Retailers Fear Contactless Payment
Retailers are increasingly worried that the forthcoming launch of contactless payment cards in the UK could leave them significantly out of pocket as the cost of accepting payments this way could be potentially much more expensive than cash.
Transport for London's pre-pay Oyster Card has certainly proven the model for contactless payments with the widespread take-up of the cards in the capital. And it is on the back of this success that card payment market leaders MasterCard and Visa are soon to launch similar propositions to encourage consumers to switch from using cash - for transactions of less than Ã‚Â£10 - to contactless cards.
The idea is that newly issued debit and credit cards will be fitted with a second chip that will give the cards the ability to be read in retailers' stores using NFC (near field communications) technology. The readers will be configured to allow purchases under Ã‚Â£10 to be PIN-free, thereby reducing average transaction times.
But there is some resistance from retailers who believe accepting transactions on the cards will increase their costs. MasterCard and Visa's contactless cards are set to launch in October - initially in the City of London and Canary Wharf.
For Nick Mourant, group treasurer at Tesco, the crux of the argument is whether the cost of accepting transactions via contactless cards will be the same as the cost of handling cash. And, at present, the negotiations with his acquiring bank suggest it will be much more expensive.
He told silicon.com: "In principle we think contactless is a great idea but only at the right price and the price at the moment is miles off the pace. What's not understood is that for major merchants the cost of handling cash is virtually free because the banks want our notes for their ATMs."
For Tesco the cost of accepting Ã‚Â£100 worth of cash transactions works out at around 5p whereas it would be as much as 10 times this for contactless payments if the pricing structure were similar to that of a MasterCard or Visa debit card transaction.
Yet Guido Mangiagalli, head of new channels at Visa Europe, said he recognises that if contactless cards are to compete with cash then the transaction charges for large merchants have to be the same or lower than the cost of accepting cash.
And it can only be assumed transaction charges have yet to be fully determined and that negotiations are ongoing between the various banks and individual retailers. Part of this process will involve using incentives to entice large merchants to accept contactless cards, according to Mangiagalli.
Scott Thomson, director of QPQ, a payments advisor to retailers, said there have been subsidies offered to various retailers to tempt them into accepting contactless payments ahead of the forthcoming launch but added there has been some reluctance to accept them. However, he said: "It will be a classic case of them picking off the weakest retailers and getting them onboard first. If the money were right then some big retailers could be tempted."
Neil Garner, managing director of tech consulting company Glue4 Technologies, who was involved with MasterCard's contactless card in the US, said although incentives were proffered to retailers across the pond they soon found they enjoyed a return on their investment as a result of reduced stock shrinkage and faster transactions in-store.
Garner's view is that retailers should take such benefits into account when weighing up contactless because without them it is hard to get the business case to stack up. "WHSmith and Boots have looked at it from the cost perspective and it has not stacked up," he said.
Since even these prime candidates for contactless cards - with their high volume, low value transactions - are sceptical QPQ's Thomson predicts the intended launch date will inevitably slip back. "
Until you get a quote from a retailer that they are going [to sign up at the beginning of October] then I do not believe it will happen," he said.
Despite the doubters Mangiagalli is confident of reaching a target of having 200,000 Visa contactless cards in use and between 2,000 and 2,500 acceptance devices in the retail marketplace by the time of the launch.
He believes food and drink merchants will be among the first operators to accept contactless cards and cites McDonald's as a potential early adopter as it has already rolled out card readers across its outlets in the US (where it benefits from reduced queuing during the two hours around lunchtime when it takes a hefty 80 per cent of its total sales).
Although Toni Merschen, group head of chip at MasterCard, will not disclose the targets of MasterCard PayPass he is also confident the launch will be a success: "The banks' position is that this is the start of a nationwide launch. There will not be any big debates about it - this will be the start of contactless [in the UK]."
Such are the benefits of contactless to retailers, he believes, that its adoption should not just be based on transaction charges: "It's not a comparison between the cost of cash and PayPass. Yes, there's the cost of bagging coins but there is also the speed of transactions as well as ease and convenience [to take into account]."
Merschen's belief in the business case is such that there will be "no programme of subsidies" for retailers from MasterCard, he said. This will not be music to the ears of large merchants and clearly much negotiation is likely to take place before the likes of Sainsbury's and Tesco can be tempted to invest in card readers.
With contactless card reader tech currently costing around $100 per unit, when this is added to the cost of integrating the devices into chip and PIN systems large retailers have another disincentive to accept contactless. By contrast, the integration process for smaller retailers with bank-owned terminals is likely to be a much more straightforward affair.
Unlike chip and PIN, there may well be a better business case for these smaller retailers to install the technology because they do not have access to the same cost-effective deals on cash handling that the big retailers enjoy. As a result it is likely that some of the early adopters of contactless may be coffee shops and newsagents, which is great news for the banks and card schemes.
But until the major supermarkets - with their large numbers of convenience stores - accept contactless payments it will be a much more difficult task for MasterCard and Visa to achieve the critical mass they need for this new form of payment to be a success throughout the UK.