The way consumers pay for goods has evolved for years, and contactless payment is the latest in convenience, but will it ever gain full acceptance?
Back in 2007, Visa Europe's CEO Peter Ayliffe predicted that the UK could become a 'cashless society by 2012'; one year on from that deadline, and the country has some way to go toward fulfilling that claim.
Though Ayliffe's prediction may have been overly ambitious, the UK payments industry is certainly heading towards the cashless purchasing environment, but one not without concerns and reservations about contactless payment technology.
Contactless payment, also dubbed 'wave and pay' or 'tap and go', offers consumers a different method of paying for lower-valued goods, at £20 and under. Ironically though, 'contactless' does not always mean contactless. Transactions require close and sometimes physical contact using a contactless-enabled card or near-field communication (NFC) smartphone over a contactless reader.
In the UK many fast-food and beverage chains, such as McDonald's, Starbucks and Nando's, have installed contactless readers in the last two years. Other retailers already accepting contactless payment include Ikea, Boots, the Post Office and WH Smith, and even the M6 motorway toll.
Credit card companies have issued their own contactless offerings, such as PayPass (Mastercard) and PayWave (Visa), while Barclaycard has taken things a step further and released PayTag – an NFC-equipped sticker that can turn any mobile phone into a contactless payment device.
Mobile phone vendors such as HTC, Samsung, Google and LG have manufactured NFC-enabled handsets as an alternative method of payment. Though Apple's involvement in contactless payment has so far been non-existent, it is rumoured that the US Patent and Trademark Office has issued the company a patent for a system that uses NFC for its speculated 'iWallet', a feature reportedly planned for the iPhone 5S.
The paying process
NFC payment technology does not change the relationship between the bank, the cardholder or smartphone holder, and the retailer, but is simply an additional way to pass information between a buyer and seller.
Before payment cards, the buyer would give the seller a paper cheque with their account details; this was replaced by cards with a magnetic strip. The card would be swiped at a point-of-sale (POS) terminal, and the account information was passed to the seller in digitised format. The signature authentication was soon upgraded to chip-and-PIN, which is now competing with emerging NFC payment technology.
Thomas Helldorff, head of innovation at payment processing company DataCash, says that NFC is a safer option: "The communication between the card and the terminal is encrypted, therefore it is protected from anybody trying to 'listen' in. Plus to limit the potential of fraudulent usage the transaction is limited to a maximum of £20."
However, Helldorff continues, NFC is "a chicken-and-egg issue. To date there have not been enough NFC-enabled cards in circulation to hit the critical mass for merchants to justify investment in the POS technology required to support it".
He adds: "But in the past year, large retail banks have started equipping debit and credit cards with NFC technology, which has encouraged many merchants to rethink their contactless payment strategy."
On a global perspective, contactless payment is still finding its feet. Analyst Gartner has had to retract its initial predictions as uptake in 2012 was slower than expected – last year Gartner predicted NFC payments would total $38bn by 2016, but this year its prediction was reduced to $22bn.
However, it would appear UK vendors may be getting slightly ahead of themselves with contactless card initiatives. Trade body the Payments Council has identified this as 'paynuphobia', a 'condition' more common than the fear of spiders. Its April 2013 survey of 2,012 UK adults revealed that 26 per cent of consumers avoid using contactless payment cards due to security fears.
Statistics from retail banking and ePayments software provider Compass Plus's 'Non-industry payments and banking overview' study – which surveyed 160 people – revealed that only one in ten UK consumers made a purchase using a contactless card in April 2013, while 40 per cent do not even know what NFC payments technology is.
This comes as no big surprise in view of what market research company ICM Research discovered from its 2012 report 'Contactless Payment: When will it take off?' contactless payment is still in the very early stages of mainstream roll-out. Out of the 2,001 UK consumers surveyed, 80 per cent were aware of contactless payment, yet only 8 per cent had made contactless transactions. Though smartphone usage is increasing, the report highlights that smartphone users are not tech-savvy, which in turn means the lack of understanding is hindering the process.
The report also revealed 34 per cent of consumers would use their mobile wallet to make payments, collect vouchers, or as event tickets and on public transport. However, 55 per cent worry about losing their phone and would accept alternative security measures including PIN authentication, remote deactivation, a daily cap on spending, and facial or voice recognition.
For and against
Within the ICT industry the issue of NFC security divides opinion. While some critics insist the technology is flawed and security is a major drawback, supporters of contactless payment say the technology is secure and consumer awareness needs working on.
Lieberman Software CEO Phil Lieberman once claimed that mobile wallet technology was potentially a serious security risk waiting to happen. "Some of the m-wallet transactions are limited to £15-£20 and under, but if a smartphone is loaded with £100 worth of bank credit – or is linked to a user's current bank account – it's more valuable," he warned in 2011. "There then is a risk that hackers can replicate the m-wallet credentials and make multiple transactions using a cloned mobile wallet."
Two years on, Lieberman's views are unchanged. He says that smartphones are more vulnerable to security threats. "Essentially the technology operates by proximity detection, namely that the card needs to be placed close to a reader and it will spit its guts out, so to speak, to anyone who interrogates the device."
Lieberman adds: "There are magnetic shields for cards to protect them from unauthorised scanning. Smartphones with these devices have 'some' controls over the access to the NFC functionality, but as many of the NFC functions are updated over the air, there are unique vulnerabilities for smartphone NFC options that are very difficult to remediate, if at all."
On the pro side, Peter Cochrane a futurist entrepreneur and former British Telecom CTO, insists that there are "no technology problems with contactless payment, but negative people and opinion have a much bigger voice than the positive and enthusiastic.
"Incumbent card companies, banks, regulators and the distrustful British attitude to anything new has put the UK in the slow lane and this is why the West has been overtaken by South East Asia and Africa whose citizens have been enjoying the advantages of the digital wallet for over eight years," Cochrane adds. "Digital wallet technology is inherently more secure than any card technology; our mobile devices are the only ones with processing power, memory and intelligence."
Neil Garner, CEO of mobile contactless company Proxama, agrees with Cochrane's view that mobile wallets are more secure than chip-and-PIN. "Bogus ATM and compromised point-of-sale machines capture a user's PIN when it's entered into the terminal," he says. "The mobile wallet is a more secure payment option as it requires the user to enter their PIN into their own phone, which is a trusted device opposed to a public one that they have no control over."
Of course with any new technology, there are always worries about fraud, for instance signatures and chip-and-PIN both received controversial feedback, but with time consumers soon accepted the process and even security implications.
"As with all types of payment, whether it is cash, chip-and-PIN or using a signature, there is always an element of risk," adds Garner, "but if consumers are educated and diligent about the security of their phones, then NFC is a safer payment option. Also, contactless cards have the added security of having a sub-£20 limit to safeguard against thieves abusing a stolen card."
Garner continues: "Another big barrier to NFC adoption is that consumers aren't aware that they have an NFC-enabled device. We, the industry, need to be doing more to highlight the benefits of this payment option in terms of offering secure payments."
Aside from the speed, convenience and security benefits of contactless payment, Garner explains consumers are inundated with various loyalty cards, coupons and special offers, and retailers should focus on how NFC could make this simpler.
"Retailers must create a more seamless experience for consumers who can access special offers in magazines using their smartphone and redeem the offers in-store. This consequently helps build customer satisfaction."
Where it works
Payment systems based on POS NFC have been rolling out around the world for more than two years. In 2011, Barclaycard and mobile network operator Orange claimed to be the first to have jointly launched an electronic wallet service, dubbed Quick Tap. The app sits on the home screen of a Samsung Tocco handset and Barclaycard, Barclays debit or Orange credit card users can transfer funds of up to £100 onto the handset and make payments of £15 and under in a single transaction.
The app contains information such as e-statements, enabling users to manage their credit. For added security users can choose to enter a PIN before making each transaction. The service can be used in food chains including Eat, Little Chef, McDonald's, Pret A Manger and Subway.
More recently, handset manufacturer Samsung and Visa unveiled that all next-generation Samsung smart devices will feature Visa's 'PayWave' app, enabling consumers to 'wave and pay'. According to Visa, in March 2013 monthly transactions across Europe reached more than 19 million from contactless cards and smartphones equipped with the PayWave app. It also revealed contactless transactions grew 46 per cent between December 2012 and March 2013.
The benefits for fast-food chains are largely self-evident: touch-and-go can hasten customer throughput, especially during busy periods such as lunchtime when people are attracted by anything that helps reduce the amount of time spent waiting in queues. But NFC can also benefit the sit-down catering sector, where delays caused by waiting to pay at the end of a meal can also cause diner frustration.
The National Restaurant Association has released its '2013 Restaurant Industry Forecast', which revealed 44 per cent of consumers surveyed would use a tableside ordering system, 33 per cent would use a mobile payment option, and 50 per cent would use an app to view menus, place orders and make reservations.
"Our research shows that there's strong consumer demand for tableside ordering systems and mobile payment options. Both technologies are still relatively young and are just coming to market," says Liz Garner, director of commerce and entrepreneurship at National Restaurant Association. "With these systems consumers have new opportunities to order remotely so that your food or beverage may be waiting for you when you walk in the store, thus increasing convenience. Mobile payments is an opportunity to bring some robust new players to market, increasing competition and, along with it, the prospects for a more secure and cost efficient system."
POS vendors NCR and PayPal have together launched a mobile payment app, Mobile Pay, which will integrate PayPal's digital wallet technology into NCR's Aloha online ordering software, specially designed for restaurant goers. NCR Mobile Pay enables restaurant customers to re-order menu items, alert their server, complete surveys, and browse their bill and pay.
"Digital wallets are dead. They were never really alive as stand-alone entities," says NCR VP of Hosted Solutions, Mike Finley. "Consumers want something better than plastic, and being better than plastic means mobile, but a truly integrated experience with payment being just one tiny part of it."
He continues: "We do not simply enable payment and hope that consumers will somehow flock to a more complex process than what they currently endure. Instead we provide a contextual engagement to make parts of the meal more interesting by virtualising the point-of-sale and providing the consumer with more payment control."
According to ABI Research's 2013 'NFC IC Vendor Competitive Assessment', NFC chip manufacturers NXP Semiconductors, Inside Secure and STMicroelectronics were the top rated NFC vendors for design, innovation and highlighting new projects for NFC capabilities.
This includes NXP Semiconductors latest partnership with Store Electronic Systems (SES) which aims to support the retail industry in adopting NFC technology. NXP will integrate its NFC chips in SES electronic shelf labels, which are fitted with a high-definition graphic screen, a dynamic display of patented Dual Transistor Pixel technology, a high-speed radio transmitter and NXP's NFC chip, which will enable consumers contactless interaction with their smartphones. The project enables retailers to offer a variety of services to their customers, such as origin of products, social media interaction, calorie and allergy information and loyalty points by simply tapping their smartphone on a price label.
Retail risk and rewards
Lieberman Software's Phil Lieberman suggests there isn't an urgent requirement for retailers to implement contactless readers as they will experience limited benefits. "Retailers should have the knowledge that contactless technology is not mandate and is not necessarily the future, which must be aggressively invested in, as no one is forcing the adoption. In any case they are not liable for any losses due to fraud, so it would not matter to them."
Supermarket chain Tesco's enterprise consultant architect Lyndon Lee has also criticised NFC mobile payments, stating the concept is too complicated, there are too many parties involved and the concept offers little value. "NFC was revolutionary ten years ago, but I think it just might have passed its sell-by-date," declared Lee, speaking at the Mobile Payments and Value Added Services conference in April 2013.
He added: "Is mobile NFC at the right place, at the right time? I don't see any real movement or activity. NFC usability is not really revolutionary and, for the general public, is it really cool? I think the next generation won't think it's cool enough for them and they won't use it."
Despite Lee's trenchant views, in 2010 convenience store Spar rolled out its contactless payment system SPARPoS in 2,600 stores with the support from IT company Business Computer Projects. Similarly, this year convenience store the Co-operative Group installed contactless payment terminals in 1,800 of its 2,800 stores.
Supermarket giant Asda, is reportedly the first major player in supermarket history to pilot contactless payment. In 2012, the company installed terminals, created by payment services giant Visa Europe – also behind WHSmith and Superdrug stores – to help reduce store queues during peak times.
Glitches and bugs
However, this year Marks and Spencer, Pret a Manger and Transport for London customers have reported payment deductions from contactless payment cards while paying for other goods.
According to BBC Radio 4's 'Money Box' programme, aired on 19 May 2013, two customers claimed payments were taken when their cards were in purses away from the contactless reader.
Also speaking on the programme was Martin Emms, a researcher at Newcastle University's Centre for Cybercrime and Computer Security, who conducted his own experiment. "I approached the reader with a card ready to pay, to put in the Chip and PIN machine, and my wallet in my other hand. The first time I went up to the Chip and PIN terminal I made the normal Chip and PIN transaction; nothing was read from my wallet.
"But the second time I approached the terminal with the card in my left hand, when I got within about five centimetres of the left-hand side of the terminal, it took the payment out of my wallet and not from the card I was putting into the Chip and PIN machine."
"This isn't possible as contactless cards can only be 'powered-up' at a distance of 3-4cm," comments Proxama's Neil Garner on the Marks and Spencer incident. "It's likely that customers may have unintentionally been charged through the terminal either being at waist height or their bag or purse being placed on to or next to the reader while they retrieved their chip and PIN card."
Garner adds it would also be a challenge for a fraudster to steal money from a contactless card and phone: "While it is feasible for someone to go around with a device and tap contactless cards in people's pockets, they would need to be a registered merchant and with this comes numerous checks and protocols, making it difficult to set up a fraudulent account. Plus, if various financial institutions became aware of dubious transactions, the merchant would be struck off and the authorities would be notified."
Making the most of contactless
Nevertheless, contactless technology is slowly evolving; NFC technology has the potential to be a great benefit to retailers, advertisers and marketers, providing them with an additional opportunity to interact with consumers through smartphones.
Lieberman suggests contactless cards would be better suited for door control access systems, car parks, petrol stations and badges for tradeshow attendees.
DataCash's Thomas Helldorff adds: "In the next ten years, we believe this trend will develop and TVs, tablets and laptops will be NFC equipped and act as payment terminals. Also, the transport industry is quickly picking up contactless technology as well as festivals and theme parks where NFC wrist bands are used for access, payment, loyalty and identification."
The future of contactless payment is still uncertain, though the benefits are clear. The lack of consumer awareness and the lack of confidence in security means unless these problems are addressed, contactless payment will be at risk of not showing its full potential.