The shape of the future of contactless payments

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By: Wise Marketer Staff |

Posted on June 20, 2006

With contactless payments gaining momentum in the USA and in other markets throughout Asia-Pacific, and developments stepping up in Europe, the potential value of the world market for contactless payments is estimated at some US$724 billion, according to a report published by market analyst Datamonitor.

Contactless payments have grown rapidly from the early trials in 2002 to full commercial launches in 2005. The speed of this development shows the strength of the proposition to issuers, merchants, and consumers alike.

Replacing cash?
According to Kieran Hines, report author and financial services analyst at Datamonitor, the share of total consumer payments made by plastic card continues to grow, but both consumers and merchants still rely on cash to make low value payments. But contactless payments are aimed at converting these small value cash payments into electronic payments.

The technology is designed to make it quicker and easier for consumers to make low value payments by card. To make a contactless payment, the consumer simply has to tap or wave their card or other payment piece such as a watch or key fob on a reader at a point of sale. Within half a second, the payment is verified and the transaction is completed, and there is no need to sign or enter a PIN for low value transactions.

According to Datamonitor, the technology also offers particular benefits to both consumers and retailers in sectors where speed is important, such as quick service restaurants, pubs and bars, cinemas, convenience stores, and petrol stations. Consumers benefit from faster service, as well as from not having to carry so much cash with them.

Secure transactions
The value of a contactless transaction is capped at quite a low level, while consumers would still face zero liability for any losses due to cards being lost or stolen. In addition, programmes built on EMV (Chip and PIN) technology offer the same authentication security as a standard card transaction.

Datamonitor's Contactless Payment Market Opportunity Model suggests that the value of cash payments below US$25 made in six key contactless retail sectors in 2004 was US$724 billion.

Best potential markets
Petrol retailing (both petrol and service station convenience retailing) offers the greatest opportunity, as US$376.4 billion in low value cash payments were made in this sector in 2004. This is followed by convenience stores, at US$168.3 billion.

Fast food accounted for US$101.9 billion, while pubs and bars accounted for US$67.6 billion, nightclubs accounted for US$6.1 billion, and vending machines accounted for US$3.9 billion.

Leading markets
The USA is the largest contactless payment card market in the world. At the end of Q1 2006, there were over 10 million American Express, MasterCard, and Visa branded contactless devices in circulation in the market (card-based, and other form factors such as key-fobs and miniature cards), and these are accepted at over 30,000 merchant outlets.

Several banks now issue contactless products to their customers, led by Chase Bank, which began a full commercial launch in summer 2005. Perhaps not surprisingly, Datamonitor found the largest opportunity for contactless payments in the USA. The potential for contactless payments in this market is estimated at US$226 billion, of which approximately half is accounted for by petrol retailing. Interestingly, the fast food sector is the second most important in this market, which differs from the global average market ranking.

In Asia-Pacific, contactless payments have been deployed in Malaysia, Taiwan, Japan, South Korea, and Singapore. Japan is the largest market for contactless payments in the region. Datamonitor estimates that US$71 billion of low value cash transactions were made in the six selected sectors in 2004, greater than both the UK and Germany. Again, petrol retailing is the most important sector, followed by convenience stores.

European markets
The UK and Germany present the greatest opportunities in Europe. There has been little activity in Europe to date, largely because issuers have been focused on the migration to EMV ("Chip and PIN"), but Datamonitor believes that major developments are just around the corner. Indeed, RBS has already announced a trial of contactless payments in the UK for the summer of 2006.

The UK and Germany present the greatest opportunity for contactless payments, with US$59 billion and US$51 billion of low value cash transactions in the chosen sectors respectively. Again, petrol retailing is the most important sector in both of these markets, but it is interesting to note that pubs and bars is the second most important merchant area in the UK (at US$18.6 billion), while in Germany the second largest is convenience store retailing (at US$11.5 billion).

The Contactless Payments analysis and overview report, which includes in-depth coverage of the successful launch in the US, is available directly from Datamonitor.

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