UK reaching NFC tipping point?


Contactless payment continues to grow rapidly in the United Kingdom, but transaction volume is still low, and it remains open to debate whether 2011 will be a tipping point for the technology.

As the European country with the most contactless payment terminals in place, along with high-profile NFC commercial rollouts either already launched or planned this year, what happens in the UK offers a sign for how contactless payment will fare in the rest of Europe and beyond – reports Dan Balaban.

There will be about 25 million contactless cards on issue and roughly 10% of the country’s merchants will be equipped to accept them by the end of 2011, predicted James McDonald, who heads contactless payments for Barclaycard Global Payment Acceptance, the merchant acquiring arm for Barclays bank and the bank’s Barclaycard credit card unit.

There will also be at least two commercial NFC mobile payment services in operation by the end of 2011. One already has launched, Quick Tap, from Barclaycard and mobile operator Orange. O2 plans to launch NFC during the second half of the year, a service expected to be anchored by the telco’s own contactless prepaid O2 Money service.

But overall, contactless transactions still make up a very small percentage of card payments in the UK. Barclays and Barclaycard, which are responsible for the vast majority of both the cards and contactless terminals in place in London and around the country, recorded only about 1.7 million contactless transactions in 2010.

That’s far less than 1% of total card transactions for all Barclays debit and Barclaycard credit cards. Overall, contactless accounts for only 1% or less of transactions for most UK merchants equipped with contactless terminals. Barclaycard said in April that contactless transactions on its terminals had grown by 150% compared with a year earlier.

But McDonald, who spoke last month at SMi’s Contactless Cards & Payments conference in London, predicted they would grow by even more – perhaps to 5 to 6 million total contactless transactions for all of 2011.

The transaction volume will be boosted by acceptance of contactless payment at 1,200 McDonald’s restaurants in the UK. The fast-food chain rolled out contactless acceptance in recent months, one of the first tier-one retail chains to do so.

If the projection of 5 to 6 million contactless transactions comes to pass, it would be three times the number of taps by UK consumers as in 2010. Contactless payment activity was even smaller in 2009, during which Barclaycard recorded only about 200,000 contactless transactions and only one-tenth of that in 2008, the first full year after the bank launched contactless payment in London, in September 2007.

On average, each of the approximately 60,000 contactless POS terminals is used only four to five times per month, said Matt Rowsell, chief commercial officer for Streamline, part of WorldPay, the UK’s largest merchant acquirer.

WorldPay is acquirer for McDonald’s, as well as such large tier-one UK merchants as the Tesco supermarket chain and Boots retail pharmacies. Both of the latter are trialling contactless and are expected to eventually roll out the technology chainwide.

Rowsell, however, also speaking at the Cards & Payments conference, said that the ‘sense of urgency’ among UK merchants, in general, to adopt contactless is lacking for now. Most merchants believe cash is still cheaper than cards and the faster speed contactless technology offers doesn’t excite many of them. Cardholders also have had trouble seeing the benefits of contactless.

‘A large proportion of customers have at least one contactless card in their wallet; whether they knew they had a contactless card is another matter,’ said Rowsell. ‘It’s safe to say card usage isn’t habitual. I think we’ve got to question, ‘are we at the tipping point, really?’ I’m starting to think it’s a little further away.’

Some merchant segments are seeing the value of contactless, but until more people in the checkout queue pay with contactless cards or phones, merchants and cardholders will see little benefit from the faster transaction speeds, he said.

Rowsell concedes that contactless tipping point might happen in 2012, when Transport for London is set to equip all of its 8,500 buses in London to accept contactless credit and debit cards directly to pay fares, in time for the opening ceremony of the Olympics next July. But outside of the London metropolitan area, the impact of Transport for London’s move will be more limited.

The open-loop transit terminals also won’t accept contactless payment from NFC phones if the payment applications are prepaid, at least not initially. Both Quick Tap and the planned O2 Money NFC payment services are prepaid. Moreover, Transport for London is requiring that transaction times come in at 500 milliseconds or less, which might be a problem since the payment applications will be stored on SIM cards in the NFC phones.

Still, most agree that if the tipping point doesn’t come this year, it should happen by 2012.

Barclaycard’s McDonald predicts that the number of cards and percentage of contactless merchants will double from this year – to more than 50 million cards on issue and 20% of merchants equipped with contactless terminals.

By the end of 2012 or early 2013, all 25 million Barclays and Barclaycard credit and debit cards will have a contactless interface, said McDonald. That would represent about half of all cards on issue in the UK by that time, according to the projection. At present, Barclays and Barclaycard have issued more than 80% of the approximately 15 million UK contactless cards in circulation.

In addition to Barclays, Lloyds TSB in March announced it would begin its rollout of contactless debit cards and expects to have about 1 million cards on issue by the end of 2011. TSB also plans a commercial launch of NFC payment by the end of this year, which it would expand next year.