Apr 7, 2006

The true test for contactless payments: will merchants agree to pay for the readers?

Almost all growth in contactless payments last year came from the US, with half a dozen card issuers and 25,000 merchant locations signing on in 2005. Merchants signed up quickly because most did not have to pay for the contactless readers attached to their payment terminals. This cost was subsidized by the associations and major banks. But the subsidies are likely to end soon, which will create a more normal situation in which merchants must see value in contactless in order to justify investing in readers. It becomes especially crucial right now to make sure the merchant business case is clear, simple and powerful. This might not be the case yet.

Apparently, some merchants are already beginning to complain that they can’t afford the investment, according to participants at a contactless conference in Las Vegas. “One of the big issues we’ll see is that many tier 1 merchants received subsidies, and that’s going to change,” a speaker said. “You can’t subsidize everyone.” That will raise affordability issues for merchants and pressure acquirers to sharpen the business case for contactless payments. “There’s already some push-back from small merchants [saying], ‘I can’t afford it,’” the speaker said, adding the end of subsidies could also dampen interest by acquirers and ISOs, key players in signing merchants.

This is a critical transition phase to get through. Giving something away for free is easy. Getting people to pay is much harder. If contactless can be shown to create real and substantial benefits for merchants, and merchants really want it, they will certainly agree to pay for the readers. If not, growth in merchant acceptance locations will stall, cardholders will not find many places to use their cards, and issuers will wonder why they need the additional cost.

This is the real test of the value of contactless payments.

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