Contactless Pay Technology Opens Up A New Frontier for Vending

It appears that even the smallest purchases (e.g., lattes, newspapers, bus fare and candy bars) are becoming easier to buy with a noncash payment than with bills and coins. Recently, research conducted by the consulting firm Ipsos-Insight revealed that 37 million Americans are willing to use a credit or debit card for transactions of $5 or less — normally referred to as micro-transactions — while nearly 6.5 million Americans reported they would be comfortable using noncash payments for transactions of less than $1.

While the convenience of cashless transactions is gaining traction in the vending industry, the next level of convenience has already arrived in the form of contactless cashless payment technology.

Purchase transactions are conducted with the wave or tap of a plastic card, flexible tag, mini-card or key chain fob; not the swipe of a magnetic stripe. Transactional data is exchanged through contactless linkage with a specially designed radio frequency equipped device.

Based on field testing, the transmission and receipt of radio signals between a contactless credit card and radio frequency identification (RFID) enabled vending machine reader has been shown to increase sales and enhance transaction speed as well as customer satisfaction.

While contactless payment technology is new to the vending industry, it has been used in gasoline retailing (e.g., Mobil Speedpass) and toll road operations (e.g., EZ Pass) for nearly 10 years. Part of its success is due to the fact that the data exchanged between the contactless media and the scanner is not account information, but an identifier that is fully encrypted to achieve much greater levels of security than conventional magnetic stripe cards that can be easily copied.

To vending operators, proximity payment systems represent an alternate form of cashless payment intended to accelerate the purchase process while ensuring secure transactional processing and the capture of comprehensive transactional data. estimates more than 35,000 domestic merchant locations will soon be poised to accept contactless payments. Wherever speed and convenience are important transaction metrics, proximity payment systems appear well suited and appropriate. Soon, alternate payment solutions including biometric payments and cellular phone payments will be available.

Cash out, cashless in

The Wall Street Journal reported that the push toward small dollar transactions is part of the credit card industry's continuing strategy of getting consumers to use plastic instead of more traditional forms of payment. Consumers already are moving in that direction. The number of U.S. electronic payments topped the number of cash and check payments in 2003 for the first time, according to a study conducted by the American Bankers Association and Dove Consulting.

Of special interest is the fact that the market for micro-transactions (valued at less than $5) accounted for $1.32 trillion in consumer spending in 2003, representing more than 400 billion transactions.

During 2005, the volume of cashless micro-transactions significantly increased and was sufficient to attract the attention of payment processors and card associations. The volume of transactions with a value of $5 or less accrued from online, transient and mobile commerce. From 2003 to 2004, micropayment transactions grew from $2 billion to $5 billion.

The benefits of contactless cards over contact cards are primarily due to the increased transaction speed and convenience.

Contact cards must be inserted into a specific slot on a card reader, and the magnetic stripe must be properly positioned and aligned for the swipe to successfully lead to electronic data capture; whereas a proximity card can be presented to a reader in any orientation.

The only requirement for a contactless payment card is that it be passed within the reader's proximity range.

Card association expresses interest in contactless

One goal of credit and debit card associations appears to be moving proximity payment media to the top of the consumer's preference list and thereby converting small purchases from cash to cashless.

The two major suppliers of proximity payment media are MasterCard and Visa. To date, the adoption of MasterCard's proximity payment technology (PayPass) has exceeded the company's projections. For example, for 2005 the company projected 1,000 merchant locations and 2 million cards would be handling contactless transactions; but by the beginning of December 2005, there were in excess of 120,000 media readers deployed at 19,700 merchant locations accepting nearly 10 million contactless cards and key chain fobs by year-end.

The card associations have identified the vending industry as an important market channel and will assist the industry in moving consumers from cash to cashless transactions.

American Express similarly underestimated its number of contactless account holders and merchant locations stating that the numbers associated with ExpressPay exceeded the company's 10-year forecast.

MasterCard PayPass Pilot: 28 percent volume gain

During the pilot testing and market research phase, MasterCard discovered a 28 percent increase in weekly transaction volume among its PayPass account holders compared to the previous year when the technology was nonexistent. According to MasterCard's findings, the convenience of contactless technology, coupled with reduced interchange fees, helps construct a compelling business case.

American Express claims that contactless payments can be authorized and executed up to 53 percent faster on average than comparable credit card transactions and 63 percent faster than when cash is tendered. Additionally, merchants reported a 12 percent increase, month over month, in transaction volume after implementing a contactless payment option. It is for these reasons that the credit card associations are working to promote the contactless platform.

The infrastructure necessary to conduct contactless cashless transaction processing is minimal since once the data is captured, subsequent settlement processing parallels that of conventional cashless reconciliation. In other words, the contactless format is merely a front-end application that does not alter the back-end processing necessary to complete the transaction.

Quick-serve restaurant Applications

McDonald's restaurants accounted for 10,000 of the 13,370 domestic restaurants that accepted PayPass transactions in 2005. In an effort to support contactless transactions, PayPass launched a national television advertising campaign promoting the “priceless” nature of the convenience of contactless payments at the drive-through window.

The implementation of contactless payments for quick-serve restaurants has been shown to reduce purchase transaction time sufficiently to produce a measurable, tangible impact on the restaurant's ability to support a higher volume of transactions more effectively.

The most significant time savings were found in drive-through lanes where 12 to 18 seconds per transaction were saved with proximity cashless payments compared to cash tendered sales.

Interestingly, at the November 2005 Food Service Technology (FS/TEC) trade show, there were many innovative kiosks dedicated to self-order entry for quick service restaurants. Nearly all of the kiosk models on display accepted credit cards and gift cards. More sophisticated models also processed debit cards, but the most elaborate kiosks — and thereby the most expensive — also accepted cash; leading one to ponder, might cash be going out of style?

Radio frequency identification technology

Radio frequency identification (RFID) can be used to automatically identify products, parts, objects, pets and people. RFID has many advantages over competing technologies in that it is a noncontact and non-line-of-sight technique. RFID media can be read at high speed and components can be modified through read/write capabilities.

RFID technology, for example, is quickly replacing UPC bar codes since bar coding requires each product be handled carefully and passed slowly before a scanner.

To accurately conduct a bar code inventory of a warehouse, storeroom or shopping cart requires each product be transported and each bar code be placed before a scanning device.

Since bar coding is read-only technology, it is not capable of transmitting data to a reader. Instead, the data must be individually scanned. This is not true of RFID tags which can communicate data directly to a reader without concern for sight line or scanning speed.

An RFID system consists of an integrated circuit (microchip), an antenna and a transceiver (reader), and is available in two configurations: passive and active. In a passive system, the reader sends out a signal that creates a magnetic field. Through its antenna, the reader broadcasts the electromagnetic field, thereby creating a sensitive detection zone.

Once a passive RFID tag enters the detection area, its antenna is activated and it becomes engaged, receiving the signals of the reader. Basically, the microchip is empowered by the magnetic field and sends a signal to the reader acknowledging its presence. These signals are used to turn on the microchip's transmitter and thereby allow communication with the reader.

A passive system is a short distance relay system (ranging from one inch to a few feet). In turn, the reader can then transmit the captured data to an external system for subsequent processing.

In an active system, both the microchip and reader have onboard energy supply units and are capable of sending and receiving signals, thereby establishing a long distance range of interaction. Active RFID microchips normally possess read and write functionality, thereby allowing the microchip's data to be modified or rewritten. The memory size of an active chip varies depending on the application requirements. The read range for active microchips spans from several inches to more than 100 feet. Given the nature of most retail environments, including vending, a passive configuration is most appropriate.

Payment cards, contact and contactless, simultaneously

Contactless transactional media (e.g., credit card, debit card, flexible tag, mini-card or key chain fob) often are equipped for both contactless and contact processing. In other words, an RFID-enabled card typically appears to be a regular plastic card with the account holder's name and account number embossed on the front and a magnetic stripe containing encoded account information on the back. These features enable the card to gain flexibility in acceptance regardless of reader requirements.

Last year, MasterCard, Visa and American Express agreed to adopt a common contactless payment standard known as International Organization for Standardization (ISO) protocol 14443. The ISO 14443 specification for contactless RFID transactions incorporates short-range (4 inches or closer) proximity restrictions and requires the capacity to encrypt transactional data.

ISO 14443 stipulates the presence of encryption software to prevent wireless interception or data theft and is designed to enable the reader to read only one transaction media at a time. This feature enables communications between the transactional media and reader to be streamlined to provide faster transaction processing, making contactless payments ideal for environments where speed is of the essence, such as parking garages, vending machines, quick service restaurants and convenience stores.

From a technical perspective, ISO 14443 is described as a passive RFID-enabled system.

Passive RFID configuration

In a passive RFID configuration, the transaction media contains an embedded microchip and wire loop or miniature antenna. When the microchip is in close proximity to a reader, encrypted information is transmitted by the microchip to the reader.

Instead of swiping a magnetic stripe as is the practice in a contact reader, RFID-enabled media simply has to be close to a reader to exchange data.

When the payment media moves into proximity of the RFID reader, it is detectable within the magnetic field projected by the reader. Basically, power and data are transmitted from the reader by means of an electromagnetic field generated by the reader and emitted through its antenna to the matched antenna located on the transactional media.

The voltage generated by the interconnectivity of signals provides power to the embedded microchip. Without this power process, the transactional media would have to possess its own power supply (i.e., battery), thereby adding onboard weight and density. Once the media is powered by the reader, it is able to encrypt and transmit settlement data. The reader is equipped with small lights that blink to acknowledge successful transaction completion.

With a contactless transaction, processing time is reduced and security enhanced since the payment media never leaves the sight or possession of the account holder. A contactless reader is designed with a series of small lights that blink, and may also emit an audible beep while processing a transaction. This feature is often used to promote the technology.

Wave More, Swipe Less

Contactless payment solutions are aimed at traditional cash-only merchant locations where fast customer throughput is essential, such as quick-service restaurants, vending machines, fuel stations, convenience stores and movie theaters. Contactless transaction technology allows customers to authorize and settle transactions by holding, taping or waving RFID media near a special reader designed to capture radio wave transmissions.

Consumers' buying habits are undeniably changing in favor of cashless payments, and the process has been made even simpler as contactless settlements allow buyers to wave more and swipe less.

Proximity payment technology, available to the vending industry, enables consumers already accustomed to multiple payment options at most retail locations to select among payment options to complete a vending transaction. Account holders simply wave or tap payment media near or on the reader mounted on the vending machine and the transaction is automatically initiated and completed. Contactless microchips can be embedded in such media as plastic cards, key chain fobs, mini-cards, tags, stickers, printed labels, cell phones and other media.

Vending will be impacted in several ways

Contactless technology can contribute to enhancing consumers' perception of vending. The combination of new product offerings, convenient methods of payment and overall improved machine servicing can increase revenues.

With a contactless transaction, the vending consumer enjoys the extra convenience of faster transaction speeds (as little as a few seconds), while the vending operator benefits through reduced cash management and increased average purchases (reported at 15 to 20 percent).

Similar to the way cashless transactions positively influenced speed and convenience at the machine, contactless can take business to the next level.

Incentives for vending operators can be found in recently reduced credit card interchange rates and transaction fees being offered by electronic payment providers. It is no coincidence that these new rates and fees, focused on generating significant increased volume in small dollar transactions, are being introduced at the same time as contactless credit and debit cards.

Card issuers offer incentives

MasterCard and Visa have long sought to expand acceptance in quick payment or small-value payment environments.

Visa stepped up its efforts in November 2005 when it introduced procedures to make the payments process faster and easier for cardholders and merchants. This includes offering lower debit interchange rates to merchant acquirers in order to help lower costs for a broader set of eligible merchants.

For example, Visa allows eligible merchant categories, where fraud has been low, to forgo obtaining a cardholder's signature on a receipt for authorized transactions less than $25 to speed up settlement.

First, it is important to consider the account as a whole instead of machine by machine. For example, adding cashless payment systems to individual machines will not always be successful on their own. If consumers have to pull cash out of their pocket for a snack, they may be less likely touse their credit card for a soda.

Operators should target accounts and locations with machines that are already doing well with an average of at least $100 per machine a week in sales and ideally that have vend prices over $1. Generally, the higher the price point, the greater the usage of cashless. For example, we see machines selling beverages at $2.50 or even $3 with large numbers of multivends once cashless is available. Some have experienced very high sales growth where machines had previously been continuously out of change.

RFID WristBand

In November 2005, the first RFID wristband for cashless POS payment was introduced by the Precision Dynamics Corp. at the International Association of Amusement Parks & Attractions Trade Show. The system consists of three component parts: kiosk, wristbands and readers.

An important feature of contactless media is that the payment media never leaves the consumer's hand.

Proximity payment technology systems enable increased speed and convenience for the vending customer. This technology can help innovative vending operators gain a competitive advantage in the marketplace, thereby contributing to earning new accounts while retaining existing accounts.

About the Author
Michael Kasavana, Ph.D., is the NAMA endowed professor in hospitality management at Michigan State University. He has been researching vending technology for several years.