2002 was a relatively small issuance of 450 cards, accepted in three locations; a cafeteria, a general store and a coffee stand. The metrics recorded were impressive – transaction time was reduced 64%, transaction volume grew 36% over cash and average transaction size increased by 15%.

Given the success of this small pilot, MasterCard ran two larger scale trials in 2003; one in Orlando, Florida and the other in Dallas, Texas. Orlando was a large scale deployment of 16,000 contactless smartcards with 60 participating locations across the retail spectrum from fast food restaurants to vendors of high ticket items such as electronics and cameras. Dallas was a smaller deployment, but used an alternative form factor; 2,000 Nokia phones with contactless technology imbedded in the snap on cover. This trial also made use of SMS messaging to examine the effectiveness of geographically targeted marketing.

Not to be outdone, American Express has also made a foray into the realm of contactless payments with ExpressPay. Initially a small scale pilot in Jersey City, it was given a wider rollout in 2003 to 4,000 participants and 175 merchants in Phoenix, AZ. The ExpressPay payment mechanism is a contactless RFID fob not unlike the Speedpass device (both are made by Texas Instruments) which links to an American Express charge or credit card account. ExpressPay differs from the PayPass model in that ExpressPay allows customers to pre-pay and “load” the device, a nice feature for those wary of having their entire credit limit attached to a bunch of keys.

Similar metrics to PayPass have been recorded from the various ExpressPay trials; customer spending per transaction increased 17%-33% compared with standard payment methods and average transaction time was recorded as 28% faster than cash and 42% faster than signature based transactions. A spokesperson at American Express stated that there are no plans to roll out ExpressPay this year and the Phoenix trial will complete as planned in July.

The figures speak for themselves – contactless payments are faster than traditional payment media and increase average transaction size, at least in the case of these trials. On paper, contactless looks like a winner for all parties involved. However, mass rollouts have a way of exposing previously unforeseen difficulties. MasterCard is taking something of an informed leap of faith. Teething trouble is inevitable, to what degree is unknown.

If the rollout is a success, and there is every reason to suspect it would be, MasterCard will hold an initial position of strength in the contactless payment arena. The ‘first-past-the-post' gets not just public acclaim for their innovative product, but quite conceivably locked-in merchants and consumers as well. Both parties are likely to be unwilling to clutter their checkouts and pockets with a plethora of ‘also ran' products. And ‘cluttered' is the right word - it can be expected that devices and readers touted by card associations aren't going to be quite as surreptitious as the Speedpass tag as they fight for brand exposure.

Longer term, the solution has got to be a consensus between associations allowing for interoperability between device readers. Some degree of foresight is being exhibited in MasterCard's choice of ISO 14443 as the standard for PayPass. If MasterCard wins out at the POS, the opportunity is still there for issuers to develop compatible devices. And the perfect form factor is yet to be determined; although the initial PayPass rollout will be in a card form factor, there is no reason why other accoutrements to 21st century living cannot include the technology. The Nokia cellphone trial points the way to a movement away from traditional cards since the technology can be imbedded into almost any object we carry with us, and even ourselves.

Moreover, if speed is the killer app, additional functionality provided by smartcards can piggyback on this. The initial business case for smartcards in the US; security and loyalty, have been shown to be unable to gain sufficient traction, as we've seen in the case of Target. Contactless smartcards can provide a platform for these features to be gradually introduced to users, thus providing an alternative route to the core functionality of smartcards. This could well be the route that smartcard evolution takes in the US.

One final factor to consider which may shift the balance in favor of contactless - the human psyche is such that people love shopping and hate paying. Making the instant gratification of ‘retail therapy' that bit more instant might just be a winner.