UK Contactless to Reach a Tipping Point in 2011?
Contactless payment continues to grow rapidly in the United Kingdom, but transaction volume is still low, and it remains open to debate whether 2011 will be a tipping point for the technology.
As the European country with the most contactless payment terminals in place, along with high-profile NFC commercial rollouts either already launched or planned this year, what happens in the United Kingdom offers a sign for how contactless payment will fare in the rest of Europe and beyond.
There will be about 25 million contactless cards on issue and roughly 10% of the country’s merchants will be equipped to accept them by the end of 2011, predicted James McDonald, who heads contactless payments for Barclaycard Global Payment Acceptance, the merchant acquiring arm for Barclays bank and the bank’s Barclaycard credit card unit.
There will also be at least two commercial NFC mobile payment services in operation by the end of 2011. One already has launched, Quick Tap, from Barclaycard and mobile operator Orange UK. Telefónica (O2) UK plans to launch NFC during the second half of the year, a service expected to be anchored by the telco’s own contactless prepaid O2 Money service.
But overall, contactless transactions still make up a very small percentage of card payments in the United Kingdom. Barclays and Barclaycard, which are responsible for the vast majority of both the cards and contactless terminals in place in London and around the country, recorded only about 1.7 million contactless transactions in 2010.
That’s far less than 1% of total card transactions for all Barclays debit and Barclaycard credit cards. Overall, contactless accounts for only 1% or less of transactions for most UK merchants equipped with contactless terminals.
Barclaycard said in April that contactless transactions on its terminals had grown by 150% compared with a year earlier.
But McDonald, who spoke last month at SMi’s Contactless Cards & Payments conference in London, predicted they would grow by even more–perhaps to 5 million to 6 million total contactless transactions for all of 2011.
The transaction volume will be boosted by acceptance of contactless payment at 1,200 McDonald’s restaurants in the United Kingdom. The fast-food chain rolled out contactless acceptance in recent months, one of the first tier-one retail chains to do so in the United Kingdom.
If the projection of 5 million to 6 million contactless transactions comes to pass, it would be three times the number of taps by UK consumers as in 2010. Contactless payment activity was even smaller in 2009, during which Barclaycard recorded only about 200,000 contactless transactions and only one-tenth of that in 2008, the first full year after the bank launched contactless payment in London, in September 2007.
Little Wear on Contactless Terminals
But not everyone agrees that 2011 will be a tipping point for contactless payment in the United Kingdom or that UK consumers will conduct as many as 5 million contactless transactions this year.
On average, each of the approximately 60,000 contactless point-of-sale terminals in the United Kingdom is used only four to five times per month, said Matt Rowsell, chief commercial officer for Streamline, part of WorldPay, the United Kingdom’s largest merchant acquirer.
WorldPay is acquirer for McDonald’s, as well as such large tier-one UK merchants as the Tesco supermarket chain and Boots retail pharmacies. Both of the latter are trialing contactless and are expected to eventually roll out the technology chainwide.
Rowsell, however, also speaking at the Cards & Payments conference, said that the “sense of urgency” among UK merchants, in general, to adopt contactless is lacking for now. Most merchants believe cash is still cheaper than cards and the faster speed contactless technology offers doesn’t excite many of them.
Cardholders also have had trouble seeing the benefits of contactless.
“A large proportion of customers have at least one contactless card in their wallet; whether they knew they had a contactless card is another matter,” said Rowsell. “It’s safe to say card usage isn’t habitual. I think we’ve got to question, ‘are we at the tipping point, really?’ I’m starting to think it’s a little further away.”
Some merchant segments are seeing the value of contactless, but until more people in the checkout queue pay with contactless cards or phones, merchants and cardholders will see little benefit from the faster transaction speeds, he said.
Rowsell said that contactless tipping point might happen in 2012, when Transport for London is set to equip all of its 8,500 buses in London to accept contactless credit and debit cards directly to pay fares, in time for the opening ceremony of the Olympics next July. But outside of the London metropolitan area, the impact of Transport for London’s move will be more limited, he added.
The open-loop transit terminals also won’t accept contactless payment from NFC phones if the payment applications are prepaid, at least not initially. Both Quick Tap and the planned O2 Money NFC payment services are prepaid. Moreover, Transport for London is requiring that transaction times come in at 500 milliseconds or less, which might be a problem since the payment applications will be stored on SIM cards in the NFC phones.
Three Banks to Support Olympics Phone
Visa Europe and Samsung Electronics, both Olympics sponsors, have announced they will introduce a sort of commemorative NFC phone for the Olympics, though have not revealed details about the model or most of the partners on the project. Lloyds TSB, part of Lloyds Banking Group, said it would issue a Visa payment application for the phone.
Mary Carol Harris, vice president for innovation and new product and channel development, mobile, for Visa Europe, said recently that a total of three banks are ready to issue Visa payWave contactless applications for the phone. She did not name the banks.
Sources told NFC Times the other two banks, besides Lloyds, probably are Barclays and HSBC, the latter not yet a player in contactless payment in the United Kingdom. An HSBC spokeswoman, however, would not confirm that the bank is keen to suit up for Olympics project, adding that contactless is “not something our customers asked for or (to be) delivered anytime soon.”
It’s also unclear which UK mobile operators will participate in the launch of the phone, which is expected to be given first to athletes and then made available to the public. O2 is likely to be one of the telcos participating, sources said. The operator expects to have a number of other NFC phone models available in its shops by Olympics time, as well.
Visa, which clearly wants to squeeze as much promotional value out of its Olympics sponsorship as possible, is keen to have multiple telcos onboard, in addition to multiple banks.
“We really want to move beyond the kind of bilateral configuration (for NFC rollouts) we’re seeing now, open it up for more consumers, more issuers and more mobile operators,” Harris said at a recent conference, speaking not just about the Olympics phone project.
In mentioning bilateral arrangements, she was no doubt referring to the NFC mobile-payment launch in May by Barclaycard and mobile operator Orange UK, which are using a contactless PayPass application from rival MasterCard Worldwide. Quick Tap is only available on a single NFC phone model, so far, the Samsung S5230, known as the Tocco Lite in the United Kingdom. Harris also made the remarks before the three largest UK mobile operators, Everything Everywhere, of which Orange UK is a part; O2; and Vodafone UK; announced their planned joint venture to roll out interoperable NFC wallets.
Tipping Point in ’12?
Still, most agree that if the tipping point doesn’t come this year, it should happen by 2012.
Barclaycard’s McDonald predicts that the number of cards and percentage of contactless merchants will double from this year–to more than 50 million cards on issue and 20% of merchants equipped with contactless terminals.
By the end of 2012 or early 2013, all 25 million Barclays and Barclaycard credit and debit cards will have a contactless interface, said McDonald. That would represent about half of all cards on issue in the United Kingdom by that time, according to the projection. At present, Barclays and Barclaycard have issued more than 80% of the approximately 15 million UK contactless cards in circulation.
In addition to Barclays, Lloyds TSB in March announced it would begin its rollout of contactless debit cards and expects to have about 1 million cards on issue by the end of 2011. TSB also plans a commercial launch of NFC payment by the end of this year, which it would expand next year.
“We don’t want to be in a position in five years of people using Google prepaid cards,” Shoomon Perry, who heads planning and new product development at Lloyds Banking Group, said at a recent conference. He was referring to Google’s payment application in its planned wallet in the United States. The search giant plans to introduce the wallet in Europe next year. “We know we have to be there and offer our customers the payment products they really want to use.”
Bank of America's card unit MBNA and Virgin Money also have announced contactless-card rollouts for the United Kingdom. Lloyds’ Halifax unit earlier issued some contactless cards as has the Royal Bank of Scotland, though not as part of rollouts, yet.
Contactless Limit Likely to Increase
In 2012, there will be “hundreds of millions of transactions,” forecasts Barclaycard’s McDonald. He also expects the limit for contactless transactions to be raised from the present £15 (US$24.50) to £20. Merchants have reported only five chargebacks on contactless transactions, he said, apparently referring to 2010.
“We have to move the limit up,” he said. “That’s good for taxis. That’s good for leisure entertainment, (for) pubs to have the (higher) limits.”
Lloyds’ Perry said there is debate in the UK banking community about whether the limit should be raised. But he agrees fraud has been low with contactless cards.
Besides taxis and pubs, purchase amounts can easily go over £15 at supermarkets, restaurants and drug stores, all merchant categories that banks hope will adopt contactless. And when the tab does surpass £15, contactless is no longer an option for consumers, who have to insert their cards into terminals and conduct chip-and-PIN transactions.
“We’re fairly relaxed (about the limit) increase, as an issuer,” Perry said. “We’re not seeing a lot of chargebacks.”
The higher limit would also apply to NFC phone payments. And Perry added that above this limit, he expects consumers will be able to conduct even higher purchases by entering PIN codes on their handset keypads, an option not yet fully agreed to by payment networks.
Higher-value NFC phone transactions with PINs will certainly be the case by 2015, said McDonald. By then, he predicts there will be more than 100 million contactless cards on issue and millions more NFC phones in circulation in the United Kingdom, which consumers will be able to use at 40% of the card-accepting merchants in the country.
All this hinges on whether UK consumers and merchants see the value of contactless payment. Awareness problems remain, but Barclays, for one, plans to continue to put the message out about what it sees as the benefits of contactless.
“We will spend many millions of pounds over the next few years promoting contactless,” McDonald said. NT