Contactless Payments: Accelerating POS Transactions

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March 01, 2006
Next Generation | Technology
Michael L. Kasavana, Ph.D., NCE, CHTP

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© 2006 Hospitality Upgrade. No reproduction without written permission.

During the past year, the volume of cashless micro-transactions (purchases of $5 or less) more than doubled as payments shifted from coins and bills to electronic settlement at an unprecedented rate. The Nov. 1, 2005 issue of the Wall Street Journal reported that the push toward cashless settlement of small dollar transactions is part of a credit card industry strategy to persuade consumers to use plastic instead of cash. The fact is, in 2003 the total volume of electronic payments topped the number of cash and check payments for the first time. According to a recent study of the American Bankers Association, cash and checks in 2005 accounted for 45 percent of consumers' monthly spending, down from a level of 49 percent in 2003, and 57 percent in 2001.

Using plastic in place of cash in restaurants is perceived as a win-win-win situation as the consumer gains added security and convenience, the foodservice operator enhances customer satisfaction and increased revenues, and banks develop stronger relationships with cardholders. Visa, for example, estimates that much of its business growth will come from micro-transactions as approximately one-half of its debit volume is attributable to purchases of less than $25 with an expectation that even a higher percentage of volume will emanate from smaller dollar transactions in the future. As the quick service restaurant (QSR) industry continues to adopt cashless electronic transactions, the next wave of convenience – contactless payment technology – has begun to be implemented. The benefit of this media over contact formats is increased transaction speeds gained from waving or tapping payment media as opposed to physically swiping it. Traditional credit and debit cards (magnetic stripe cards) must be correctly inserted into a special slot on a reader with the stripe properly positioned to initiate a transaction. Contactless cards, tags and keychain fobs have no such requirements and can be presented in any orientation so long as the media passes within a detectable range (usually 4 inches or closer) of the reader's antenna. Contactless processing is rapidly replacing installed technology as operators seek alternative payment techniques to accelerate micro-transactions.


Micro-Transactions
A 2004 MasterCard study revealed that nearly half (49 percent) of Americans carry $20 or less in their wallet and a significant majority (86 percent) expressed a desire to use cash less often in the future. The survey also noted that 40 percent carry less cash than five years ago. Based on transactional analysis, it appears that even the smallest purchases (e.g., lattes, donuts, hamburgers, bagels and ice cream cones) are becoming more commonly purchased with non-cash payment than with bills and coins. Additional research revealed that 37 million consumers expressed a willingness to use a credit or debit account for transactions of $5 or less, while some 6.5 million folks reported they would consider non-cash payments for transactions as small as $1.

With contactless settlement, also referred to as proximity payment technology, a cashless transaction is initiated and completed without physical contact between the payment media and a point-of-sale (POS) device. Purchase transactions are conducted with the wave or tap of a card, tag, mini-card or keychain fob, not the swipe of a magnetic stripe. Settlement data is exchanged through contactless linkage with a radio frequency identification (RFID)-equipped reader. The transmission and receipt of RFID signals between the payment media and an RFID-enabled POS initiates and completes the transaction.

Epaynews.com estimates that the number of contactless media (cards, tags and fobs) in circulation in the U.S. will exceed 50 million by the end of 2006 with more than 35,000 merchant locations accepting transactions. Wherever speed and convenience are important transaction metrics, contactless cashless payment systems appear well suited and appropriate. To give foodservice customers additional convenience, or accelerate transaction speeds, or to enhance customer loyalty, innovative contactless payment systems are intended to accomplish these objectives.


QSR Applications
Proximity payment technology represents the next generation of cashless payments designed to accelerate the purchase process while securing settlement. In other words, proximity payments can put the 'quick' back in quick service. While contactless payment technology is in its infancy in the foodservice industry, it has been used in gasoline retailing (e.g., Mobil Speedpass) and toll road operations (e.g., EZ Pass) for nearly 10 years. The quick service restaurant industry is an industry segment most appropriate for this technology.

At the end of 2005, McDonald’s restaurants led the industry in the number of implementations accounting for 10,000 of the 13,370 domestic restaurants accepting MasterCard’s contactless payment technology, PayPass™. In an effort to support McDonald’s contactless transaction volume, PayPass launched a national TV advertising campaign promoting the 'priceless' convenience of contactless payments at the drive-through. As the advertisement stated, '…having the exact change: priceless…Just Tap N Go™ at McDonald’s instead of using cash!'

Until recently McDonald’s restaurants had been exclusively accepting only PayPass for contactless settlement. This is no longer the case as some McDonalds have begun accepting American Express’ ExpressPay and Visa USA’s contactless media in addition to PayPass. McDonald’s has stated it will accept all brands of contactless payment products in 2006.

Overall, the implementation of contactless payments at QSRs in Orlando, Fla., produced reductions in purchase transaction times sufficient to allow tangible gains in transaction traffic. Between 12 and 18 seconds were saved per contactless transaction compared to traditional cash tendered sales.

Interestingly, at the November 2005 FS/TEC there were many innovative kiosks dedicated to QSR customer self-order entry. Nearly all of the kiosk models displayed accepted credit cards and gift cards. More sophisticated models also processed debit cards, but the most elaborate kiosks – and the most expensive – also accepted cash. Such designs beg the question of whether cash might be going out of style.


RFID Technology
Contactless payment technology relies on RFID connectivity to operate. An RFID system consists of three components: a transponder(tag), an an integrated RF circuit and antenna, and a transceiver(reader). Basically, a transceiver transmits and receives radio frequencies from a transponder via antenna relay. The transceiver subsequently transfers data to a processing device for reconciliation. There are two types of RFID configurations: passive and active. Contactless payment systems are passive in nature. In a passive system, the reader broadcasts an RF signal that creates a magnetic field. The tag is empowered by this magnetic field and returns a signal to the reader to acknowledge its presence. A passive system does not require that the transponder have its own power source, instead it relies on the interrogation and power generated by the reader to be its energy source. Reliance on an external power supply enables a passive RFID tag to be small, compact and lightweight. By contrast, in an active system both the transponder and transceiver send and receive signals and each has its own power source. An active configuration therefore is able to establish an extensive and broader range of detection and readability.

For contactless transaction processing, an RFID reader is used to generate and broadcast an electromagnetic field (through its antenna). Once a passive RFID tag enters the electromagnetic detection area, it is activated and empowered to encode and exchange signals through its embedded antenna. The signal used to activate the tag's transmitter establishes authorization between the transponder and transceiver. The reader subsequently moves the transactional data to a POS or external data processing system for settlement. Such terms as Tap N Go, Touch N Go and Blink are popular contactless technology references meant to emphasize the non-contact nature of the transaction. It is important to note that most contactless media continue to feature a magnetic stripe and display of account information thereby permitting transaction processing at locations where contactless technology is not available.

RFID has many advantages over competing contactless, cashless technologies such as bar coding and infrared. Its primary advantage is its non-line-of-sight technique. RFID tags can be read with great speed without attention to positioning, orientation or clear sight line. A tag can be read at high speed (faster than 100 milliseconds) with a high level of accuracy (estimated in excess of 99 percent). Additionally, the infrastructure necessary to conduct contactless settlement, as compared to cashless settlement, is minimal since once the RF data is captured, settlement processing parallels contact media reconciliation. In other words, the RFID application becomes the front-end of electronic data capture with subsequent reconciliation identical to other forms of cashless settlement.


What’s Next?
The future of contactless payment technology will include biometric cards (referred to as biocards) and mobile devices such as cell phones and PDAs. The biocard, a highly secure form of plastic, embeds a biometric scanner and special microchip onboard an RFID-enabled contactless card. While the risks associated with a card, tag or fob being misplaced, lost or stolen is an important issue, fingerprints are portable, reliable and in possession. With a biocard, the user self-enrolls on the card by scanning and storing a fingerprint directly into the microchip (the biochip) within the card. To initiate a transaction, the user scans his/her fingerprint across the onboard scanner. A match with a stored image (sample) in the biochip activates the card for RFID-based transaction processing. The biocard remains active for a predetermined limited time (several seconds or minutes) whenever there is a sample matching, thereby maintaining the integrity of an authorized transaction. It is important to note that since a biocard is self-contained, it operates independent of an external database and thereby further assures the cardholder of privacy. Biocards are currently being tested for purchase transactions by Scandinavian Ecotechnologies and the Digital Defense Group.

During the past few years, countries outside the U.S. have used mobile technology to conduct contactless transactions. Basically there are three approaches for implementing contactless payment technology via a cell phone or PDA: Program the device software, slip a near field communication (NFC)-enabled shell over the device, or embed an NFC chip within the device. For mobile devices, NFC is used in place of RFID as it has superior interconnectivity capabilities and supports a wider range of interface standards. NFC-enabled applications are produced by NTT DoCoMo, Nokia, Motorola, Philips and Sony.


NFC Testing
NFC-enabled cell phones and PDAs are expected to replace RFID contactless credit and debit media. Unlike plastic cards, keychain fobs or tags, cell phones and PDAs offer the user an interface that provides rapid transaction settlement with an option to require entry of a secure PIN code to authorize transactions. In addition, NFC technology can also provide a basis for audio and video content downloading. It is anticipated that the smart cell phone, a hybrid device that combines a PDA and cell phone, will be the main NFC device of the future.

In mid-December 2005, tests using cellular phones with NFC technology began at Philips Arena in Atlanta, Georgia. This test allows cell phone users to pay for concessions and merchandise by waving an NFC-enabled phone near a contactless POS reader. The phone’s NFC chip is used to establish a radio link that allows for transmission of the consumer’s payment data without the need for a card swipe. Technically, NFC-phones permit wireless provisioning based on service discovery. Wireless provisioning is defined as the automatic transmission of content via near-field connectivity (basically a push technology application). This feature may be most compelling in changing consumer’s buying habits from cash to cashless to contactless. For example, wireless provisioning can enable the automatic downloading of electronic coupons (to an NFC cell phone) just by passing nearby an NFC-enabled banner, sign or device. Rather than broadcasting paper coupons through the mail or after settlement, an NFC transmitted coupon can be applied immediately, thereby allowing the operator to impact consumer behavior prior to purchase.

Through an innovative process known as service discovery, NFC enables the transmission of optional content downloads from a smart display (a pull technology application). When an NFC-enabled chip is placed near a smart poster or sign, content downloads – including entertainment, animations, games and nutritional data – can be selected. The smart display contains an NFC chip capable of detecting other NFC chips. Once detected, the download process is initiated and download instructions are sent to the phone’s browser. The user then chooses which, if any, downloads to execute.

Nokia America announced it will test NFC payment technology at quick service restaurants and pharmacies during 2006. The company will introduce an alternate phone model for those tests; one that places the NFC microchip inside the phone, not in an add-on outer casing as is currently the situation with the Nokia Model 3220.

Contactless media never leaves the customer’s hand and has been shown to increase transaction speed and further customer convenience. Contactless payment technology is built on passive radio frequency identification. RFID is designed to send and receive radio wave transmissions from an empowered media device without physical contact, thereby rendering the transaction as fast as or faster than cash. RFID enables data to be collected quickly and automatically without physical contact or line-of-sight. As the QSR industry implements contactless payment technology it needs to be mindful that the next generation, likely to include biocards and mobile device payments, is not far away.


Michael Kasavana, Ph.D., CHTP, is a NAMA Professor in Hospitality Business, School of Hospitality Business, at Michigan State University. He can be reached at Kasavana@pilot.msu.edu.



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