The Future is Contactless

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1 Contactless Implementation and Benefits The Future is Contactless One of the most exciting new applications to be launched in the payment world is contactless payment. The technology is already available and waiting in the wings to help card-based payments eat further into the cash market.

2 Overview Contactless payment promises to deliver return on investment to banks, enables differentiated services and increased revenue for retailers, and offers speed and convenience to cardholders. This white paper explores what it contactless payment will look like when it s part of our everyday lives. How Does Contactless Work? Contactless is a new way in which a card can interface with a card reader. Rather than inserting a payment card into an EFTPoS (Electronic Funds Transfer Point of Sale) device, or swiping it through a magnetic stripe reader, a cardholder can use contactless to pay for goods by simply waving a card within 10cm of a contactless reader. These contactless readers are already available as modular add-ons for existing EFTPoS devices, enabling retailers to leverage their existing payment infrastructures. The new contactless interface can be used either with EMV chip-based cards or in magnetic stripe card environments. In EMV scenarios, PIN entry can be used to verify contactless transactions. In a non-emv contactless transaction, data derived from Track 2 magnetic stripe-related information and secret data is transmitted by the contactless chip in response to a signal from an EFTPoS device. In some instances, this data undergoes authorization in a manner similar to a magnetic stripe transaction. The primary motivation for deploying contactless solutions is the speed and convenience it offers. This speed of service is especially attractive for low-value transactions in busy retail environments. Because of this, transactions below a certain value threshold, typically set to US$25, can be made without requiring cardholder authentication. Any fear of potential fraud is nullified by the fact that the transactions are for small amounts and, more importantly, by the ROI generated as a result of shorter transaction times and increased efficiency. In any case, losses suffered through fraud are likely to be infrequent, given that the level of security is still relatively high, and that any temptation for criminals is minimized by the low values involved. C o n t a ct l e ss P a ym e nt W h i te P a p er S e p t em b er

3 EMV contactless transactions can also make use of the new secure offline Pre-Authorized Debit payment method to save time otherwise spent on online authorization. A protocol between card and terminal investigates whether or not the cardholder has registered sufficient funds on the card prior to the transaction. Retailers are guaranteed that all funds registered and pre-authorized on the card are actually available for spending. The contactless Pre-Authorized Debit extension to EMV is ideal for retailers who want to offer contactless speed and convenience to their customers while also eliminating fraud. The Benefits of Contactless Payment For issuers and service providers, the contactless interface can be used to stimulate additional card-based transactions to quickly generate a return on investment. After examining contactless payments in the United States, the Smart Card Alliance reported increased cardholder transaction volumes, an increase in average transaction sizes and transaction speeds, and proved that this technology is significantly faster than that of contact EMV transactions. With faster transactions, retailers with a steady flow of customers can increase the number of people served in a given period of time. Also, with faster service and shorter queues contributing to fewer customer dropouts, there is reason to believe that retailers are better able to serve a higher percentage of the consumers who enter their premises, including those who have limited patience for standing in queues. In the United States, the retailer and cardholder convenience inherent in faster transactions is the biggest motivation for introducing the new payment interface. Because contactless is ideal for busting queues, it is particularly useful in the quick service restaurant (QSR) sector. Using contactless payment in this environment, orders can be fulfilled as soon as they are received. The time that would otherwise be spent opening and closing tills and fumbling with notes and coins can be spent more efficiently on flame-grilling, deep-frying and burgerwrapping. With less staff on the tills and more in the kitchen, fast food becomes super-fast and QSRs are able to cut costs and generate greater profits than before. Contactless payment can be expected to thrive in all sorts of retail environments, particularly in convenience stores. Because of the efficiency it offers, contactless is an economic proposition for many small retailers who have C o n t a ct l e ss P a ym e nt W h i te P a p er S e p t em b er

4 not previously been able to justify the acceptance of card payment in low-value transactions. This proposition is strengthened further still if contactless is offered as an interface for Pre-Authorized Debit. Like the contactless interface itself, the new offline smart card based payment method is ideal for low-value transactions. In most instances, the profit increase enjoyed by the retailer, delivered by a combination of offline availability and tap-and-go customer convenience, will more than cover the cost of existing debit card interchange fees, thereby solving transaction charging problems. While the convenience of tap-and-go payment completely transforms the interaction between cardholder and retailer at the point of sale, it also opens up possibilities for new Customer Relationship Management (CRM) initiatives. In the not so distant future it is possible that cardholders will be able to introduce themselves to a retail environment by tapping or waving a contactless card upon entry, and then by tapping or waving over items within the store they will be able to explore truly personalized special offers. The increased frequency and sophistication of interaction brought about by the sheer intuition of the contactless interface will enable payment systems to better recognize their customers in retail environments. With contactless, the objectives of earlier magnetic stripe-based and Chip and PIN-based loyalty initiatives are finally viable. A Versatile Payment Interface The Oyster card used on the London Underground in the UK and the Warsaw City Card trial in Poland have already shown that contactless technology can be used effectively for fare collection in transport systems. Contactless cards can be topped up in the manner of a phone card or e-purse, and can then be tapped or waved upon entry to the transport infrastructure. In addition to speeding up the flow of travelers in bus and train stations, automatic fare collection allows bus drivers to proceed to the next stop without having to handle cash, which significantly reduces the wait for passengers eager to reach their destination as quickly as possible. For many small retailers, this presents a great new stream of revenue: top-up cards for transport may well have an impact on profits akin to that of the lucrative pay-as-you-go top-up cards they already sell for mobile phones. As well as being used in payment for transport, the contactless Warsaw City Card is also used for public parking payment. But contactless technology is C o n t a ct l e ss P a ym e nt W h i te P a p er S e p t em b er

5 likely to take off in many other applications for local authorities. While there are already contactless entitlement cards, the technology can be used for issuing housing benefits, checking books in and out of public libraries, or keeping medical records when visiting a doctor. On a much larger scale, contactless could even be used as part of a national identity card scheme. As well as creating new ways of interacting with a payment device, the introduction of contactless is likely to change the way that retail enterprises are organized, particularly as a result of contactless suitability for turnstile applications. Without the restrictive cost of staffing a reception or box office, there is a significant opportunity for retailers to allocate funds to new retail initiatives. The technology can be used to identify season ticket holders at cinemas and sports grounds, and paid members at fitness centers. Using the same principal, contactless can be used in closed campus card schemes to control building access and computer network access within an organization. Enhancing the Cardholder Experience In addition to substantially reducing queuing times, contactless cardholders are likely to be pleased with the ways in which the interface delivers userfriendly and simplified transactions. In fact, a card reader is capable of interacting with contactless chips in coat pockets, which means that, in theory, a contactless payment can be made without showing the card to the retailer. Cardholder satisfaction can also be delivered by the form factor permitted by the interface. If a card is used only in contactless scenarios, the only significant limitation in terms of physical appearance is that it must be large enough to contain a contactless chip. There is no longer any need for the physical dimensions of the card to fit those of the reader, so contactless key fobs are emerging as a more practical, easy access alternative to cards. Contactless is Gaining Momentum There is already significant momentum behind the introduction of contactless around the globe. MasterCard and Visa have both introduced contactless programs, and American Express has started to issue contactless key fobs. MasterCard and Visa have agreed to use a common communications protocol for contactless payment. The adherence to a single RF standard for C o n t a ct l e ss P a ym e nt W h i te P a p er S e p t em b er

6 contactless, ISO/IEC Type A and B, and the interoperability it enables, will provide additional motivation for acquirers and retailers to adopt EMV. Where contactless has taken hold, it has succeeded admirably. In just five years, the contactless Octopus card in Hong Kong has gained over 11 million cardholders and is used in nearly 9 million transactions a day. It is accepted in payment for groceries as well as for transport and parking. The businesses likely to benefit the most from contactless are those that form partnerships to help it thrive. A partnership can be used to increase the scope of what can be achieved with contactless, beyond the limitations of isolated host system providers. The systems used for issuing transport tickets, for example, can be standardized and shared to cost-effectively connect different transport networks and simplify travel for passengers in neighboring communities. With faster transactions, shorter queues, fewer customer dropouts, less cash handling and reduced maintenance costs, contactless practically pays for itself. The technology is already here for issuers who want to add extra transactions into their card bases, and the extra functionality is no giant leap of the imagination for retailers and cardholders already using smart cards. With this great innovation at the disposal of the payments industry, the next few years can be expected to bring about significant changes to the way we pay. C o n t a ct l e ss P a ym e nt W h i te P a p er S e p t em b er

7 Components of a contactless system Contactless Reader A contactless reader is a device that emits electromagnetic waves and is able to communicate with a contactless card appearing in its range. The high frequency radio waves that the contactless card reader emits are used to both provide power to the contactless card and communicate information between the card and the reader. Contactless Card Antenna: The antenna on the contactless card absorbs the electromagnetic waves emitted from the contactless reader in order to power the transponder. Transponder: a chip connected to the antenna and able to communicate with the reader. Transponders can be read-only, read-write memory or processor devices, and can be embedded in a card, paper label, key fob, mobile phone and so on. Behind The Scenes The Contactless Transaction The cardholder waves a contactless card within a few inches of the contactless reader. Once a transponder appears within the range of the terminal s contactless card reader, the characteristics of the reader s electromagnetic field are changed, and the contactless smart chip is powered on. Once the chip is powered on, a wireless communication protocol (system agreement on low level communication parameters) is established between the contactless reader and the card, and the data transmission begins Mutual authentication is performed and secured channel (encryption) is established, if applicable. Application-level communication occurs, eg. EMV-specific messages exchange between the reader and transponder. Once the card and terminal have exchanged security information, a secure payment transaction is then conducted typically in less than one-third of a second. C o n t a ct l e ss P a ym e nt W h i te P a p er S e p t em b er