Is the End of Cash at Hand?

From Bluetooth-enabled cell phones to iPods, consumers are embracing the next generation of technology products like never before. And this growing comfort with digital and wireless technologies may be largely responsible for the recent upswing in e-payments. Of course, the trend has not gone unnoticed by the financial services industry.

"Consumers have embraced electronic payments and are moving away from checks," observes Leonard Heckwolf, ACH and retail lockbox executive with New York-based JPMorgan Chase (JPMC; $1.1 trillion in assets). "With electronic bill payment and direct debit, it's easy for consumers to use electronic payments today. A significant segment of consumers doesn't want to write checks. In the retail payments area, the foundation is in place and the trend will accelerate."

When it comes to e-payments, "People are less afraid," says Bob Leong, VP of electronic banking with Buffalo, N.Y.-based M&T Bank ($52 billion in assets). "We're especially getting mass adoption in online billpay, whether through the bank's or billers' sites. There's growth in the overall consumer payments space ... and people are more willing to use alternate forms of payment."

The payments space finally is maturing to the point where the industry can concentrate on bigger-picture payments issues, as opposed to trying to recruit users for their services, according to Steve Rathgaber, president of Secaucus, N.J.-based payments network NYCE. "The [payments] infrastructure that has been built is being expanded to different applications, like health savings accounts, prepaid cards and contactless cards," which raises the question, "How else can I use it?" Rathgaber says. "The trend is, there's an adoption [followed by] an evolution into the next stage of utilization in the consumer space." So what will the next stage of utilization involve? From the beginning, consumers have been encouraged to use electronic payments for their convenience, and ease of use, experts say, will continue to be central to banks' promotional efforts.

One convenient payment technology that has received a lot of press lately is contactless or proximity payment cards. Just wave the card in front of a reader and goods are paid for instantly - no signatures, no hassles. MasterCard (Purchase, N.Y.) is one of the biggest proponents of the technology with its PayPass card. Some banks, including Cleveland-based KeyBank ($91 billion in assets) and HSBC, North America (London; $300 billion in assets), already have jumped on the bandwagon and launched programs to gauge the effectiveness of the payment technology.

"This fits the notion of the continued evolution of payments products," says NYCE's Rathgaber of contactless technology. "It might have some limitations in terms of the types of purchases that they can be used for, but this can open the market at the low end, like for burgers, and remove paper from it. We're at a point in the industry where we're realizing which technologies are the best for a particular situation."

M&T's Leong sees a significant opportunity for banks, consumers and businesses in adopting contactless payments. "It's electronic, so money moves faster," he comments. "And for business, speed of servicing customers improves. We still face the challenges of getting the merchant community to adopt this and having a significant card base to make investment worthwhile."

Bruce Cundiff, a research analyst with Pleasanton, Calif.-based Javelin Strategy and Research, however, says he still is skeptical of the number of cash transactions contactless technology will purportedly convert. "I don't buy that all these transactions are going to be converted from cash," he remarks. "But [the issuers] are going after the right merchants," Cundiff adds, citing quick-serve restaurants, gas stations, movie theaters and convenience stores as examples.

Cundiff also points out that although contactless payments do not run on an entirely new infrastructure - they still use the traditional card rails, more or less - they require an entirely different card on the issuer side. "And it's not cheap," he stresses. "There has to be justification on the merchant side for adding this onto their existing infrastructure. Add-on costs can be between $50 to $100 per lane for this technology. That's OK for a little convenience store, but it will be a multimillion-dollar investment for a larger merchant."

The industry has to prove to retailers that they will see increased transaction volume and a bump up in the average ticket price for contactless to really catch on, according to Cundiff. The whole concept with contactless - in a fast food joint, for example - is that someone's purchase is not limited to the $10 in his or her pocket, he says. With a contactless card, the consumer's spending limit is, effectively, endless.

But that begs the question, Why not just stick with tried-and-true mag stripe cards in these venues? "That was Visa's line when [MasterCard's] PayPass came out," comments Cundiff. Outside their use at tollbooths and gas pumps, proximity cards still are in their infancy, he notes. "Now, Visa feels it's ready for the technology, but they aren't investing as heavily as MasterCard yet. They're waiting in the wings and watching MasterCard. This is a brilliant strategy by Visa."

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