With Starbucks launching its in-app billing based contactless payments service in the US and Apple, Nokia and Android all expected to start offering contactless payments this year, you’d think it was a done deal. But there is still some distance left to run, says an Phil Burroughs, commercial director at rmi (retail marketing international)
Nokia’s plan to activate the contactless payment chip within its C7 handset in 2011 is a clear indication that the handset manufacturer believes contactless payment is on its way. However, while some retailers in the UK such as Spar and The Co-operative, as well as chains like Eat, have announced, or are carrying out, tests, there are still some big issues to be ironed out before we are likely to see this hit the mainstream.
Contactless payment has been talked about for some time, and in many ways is one of the most eagerly awaited developments in retail for a generation. So why has it taken so long to get here?
Although Londoners may now have embraced contactless payment through Oyster cards across the tube system, and more recently across the bus network, it still represents quite a closed and small system. While tube stations number in the hundreds, retail outlets will be registering in their thousands, and that is going to take a massive investment. New hardware infrastructures will be required, including 2D in-store scanning facilities, and retailers’ back-end systems will need to be overhauled to handle integration with mainframe servers, sophisticated database architecture and associated security measures.
As most retailers have only basic scanning systems at present, it’s not a case of simply tweaking their current infrastructure; typically existing loyalty programmes and voucher codes need to be linked to a real-time database, whereas any contactless payment system will need to work to a set of updates downloaded to a store every evening. This is not a simple step, it’s a giant leap. Furthermore, while there is an obvious benefit to introducing this in the Underground in terms of speed and ease of travel, people within the retail environment are likely to be much more questioning about the direct benefits.
For retailers, particularly the big supermarkets, to make the substantial investment needed to drive forward widespread adoption of contactless payment, they will need to see a benefit, such as an increase in incremental sales. If not they’re just adding in another layer of cost for no reason. It can’t just be about making things easier for consumers, unless it makes it significantly easier that they spend more.
And this has been a major stumbling block to adoption. Consumer payment technology is not without its debates either. Mobiles are the most logical place for this technology to sit; the processing power is already there, the chips are being readily built into the handsets and so the development cost isn’t going to be that great.
Although smartphones currently only accounts for 30% of the handset market, it is the biggest growth area, and with 97% of people not leaving home without their phones, mobiles are destined to become an increasingly essential part of everyday life.
Indeed, a recent Google statistic claimed that by 2013 more people will be accessing the internet via phones than via PCs. So having everything tied into one device makes complete sense. And the handset manufacturers are obviously banking on this shift with Nokia already building near field communication (NFC) chips into its phones and Apple including the chip in its iPhone 5 patent. In reality, if it does take off I think we are likely to see a combination of cards and mobiles being used, but as more and more people have smartphones we’ll see a shift towards that as the main medium.
But the big problem that needs to be resolved for mobile-based payments is where any transaction sits. Does it come off the user’s mobile bill, essentially transforming network providers into banks, or does it sit with the handset manufacturers or indeed the banks themselves? Apple would already appear to be planning its position, with rumours abounding that the NFC chip in the iPhone 5 will use the owner’s iTunes account as a payment vehicle, and Apple will take the sort of commissions typically associated with the banking merchants.
This is interesting as it is clear evidence that Apple is looking to take away the reliance on the network provider and place the power firmly with the handset manufacturer who has the closest relationship with the consumer. Other developments such as Visa’s In2Pay also point towards prepay transactional chips as a viable option.
Recent news that Starbucks’ in the US has introduced an in-app billing system, represents an interesting short-term solution to a gap in the market. While it serves to educate the customer that they can buy things using their mobiles, in the long run is likely to prove an unnecessary step in the process. The advantage of the NFC chip is that it provides a simple, universal payment system and is still the most effective solution to contactless payment.
But my feeling is that the retail industry still needs to be convinced.
Yes, it has gone through changes with the introduction of chip and pin, but this was driven by the financial providers. While developments in contactless payment to date have focused on the banks and handset providers, a relatively small number of retailers have done serious test into the technology. The harsh reality is that for contactless payment to be adopted on a large scale basis by the large retailers, it is again going to have to be pushed through and funded by the banks.