The 'chicken and egg' challenge of contactless payments

9 Jul 2013

If South Africans are willing to adopt contactless payment systems, consumers will enjoy greater convenience, says a local expert. However, adoption presents a kind of 'chicken and egg' challenge - the introduction of the necessary technology can only be justified by enough consumers trusting it. This problem could be resolved through the introduction of more specific smartphones, or could resolve itself through the passage of time.

Liam McDermott

This is according to Liam McDermott, director at Stanchion Payment Solutions: "As with all things, consumer adoption is the key to the success of the technology. While contactless cards are more prevalent in the USA and UK, it is still in the early stages locally, with most banks in South Africa at least piloting the systems, and some at an advanced stage of rolling it out."

Consumer convenience

Contactless payments take place by presenting a "payment token" to a suitable reader; it is typically used for low-value payments, such as bus, train fares or convenience store purchases. Because there is no interaction with the customer's bank at the time of the transaction, the process is instant, delivering convenience to consumers (and operators).

It depends on Near Field Communications (NFC) technology, which operates over a distance of a few centimeters. Payment tokens can be credit-type cards or smartphones with embedded NFC technology.

Contactless payments are geared towards high-volume, low-value payments, says McDermott. "It's faster. Rather than struggling with cash and waiting for change, customers can merely 'Tap-n-Go' and therefore it makes checkout a faster and smoother process. For a store owner, the benefit is a faster through-put at the tills, and thus potentially a higher foot-count through the store."

For example, he says MasterCard PayPass does not require online authentication or PIN entry for values below US$20, thus paying with this contactless system is a simple Tap-n-Go. The transaction is finalised and settled at a later stage during the banking process. Depending on the contactless payment system, the card may or may not require pre-loading of funds.

A secure means of transacting

As for security concerns, McDermott explains that the technology is based on EMV (Europay, MasterCard, Visa) card technology and standards. "As an extension of that technology, the devices are as secure as the 'chip' cards in use today, and substantially more secure than their 'magnetic strip' counterparts," he says.

While some consumers are concerned about their details being 'eavesdropped', McDermott says the short distances over which NFC works means this is practically impossible. "Someone would have to be practically standing on top of you, or getting between your hand and the device. You'd definitely notice that."

Continuing, he says contactless payment is being used locally already by some retailers and transport operators. The Muvo card (for some buses in Durban) and the MyConnect card (for MyCiti buses in Cape Town) were introduced in the last few months by local banks. Both are examples of PayPass cards; the cards can also be used at retailers that have PayPass terminals. These cards can be used to make Tap-n-Go payments for up to R200 without the need to enter a PIN; if a purchase is for more, a PIN is required.

However, contactless payment use is as yet far from widespread in South Africa. "The rollout of point of sale systems that support contactless payment is limited; however, it is picking up quite rapidly and these types of devices are now being seen in well-known stores more frequently these days," remarks McDermott.

Smartphones may provide a solution

He believes one possible answer to driving distribution of the technology that makes contactless payment possible is the smartphone. With more mobile devices with NFC technology entering the market, one half of the challenge is directly addressed. "In effect, this puts the 'consumer' side of the technology in the hands of users by default. It is used with apps like Google Wallet to store 'cards' to choose and use when presenting the phone as payment instrument," McDermott explains.

There is a possible future where you would no longer need, for example, to queue to pay for your parking on exiting a mall - you could simply present your phone on entry and then on exit at the boom, to pay for the time that you parked. "We typically have our phones with us all the time, so the convenience factor is obvious," he says.

That said, he concedes that smartphones are far from a sure-fire driver for widespread NFC payments in the hands of the consumer; few phones that support NFC are presently available: "It's apparently not on the iPhone roadmap any time soon, so it remains to be seen if this will be the driving force it could potentially be. That's a pity."

McDermott points out that with patience, historically the chicken and egg conundrum eventually sorts itself out; after all, while no-one can say which came first, chickens and eggs are abundant today. "What is certain with contactless payment is that it is a secure, convenient, fast and reliable payment method. These attributes have seen its continued adoption around the world; the pace in South Africa is bound to pick up in coming months."

For more information on Stanchion Payment Solutions, go to www.stanchion.co.za.