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Letter from the CEO: Contactless 3.0 (MAG Quarterly- Volume Seven, Issue One)


By John Drechny, CEO, Merchant Advisory Group

March 7, 2019

We all remember the promises when contactless was first issued over a decade ago on cards in the United States - it was going to revolutionize the checkout process. We were told not only would contactless improve the checkout experience but somehow it was also going to increase the average purchase and frequency of our customers. Several issuers spent the additional money to include the contactless chip on cards but not many merchants saw the benefit of adding new technology to the checkouts.

The next iteration of contactless saw NFC technology embedded in mobile devices.  Again, the industry promised the benefit of faster checkouts and improved spend numbers. Countless millions were poured into advertising the revolution of the mobile payment industry and more merchants turned on the technology at POS. But even with this push it seems most customers were still content with swiping a card versus tapping a mobile device.

We are now entering the latest push for the adoption of contactless chips as many issuers have pledged to issue dual interface chip cards as current contact chip cards expire. We have heard in several markets contactless chip transactions now exceed contact transactions. The latest revolution on the issuance of contactless chip cards seems to be predicated on a number of transit authorities agreeing to accept network-branded payments, turning away from their proprietary closed loop cards with the hopes that a reduction in kiosk expenses and labor at ticketing booths will make up for the incremental cost of accepting network payments like interchange, system upgrades and securing the PCI data.   

The promise this time is also backed by the realization that merchants who had to invest in new hardware for contact chip terminals had contactless chip integrated from a hardware standpoint as well. With all of the hype around contactless, merchants need to ensure that the implementation of any new software or hardware is in their best interest, so here are my suggestions as you investigate if contactless implementation is right for your business:

  • Understand the requirements to implement contactless – Unlike contact chip, each brand has its own kernel requirements for contactless acceptance. This means you must maintain and certify each kernel separately which adds complexity to maintaining your checkout.
  • Know your routing rights – While routing is possible with contactless transactions the technical solution to enable it is much more difficult. As terminals only have a millisecond to capture the information in the tap, you cannot go through the different specs on the card and pick one. Instead the terminal needs to be set to read only one and process accordingly.
  • Be careful of the long‐term competitive threats – Once contactless is implemented, you agree to accept it no matter who holds the wallet or issues the cards. This means if you have a competitor who decides to put their stored credentials in a mobile wallet and that wallet uses contactless as a means to transact, they will be accepted at your location. While we have heard that any use of this data is prohibited outside of processing the transaction, this is a risk you should be willing to take. Unfortunately, rules change and not everyone abides by them. So, make sure you are comfortable with the competitive threat this may cause long term.
  • Ensure contactless solve an issue raised by your customers  – Most of the successful mobile technologies implemented today have more to do with making the customer interaction with the brand easier and not just solving the payment piece. For instance, the Starbucks mobile app is not just about payments, but also using the connection to deliver loyalty and expanding the functionality into ordering ahead which saves time. Make sure any new payment technology you implement does not inhibit your ability to build a stronger relationship with your customer.

If the main issue you are trying to solve at the POS is speed by implementing contactless, there are other ways you may want to consider before taking the plunge. For instance, contact chip can now be programmed in a way that customers can instantly insert and remove the card at the register. This gives the impression of speeding up the transaction process as customers are no longer waiting for the terminal to beep at the end of the transaction before being required to remove the card. 

Just to be clear, the purpose of this article is not to suggest that merchants should not implement contactless but to help you think through the process when making the decision. In some cases, the incentives to implement will outweigh the concerns outlined and you should move forward if as a result of examining these ideas, you have determined that implementing is in the best interest for your business.

With any decision an investment in not just time but money, it is always wise to understand all the implications and educate yourself as much as possible before making the commitment.