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It’s a truism these days to say you’re more likely to leave your home without your wallet than without your phone. So if you can buy what you need with just a wave of your phone or a tap of your card, that’s a real advantage for consumers as well as a time-saver for retailers. This is especially true for transactions usually paid for by cash or which are of such low value that a chip and PIN transaction becomes inefficient. Industry estimates put cash transactions at around 60% of all payments while Visa has reported that 80% of retail cash purchases are for less than €12. This is an ideal sweet spot for a more convenient payment offering. The industry’s solution is contactless payments using Near-Field Communications (NFC). With NFC, you can tap your card or phone at the retail terminal to authorize a transaction (see our video for an example). But, for retailers, the value of NFC needs to be made clearer and you need to know what the future holds before making any significant investment.
Physical money is on the decline. If you get one for Christmas, you’ll find that even Monopoly sets are electronic now. Generation-Y (those of us born after 1980) is more accustomed to PayPal, Facebook credits, Google’s wallet technology, and prepaid cards than credit cards or cash. Recent research from Ofcom shows that 27% of adults and almost 47% of teenagers in the UK now own a smartphone. The Internet is mobile, and so are we. Consumers want both a shopping payment experience that is convenient, quick, and which does not draw lines between the physical world and the Internet. And they want virtual and mobile payment solutions so they can buy goods in the retail environment in just the same way as they do online. Payment card companies and banks are responding to this need by establishing support for faster, contactless and mobile payments at the retail point of sale using NFC. It’s seen as an ideal solution for low-value payments in high-volume environments.
Market analysts enjoy creating hype around new technology trends but there is an overwhelming sense that NFC is inevitable. Market research firm Frost & Sullivan estimates that, in 2015, NFC will be the most used solution for mobile payments with an expected total payment value for NFC globally to reach €111.19 billion. During his keynote presentation at 2011’s Mobile World Congress in Barcelona, Google’s outgoing CEO Eric Schmidt stated that, “NFC should revolutionize electronic commerce as well as payments”. This sentiment is underpinned by massive investments being made by companies such as Google, Visa, MasterCard as well as banks and telecoms operators to realize the potential of NFC. The stage appears to be set for a contactless payments revolution.
The challenge for the adoption of NFC in the retail environment, one that’s set to keep the payments industry thinking, is twofold. Firstly, how do you give enough consumers access to contactless payments and, secondly, how quickly and cost effectively can you roll out an acceptance infrastructure to allow them to use it?
Until recently it seemed that NFC depended on the consumer owning a smartphone. However, in November, 45 of the world’s largest mobile operators committed their support for the GSM Association’s NFC standard. This means that NFC technology will be embedded in every phone’s SIM card, removing the current restriction to smartphones. Added to recent innovations like over-the-air application updates, this will help consumer adoption. However, whether your phone comes with NFC out-of-the-box or not, enabling the retailer to accept these new contactless transactions presents a more difficult challenge. Merchant acceptance remains a problem that falls to merchant acquirers and independent service organizations and retailers themselves.
However, the card schemes are now offering clear incentive for contactless adoption through EMV. Starting in October of 2012, Visa will waive requirements for merchants to conduct annual assessments for compliance with the PCI Data Security Standard if at least 75% of their Visa transactions are conducted through point-of-sale terminals that accept both contact and contactless chip cards and NFC devices. Considering that PCI compliance annually costs US merchants about $2 billion, this is a significant incentive in its own right.
It is also possible that the mobile network operators will have more of a role in solving the retailer’s adoption problem. With the move to embed NFC technology in your SIM card, NFC will be released from its dependence on smart phones and even NFC stickers. With all phones NFC-enabled, mobile-to-mobile NFC payments could happen more readily in-store without the need for physical integration into the retailer’s systems. This should make NFC adoption by retailers much easier. And, with operators having the ability to choose which payments schemes are supported, there could be an opportunity for alternatives to the existing payment schemes for low value transactions perhaps offering more favourable payment processing rates.
There isn’t just one new payments model on offer for retailing. In contrast to the open NFC standard, proprietary schemes like Square are offering new cloud-based payments to eliminate the need for any in-store infrastructure. Cloud retailing, which is not limited to proprietary offerings, can blur the lines between traditional Internet shopping and the real thing. And this is something consumers should welcome. For example, you could choose to pay via apps on your phone while in the store, as if it were a virtual transaction. Square, in particular, offers the ability to pay without any physical interaction – no signature, no swiping, no PIN, and no tapping either. With Square’s Card Case, geo-fencing can transparently initiate the shopping process with check out being completed by user verification. Square’s Jack Dorsey insists that, “Cash registers and credit card terminals are relics of an expensive, complicated, and impersonal commercial transaction system.”
Whether any method comes to dominate will probably come down to consumer preference and utility. Some solutions may be more appropriate for different retail environments and some may facilitate more sophisticated added-value offerings like loyalty. In any event, with the weight of industry behind it, NFC is likely to be here for some time. What’s clear is the future of in-store retail payments is primed for valuable innovation that is more than just another payments method but should be seen as an opportunity to drive customer loyalty and revenue.
Bayberry was engaged by a group of Credit Unions seeking a solution in response to the need for access to payments and electronic banking solutions. The group was overseeing the roll-out of an EFT and ATM solution it had selected from a local banking provider