Contactless and the Dawn of a New Payment Era

After years of testing contactless payment devices, many financial institutions are now offering these devices to their customers nationwide. Three years have passed since American Express launched the first pilot in July 2002. Today, contactless devices are being issued by banks such as American Express, Bank of America, Chase, Citibank, KeyBank, and Wells Fargo. This is proving to be a big year for the contactless payment industry with over 30,000 merchant locations in the US now capable of handling a contactless transaction and over 13 million contactless devices in the hands of consumers. The number of devices has nearly doubled in the past year, according to a new report from Celent, Contactless and the Dawn of a New Payment Era.

However, we have only just begun this journey. Some significant hurdles must still be cleared before mass deployment is successful. The average consumer may be uncomfortable with new technology or may have security concerns. Merchants must also be convinced of the benefits of accepting contactless payments. Lastly, the proliferation of similar technology in other industries is a double-edged sword. The familiarity that accompanies such widespread use will help some understanding the basics of contactless transactions but worry some others when they improperly compare the two.

"Given these hurdles and the recent scars of the smart card initiatives, many banks are taking a conservative approach to contactless," says Ariana Michele-Moore, senior analyst and author of the report. "We see hesitation among many issuers and hedged launches for those that are taking the plunge."

According to the report, the benefits of this technology will be realized by the market. Contactless technology is robust, flexible, and next generational and can pave the road for issuers seeking new interchange opportunities. Based on the trends in the electronic payment space and advances in contactless technology, Celent predicts that contactless payments will capture 15% of the market by 2011. Much of the growth is attributed to issuers being most likely to equip existing cards with contactless capabilities rather than require consumers to sign up for a new credit or debit account.

This report addresses not only the recent progress of contactless payments but also the opportunity and challenges that lay before the initiative. Celent examines the quantifiable opportunity for contactless payments and the many benefits they bring to market participants. The report also outlines industry best practices and Celent projections.