This article explores the evolution of contactless payments, whose use will likely increase and could have an important impact on the payments landscape.

Terri Bradford

English

Research Papers in Economics

he U.S. payments system continues to transition 
from one that was predominantly paper-based 
to one that is increasingly electronic. While 
increased use of automated clearinghouse (ACH), debit 
card, and credit card payment options have sharply reduced 
the market share of check payments, the number of 
cash payment transactions also is likely to be reduced by 
conversion to electronic transactions.  
It is reported that the number of debit and credit cards 
in consumers’ wallets is not expected to grow rapidly in 
the coming years (ATM & Debit News 10/06/05). So, one 
challenge for networks and issuers is to get consumers to 
use their cards more, in particular as a replacement for 
cash. Toward that end, the card industry has employed a 
number of product development and pricing strategies to 
increase acceptance of card products by merchants who 
deal primarily with smaller-ticket sales. Speciﬁc industries 
targeted include theaters, quick-service restaurants, drug 
stores, service stations, and convenience and specialty 
stores. Just this past month, for example, Visa announced 
that it will ease further small-ticket restrictions, lowering 
the fees it charges for certain retailers to accept credit and 
debit cards for purchases of under $15 and raising to $25 
Contactless: The Next Payment Wave?
by Terri Bradford, Payments System Research Specialist
D e c e m b e r   2 0 0 5
the maximum purchase for which qualifying merchants 
may accept a credit card without a signature (American 
Banker 11/1/05).
These strategies appear to be producing results: 1) 
consumers are increasingly using cards for purchases at these 
newly targeted retail locations, 2) these retailers and their 
consumers are experiencing faster transaction times, and 3) 
average ticket sales are higher for card payments versus cash 
payments. So, with card payments making inroads into the 
market share of cash payments, what could be next?
The answer: making card payments an even faster and more 
convenient option. Enter contactless capabilities. Just as 
the magnetic stripe expedited card payments as compared 
to impression machines and telephone authorization, 
contactless technology has the potential to do the same.
What are contactless payments?
A very simpliﬁed explanation of contactless payments is that 
they are “traditional” payments (credit and debit cards, for 
the most part) that utilize microchips and radio frequency 
identiﬁcation or near ﬁeld communication technologies to effect 
transactions without physical contact between the payment device and the point of sale (POS) terminal. The contactless 
element, however, can be embedded in “nontraditional” items 
such as key fobs, watches, or even telephones. 
ExxonMobile was one of the pioneers of contactless payments 
in the United States, having launched its SpeedPass product 
in 1997. SpeedPass enabled ExxonMobile’s customers 
to pay at the pump with the wave of a key fob. Though 
SpeedPass was piloted for use at other merchant locations, 
such as McDonald’s and Stop and Shop, those pilots were 
discontinued. Today, the more than 6 million active SpeedPass 
devices remain proprietary to ExxonMobile locations. 
In 2003, American Express launched its ExpressPay 
“waveable” product, and MasterCard introduced PayPass, a 
“tap and go” product. And, in 2004, Visa introduced Visa 
Wave. Whether waved or tapped, all employ a standard, open 
technology and can be used for payment at any merchant that 
is able to accept it (The Philadelphia Inquirer 10/27/05). 
However, until recently, the deployment and adoption 
of contactless payments had been relatively modest. So 
what is the impetus for the renewed interest in contactless 
payments? Widespread and growing merchant acceptance 
of card payments in small-dollar settings and subsequent 
consumer adoption have created a ripe atmosphere. And 
card issuers, realizing the opportunity to capitalize on the 
revenues to be gained by converting cash transactions, have 
demonstrated both an interest and willingness to explore ways 
to differentiate their card products.
Issuer deployment
MBNA has been issuing contactless afﬁnity cards targeting 
sports stadiums in a host of cities. And, during the last 
several months, issuers like Citibank, HSBC, JPMorgan 
Chase, and Key Bank have announced partnerships and/or 
plans to deploy contactless payments products. Citibank has 
announced that it will issue 2.5 million debit cards and key 
fobs with MasterCard’s PayPass technology.  HSBC Group’s 
U.S. banking unit began replacing existing customers’ debit 
cards with new cards embedded with MasterCard’s PayPass 
technology. It reportedly has plans to issue cards to more 
than 1 million existing and new customers by year-end 
and eventually will reissue to its nearly 3 million debit card 
customers. JPMorgan Chase has begun deploying its product, 
“blink,” in both MasterCard- and Visa-branded cards in 
Atlanta, Denver, New York, New Jersey, and Connecticut. In 
addition, Key Bank has begun issuing MasterCard’s PayPass 
cards for debit transactions to its 1.5 million checking 
account customers. With all of this activity, it appears that 
contactless devices will be widely distributed to consumers in 
the weeks and months to come.
Not only are issuers deploying cards, but also other 
contactless devices are on the way. Citibank has reported 
plans to roll out a contactless key chain attachment to its 
estimated 2.5 million debit card customers by the end of this 
year. And, it has plans to offer its customers a money clip 
that can substitute for a credit card sometime next year. Also, 
MasterCard has developed prototypes of jewelry and watches 
that double as credit cards. Discover reportedly is testing 
contactless cell-phone payments with vendors that accept 
ExpressPay and PayPass products. In addition, KeyCorp’s 
banking unit also is exploring non-card devices. It all sounds 
a bit like the old television show “Get Smart,” doesn’t it? But, 
the motivation is product differentiation.
Merchant acceptance and  
early results
As small-ticket merchants began to accept card payments, 
some opted to install POS equipment that was already 
contactless-enabled. Others, having experienced the increase 
in speed at checkout that has come with cards, now are 
interested in the additional time that can be saved with 
contactless payments.  
Drug stores like CVS Corporation, Duane Reade, and 
Walgreens; quick-service restaurants like Arby’s, Carl’s 
Jr., Cold Stone Creamery, Kentucky Fried Chicken, and 
McDonald’s; movie theater chains like Regal Entertainment 
Group and AMC Theaters; 7-Eleven and Sheetz convenience 
stores; and a host of NFL stadiums (Kansas City Chiefs, 
Washington Redskins, Seattle Seahawks, Baltimore Ravens, 
Philadelphia Eagles, and New York Giants) all have begun to 
accept contactless payments.
Aite Group reports that CVS, the drug store chain, has 
found the average contactless transaction takes 12.5 seconds 
versus 26.7 seconds for a magnetic-stripe card payment and 
D e c e m b e r   2 0 0 5   •   P A G E   233.7 seconds for a cash transaction. In addition, they have 
reported that the average transaction value with a contactless 
payment is 20 percent higher than that of a cash transaction. 
Sheetz, the convenience store chain, also has reported that 
contactless payments are faster than magnetic-stripe and cash 
payments, although, in their case, cash is somewhat faster than 
magnetic stripe. 
Clearly, there is much to be learned about the beneﬁts that 
contactless payments may offer parties involved in POS 
transactions. Further, there remain unanswered questions, 
such as what are the operational and fraud risks, and how 
will interchange fees impact merchants’ decisions to accept 
contactless payments? But, momentum seems to be building for 
contactless payments, and a rise in their use seems very likely.
D e c e m b e r   2 0 0 5   •   P A G E   3
payments system research  Web site: www.kansascityfed.org/home/subwebs.cfm?subweb=9
The Payments System Research Department of the Federal Reserve Bank of Kansas City is responsible 
for monitoring and analyzing payments system developments. Staff includes:
The views expressed in this newsletter are those of the author and do not necessarily reﬂect those of the Federal Reserve Bank of 
Kansas City or the Federal Reserve System.
Fumiko Hayashi 
Senior Economist
Fumiko.Hayashi@kc.frb.org
816-881-6851
Rick Sullivan 
Senior Economist
Rick.J.Sullivan@kc.frb.org
816-881-2372
Terri Bradford 
Payments System Research Specialist
Terri.R.Bradford@kc.frb.org
816-881-2001
Nathan Halmrast
Research Associate
Nathan.Halmrast@kc.frb.org
816-881-4721
Zhu Wang
Economist
Zhu.Wang@kc.frb.org
816-881-4742
Stuart E. Weiner
Vice President and Director
Stuart.E.Weiner@kc.frb.org
816-881-2201

Contactless: the next payment wave?

http://www.kansascityfed.org/PUBLICAT/PSR/Briefings/Dec05Briefing.pdf

Contactless: the next payment wave?

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Research Papers in Economics