While smart cards have replaced magnetic strip cards for point-of-sale and ATM transactions in most other countries, the United States has been slow to adopt chip-driven technology despite improved security for transacting payments. For example, one form of smart cards, the EMV (Europay, MasterCard, Visa) chip and PIN-based card programs, is gaining wide acceptance outside the United States.
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But one U.S. industry has found a way to make sense out of contactless payments—the mass transit sector. Transit providers in major cities are moving from proprietary coin and paper-based systems to card-based systems, advancing the use of contactless cards. A discussion paper authored by the Philadelphia Federal Reserve Bank's Payment Cards Center analyzes the influence of the transit industry on electronic payments and suggests that transit's adoption of contactless card payments is likely to drive increased use of electronic payments overall. In fact, the paper describes a potential future system in which transit also acts as an "open-platform merchant" capable of accepting open-loop major card company-sponsored credit and debit cards.
Will contactless adoption achieve sufficient critical mass necessary to transition to the magnetic stripe? As with other emerging payments, future network effects are difficult to predict, and both sides of the argument can be compelling.
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The benefits: Contactless technologies fight fraud
Proponents of contactless payments assert their superior benefits. First of all, their high transaction speeds support mass transit applications, but more importantly, contactless technologies are more resistant to fraud. Magnetic strip cards are vulnerable to counterfeiting because the information contained in the strip can be skimmed at the reader location and then cloned, thereby permitting unauthorized use. In contrast, the near-field chip technology used in contactless smart cards is difficult to duplicate and promotes a more sophisticated and secure processing environment. Another advantage of contactless technology is its higher memory capacity than magnetic which can be used to promote improved identity authentication at the merchant's point of sale.
Credit card fraud plummeted for point-of-sale transactions in the United Kingdom after chip cards were deployed. According to the U.K. Card Association's January 2010 release of new card and banking fraud figures, the success of chip and PIN has reduced counterfeit card fraud losses to their lowest level since 1999. While fraud in online channels increased in response to smart card deployment, as fraudsters moved to more vulnerable environments, this latest report cited a decrease in card-not-present fraud. A loss of 19 percent is purported to be the first year-on-year decrease and is attributed to the use of more sophisticated fraud screening detection tools by banks and merchants.
| Annual plastic card fraud losses on UK-issued cards 2005 to 2009 | |||||||
| Card Fraud Type (on UK-issued credit and debit cards) | 2005 | 2006 | 2007 | 2008 | 2009 | +/-(08/09) | |
| Phone, Internet, and mail-order fraud (card-not-present fraud) | £183.2m | £212.7m | £290.5m | £328.4m | £266.4m | -19% | |
| Counterfeit fraud (skimmed/cloned) | £96.8m | £98.6m | £144.3m | £169.8m | £80.9m | -52% | |
| Fraud on lost or stolen cards | £89.0m | £68.5m | £56.2m | £54.1m | £47.9m | -11% | |
| Card ID theft | £30.5m | £31.9m | £34.1m | £47.4m | £38.2m | -20% | |
| Mail non-receipt | £40.0m | £15.4m | £10.2m | £10.2m | £6.9m | -32% | |
| TOTAL | £439.4m | £427.0m | £535.2m | £609.9m | £440.3m | -28% | |
| Contained within this total: | UK retail face-to-face transactions | £135.9m | £72.1m | £73.0m | £98.5m | £72.1m | -27% |
| UK cash machine fraud | £65.8m | £62.0m | £35.0m | £45.7m | £36.7m | -20% | |
| Source: UKCARDS Association: http://www.theukcardsassociation.org.uk/media_centre/press_releases_new/-/page/922 | |||||||
Economic reality—for now
If the industry is concerned with fraud, and contactless payments are more secure, why is the United States resistant to change? The answer lies in the "chicken-and-egg" problem, as adoption relies on the need for contemporaneous adoption by both merchants and consumers. Consumers are accustomed to swiping their cards and may not realize their payment cards are enabled with smart technology in addition to the mag stripe. Merchants want safer payments but remain hesitant to invest in contactless hardware technology because of concerns that more advanced alternatives could follow in the near-term, forcing them to allocate additional capital. While millions of chip cards have been issued in the United States, the cost of hardware deployment at the point of sale represents a hurdle to widespread adoption.
Overcoming hurdles in the transit industry
According to ContactlessNews a number of transit providers are working with the major card networks to trial the issuance of credit and debit cards. One noteworthy example is the Utah Transit Authority of Salt Lake City, which has employed a system on an open-payment network. The Utah transit system accepts major contactless cards such as Visa payWave, MasterCard PayPass, and American Express ExpressPay. Contactless has proven beneficial in the transit sector as collection efficiencies have driven down operational costs and created convenience for the consumer by eliminating the need to purchase fare media from station agents, often through a a card-based payment. Whether or not this positive consumer experience in transit can drive more wide-scale adoption in the United States is certain to be a hot debate topic for some time to come.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum