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MasterCard Worldwide is making a major push behind contactless payment in Milan as it tries to establish its PayPass brand on Italian soil.

The card scheme has paid for 1,000 billboards in and around the city promoting contactless payment, lined up a dozen issuers and–potentially crucial for recruiting merchants–lowered interchange for PayPass transactions.

The lower interchange could encourage more merchants to install contactless readers or, if they don't accept cards at all, to hook up point-of-sale terminals. This along with the fact that Italians make the vast majority of their retail purchases with cash will make Italy a key test of the market-worthiness of contactless payment. MasterCard and rival Visa target cash with their contactless applications.

The major Italian bank so far taking part in the Milan launch, Intesa Sanpaolo, said it is seriously considering a national rollout of PayPass after it evaluates results of its 100,000-card PayPass “pilot,” which it launched in November. That rollout could begin as early as 2010, the bank told NFC Times, depending on the results of the trial. Some of the cards the bank is issuing are prepaid, a payment type more popular in Italy than in other Western European countries.

Intesa Sanpaolo, one of Italy’s two largest banks, said it is “very satisfied” so far with the project. “After we have completed our research, we will decide the best way of rolling out the cards nationwide,” Stefania Gentile, head of payment cards and POS for the bank told NFC Times in a statement.

Most of the other issuers in the PayPass project are small or mid-size banks and are not likely issuing nearly as many cards as Intesa Sanpaolo. But Paolo Battiston, MasterCard country manager for Italy, told NFC Times that BancoPosta, the financial services arm of Italy’s postal service, Poste Italiane–and one of the country’s largest payment-card issuers–will also join the Milan project during the second quarter of this year.

He declined to say how many PayPass cards the postal bank planned to issue or whether they would be debit, prepaid cards or both.

Organizers say 15 “major” retail chains are also onboard for the project, thanks in part to Intesa Sanpaolo’s card processing arm, Setefi. They include travel restaurant chain Autogrill, Blockbuster DVD rental, sporting goods retailer Decathlon, supermarket chain Esselunga, Total gas stations, and Zara clothing stores. As of January, there were nearly 800 merchant locations in Milan accepting PayPass. Some are small merchants in the city center.

Avoiding Mistakes
MasterCard Worldwide said it has studied other contactless rollouts to learn from missed opportunities or mistakes in these other markets.

“We know that awareness and education is key,” Battiston told NFC Times. For this reason, we at MasterCard have invested a lot in Milan with an awareness campaign.”

He declined, however, to stay how much the card scheme has spent on promotion, including the 1,000 billboards or posters, some of which are in Milan metro stations. And Battiston also wouldn’t say whether MasterCard is subsidizing terminals for merchants.

Besides poor awareness among consumers, a relative scarcity of contactless acceptance points has also kept many consumers from tapping their cards to pay in such places as the U.S. and UK, where banks have rolled out cards.

In Italy, merchant acceptance would “increase significantly,” said MasterCard. “We are seeing a lot of requests from merchants that are not part of the pilot,” Beatrice Cornacchia, who handles the Intesa Sanpaolo account for MasterCard, told NFC Times.

Lower Interchange in Italy
MasterCard hopes its decision to lower interchange on debit, credit and possibly prepaid contactless transactions will encourage more merchants to accept contactless.

Interchange, most of which is passed on by acquiring banks to merchants on card transactions, would be cut substantially and would vary according to the type of merchant and transaction amount. Interchange would be cut most for "very low-value" merchant categories. This includes bars, cafés, bakeries, news agents and tobacco sellers, said a MasterCard spokeswoman.

For example, for a 25-euro (US$34.75) purchase–the maximum amount allowed for PayPass in Italy–at one of these types of merchants, the interchange would amount to 11 euro cents for the contactless transaction, down from 13.75 cents for a conventional contact chip debit transaction. That is a 20% cut. And with the much lower fixed fee for debit PayPass that MasterCard has set (see chart), the lower the transaction amount, the lower the interchange. Fees would drop by more than 40% on a 10-euro transaction, for example, in this merchant category.

Credit and possibly prepaid interchange would fall by about a third from 17.5 cents for a conventional 25-euro transaction to 13.5 cents for a PayPass transaction of the same amount in the very low-value merchant category. The cut would be less for lower-value purchases. It was not clear whether the lower rate for PayPass credit will also apply to PayPass prepaid cards.

Banks would recoup the lost revenue with a higher number of low-value card transactions that normally would have been spent with cash, maintains MasterCard Italy.

The card scheme, along with rival Visa, has declined to lower interchange in the U.S. for contactless payment. Visa Europe has done so in the UK, although that has not yet encouraged a tier-one merchant to roll out contactless terminals there. It’s not clear whether MasterCard followed Visa in lowering interchange in the UK.

Geographic Approach
Unlike in the UK, where banks and the card schemes coordinated their planned national contactless rollout, which started in London in 2007, much less coordination exists in Italy. Moreover, MasterCard in Italy cannot count on big retail chains and their banking arms to both issue and accept PayPass cards, as large hypermarket/supermarket chains Carrefour Group and Auchan Group have started to do in France. This has given consumers a ready place to use their cards.

MasterCard Italy’s Battiston said that is why the card scheme is focusing on one market, Milan, at first, before proceeding.

“We tested the technology in the Italian market, and we decided as a country strategy, the best way for Italy to deploy PayPass is by a geographic approach,” he told NFC Times.

It remains to be seen whether this approach and the lower interchange will encourage more Italian merchants to move on contactless. But any new terminals and readers will be designed to also work with Visa payWave cards.

Visa Europe, which participated in significant pilots in northern Italy in 2008, now appears to be playing catch up with MasterCard in the country. Visa said that about 10,000 V Pay contactless debit cards were issued in 2008, all or most by Credito Valtellinese as part of pilots in five cities in the region. The bank and Visa also launched an NFC trial in September 2009.

Around the same time, Banca Popolare di Sondrio began issuing a prepaid bank card that includes Visa payWave and also doubles as an ID card for students at two universities in or around Milan. Both Credito Valtellinese and Banca Popolare di Sondrio also are issuing PayPass cards.

Intesa Sanpaolo told NFC Times that it is also planning a university pilot, testing contactless payment on the campus of Milan Polytechnic in coming months. 

The bank, however, did not mention the prospects for an NFC trial involving PayPass. In neighboring Slovenia, Intesa Sanpaolo group member Banka Koper launched a PayPass trial in December. MasterCard may participate in a PayPass NFC trial in Italy this year, according to a source, but details, including the name of the bank, were sketchy.

And despite the promise of a national card rollout, the PayPass project in Italy remains a pilot in Milan for the time being, albeit a large one.

But with banking giant Intesa Sanpaolo apparently backing the technology and some big-name retail chains participating, MasterCard’s Italian branch can’t be blamed for a little self-assurance.

“We have right now all the elements: A big issuer, an interesting number of cards and the right communication in place,” said MasterCard’s Cornacchia. “Then (there are) the major merchants and located in the best area.” We are confident that “this will not be (just) a pilot, but we will go ahead.” NT