Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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October 25, 2010

Can mobile payment adoption define the "end game" for technology investment?

Payment cards in the United States have been stuck for years in a chicken-and-egg quandary when it comes to chip technology. Merchants are reluctant to invest in developing the technology until consumer demand for it is there. But without the technology, it may be that consumer demand just won't be there. Add to this the competing forces that are at play: various stakeholders are pulled in different directions—contact versus contactless technology—and the cost of capital for technological investment is borne disproportionately among these stakeholders.

At the same time, we hear anecdotal evidence that losses from payment card fraud are on the rise. As we've described in previous posts, like this one, this trend could change the paradigm, spurring those in the industry to invest in more fraud-resilient, smart-card technologies. With this pressure, it's inevitable that payments card will shift from magnetic strip to chip card technology. But the problem is that chip card technology is constantly evolving, and those stakeholders bearing the costs for investment in new computer chips and terminal hardware infrastructure want some assurance that their investments are sound before they choose which technology path to follow, contact, or contactless.

In the interest of promoting global interoperability as well as battling magnetic-strip payment card fraud, now may be the time for an industry dialogue on a strategy for investment in smart technology. One question we should be asking ourselves in this discussion is, should we avoid investing in contact card technology if contactless mobile payments represent the end game?

Smart card basics: Contact versus contactless
Contact and contactless smart cards are so named because of the way that the embedded computer chip communicates with a terminal at a merchant's point-of-sale or at an ATM. In the case of contact technology, the data stored in the embedded computer chip is transferred to the reader when the card physically touches the reader. With a contactless card, the data is transferred using some type of radio frequency transmission such as near-field-communication (NFC) technology, which is the current contactless card technology standard. NFC technology, of course, precludes the need for a physical connection between the card and the reader. The user can use it in a variety of devices, including the mobile phone. Importantly, contactless technology in the chip can work with the phone itself to authenticate the user and thereby reduce payments fraud.

Countries that rely on smart card payments are using various combinations of contact and contactless payments that conform to certain security standards and specifications to protect consumers and merchants from payments fraud. To encourage consumer adoption, some issuers have introduced dual-interface cards, with both contact and contactless functionality, so that consumers can use either card at the point-of-sale terminal. This approach, with a dual-interface card, optimizes utility for consumers as retail payments evolve to the mobile channel, potentially empowering both the use of contact cards and contactless mobile payments.

The outlook for contactless mobile payments
Although the evolution of mobile payments in the United States has so far been slow, merchants are introducing new pilots with increasing frequency, and many industry stakeholders want to accelerate the deployment of a universal contactless mobile payments infrastructure. Moreover, U.S. consumers are relying more and more on their mobile phones for new and unexpected applications, which points to a good chance of success for mobile-based payments and related activities in the future. In fact, according to a report from the Pew Research Center, 85 percent of American adults today own a mobile phone, more than any other device.

Percentage of Americans who own gadgets
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Building consensus in the face of market forces
The recent deployment of contactless card payments in global markets is contributing to the establishment of an infrastructure for contactless mobile. In essence, here in the United States, we can go in either direction, contact or contactless. However, in a world where all stakeholders shared the same fully transparent information and vision for the future, could it be possible to leapfrog spending our investment dollars on contact cards and readers and instead use capital on contactless technology? We can avoid the costs for interim technology solutions if industry stakeholders can agree on a future direction despite the different economic incentives and costs demanded. Really, if NFC deployment is the ultimate endgame for mobile payments, bypassing the investment in contact technology as an interim step is a viable, if not ambitious, consideration.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum

October 25, 2010 in cards , chip-and-pin , consumer protection , contactless , mobile payments | Permalink


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