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Speed the Wireless Payment

Visa's RFID payments infrastructure is open for business, but analysts say it's up to merchants to make the move.

The nation's largest credit card issuer announced the availability of Visa Contactless on Thursday, in advance of the RFID World trade show next week. Visa was the last of the big three payment processors to provide the works for credit card issuers and merchants to let consumers pay with a wave of their hands.

Proximity payment systems, also known as contactless payments, use very short-range radio frequency technology to send information from a chip in a credit card, phone or fob to a reader. The reader transmits the information to the merchant's standard credit card processing system. The technology is similar to RFID used in the supply chain.

Visa USA said it enhanced its VisaNet payment processing network to handle the new type of transaction, promising to minimize the impact on merchants and credit card issuers.

"We think that speed and convenience will drive value not only to cardholders but to merchants who can optimize operations," said Niki Manby, senior vice president for smart card applications.

As the market leader, Visa can afford to hang back and let rivals spend money to seed the market and work out the kinks, said JupiterResearch analyst Bruce Cundiff. JupiterResearch and internetnews.com both are owned by Jupitermedia.

"Merchants won't pay for it by themselves," Cundiff said. "To get mass-market acceptance is really tough without hardcore investment among Amex, MasterCard and Visa -- which is not investing in merchant infrastructure, apparently."

MasterCard has indeed invested big-time. Its first pilot, in early 2003, put chipped cards from Chase, Citibank and MBNA in the hands of 16,000 consumers, equipping around 60 retail locations with readers. 2004 saw pilots in the U.S., the Philippines and Japan, with McDonalds signing on to roll out PayPass in stores throughout the United States. This year, MasterCard inked a deal with MBNA, the Seattle Seahawks and Baltimore Ravens Football Clubs to incorporate PayPass chips into the teams' loyalty cards.

"We're trying to really push cards to be used where cash is traditionally used," said Murdo Munro, vice president of mobile and wireless for MasterCard International. "The challenge we have is to find products that merchants and consumers like enough to stop using cash and start using these products."

Who will make the market?

Consumers who've tried them seem to like contactless payments. In its pilots, MasterCard found that consumers like the speed of proximity payments, and they like keeping control of their cards.

Bill Allen, a spokesperson for Texas Instruments' RFID group, said the consumer acceptance rate has been high in the pilots it's done, notably with chipped keychain fobs used to pay for gas at Exxon-Mobile. "Once they understand it and get used to it, they are more than willing to use it," he said. "We view RFID as having that same capability [as credit cards] of becoming a universal payment device."

TI makes the chips used by FreedomPay, a cashless payment system focused on corporate dining facilities. It will support American Express and MasterCard's contactless initiatives.

Payments processors and credit card issuers have much to gain: a bigger share of what Visa estimates as $1.2 trillion in annual cash transactions worldwide. The transition to open systems tied to bank accounts and credit cards will help them get a bigger slice of the universe of transactions, according to ABI Research analyst Erik Michielsen.

"Credit card issuers will be the initial dominant wave of providing electronic credit cards for digital commerce," said Jorge Fernandes, chairman of ViVOtech. "In a second wave, a lot of retailers will leverage this technology to create a closer relationship with consumers. Digital credit cards will let consumes identify themselves to merchants and let merchants communicate with them."

Credit card companies will have to push RFID cards into consumers' hands, said JupiterResearch's Cundiff. "It's never been an issue of consumers knocking down Visa's door, saying, 'We want this.' It's always been credit card issuers trying to come up with that next exciting product."

Some national retailers have signed on. McDonalds plans to roll out MasterCard PayPass throughout North America this year, while pharmacy giant CVS plans to offer American Express' ExpressPay system in most of its retail stores.

Merchants with high levels of low-value transactions, such as fast food restaurants, could see the greatest benefit, according to Michielsen.

He said both Visa and MasterCard say merchants will see a return on their investment in contactless payment technology in several ways: They'll be able to move customers in and out quicker, reduce losses from theft and miscounted change, increase the average transaction value and reduce staff time devoted to handling cash.

ViVOtech's Fernandes said trials of proximity payments have shown "20 percent shift and 20 percent lift." That is, if given the option, at least 20 percent of consumers will use a contactless payment instead of cash. More interesting, consumers who are not paying with cash tend to spend about 20 percent more.

The RF payments industry is hoping that 20 percent lift will be compelling to merchants -- compelling enough to get them on board.

The sticking point

But the payment processors may have a harder time moving retailers with mostly cash transactions onto chip-based systems for two reasons.

First is the cost. Both Visa and MasterCard plan to charge retailers the same transactions fees for proximity transactions as for credit card transactions. So, the merchant must balance the potential soft savings from improving efficiency and reducing cash-handling labor with the hard transaction cost, which Cundiff said is usually between 1.5 to 2.5 percent plus a $0.25 flat fee.

Second is the labor of installing the readers and integrating them with point-of-sale software and corporate systems.

"Even very large chains, they schedule their upgrades five to seven years out and in between do very little to no changes," said ViVOtech's Fernandes. "Any time they do a point of sale change, it's a major impact to the system."

ViVOtech's offering combines chip technology, software and a reader that can be attached to existing POS systems and costs around $100 in quantity, eliminating the need to change out pricey electronic cash registers.

"The savings in not handling cash are not small but usually get hidden," said MasterCard's Munro. "You have to get rid of a fair chunk to lower your costs. When a few consumers pay with contactless and a few with credit cards, merchants wont see the benefit."

Deja vu all over again

Cundiff thinks RFID-enabled cards will be prone to the same problems that plagued Amex's Blue, a smart-chip-enabled credit card launched in 1999. The idea was that a smart card reader connected to the card member's PC would authenticate the user, allowing him to use an e-wallet to shop online. While consumers loved the low APR and lack of an annual fee, the chip feature fell flat and was discontinued.

Said Cundiff, "Ninety percent of [merchants accepting credit cards] in the U.S. won't see the value proposition in RFID, just like they didn't see it with the chip."

If getting reader hardware at the point of sale is the sticking point, Precision Dynamics may have found a likely niche. It provides RFID-enabled wristbands for use at high-traffic, discrete destinations such as stadiums and amusement parks.

"We provide a temporary credential that someone can use to make purchases and do transactions for one or two days, and it makes the experience that much more fun," said Irwin Thall, RFID manager.

When the company's Smart Band RFID Wristband System is used in entertainment venues, Thall said, the most efficient method is to hand everyone a wristband when they buy a ticket, then give individuals the option of loading credits into it via the company's Smart Kiosks located inside the gates.

In a three-day pilot of Precision Dynamics' Smart Kiosk at the Jacksonville Suns' Baseball Grounds, 10 percent of the 35,000 patrons used it to buy food and beverages. The company said the system helped increase per capita spending by an estimated 10 percent and increased revenues by an estimated 15 percent.

There's some additional ROI with Precision Dynamics' system, Thall said: If customers don't take the time to zero out their wristbands before they leave the venue, or don't want to pay their bank's ATM fee, that's extra money in the merchant's pocket.