The innovation of contactless payments has brought several options forward, most notably including RFID and NFC technology.  RFID cards (i.e., contactless smartcards) came to light with MasterCard’s PayPass and Exxon/Mobil’s SpeedPass.  Concerns with these cards include data security, to include card loss/theft.  Thieves have adapted (as they always do) and use RFID readers to steal card data, needing only to be close by (near you at the mall court or coffee shop) to snatch your info.  One suggestion offered is to wrap your RFID card with aluminum foil to prevent RFID theft.  Another is to use a RFID blocking wallet or shield.  As a result, some consumers have abandoned the RFID cards all together in favor of the old fashioned magnetic strip cards.

NFC technology, targeted for mobile phone usage, is slowly coming about.  While RFID can only transmit data, NFC can also receive data.  This key feature requires a password or PIN information to enable the payment, thereby adding a level of security important to consumers.  NFC can be used a few different ways, but the current plan by mobile phone manufacturers and wireless carriers is to have NFC embedded within the mobile device.

NFC phones are not entirely new, but the technology is finally gaining some ground as popularity grows.   Not surprisingly, the U.S. is behind other countries as this technology already exists in other countries.  However, NFC-enabled phones are still in limited use.  Samsung, Nokia and a few other manufacturers have NFC phones available outside the U.S.   Some carriers are taking the initiative and not waiting for phone manufacturers.  Softbank, Japanese wireless carrier, introduced a NFC sticker for the iPhone 4 and communicates with the FeliCa payment system.  There are concerns about how effective the sticker will be if the phone is within a case (protection used by a good portion of smart phone owners).  Maybe the iPhone 5 will be NFC-enabled.

Google, who seems to be taking leaps over Apple, introduced a new Android touch screen phone, the Samsung Nexus S, which was released on Dec 16 in the U.S.  It features a NFC chip and “tap and pay” ability and is available locked or unlocked (obviously more expensive) with T-Mobile.  The company has also launched Google Places, providing retailers with window decals that are NFC enabled so consumers can find them.  The one hurdle for retailers is the need for NFC readers, which are fortunately now being combined with magnetic stripe readers.

The trend that keeps growing involves credit card companies getting pushed out of the loop, as mobile carriers and shopping sites introduce new payment technology and enable alternate payment options.  PayPal continues to grow at 300% annually, and Isis, a joint venture between AT&T, Verizon and T-Mobile to enable NFC mobile payments, was announced in November.  In my August blog, I discussed the joint venture (known as Project Mercury at the time) and their partnership with Discover and Barclay’s to process the payments.  Unfortunately, they do not plan on having anything available until mid-2012.

No matter what the new payment vehicle, it will come when it is ready.  The storage of payment data, whether on a device or online, will always prompt some security concerns.  Wireless phone manufacturers and carriers have been careful about releasing new capabilities, trying to couple innovation with data encryption so as to prevent theft but enable payment evolution.  Before we know it, all computers will come with NFC technology and you will be able to use your mobile phone to shop instead of entering your credit card data online.  However, I wouldn’t leave your wallet at home just yet.

In 2008, Juniper Research forecasted that mobile payments would reach $600 billion globally by 2013.  Mobile contactless payments have been in place in other countries (Korea, Japan, Spain) for some time and the demand in the U.S. has been increasing, especially with the growth of the smartphone market.  Discover has been trying to increase their market share using reward programs and partnerships, so what better way than to jump on the mobile payment wave?  Joining the leading wireless carrier and cell phone provider partnership is a smart move.

About the Technology

Contactless payments have actually been around for a while.  Introduced with Mobile (Exxon)’s Speedpass in 1997, the technology has only recently evolved and become more popular for several reasons.  Consumers want faster ways to conduct face-to-face transactions.  People are constantly on the move and standing in any line to make a purchase is considered an inconvenience.  There have been recent advances in Near Field Communications (NFC) technology, a more secure payment method for mobile devices.  (Basic RFID was used in the previous contactless cards and devices.)  Merchants are trying to find ways to circumvent interchange and association fees from Visa and MasterCard.  (Merchants persuaded Congress recently to approve a cap on interchange fees.  An antitrust lawsuit filed in 2005 is still pending.)

To enable mobile payments, the mobile phone is equipped with a smartcard which contains payment card data.  Merchants would need to have a compatible payment card reader and, to help prevent fraud, a PIN would be required to complete a transaction.  For merchants already accepting contactless payments, most existing readers are supposedly compatible with NFC devices.

The Faster, Faster Checkout

Some retailers have already instituted Visa’s No Signature Required program and MasterCard’s Quick Payment Service, both of which do not require signatures for swiped credit card purchases ranging up to $50 at certain merchant categories.  Skeptics claim that this business practice can increase fraud, since a cardholder signature is used as proof of purchase at a brick and mortar merchant and most fraudulent transactions start out in small amounts.  Gas stations have long employed this practice, but usually require a billing zip code for fraud prevention.  In this case, a PIN is not enough protection for one group of consumer advocates.  Each country has its own set of government regulations with regards to mobile payments and consumer protection.  Nothing currently exists in the U.S.  Recently, Consumers Union, the nonprofit publisher of Consumer Reports, has requested that regulators “use their current statutory authority to ensure that existing consumer protections are applied to all new payment methods.”  They are also asking that companies providing the payment systems provide consumer rights in their contracts for “zero liability” to the cardholder.  With the current government administration’s involvement in financial matters, a lot more work may need to be done before this becomes reality.

Sharing Revenue

One challenge with this new payment channel involves basic business.  Right now, the major card networks, issuing banks, and payment processors earn the bulk of the revenue from card transactions.  Contactless payments using mobile phones introduces new players – wireless carriers, phone manufacturers, and application providers.  Why wouldn’t the players enabling the mobile payments want some of the transaction revenue?

The Privacy Issue

Retailers and consumers both like the idea of mobile payments when it comes to faster checkouts.  However, they may differ on the amount of information shared.  Retailers would love to gather more information about their customer and the transfer of CRM data wirelessly is the easiest way to do that.  Consumers however, may not want to share anything else about themselves.  Mobile payment applications could limit the amount of data stored, or allow the customer to control what data they want to share, such as loyalty card information and purchase history.

With fraud being a common concern amongst consumers, it still may be a while before mobile payments using NFC really take off.  Sure, there will be the early adopters and people who are tapped to do trials (Discover used employees last year to trial its mobile contactless sticker where Discover Zip payments were accepted).  Adoption requires all the pieces be in place  – consumers with Discover accounts who are also using mobile phones equipped with the NFC payment technology and merchants who have the equipment and capability to accept contactless payments from Discover.

Per Bloomberg, trials for the project, named Mercury, might possibly take place in Austin, Minneapolis, Salt Lake City, and Atlanta, starting in mid-2011.

Although many large retail chains such as Regal Cinemas and McDonalds have the technology available, the process has been put under a great deal of scrutiny because it is said to be more susceptible to identity theft and other types of fraudulent activity. The devices are easily hacked using a wireless frequency. Regardless of the security risks, all the major credit card companies were ready to get their piece of the action. In July of 2005, AMEX launched ExpressPay, which was quickly ditched because of a lack of response by consumers. The Discover Network released its Zip technology, Visa Inc released payWave, and MasterCard has PayPass.

MasterCard Mobile recently released its Secure Set-up for MasterCard PayPass on mobile phones. They call this the Over-the-Air Provisioning Service, and it is the first program to enable issuers to perform over-the-air personalization of their cardholders’ mobile devices. Mobile MasterCard PayPass enables mobile devices to perform payment transactions at merchant locations with PayPass enabled point-of-sales terminals. In order for account holders to use their mobile phones to make purchases, their mobile phone must be equipped with Near Field Communications (NFC) and a mobile data subscription. First, the PayPass application is downloaded onto the consumer’s mobile phone. The application is available through their issuing banks website. Then, the PayPass application is personalized with the consumer’s individual account details.

With the wide range of savvy hackers out there, it may still be hard for consumers to feel safe about the contactless payment technology – whether it be on a mobile phone or on a credit card. As for merchants, my advice is hold of off on buying your contactless equipment just yet.

Technology in the payment card industry has grown tremendously in just the last 5 years. Merchants are able to accept payment using any java enabled cell phone, and can even turn their laptop into a credit card terminal. But the best is yet to come.

• Google recently announced the Android smartphone, and Visa is planning to develop e-payment applications for the device. This technology will allow merchants to receive notifications of account activity to their mobile device, locate ATMs that accept Visa, and Google maps to quickly locate a wide arrange of merchants to redeem visa rewards.  Soon, you will be able to make purchases at retail locations using your mobile smart phone.
• Visa also plans to release a money transfer pilot program by the end of 2008, which will allow Visa cardholders to use their mobile phones and PDAs to send funds directly to another visa card holder. I guess you better make sure you are not dialing the wrong number.
• MasterCard is introducing Chip and PIN.  Instead of swiping a card with the magnetic strip on the back, you will insert a card that has a computer chip embedded on the front. Instead of signing to verify a payment, you will enter a PIN.
• PayPass is MasterCard’s “contactless” payment technology. A tap of your card is all it takes to pay at the checkout; however your purchase must be under the pre-specified floor limit.

I am still a big fan of Biometrics. I believe that we will be able to pay for items using our finger print or a retinal scan. Although there have been recent failures by some companies to create the technology, my opinion is it’s the future of payment processing.