Article

Contactless technology on the brink

QSRs ready, watching for technology to take off.

July 28, 2008

It sounds great: Customers tap a credit card against a terminal to process payments in less than a second — with no signature required. Drive-thru and counter lines would move more quickly, and gone would be customers' reluctance to use credit for small payment transactions.

But U.S. consumer acceptance of contactless cards, often referred to as tap-and-go, has been slow. Media reports of suspected security issues related to contactless technology have scared off some cardholders. Others simply don't know they have the option of tapping or waving a card—otherwise known as a contactless transaction—at payment terminals.

With consumer acceptance yet to match the number of contactless cards in circulation, quick-service retailers have mixed feelings about deploying the technology.

American Dairy Queen Corp. has had contactless-payment terminals in its stores since December 2007. As of June 1, 2008, more than 1,700 stores, including all 70 company-owned stores, had deployed the devices.

"We really recognized that this was an opportunity for us to improve service in our drive-thru," said Dairy Queen's Bob Hynick, executive vice president of concept support services. "It certainly does impact speed of service."

Contactless offers speed, ease of use

Randy Vanderhoof, executive director of the Smart Card Alliance, an organization intent on raising awareness of the benefits of smart cards, said the QSR industry is ahead of other merchants in adopting the technology because of its fast transaction time—less than a second — with no signature required for transactions under $25.

QSRs with contactless-payment terminals typically have higher average ticket sales when customers use their contactless smart cards over cash, just as credit cards do. But the advantage of contactless cards is the transaction's ease of use, which tends to remove customers' reluctance to use credit or debit cards for smaller payment amounts, Vanderhoof said.

"People are using their cards in stores that they typically didn't use cards before," he said. "Those (QSRs) who also accept credit cards are finding that people that have their contactless cards are making purchases of higher value than they had expected."

About 35 million contactless cards are in consumers' wallets, and approximately 80,000 retailers have terminals. Contactless-card concentrations are higher on both coasts, with the central U.S. regions slower to issue the cards, Vanderhoof said.

Contactless technology also has been deployed in key fobs, which have been accepted less by consumers than contactless cards. A pilot program currently is testing the success of adding a compatible chip to cell phones, including utilizing cobranding and loyalty programs.

Dairy Queen has customer-facing contactless-payment terminals on its counters and a combination contactless-magnetic-stripe terminal mounted outside its drive-thru windows.

Hynick said more customers seem to be using the mag-stripe at the drive-thru, but that may be because customers in the chain's more rural markets often don't have the contactless option in their cards.

Those who do have contactless cards "really seem to like that it's quick, it's easy," Hynick said. "What people really have liked is the speed and convenience factor that's happening at the drive-thru."

Adding contactless readers to existing terminals was easy and fairly inexpensive. Franchisees complete their own installation, which is a matter of adding a peripheral device to existing terminals. Operators also pay for the equipment, typically a few hundred dollars, although costs can top $1,000 for large operations with multiple terminals, Hynick said.

Training employees to use the terminals also went smoothly, he said. Now, it's just a matter of waiting for customer use to pick up.

"We're ready and real eager to see a lot more contactless activity out there," Hynick said. "We'd really love to see the card associations to continue to pump contactless cards out and some of the newer technology . . . with phones and so forth."

Consumers, some operators still not sold

Jeff Chasney, CKE Restaurants Inc.'s executive vice president of strategic planning and chief information officer, would rather wait until that day comes before installing contactless-payment terminals in Hardee's or Carl's Jr. locations.

"This thing has been hyped at least two years, and it's still only a few percentage points of use," Chasney said.

He said CKE did an informal internal poll of its staff and found that less than 5 percent had contactless cards. The company also studied other chains and how their customers used the technology.

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But Vanderhoof said that fears of contactless-payment security are unfounded.

"Contactless credit cards and debit cards are actually as safe or more safe than the magnetic-stripe cards that people are using," he said.

Unlike mag-stripe cards, from which thieves can copy the account number and security code with a device known as a skimmer, contactless cards do not allow anything to be copied from the card itself.

Still, Chasney is skeptical and said he believes that cell phones with next-generation contactless technology will supplant chip-embedded cards.

He envisions such cell phones replacing the need for plastic cards, since the phone could contain information about each user's card—and transmit transaction information securely. Transactions would still be initiated by a tap, but would require the use of a pin for enhanced security. The chip itself also would be able to process more information.

"I just don't believe in its present form (contactless-card technology will) mature into widespread use," Chasney said.

Vanderhoof and the contactless-card industry believes otherwise. He said as more cards enter the market, more consumers will use them.

"We're past the stage of whether or not this is a technology that may or may not catch on," Vanderhoof said. "Just how quickly it's going to grow is really the only question."