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After years of preparation, Discover Financial Services has begun its first commercial launch of contactless cards–along with one of the first rollouts of contactless stickers in the United States.

The move, announced yesterday, comes more than five years after issuers at rival payment networks began rolling out contactless–and more than three years after Discover certified its first point-of-sale reader to accept its brand of contactless payment, Zip.

Discover said the infrastructure of contactless terminals deployed among U.S. merchants had not been "mature" enough in the past to begin even a phased rollout of cards or stickers. Since mid-2007, when the first merchants began accepting Zip, Discover estimates its contactless brand is now present on at least 90% of the contactless bank-payment terminals installed in convenience stores, fast-food restaurants, retail pharmacies and other outlets in the United States. Zip sits alongside MasterCard PayPass, Visa payWave and, usually, ExpressPay from American Express on those terminals.

But to date, no one outside of Discover employees participating in trials has tapped Zip to pay.

"We wanted to wait until we had a decent footprint," Mark Scarborough, senior vice president for card member marketing, told NFC Times.

Discover estimates that more than 100,000 merchant locations accept Zip, and the only major chain that does not take it but accepts the other contactless brands is CVS/pharmacy, which was among the first U.S. chains to sign on to contactless. Discover hopes to add at least some of the more than 7,000 CVS/pharmacy stores.

Yet, Discover’s contactless footprint at the point of sale–like those of PayPass and payWave–still represents fewer than 2% of all card-accepting merchant locations in the United States. That’s why the card brand is beginning slowly with its rollout, sending Zip stickers and companion cards to selected customers, mainly the more tech savvy and mobile inclined within its customer base. It will resume in January with the unsolicited mailings, including to customers in markets with a high concentration of Zip terminals. Customers also can request the cards and stickers.

Zip and Isis on Separate Tracks?
The start by Discover of its Zip contactless card and sticker rollout Nov. 15 came just a day before the announcement by major U.S. mobile carriers of their joint venture to launch a new payment brand, called Isis.

The telcos, led by Verizon and AT&T, plan to offer the contactless Isis payment application and other services on NFC phones and perhaps other devices. Discover will lend its acceptance network and also its Zip application specifications to Isis, which would compete head-to-head with Visa, MasterCard and American Express. Discover’s partnership with the Isis venture is separate from its planned Zip rollout, but the card network will be helping the telcos to try to convert many more of the 7 million merchant locations in the United States that accept conventional Discover cards but not contactless.

That would mean POS terminals and readers would accept both Isis and Zip, which technically would be the same application. This could add substantially to Zip’s footprint in the United States. But it also might set Isis up as a competing brand.

"I don’t see a conflict,” said Diane Offereinn, Discover’s head of payment services following the Isis announcement, when asked by about the potential competition with Zip. "This is a network play, where carriers are going to be using our network and provide us the scale to do some innovative things. This is a separate venture from Discover, but running on the same network."

She declined to say what those innovative plans are or whether Isis intends to lower merchant fees to try to attract merchants, as is expected. But Offereinn told NFC Times the task at hand is to give merchants a reason to upgrade to contactless. And she added that Isis also could help break the "huge dominance" of Visa and MasterCard.

"In the medium term, we won’t have challenges with merchant adoption because many are already poised for it," she said. "Technology can be a great equalizer that will help small businesses compete in the consumer space."

Betting on Stickers in the Interim
Isis isn’t scheduled to begin rolling out until 2012, when most experts agree a significant number and variety of NFC phone models will be on the market. Discover also plans to put Zip on NFC phones. Before the phones arrive, however, Discover hopes to generate the kind of excitement among consumers for contactless payment that has eluded other issuers and card networks. The former includes JPMorgan Chase, which began rolling out its blink contactless payment cards in 2005.

Discover, which is much smaller than its rivals Visa and MasterCard, years ago adopted a mobile focus for its nascent contactless program.

The sticker launch will be one of the first by an open-loop credit or debit card issuer. It follows the launch by Citigroup last May of the PayPass-enabled sticker. Before that, processor First Data introduced a Visa-branded contactless sticker, Go-Tag. Sold in a few retails chains, the prepaid sticker, which First Data launched in 2009, failed to take off. Bank of America has confirmed plans to begin issuing contactless stickers next year.

The passive stickers, which customers can attach to the backs of their phones or other devices or surfaces, are similar to contactless cards and do not have any connection with the phone’s software or processor. Discover could send mobile-transaction alerts when customers tap the stickers to pay, but it already offers the mobile alerts with its conventional cards.

Discover’s senior business leader of new technologies, Troy Bernard, said the company tested other products that could communicate directly with applications on the phones but rejected them, saying they were not yet reliable. That includes contactless microSD cards and SIM or SIM overlays with flexible antennas.

"The microSD cards come with varying results, and at the end of the day, we want to provide an excellent user experience, and we are confident the sticker provides that," Bernard told NFC Times. He said that in the lab, the contactless microSDs would sometimes require users to tap on different parts of the phone or reader.

"If the microSD does not exist in the case of the phone, we have not seen a very good reading experience," he said. "I haven’t seen one that you can just tap the back of the phone and get a quality read. Do you really want to train the consumer on how to orient their phone?"

He declined to identify the makers of the microSD cards Discover tested. But the comments likely are aimed at rival Visa and big U.S. banks, which are now testing contactless microSDs made by U.S.-based DeviceFidelity. The microSD card supplier, which has an exclusive agreement with Visa, has said its In2Pay microSD will be commercially ready by the end of the first quarter of 2011. The vendor also has produced a case with a full-sized contactless antenna and microSD slot for Apple’s iPhone.

The passive sticker, however, presents its own problem for Discover. Surveys from Discover’s 700-person trial launched in April 2009 found that a high majority of respondents–69%–said they would want the sticker to be hidden, such as inside the phone cover. Only 4% said they’d want it visible so that other people could see their phones were payment devices. The results were all the more surprising since the trial participants were Discover employees.

Bernard said even if it wanted to, Discover couldn’t issue the stickers without its logo because merchants need to be able to verify that customers are presenting a payment device from an accepted card network. The customers still could hide the stickers underneath their phones’ back covers or behind an ID card, but they would need to be able to show them to clerks when asked.

Discover did reduce the size of the logo to one half or one quarter of its size in the trial, Bernard noted.

Meanwhile, Discover continues to develop the Zip application for full NFC phones, anticipating the first launches of compelling phones, expected next year.

"This (sticker) is probably an intermediary step, before you get something more integrated in the mobile device," said Scarborough.

It remains to be seen whether Discover can successfully take on its big rivals Visa and MasterCard and other m-commerce players as retail payments begin to move to mobile phones. But with the launch of Zip on stickers and cards and partnership with the Isis joint venture, Discover’s contactless strategy is finally taking shape.