June 13, 2005

7-Eleven's CIO: Contactless Payment Is Here

By Evan Schuman, Ziff Davis Internet

Contactless payments—whether they're made using a fob dangling from a keychain at a gas station, an RFID chip embedded in a cell phone or a new contactless credit/debit card—have now moved from the experimental to the real-world stage.

This is primarily thanks to a pair of crucial developments announced in June by Chase Manhattan of JPMorgan Chase & Co.—the world's largest issuer of credit cards—and 7-Eleven Inc., the world's largest convenience store chain, which brings in about $41 billion a year with some 27,100 stores worldwide.

Those two coordinated announcements are part of a trend with its goal being to simplify retail transactions by allowing customers to wave identifying devices over a reader and have the amounts deducted automatically from their accounts.

Chase Manhattan and 7-Eleven are far from the only companies to investigate contactless payment systems. But together, the two announcements add legitimacy and stability to the approach, which has been used most successfully in transponder-based toll-road payment systems like E-ZPass and single-company, keyfob token-based systems such as Exxon Mobil Corp.'s SpeedPass system.

Adding a large bank and a well-known retailer to those ranks could create the kind of impact for contactless payment systems that Wal-Mart Stores Inc. made a couple of years ago by decreeing that many of its suppliers use RFID (radio-frequency identification) tags to help track inventory.

Wal-Mart wasn't the first RFID adopter, but it was the largest and the most significant user of the technology, both because of its size and the number of companies it could draw into the RFID pool.

Chase also isn't the only financial-services company pressing for contactless payment. MasterCard International Inc., Visa International Service Association, and American Express Co.—as well as some smaller credit card issuers—are aggressively pursuing contactless card strategies.

Several traditional retail companies have experimented with approaches to contactless payment, but so far, few other than ExxonMobil have gone further than small trial installations.

At 7-Eleven, testing began three years ago with a two-store trial in Texas. "We saw lots of positive indications from that pilot," said 7-Eleven CIO Keith Morrow. Customers using the cards shopped at the stores more frequently than they had before, and spent more during each trip. "We've been very aggressively pursuing this for more than two years."

The chain also conducted opinion surveys of the participants in those trials. "They just felt, 'I was more in control of the transaction. I came up and, when it was time to pay, instead of swiping, waiting, signing, getting a receipt, it was one step. I had the control. I beeped at the terminal and then I was on my own way, out the door, in the normal time I would still be trying to sign the pen-pad or get a receipt,'" Morrow said.

Initially, getting existing POS systems to accept contactless payments should be relatively painless, because it only requires that a small unit be added on to a card-swipe machine to allow it to read contactless devices.

But Morrow points out that if the devices are successful, the POS hardware sophistication would likely have to improve.

"I think it's going to impact POS if the consumer adoption drives different uses.

Especially if it drives more ways—like it has in Japan—of providing a loyalty and couponing, then I think that could drive the need for more robust transaction at the POS," Morrow said. "At the beginning phase, it has been a very easy hardware piece to integrate in, as a reader, to get into the game. But I think as we rely on the chip to do more things for the customer, it could drive some more requirements."

Click here to hear audio of Morrow detailing how the Japanese use contactless payment and why that might apply to the U.S. (Audio 2 min., 38 sec.)

But not everyone believes adoption will happen that quickly. Chase Manhattan officials, who are aggressively pushing contactless payment for their own objectives, say the rollout will be slow, with contactless cards only going out to existing cardholders as new cards are issued when the current ones expire. That could take many years before it's a dominant force in the market, Chase officials said.

A recent Jupiter Research survey also anticipated a slow ramp up, despite consumer desires. Nearly half of the U.S. online consumers "expressed interest in the speed and convenience benefits of proximity payments," said David Schatsky, a Jupiter research senior vice president.

"We have built a forecast model to estimate the adoption and usage of contactless--also called proximity—payments.

POS systems will have to gain power if retailers start using it for loyalty and more data-intensive uses, Morrow says. (Audio 41 sec.)

In the most likely of the scenarios modeled, JupiterResearch estimates that proximity payments will represent only 2.8 percent of all retail transactions in 2009. So we don't see floodgates about to open.

A lot depends on whether card issuers and payment networks get behind the technology and subsidize its adoption by replacing cards and (adapting) POS (readers) ahead of their normal replacement cycle and market the benefits to consumers as well," Schatsky said.

"It's possible that some customers, empowered to make purchases more quickly than with either card or traditional credit cards, may end up spending more, but it's hard to say for sure, and we suspect the effect on overall spending will be so slight that we did not account for such incremental spending in our forecast model."

The trials at 7-Eleven were promising, but what made the contactless move inevitable to Morrow, he said, was a trip last December to Tokyo, where he visited some of the chain's 11,000 stores in Japan. That is roughly twice the number of 7-Elevens that exist in the United States.

Contactless payment in Japan was almost nonexistent one year earlier, but by December 2004, Morrow said, he saw it as a very popular and accepted form of payment everywhere from small retail operations to mass transit. "We sell convenience, we sell speed," he said.

Testers were impressed by the speed, control and convenience of contactless. (Audio 48 sec.)

Japan's culture is extremely time-compressed, he said, and they value even relatively small improvements in productivity. "They're a very concentrated population with a lot of mass transit, a lot of people on the move," Morrow said. "They love electronics. They love their cell phones. Very small living spaces with very small kitchens. Some parallels certainly exist in the U.S. urban areas."

Another key factor that pushed Morrow to open the contactless floodgates, he said, is the recent miniaturization of RFID chips.

When 7-Eleven started contactless trials three years ago, "We put them on the back of an ID badge that was about the size of a credit card. The RFID chip and the antennae were more than half of the back of the card. It was kind of an unwieldy size for RFID chips and the readers were also pretty large and clunky," he said. "The size of the chip now is probably one-twentieth of the size when we did the pilot."

And the further adoption that 7-Eleven and Chase hope to spur will, in theory, push size reductions even more quickly. "There are already RFID chips that are a very few microns: the size of a pinhead" in research-and-development formats, dubbed "'RFID dust,'" Morrow said. "We hope to drive the adoption."

That miniaturization will mostly fuel the next stage, in which the payment devices move beyond credit cards into cell phones, fobs and various other small devices.

"In Tokyo, they have gone very rapidly from cards to cell phones. They have embedded the RFID chip and it interacts with the cell phones themselves," allowing the payment system to use the phones' screens and speaker systems, Morrow said.

"So you can see your purchases, see your retail receipts right on your cell phone. You can return and they can also do couponing through that," he said.

But Morrow added that he doesn't expect similar deployments to happen as quickly in the United States. "The United States is still a credit card market," Morrow said, adding that cell phone issuers and credit card issuers must work together to make the next transition. "We've got to get those two groups cooperating and working together, and we're not quite there yet."

Although it will be a difficult move in the United States, "a cell phone offers a lot more utility than a credit card," he said.

Security is another crucial concern for 7-Eleven and contactless payments. Just as in the early days of e-commerce more than a decade ago, consumers will need to get comfortable with this technology and not fear that the unknown necessarily translates into higher risk.

From the retailer's perspective, Morrow said, contactless security is equally strong as traditional magnetic stripe cards in some respects and stronger in others, depending on the nature of the security or fraud threat in question.

The fear that identity thieves will steal personal information by sitting in a supermarket or a 7-Eleven with a wireless laptop—akin to the very real security problems with many wireless corporate LANs and so-called "wardriving" parking-lot access thieves—is not an issue because of the extremely and deliberately short read-range of contactless cards.

Click here to hear Morrow discuss what he sees as the security problems contactless will have to overcome and why (Audio 1 min., 7 sec.)

It will take time to educate consumers, he said. "Let's say there have been some issues—in the early days—about what if [the RFID tag] could be irradiated or read very remotely, let's say 'across the room' or 'as I drove by.' As people have become more educated about the technology, [they have come to realize that] it's all a product of that antenna and what distance is engineered into the product. Ours is less than two inches," Morrow said.

"So, yes, some people could be concerned that somebody could read that chip or pick up the signal, but it's such a close proximity that basically it's either a matter of tapping it against the reader or within an inch or so, so it would be very difficult to orchestrate something like that," he said.

The cards themselves do not require the PIN needed for a typical debit card or ATM card and, for many 7-Eleven purchases, they will also not require a signature. Most banks are initially requiring signatures only for contactless purchases of more than $25.

With the lack of a PIN or signature needed for many smaller purchases, one consumer fear is that thieves will physically steal the cards and then run up bills.

The consumer defense is to alert the bank, which will then immediately void the card. Many thieves know this, so they will quickly use the card, figuring that it will be useless to them in an hour or two.

The greater industry concern today is that thieves steal magstripe cards, quickly duplicate them and then return them to the consumer. This can be done in the kitchen of a restaurant or even by a waiter or store clerk using a small concealed scanner. This sidesteps the earlier defense because the consumer doesn't know that the card has been "stolen," and could potentially remain unaware for weeks until the extra charges start appearing.

However, as the nature of contactless cards makes them much more difficult to copy than their magstripe parents, many in retail and banking see them as more secure.

Contactless cards are also seen as more secure because—in theory—they never leave the consumer's possession, providing much less opportunity for even a quick copying attempt. At restaurants, for example, servers could bring small contactless readers to the table and allow consumers to quickly scan their own cards. Retailers will presumably develop such procedures as contactless payment becomes more widespread.