Contactless opportunities and challenges

Six months have gone by since the initial wave of mainstream media articles and blog postings on contactless in the US. At the time, the articles were mostly corporate press releases, modified a little bit here and there. What is being said today? What are the challenges facing contactless? What can be done to address those challenges?

Contactless payment is all about providing customers a new, enhanced payment experience. Customers pay by waving the card instead of swiping it, and the transaction is faster for low value purchases because there is no need to sign a receipt. Even if contactless bank cards are in their early stages and still face adoption challenges, the technology has already made a positive impact by helping the payments industry focus on two important subjects: re-inventing the moment of payment, and making payment as fast as possible.

The New York Times did an article on contactless a few days ago. The article starts out rather positive about contactless then quickly becomes surprisingly negative. “The notion of flash payments sounds hip and fabulous,” writes the author, “especially this time of year, when beleaguered holiday shoppers can feel like they waste entire weekends in the long approach to a cash register. But the whole idea of paying in the blink of an eye raises financial red flags for me.”

According to the author, while contactless technology may benefit banks and retailers, customers end up spending more and could lose touch with where all their money goes. “In my experience,” writes the author, “most humans would rather eat their two-page, itemized checking statement than read it. Start adding newspaper, muffin and gum purchases, and the time you've saved by using insta-payments will be lost figuring out where all that money went - if you do any figuring at all. There is a simpler and more elegant solution. It's called cash.”

This is one person’s point of view, of course. Customers that are concerned about the issues raised in the article can simply choose not to use their cards for small purchases. Still, it is disturbing that the New York Times presents cash as a “simpler and more elegant solution” to contactless.

A Google search revealed 15 recent mainstream news articles on contactless payment. Ignoring the 3 corporate press releases, nearly all of the articles attribute the speed gains to two things: waving the card instead of swiping it, and not needing to sign a receipt. The two are presented as equally important. More than half of the articles also raise concerns that the technology could create risks of fraud and identity theft.

Here are several examples:

“Credit card users are finally free of the burden of swiping their cards and signing their name.”
(InformationWeek)

“The appeal is that there's no need to run them through a machine. And no signing for purchases less than $25.”
(USA TODAY)

“New technology lets customers skip the swipe and the signature, but is it safe?”
(CNNMoney)

“But should a contactless payment card, key fob or any other device that's linked to your credit or checking account get lost or stolen, it could be potentially easier for a thief to use it. That's because in order to speed up the checkout process, contactless payment cards require no signature for purchases under $25. And even if a signature is required, the card supposedly is never handed to the clerk for verification.”
(SmartMoney)

“Some critics also worry that the technology could be vulnerable to electronic pickpockets moving through crowded locations, such as a subway car, with portable scanners surreptitiously lifting credit card numbers.”
(Pittsburgh Post-Gazette)

Contactless comments from the blogosphere

Engadget, a web magazine that specializes in gadgets and consumer electronics, recently did a post on contactless cards. Within six days, the post had received 99 reader comments, almost enough to make it one of the top 15 most commented posts. Most readers left negative comments, mainly concerning security risks. Interestingly, a second theme also appears frequently: readers question whether waving a card is really a big improvement over swiping.

Here are a few examples:

“The incredibly minor benefit is not worth the rather substantial annoyance (if your credit info is hacked).”

“It might not be as big of a security risk as some people are making it out to be, but honestly, how much of a risk is it worth to wave a card 4 inches from a device rather than slide it through a scanner?”

“Is the 1 second difference in ‘pull your card out of the wallet and hold it near the scanner’ and ‘pull your card out of the wallet and swipe it’ that much of a convenience especially when compared with the huge security risk?”

“I say if you have time to wave the card it’s about the same amount of time to swipe it the old fashioned way and also much safer.”

“How lazy and weak have we become? Swiping is now too hard. The friction of pulling the card through the grooves is just to much for some people to overcome? Sheesh.”

Some readers were more constructive and offered ideas to make the cards more secure:

“Get a tinfoil wallet. No, seriously, make a foil pocket for the card in your wallet. It should ‘foil’ any malicious attempts to read the card info.”

“HEY i got an idea! why not make it so that the card has a tiny button on it so that in order for you to make a purchase you push some kind of button on the card to activate the RFID chip in the card so you know for sure that you aren’t paying when you shouldn’t have to. although i don’t get the point of the cards in the first place. you still have to take the card out of your wallet, so you might as well swipe it instead and it would be more secure.”

What does all of this mean?

Why is it that mainstream media and blog comments are so heavily concerned about the perceived security risks of contactless payment? It’s tempting to say that the issue will simply disappear with time, and I would normally agree if only a few articles mentioned it. But there is so much focus on security that banks can’t simply shrug it off. To make matters worse, in 2005 Americans saw extensive media coverage of a disturbing number of credit card data security breaches, some of them very large, which could be making the public less confident that banks are able to protect consumers. Sure you can call your bank when you see something strange on your monthly credit card statement, that’s great, but you have to pay much more attention than in the past.

To me the heart of the matter is that the perceived benefit of waving your card instead of swiping it is just not big enough to move the focus away from security risks. Contactless cards need to offer more benefit than simply waving them in front of a reader. If the benefit is big enough, the risk appears smaller, more tolerable.

I know that enhancing the payment experience is a difficult task involving many different, unrelated parties. Especially in the US, where banks gave up ownership of the moment of payment when they sold their acquiring businesses to First Data. Today, very few US banks have a holistic grasp of the payments infrastructure, and virtually none of them own the moment of payment. So the contactless initiatives in the US are actually a brave attempt at enhancing the moment of payment in an environment which makes it extremely difficult to do so.

Still, we need to be more demanding. The huge investments in contactless demonstrate that many people understand that the payment experience needs to be enhanced, improved, and made more fun and exciting. The payment experience has been the same for the last 3 decades, it’s about time we start re-inventing it! But simply waving the card instead of swiping it? I know we can do more than that.

This was a long post. I’m going skiing. Merry Christmas and Happy New Year everyone!

Other related links:
Accelerating card acceptance at cash-heavy retailers
A Report on the Chase blink card test market in Denver
Update - blinking along in Denver
How Blink Technology Works

Encouraging card usage in China

Much has been said about China’s efforts to crack down on tax-evasion and fraud, usually in terms of severe punishment. In other words, the proverbial stick. Very little has been said about the carrot, the positive incentives the authorities are using to bring the shadow economy out of the dark.

What did Chinese authorities do to encourage retailers to declare more of their cash sales? They created official, pre-printed receipts with a scratch-off award section. Customers now demand the receipt when they pay their restaurant bill or purchase goods in stores, with the hope of winning a prize. The receipt in this picture has a scratch-off area at the top right (called “Award Area”) and instructions in Mandarin and English below (“Scratching the covering area, you will get the award or the words for thanks.”)

My Asian colleagues like to tell me how much the Chinese enjoy gambling and playing games of chance. Receipts with a scratch-off award are a typical Chinese solution to the problem of getting customers to request an official receipt and getting merchants to provide the receipt.

Bankers are facing a similar problem. Less than 10 percent of Beijing merchants accept cards. How do you get customers to more frequently present their card for payment and how do you get merchants to accept the cards? Here the banks cannot use the negative techniques that the authorities use in their fight against the underground economy. But they can use the carrot.

What kind of marketing technique can help encourage card usage and merchant acceptance in China? If you ask a typical marketing-savvy credit card executive, say from the US, the UK, Singapore or Hong Kong, I can almost guarantee that he or she will recommend a loyalty points program. The reaction is automatic. If the only tool you have is a hammer, all problems look like nails. A loyalty points program in China? Getting points or cash back worth 1 or 2 percent of credit card purchases sounds more and more like a weak offer even in countries where you can use your card almost everywhere (see my prior post on this here). Transposing the same concept to a country where 98% of cards are debit cards, which generate less fees than credit cards, and where you can only use the card for a small percentage of purchases, means that customers will have to wait a painfully long time before getting anything meaningful. A loyalty points program in China? Sounds like a pretty bad idea.

Why not learn from the scratch-off game awards on receipts? If the Chinese authorities put game awards on receipts to get customers to ask for them more often, why not put game awards on credit and debit card receipts to get customers to use plastic more often? Click here for an example of games that encourage card usage. This is much better adapted to the Chinese market than the typical loyalty points programs offered by most banks.

A recently released McKinsey report shows that certain dynamics in China's market tend to favor large domestic banks, with their extensive branch networks and existing customer relationships. However, the report suggests that foreign card providers have the marketing knowledge and the experience in managing partnerships to outdo local players with new card products that target high-spending customer segments. For example, the survey indicates that car ownership and high mobile-phone usage are good predictors of high credit card spending; a co-branded card with a mobile operator could therefore be an effective avenue for gaining access to high-quality customers.

Global credit card companies undoubtedly have lots of marketing knowledge and experience with co-brand relationships. They could indeed outdo local players if they adapt their techniques to fit the Chinese market.

Prior posts on receipt promotions:
Games that encourage card usage
Credit card receipt promotions

Prior posts on debit cards:
Competing for debit card market share
Accelerating card acceptance at cash heavy retailers
"Shop with your ATM card: easy as 1, 2, 3 ... 4?"
Cash is king!

Prior posts on why enhancing the payment experience is more important than loyalty:
Key success factor #1: Focus on enhancing the payment experience
The commoditization of points, miles and other loyalty currencies
Turkey: How a superior shopping experience increases shareholder value
Why is enhancing the payment experience so important?

Finding hidden revenue in electronic payments data

Greater use of data embedded in payments transactions could create new revenue streams for banks and drive the transformation of financial services companies into financial-and-information-services companies, according to DiamondCluster consultants in the Nov./Dec. issue of BAI Banking Strategies magazine. The article shows how payments data mining can be used to provide analytical and marketing services to retailers; engage in more effective cross-selling; and open the door to developing and selling information products to commercial clients.

“When bankers reflect on the benefits to be gained by the increased electronification of payments, they tend to think of cost savings in the back office,” write Resnick and Hugener, of DiamondCluster's financial services practice. “Yet there are potential revenue opportunities as well. The digitizing of payments information opens the door for financial institutions to capture and then leverage that information. Banks could, for example, provide analytical and marketing services to retailers; engage in more effective cross-selling to their own customers; and develop and sell information products to commercial clients.”

The report suggests that banks could monetize a significant portion of the value hiding in payments data by partnering with retailers and charging them either direct fees or bundled pricing, for example in the form of higher interchange.

“Bank-managed data could help retailers identify their best customers and prospects. It could also suggest ways to best entice customers to visit the retailer - either for the first time or for repeat patronage. Working with retailers, for example, banks can develop algorithms to print targeted offers on monthly billing statements. Infrequent customers would receive well-timed reminders to entice them back to the store.”

“Private label credit card providers currently offer such products. However, their limited variety and lack of versatility inhibit private label credit card acceptance by customers. Banks can solve these shortcomings by tying those flexible product features to general purpose credit cards, which are accepted at millions more places than any private label card.”

The authors recommend that banks should develop payment data products not necessarily linked to a single payment instrument, for example by linking the services to debit cards as well. This would attract more customers, which in turn would increase adoption and generate more banking business. “The result is that banks would capture more of the data that is necessary for conducting the information analyses and creating the offers outlined here,” write the authors.

At the same time, the report identifies significant challenges that banks face in implementing these strategies. Banks need to develop a core competency in creating information-based products, which includes acquiring assets and capabilities in retail and consumer marketing, customer relationship management (CRM) and analytics, and database management and integration. Banks may also face consumer privacy issues, and will need to deal with retailers' desire for customer control.

Many of these challenges exist because the report assumes that the data will be collected and analysed centrally, sometime after the actual payment transaction has occurred, and that the data mining will be used for example to print targeted offers on monthly billing statements. The whole approach does indeed require banks to develop new skills, and could indeed raise privacy issues with customers as well as data ownership issues with retailers. Since the authors are US based and perhaps not entirely familiar with EMV capabilities available to banks in other parts of the world, these assumptions are probably natural.

When EMV transaction data is used immediately at the moment of payment to pursue the same revenue opportunities presented in the report, the challenges that the authors raise virtually disappear. Imagine you go to Carrefour from time to time, but not very frequently. Imagine receiving a special offer from Carrefour inserted in your monthly bank statement, which you receive at home several weeks after you last went to Carrefour. You probably understand that your bank is somehow tracking your buying habits and is trying to encourage you to go to Carrefour. Compare that to receiving the same offer on your credit or debit card receipt while you are paying at Carrefour. The effect is completely different. You receive an offer at Carrefour encouraging you to shop more at Carrefour. We have never run into the challenges raised in the DiamondCluster report.

I don’t want to go negative on an otherwise excellent report. This consulting firm has produced other similarly excellent reports in the past, all useful and relevant to our business. For example, see DiamondCluster’s earlier report from April, “Banking on Payments”.

Source: Decoding the Value in Payments Data

Disney patents multi-visit movie downloads at fast food restaurants

Disney has filed a patent for technology that lets customers download a piece of a movie at each visit. Could this be the next generation of McDonald's Happy Meal toys?

The plan could work something like this: A customer buys a meal and receives an electronic code that authorizes a partial download of a movie, video or other media file, which can be downloaded while in the restaurant. If the file is in five parts there is a strong incentive to come back for four more meals.

Of course, the vast majority of patents don’t actually result in successful products. Or they take a long time to get there. I filed Welcome’s main patents ten years ago, in January 1996, and the technology is just now becoming mainstream. Still, the Disney fast-food patent is very interesting to me because it illustrates several issues that are highly relevant to our business.

This patent is about the customer’s experience in the restaurant. McDonald’s has already deployed Wi-Fi services in more than 6,200 restaurants worldwide. The Disney patent is an excellent way to take advantage of that infrastructure in a way that ties the Wi-Fi service directly into the McDonald’s experience. It is not simply Wi-Fi service to surf the web and do e-mail while having lunch. It becomes Wi-Fi service tied much more closely to the McDonald’s universe.

The patent is also about solving a problem. The Disney/McDonald’s partnership goes back many years now and is obviously profitable to both companies. But how many more of the same types of movie-meal tie-ins can you do before they become dull? The patent makes it apparent that there is a need to expand on that relationship and to offer something more than Disney figurines bundled into a Happy Meal. But here is the problem: the value of a Disney movie is too big to give away with each Happy Meal. And so there is a need to break the movie apart and bundle a small portion with each meal. Of course, this fits nicely with McDonald’s objective to get customers to come back frequently.

Enhance the customer’s experience at McDonald’s, bundle new Disney content into meals, and require the customer to eat several times at McDonald’s before getting the full Disney video. That’s the way I read the spirit of the Disney fast-food patent. While waiting for the partial download technology and the related device to be available, McDonald’s and Disney can already partner with banks to address the problems at the heart of the Disney patent. Why not offer a full movie download by printing an electronic code on the bottom of the customer’s credit or debit card receipt after the customer’s fifth visit? Or even throw in a DVD with the fifth visit. Readers of my blog all know how to do that right now, using the payment technology they have already deployed.

Read the Disney fast-food patent here.

Sources:
Invention: The McDownload
Would You Like Some Fries With That Download?

A preferred checkout experience, part 2

I encountered these 3 things over a two day period, which all triggered cross-fertilization ideas for a preferred checkout experience.

- The picture on the right shows an Esso petrol station in Reykjavik, Iceland which lets you choose either a self-service lane where you do everything yourself (the two red lanes on the right), or the slightly more expensive full-service lane (the blue lane on the left) where employees pump the petrol for you, wash your windows and maybe check the oil if you ask them to.

- A pop-up ad from a ski resort in Colorado offers a special VIP pass that gives skiers access to shorter ski-lift queues, for a $20 surcharge on the normal lift ticket price.

- A rental car agency invites customers to join an elite club with special privileges, like getting to your car faster without waiting in line or filling out forms. These privileges used to be reserved for best customers, but rental car agencies began charging an annual fee for the service years ago, so any customer could benefit.

I keep coming back to the supermarket checkout experience, maybe the most unpleasant part of grocery shopping. A great deal of innovation over the past 20 years in the checkout and payment area has focussed on speed, making the process as fast as possible so customers get over the bad moment quickly. This has already produced substantial improvements. Much of the ongoing work in this direction will continue to yield improvements, but probably in smaller, incremental steps. Sometimes it feels like the unspoken objective is to make the checkout process so fast that it approaches the point where it simply no longer exists, making the whole unpleasant experience go away. Contactless cards, for example, try to make the payment function disappear by letting customers pay without even having to choose a card, simply tapping a wallet or purse against a reader will do.

Since nobody has found a way yet to make the checkout process disappear completely, innovation has also happened in parallel in another direction: making the checkout experience less unpleasant, and more attractive and stimulating. This has produced things like checkout TV’s playing ads and round the clock news. Or self-checkout units that keep customers busy by letting them scan their groceries, put them in bags and swipe their own credit card.

If customers are willing to pay for premium service at ski resorts in Colorado, petrol stations in Reykjavik and rental car agencies around the world, why wouldn’t they pay for similar services in grocery stores? What type of premium checkout experience would customers be willing to pay for? Premium checkout lanes could feel more like an airline lounge for business and first class passengers than typical grocery checkout lanes. The service would offer shorter queues, additional help with groceries, a coffee or cold drink, and a more quiet and relaxing environment. Plus, the additional fee added to the bill at each visit could be waived for cardholders that spent over $500 in the last calendar month.

Going back to the Esso petrol station in Reykjavik, it would be easy to imagine Esso telling customers that if they fill up twice in a fifteen day period, they get to use the full service lanes for the same price as self service. The lanes are already set up for full service and self service, banks are already migrating to EMV cards that can store the fact that a customer has filled up at Esso twice in the last fifteen days, and, at the same time, terminals are already being upgraded for EMV, with the ability to automatically adjust the price based on prior purchase information in the EMV chip. So offering this type of benefit to VIP customers is becoming relatively straightforward.

Related posts:
A preferred checkout experience
Try this: increase profits by pampering best customers ... and firing undesirable customers
Study: Best customers expect VIP treatment

Try this: increase profits by pampering best customers … and firing undesirable customers

Best Buy’s strategy to get rid of undesirable customers and pamper their best customers appears to be working. The share price of the No.1 consumer electronics retailer in North America has gone from a low of around $30 in the summer of 2004, when Best Buy began working on their customer-centric strategy, to a high today of around $50. That’s a 67% increase in 18 months.

Best Buy lavishes extra services on the top customers that generate most of the profits. Employees have been trained to identify customers belonging to specific buyer categories, chat with them and walk them through the sales process. Then there is the Geek Squad, a team of technical problem solvers within the store and who also make house calls. And here is the one that I like the most: three Best Buys in the Washington area are being transformed to attract high-income men, featuring leather couches where one might imagine enjoying a drink and a cigar while watching a large-screen TV hooked up to a high-end sound system. Now doesn’t that sound like a great shopping experience?

Around a year ago, Best Buy attracted a lot of attention by announcing plans to get rid of unprofitable customers. They want to discourage customers that abusively return merchandise, for example by buying products, applying for rebates, returning the purchases, then buying them back at returned-goods discounts. They also want to drive out customers that bring in rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. The company estimates that 20% of their 500 million customer visits each year are undesirable. These customers wipe out the profits generated by the best customers in the top 20%. So getting rid of them should have a direct impact on profits.

To discourage returns abuse, Best Buy began charging a restocking fee of 15% on returned merchandise. Now other retailers, including Circuit City and Sears, also charge a restocking fee. Some stores require photo identification to complete a return, even if the customer has a receipt and price tags are still on the item. At some retailers, personal information - including name, address and phone number - is automatically put into a database so when an abusive returner is identified, the clerk can refuse to accept the transaction.

Tougher return policies that apply to all customers, the majority of whom are not involved in returns fraud or abuse, are not really the best way to build loyalty. The estimates I have seen suggest that not more than 8% of returns are abusive. But retailers are fighting lower profits than in the past. The industry is more competitive today and companies have to do what they can to avoid unnecessary markdowns.

Tracking a customer in a database using personal information is considered intrusive by a growing number of people, what with fears of identity theft, big brother, etc. At Welcome, we are working on new payment technology which tracks returns through the EMV chip that is becoming ubiquitous on credit and debit cards in many parts of the world. Through this technology, banks can offer retailers a more convenient and less intrusive method to deal with returns. The return information is entered into a payment terminal, the customer’s card is inserted, and the return is accepted in the vast majority of situations, without needing to request additional ID or looking up the customer’s return history in a database.

Customers that have a new generation card with these capabilities will not need to go through the more cumbersome process that all other customers are subjected to. Plus, banks get additional benefit from the goodwill that comes from helping retailers solve major problems. This is all part of making the payment experience more pleasant and convenient. This is not about loyalty. It is about developing technology that makes payment with plastic much more attractive than any other payment method.

Click here for an earlier post on returns fraud.

NTT DoCoMo launches a payment acceptance brand to compete with Visa and MasterCard

Japan’s top mobile operator, NTT DoCoMo, has just launched a payment acceptance brand, called “iD”. In the same that the Visa and MasterCard brands tell cardholders where they can use their cards to pay, the “iD” brand will enable DoCoMo subscribers to make credit purchases by tapping their phones at stores, restaurants and other merchant locations that display the iD brand.

DoCoMo has invited Japanese credit card companies to offer their payment services on the handsets and seeks to earn revenue by charging fees to both merchants and the credit card companies. DoCoMo hopes to get all major issuers on board as soon as possible.

"Credit card payments accounted for only about 9 percent of total payments for shopping in Japan in a 2003 survey, which is less compared to other countries," said Manabu Moriya, director of credit service and credit brand at Docomo. “Credit card payments in the United States accounted for 24 percent of the total. If Japanese consumers used credit cards more often, like in the United States, credit card payments would increase by about 50 trillion yen [nearly $423 billion]. Assuming that the charge for the credit card service is about 2 percent, that's a charge market of about 1 trillion yen [more than $8 billion]."

Not surprisingly, other credit card companies aren’t too happy. JCB, Japan’s largest credit card company, has formed what looks to be a rival mobile payment alliance that includes several other credit card companies and DoCoMo’s chief competitor, mobile operator KDDI. And there is yet a third contactless mobile platform planned for launch next year in Japan, called “Smartplus.” All this sets the stage for competing acceptance brands and confusion among consumers over where they can use their handsets to pay.

Welcome’s bank customers are familiar with the need for new acceptance brands placed next to the Visa and MasterCard brands, on cards and in stores, which show customers where they can enjoy a superior payment experience. Some examples are the Axess acceptance brand in Turkey, WOW! in the United Arab Emirates, and Vida Bancomer in Mexico. In the same way, if DoCoMo succeeds, the iD brand will come to indicate mobile payment, and will co-exist next to the Visa and MasterCard brands. The traditional payment brands could end up representing the most basic, commoditized payment experience, while the new generation acceptance brands could come to represent a new, exciting payment experience.

Chip technology in plastic cards and mobile phones is fueling the development of new payment features which would not have been possible using magstripe payment technology. These new features in turn create branding opportunities for newcomers, like NTT DoCoMo. A number of banks are likely to sign on to new brands like iD, and pay the additional fees on top of what they pay to Visa and MasterCard. However, if the traditional Visa and MasterCard acceptance brands evolve to evoke not only the basic, commoditized payment experience, but also the new features which are currently giving rise to new acceptance brands, then there will no longer be a need for newcomers to create new brands. When the core MasterCard brand truly evokes a “Priceless Payment Experience”, banks will have no need to adopt other, limited payment brands which don’t enjoy massive acceptance. Until that happens, there will be more and more room for new payment brands.

Sources:
Mobile phone becomes credit card
Japan’s DoCoMo Launches Mobile Credit Brand
NTT turns mobile into credit card
NTT DoCoMo to offer credit-card payments by handset

Related posts:
Payment brand commoditization and re-birth cycles
Accelerating card acceptance at cash-heavy retailers
Competing for debit card market share

Study: Best customers expect VIP treatment

Three-quarters of consumers think they should receive specialized treatment at stores that they are particularly loyal to during the holidays, according to a study by US based direct marketing firm Grizzard Performance Group.

The top three forms of special treatment requested by consumers are:
- special pricing, including special credit terms and promotions;
- first access to new and sale merchandise;
- invitations to loyal-customer-only events.

“Consumers want special treatment from retailers, they don't want what many retailers are offering -- such as specialized Web pages or phone numbers or customized communications that retailers today can easily flip a switch to start," said Michael King, group vice president of Grizzard Performance Group. "Retailers have to take an extra step to reach these loyal customers. They have to make an emotional connection to these people."