Replacing Cash with Convenience: The Promise of RFID Payments

Contactless payments are becoming the newest trend in the payment world as banks eye the opportunity to increase their revenues via a traditionally cash-based market.

Technically speaking, contactless payments occur without physical connectivity between the reader and the cardholder device. A variety of technologies can make this happen, including bluetooth, infrared and radio frequency identification (RFID). Although bluetooth and infrared programs are developing overseas, the prospect for them here in the US is dismal on account of their cost, complexity and lack of consumer appeal.

Unlike wireless devices based on infrared or bluetooth technologies, RFID-based transponders are not powered by a battery, but by a signal sent from the reader. Without the need of a battery, transponders can be equipped with little more than a chip and an antenna, both of which may be packaged quite small, allowing tremendous flexibility in the design of the transponder. Transponders can be embedded in key chains, mobile cell phone covers, credit cards, watches, and building identification tags. This flexibility translates into lower costs, greater simplicity and more consumer appeal. All three characteristics position RFID well for the mass market.

Many people are already familiar with contactless payments from using ExxonMobil's Speedpass program or one of the many nationally recognized toll collection programs such as EasyPass or FastTrak. The success of these programs has spurred interest from payment providers such as American Express, Visa and MasterCard. All three have launched pilot programs to test the waters for RFID-based payments in the US. Although it is difficult to describe the structure of RFID payments before the pilots are complete and the programs are launched nationally, the pilots do give some indication of what to expect from RFID payments programs and the likelihood of their success.

First, RFID payments programs are developed for traditionally cash-based markets. This point is probably the most significant for several reasons. Cash on hand is more exhaustible than a credit line or bank account. For this reason, and because cash must be carried, cash can be inconvenient. Consumers continually embrace payment products because they, like many other products, make life more convenient. By aiming to replace cash, rather than credit or debit cards, RFID programs do not require the consumer to choose between paying with the RFID transponder or with one of their cards. Issuers will of course welcome the opportunity to capture additional revenue in the form of interchange.

Second, RFID payments are intended for small-ticket items (under US$50). Smaller purchases are less likely to carry the burden of requiring a signed receipt at the point of sale, making for a much speedier transaction. Merchants will appreciate this aspect as a way to move volume, as well as the fact that consumers are apt to spend significantly more on small-ticket items when using cards than when paying with cash. In addition, consumers are less intimidated by trying a new payment product when gambling with less money.

Third, RFID payments are unconventional and their packaging is flexible. These qualities enable RFID programs to be offered with a fresh spin that will draw more attention from consumers than yet another credit card. In addition, because they come in all shapes and sizes, they will appeal to consumers who can choose the option that suits them best.

Of course, RFID payments are not without drawbacks. Merchants will have to install either new readers or attachments capable of reading an RFID transponder. Whether the sales lift will justify this investment remains questionable. In addition, if consumer adoption is sluggish for any reason, RFID payments may find themselves competing with card-based payments as the latter continue to penetrate the payment world. If, or when, smart cards emerge as a common form of payment, they will also pose a threat. Given the infancy of RFID payments and the emergence of alternative payments, it is difficult to judge the likelihood of success. However, there are some indicators as to the adoption levels of RFID payments.

Mass transit and RFID-based Speedpass programs offer historical benchmarks for RFID payments. In just over five years, more than 6 million consumers signed up for Speedpass. Given the greater ubiquity of general RFID bank cards, and increased marketing efforts by not just one company but many, Celent expects to see a stronger level of adoption for RFID payments as a whole.

In order to gauge the revenue potential of RFID payments, attention may be focused towards a few key target industries: quick service restaurants (QSRs), movie theaters and video and game rental companies. All three are high volume, relatively low-ticket, and quick-service oriented industries. In aggregate, 2002 US sales in these industries were over US$160 billion. In 2007, we expect 8 percent of sales obtained by these three outlets will be paid using RFID devices. If RFID payments programs can be introduced into these and similar industries, Celent expects the market potential for RFID-based payments to be substantial.

Ariana-Michele Moore an analyst within the banking group at Celent Communications, a financial services technology research firm based in Boston. She can be reached at [email protected].