| The Caffè Nero on Kingsway in central London is unusual for an outlet of a High Street chain: customers who want to pay by card use one machine if their bill comes to less than £10 and another if they spend £10 or more. Two devices for payments worth less than £10 sit at either end of the shop’s glass counter. However, the barista on duty explains that if we spend £10 or more, we will have to use a different card reader. He pulls out a standard-issue chip and PIN reader from its hiding place behind the counter to illustrate his point.
The coffee chain, like several of its competitors, is in the middle of a trial for contactless debit cards. The Kingsway shop, along with a handful of others in the West End, started using Caffè Nero’s first debit card readers in early March. The Barclaycard-branded readers are small black boxes with a circle drawn on the device where customers are supposed to hold their contactless cards. They are roughly the same size as the Oyster Card readers at tube stations. If its West End trial proves successful, Caffè Nero (a retailer which traditionally banned card transactions of all types) will become one of the first sizeable High Street chains to deploy contactless debit card readers nationwide.
Caffè Nero’s trial was made possible by Barclays’ decision to issue millions of debit cards (and a smaller number of credit cards) containing chips that enable contactless payments. The payment chip is embedded in the card; unlike the chip that is used to authorise a chip and PIN payment, the contactless chip is invisible. The edge of each card is an antenna. When the card comes within approximately four centimetres of the contactless card reader, the reader powers up the chip and the transaction is completed. The chip is a RFID tag. The ten million-plus Oyster cards issued by Transport for London since 2003 also use RFID technology.
Benefits
Contactless cards promise great benefits for retailers. Chief among these is the increased speed of transactions. Transport for London was the first to adopt RFID because it needed to increase the speed at which people paid to gain access to its transport network. With no prospect of significantly increasing the capacity of London Underground or the capital’s overground train links, Transport for London had to find a way to move people around the network more quickly. Retailers that handle large volumes of small transactions stand to benefit the most from contactless payments. Any retailer who risks losing custom if service is slow should also generate more revenue by carrying out more contactless transactions.
Customers, as well as retailers, could benefit from the widespread take up of contactless payments.
According to a survey of 1,000 UK adults interviewed by Ingenico, the maker of most chip and PIN terminals used in the UK, British people carry an average of £29.30 in their wallets and purses. With some 46 million adults living in the UK, according to the last national census in 2001, the total of amount of cash in the pockets of the great British public is £1.3 billion. The same survey found that people would be confident spending an average of £35.10 using contactless debit or credit cards. The answers of the people surveyed - the exercise was carried out in December last year - suggest that these cards could replace cash where retailers make contactless payment possible. For sums above £35.10, shoppers are more likely to prefer conventional debit card transactions or spending on credit cards.
Excitable commentators have been forecasting the demise of cash ever since Diners Club launched the first plastic charge card in 1950. The explosive growth of the credit card industry since then has been accompanied by a rise in the amount of cash in circulation. In the US, Germany and Japan, the volume of cash has risen at a faster rate than the gross domestic product. Cash remains king.
The Ingenico survey found that eight per cent of people have made contactless payments. There is a limit to how much this number can grow because only two banks - Barclays and RBS - support contactless debit cards. RBS started issuing debit cards in November last year. Few of the bank’s customers currently have these cards. “RBS thus far has only been issuing cards that are expiring,” says Greg Rankin, marketing manager at Ingenico. “However, it will have done one-fifth of its cards this year. We are talking many millions of cards.”
Barclays is being more aggressive. It plans to issue five million contactless credit cards and a much larger number of debit cards. All the contactless cards will carry a wave symbol to show that they can be used for making payments. “I think there will be over seven million cards in circulation in the UK by the end of 2009,” says Rankin. “Eventually the issuers will fold like a pack of cards. One of the dangers for banks that do not do issuance is that customers find themselves unable to carry out transactions more quickly.”
Most major retail banks appear indifferent to contactless debit cards. Lloyds Banking Group, which is the largest bank following its acquisition of HBOS, has no plans to issue debit cards; neither do HSBC, Santander, which owns both Abbey and Alliance & Leicester, or Nationwide. The majority of people have no choice. They cannot make contactless payments even if they want to.
Barclays and RBS customers who have been issued with the new cards may find that one of the security features of payments is annoying. The banks, through the Association for Payment Clearing Services (APACS), have set a £10 cap on the value of contactless transactions. Over-zealous security explains why branches of Caffè Nero in central London need two payment readers for different sizes of transactions. While a £10 limit is fine for a double espresso and a chocolate muffin (£3.40), it will not feed a family of four. The banks have also set up the payments system so that customers still need to enter their pin for every third transaction. Ultimately, a contactless payment that requires a pin to complete the transaction is little faster than a conventional chip and PIN payment.
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