Low Value, Big Potential, Bigger Problems

Cash is the final frontier in the banking industry's quest to electronify payments. Despite efforts to entice consumers to give up their wads of bills, a recent study by Boston-based Aite Group claims that no one has found the right formula for doing so.

The report examines alternatives to cash for low-value payments -- defined as transactions below $25. According to Aite, about half of the 138 billion cash transactions that Americans make annually are less than $10.

"There are different components to the problem [of low-value payments]," explains Aite research director Gwenn Bézard. "First, you have to make a business case for all parties involved -- issuers and merchants. Second, you have to give consumers a value proposition to make it attractive for them." So far, with few exceptions, no entity has succeeded in doing both, he says.

Current methods for enabling electronic, low-value payments -- including contact-based chip cards, contactless chip cards and contactless nonchip cards (as found in the U.S.) -- have a number of drawbacks, Bézard asserts. These include lack of speed, as is the case with contact cards, and high interchange fees, as with swipeless cards.

Bézard maintains that lowering interchange fees will be the key to the success of contactless in the U.S., at least for low-value payments. To save money, the strategy American issuers are embracing is to use existing card rails rather than installing a completely new infrastructure. However, Bézard says, merchants will be hard pressed to justify using current networks for processing small payments given the high fees associated with using those networks.

"[Contactless] is going to gain traction in the U.S., but will be limited in how far it can go because of the cost of payment acceptance to merchants," Bézard says. "Issuers can lower interchange fees, but I'm not sure if they will be reduced in a significant manner. ... The cost will be an impediment." Still, in terms of speed and convenience, contactless is the best option, he adds.

An alternative may be a contactless, stored-value scheme that bypasses the networks, suggests Bézard. This would be less expensive to process and easy to use, he contends. * --Maria Bruno-Britz