Promoting contactless usage in Malaysia

Malaysia is often mentioned as a key early market for contactless deployment in Asia. Sau Sheong recently sent me a few pictures of merchants that accept contactless cards in Kuala Lumpur.

This one is at Toy City. It shows how hard it is to manage the payment brand image at the point of sale. Even though Toy City is one of a small number of merchants that accept contactless, it was apparently impossible to get better visibility at the checkout. Also notice the prominent sign on a minimum amount for credit card purchases.



Contactless is much more prominent at a bookstore in the same mall. The door signage offers a discount voucher to customers that use a contactless card to pay. On average, it works out to be around a 5% discount when customers spend over 80RM, and it is apparently valid for the customer's next purchase. Customers don't get the voucher if they spend less than 80RM. That’s the equivalent of almost US$25, the limit for contactless transactions, so I don’t know how that promotion actually works.

London Contactless Launch: Where Are The Merchants?

Halleluiah! The card industry is starting to wake up to the single biggest problem that has to be solved before contactless can really take off, a problem that has so far been largely ignored and neglected, eclipsed by everyone’s excitement about massive contactless rollouts.

Yes, in some cases the cards are already out there, or will be rolled out soon. It was assumed that merchants would automatically come on board because of all the benefits to merchants, like faster transaction times and shorter queues. It turns out that those benefits are not enough.

According to a Card Technology article (see “London Contactless Launch: Where Are The Merchants?”), no UK merchants have yet announced their intention to accept contactless cards, even though the planned launch is only six months away.

Why are merchants not on board yet?

“It’s primarily about cost,” says the head of payment for Boots, the UK’s largest retail pharmacy chain. He explains that it costs Boots 10 times more for a card transaction than for cash.

What are the card schemes and banks considering to encourage merchants to accept contactless? Lowering interchange. Ah. What about all the other benefits like faster transaction times and shorter queues? Apparently, the answer is something like this: “Yes, those are nice features. But if you want me to prefer cards over cash, just cut interchange fees.”

There’s something very bizarre with this, which I’ll get to in a second. Bear with me while I work through this.

Contactless chip cards are more complex, technologically speaking, than the contact EMV chip cards being rolled out in lots of places. They are certainly much more complex than simple old fashioned magstripe cards. Contactless cards are more expensive than contact EMV cards and magstripe cards. And yet, because they don’t offer much additional benefit to merchants, contactless cards need to be priced less to merchants.

Here’s what’s bizarre. If the goal is to promote contactless card usage, then cutting interchange fees on those cards is a valid tactic. But if the goal is to take market share away from cash, then maybe it would be best to skip the whole contactless thing and just cut interchange on all low value transactions.

Of course, it would be even better to avoid cutting fees and look instead at creating much more value for merchants, so that they agree to continue paying fees and prefer cards over cash. Contactless is of course an attempt to do precisely that, with what we thought would be irresistible benefits, like shorter queues. For right now though, contactless just doesn’t go far enough. The benefits are from irresistible.

NFC mobile phone demo: A few smooth, convenient features … and one not so smooth

Most of the features in this video appear smooth, simple and convenient. Tap a bill board in an airport and trigger a phone call to a hotel. Tap an RF-ID enabled business card and instantly suck the contact information into the phone. Tap a contactless reader and pay without a card. The payment demo starts out just as smooth as the other features, but then unfortunately falls apart when security issues are addressed.



Watch the last part of the video carefully. The first payment demo is nice and smooth. Tap your phone against a contactless reader and you’re done. Just like a contactless card. The presenter starts saying that you can configure your phone for a PIN code if the transaction is over a certain amount. The customer taps the phone once, enters a PIN code on the phone keyboard, then taps the phone a second time. Another voice asks about PIN protecting every transaction, so if someone steals your phone they can’t use it to pay. You get a glimpse of how to configure the PIN code in the mobile phone, and then you get to see the phone tapped once, the PIN entered, then tapped again.

I pretty much get the idea of using a mobile phone the same way a contactless card is used, for speed and convenience. It makes sense for transactions under $25, where less security might be acceptable, in line with current thinking around contactless cards. Tap your phone against the contactless reader and jump out of the cab, eat your hamburger, or whatever. But over $25, things get a little messier. A contactless card can deal with purchases over $25 in several ways, inherent to the fact that the customer is holding a physical card. You can insert the card and enter your PIN code (for the EMV part of the world, i.e. everywhere except the US) or you might have to sign the credit card receipt. Those solutions are specific to contactless cards and cannot be used for mobile payments. You can’t insert the mobile phone into a chip reader to enter a PIN, and you cannot sign for the transaction, since the clerk has no way to check your signature. Hence the clunky solution that you see in this demo.

The demo doesn’t get into the mother of all mobile payment issues: the concept of a mobile wallet. You don’t see the customer choosing to pay with a different card programmed in the phone. “Let’s see, I want to choose my Citibank card, so I touch this key, then that one to confirm.” Or how about another nightmare situation that you know is going to come up: “Oh wait! Cancel that transaction please. I just noticed that it automatically chose my Visa debit card, but I wanted to use my American Express card instead!”

To me, this demo just shows that the cleanest, simplest and fastest way for mobile payments to come about is by keeping everything simple. Only small transactions and only one card linked to the phone. If you think about it, the only place where mobile payments have had some measure of success is Japan, where the phones are linked to the universal mass transit card for payment. Small transactions only, and just one payment option, your transit card.

On a completely different note, I really liked the way the video shows how NFC can be used to simplify Bluetooth connectivity. Bluetooth is always a hassle, what with identifying each device and everything. Here, you tap the device with the phone, which establishes the identification, and then Bluetooth is used automatically to transfer larger volumes of information that NFC is not designed for. So you skip the whole manual identification phase. It’s done automatically with NFC. That’s a cool feature that really does make things more convenient.

Actually, come to think of it, that is very much related to the payment issues that I write about. The “NFC/Bluetooth connectivity automation feature” is actually very relevant to how I think about payment innovation. I like things that make the complexity disappear, that hide all the strings, wires and mechanics so things look smooth and simple to the user. Make complexity your problem, don’t pass it on to the user like a hot potato. That’s the type of innovation that is really useful and makes you go, “Wow, I have to have that! It’s just too cool! When can I get it? I want it now!”

I haven’t gotten all excited about contactless cards or mobile payment because I just don’t get that feeling.

Mega trend: Banks mass issue premium cards for more interchange revenue (but risk making merchants even angrier!)

The irresistible attraction of higher interchange is leading to mass issuance of premium cards, which could quickly result in even greater merchant anger and resistance, and cause merchants to increasingly resort to surcharges and whatever other steering tactics they can use.

The attraction is irresistible. Why issue a low interchange card product to a customer who also qualifies for a premium card? Visa and MasterCard are making it easier for banks to issue high interchange cards by launching new premium products (which also reduces the risk of banks converting over to American Express). Visa just announced their new Signature Preferred credit card, which will give banks an average 2.27 percent interchange, much more than the 1.99 percent rate on a typical high-end card from Visa. In comparison, American Express charges merchants an average 2.55 percent of a transaction.

The promise of higher interchange is causing card issuers to offer premium cards with no annual fees, so as to attract a maximum number of customers. The process is so simple and the attraction of higher interchange is so strong, that it is difficult to imagine why an issuer would not want to upgrade as many cardholders as possible, the more the better. Could entire card portfolios be switched over to premium products? Some card issuers are certainly going to try! It's just too irresistible. Why not convert an entire credit card portfolio? It makes perfect financial sense.

Of course, merchants will naturally become more and more reluctant to accept high end cards. They will increasingly resort to surcharges and whatever other steering tactics they can use. Visa and MasterCard's new premium card products will need to take this into account. New premium products will need to focus more on satisfying merchants, so merchants will not react violently to mass issuance of premium cards.

American Express has always had to deal with this problem, but it will get much worse as merchants see a much larger portion of sales being performed at high interchange rates. When only a few customers use a high end payment card, the total fees paid by the merchant are not very significant. Once they become significant, everything changes.

Taxi promotions and credit card surcharges: worse than just weird

I am embarrassed.

The other day I wrote about a promotion running in Singapore taxis, offering a 1% cash rebate when you use your POSB MasterCard credit card to pay for the cab fare. I wondered whether the person that designed the promotion was aware that customers get hit with a 10% surcharge when they pay with plastic in Singapore cabs.

Now, why am I embarrassed? Vanity often causes me to run around without my glasses on. I should have seen the very fine print at the bottom of the promotion that says, “10% administration fee applies” (click on the picture above, taken with a higher quality camera and with my glasses on).

The person that designed the 1% cash rebate promotion was indeed aware that cardholders have to pay a 10% surcharge. That’s beyond just weird.

Here is a MasterCard promotion also running in cabs: “Win Windows Vista Home Premium – charge this taxi fare to MasterCard”, and in very fine print, “10% administrative fee and prevailing GST apply”.

Right next to the MasterCard sweepstakes promotion, you can see another one by NETS, the local debit card payment brand: “Win $10,000 worth of free rides!”, and, in tiny letters, “30 cent admin fee applies”.

So much wasted effort to get customers to use their cards in taxi cabs. In an informal survey (conducted by myself) all cab drivers surveyed say that very few people pay with plastic, with most days absolutely nobody using a card. Who uses a card? Usually people from out of town, between the city and the airport. Why do you think more people don’t use a credit or debit card? The administrative fee la! So if there were no administrative fee, more people would use a card? Of course, la! Lots more people! And you, as a taxi driver, what do you prefer, cash or plastic? Cash is better. The cab company gets the adminsitrative fee, I don't. And I have to wait one or two days to get paid when a credit card is used. I get my money immediately with cash.

There is clearly a structural problem here. No promotion is going to fix these problems. Yet banks and payment brands clearly want to promote card usage, otherwise they wouldn't be putting the effort into these promotions.

Not only are the promotions a wasted effort, I would venture to say that they actually damage the brands of the companies running them. Get a 1% cash rebate when you have to pay a 10% surcharge? How could such a promotion be good for that bank’s brand image?

Our industry still operates under the notion that if you get customers to want to use their card, they will force acceptance by merchants. These promotions continue under that same premise. They don’t take into account the powerful impact of merchant steering. Banks and payment brands need to learn to operate differently today.

I can’t leave out a jab at mobile payments here. When you’re trying to quickly get out of a taxi, fumbling with cash is a real problem, more so even than in a fast food restaurant or coffee shop. You’re struggling with your stuff, paying attention not to leave something behind, like your glasses (if you are not as vain as some people I know), your umbrella or your mobile phone. Wouldn’t tapping the mobile phone against a reader be a more convenient way to get out of the cab? Paying with plastic is already a big step forward in convenience, compared to cash, but we know that the surcharge kills the desire to use a card. People prefer inconvenience over a surcharge. I honestly don’t believe that mobile phones would be used to pay in a cab if there is a surcharge. The industry has to address that problem head on.

Readers of my blog have heard this over and over, but I will say it again. The only solution is to make cards (or mobile payments, or whatever) much more useful and valuable for merchants than other payment methods. Otherwise customers will increasingly encounter surcharges, and will increasingly revert back to using cash for small, everyday purchases.

Debate: Are Paper Coupons History?

99 percent of coupons are never used. Some people feel that coupons are the single most inefficient marketing tool you could imagine. Are paper coupons history?

Since one of the features of Welcome’s payment software is to print targeted coupons at the bottom of credit or debit card receipts, we sometimes get pulled into this debate. Retail marketing executives don’t usually question the value of coupons, but banking executives are not as familiar with promotional marketing techniques and often show a deep desire to eliminate paper coupons. They shouldn’t. Here’s why.

Last year, RetailWire ran a piece called, “Are Paper Coupons History?” and invited marketing executives to give their opinions. There are less than a handful of negative comments. Unlike one executive’s strident cry that “the traditional paper coupon is going to die”, you will find that the vast majority of comments are balanced, subtle and generally positive.

Take the following comment for example:

“It doesn't matter if paper is an old technology and it doesn't matter that coupons are distributed electronically, too. Marketers use coupons because they help induce people to try their brands. When the coupon offer is compelling, great results are achieved. The fact that well over 99% of all coupons become trash doesn't matter when that figure is compared to the effectiveness of the alternatives. Well over 99% of all ad impressions (radio, TV, newspaper, magazines, billboards, table tents, signage, press releases, skywriting, package inserts, public transit posters, blogs, spam, online banners) don't induce people to buy.”

Welcome’s payment technology also supports e-coupons stored in a credit or debit card’s chip, essentially eliminating the need for a paper coupon. That sounds good, right? The best of both worlds, right? Not always. In fact, not very often. I will explain in another post why I would almost always prefer a simple paper coupon.