The Truth about Contactless Payments

1 The Truth about Contactless Payments 1 The Truth about Contactless Payments Executive Summary Contactless Payments are an efficient and convenient way to purchase goods and services. Consumer uptake of this innovate technology has been strong and positive, providing benefits for merchants and customers. As the volume of transactions rapidly grow, the level of fraud, as a percentage of this growth continues to decrease. Australian consumers will only continue to fuel this growth whilst they have the trust and confidence in the payment platform to do so. In order for Australia to continue to be at the forefront of payment innovation and adoption, ongoing investment and focus on security is critical. Importantly, should any lost or stolen Contactless card ever be misappropriated, any ensuing transaction is traceable and the consumer is protected by zero liability (if using MasterCard or Visa branded products).

2 March 2016 The Truth about Contactless Payments . 2 Introduction Technology and innovation are transforming the financial services industry. Financial institutions are striving to continually improve the customer experience with banking making it safer, easier, convenient and competitive. Once such innovation has been the introduction of Contactless Payments . But has this game-changing technology, which offers speed and convenience for consumers, made an impact on the safeguards from financial crime? Innovation in Financial Services Innovation within the financial services sector is being driven not only by existing organisations but also by the constant flood of new entrants into the global marketplace. Increased consumer uptake of new technologies, particularly mobile devices, has led to greater innovation in the sector, primarily in relation to Payments , investments, credit facilities and user experience.

3 The financial services sector has embraced innovation in technology, services and platforms. This need to innovate is often referenced in the context of disruption - the change that occurs when new digital technologies and business models affect the value proposition of existing goods and services. Understanding the disruptive context of a marketplace is essential in judging whether innovation is responding adequately to a market need. Without such an understanding, many companies may only act tactically on innovation. Australia has benefited from global innovation applied locally, with Australian financial services being at the forefront of strategic innovation and disruption. Examples of this include Aussie Home Loans offering alternate sources of home loans from banks; numerous providers of alternative payment systems; online brokers offering low-cost stock market transactions; and now the digital currency revolution.

4 Australia s Payments landscape continues to change as technological advances impact on the way consumers pay. Today, the majority of cards are issued with the more secure chip technology as well as the traditional magnetic stripe; and many cards also offer Contactless functionality. about the Author Nigel Phair is an influential analyst on the intersection of technology, crime and society. He has published two acclaimed books on the international impact of cybercrime, is a regular media commentator and provides executive advice on strategic digital issues. In a 21 year career with the Australian Federal Police he achieved the rank of Detective Superintendent and headed up investigations at the Australian High Tech Crime Centre for four years. about the Centre for Internet Safety The Centre for Internet Safety at the University of Canberra was created to foster a safer, more trusted Internet by providing thought leadership and policy advice on the social, legal, political and economic impacts of cybercrime and threats to cyber security.

5 The Centre is hosted within the Faculty of Business, Government & Law at the University. The University of Canberra is Australia's capital university and focuses on preparing students for a successful and rewarding career. The Truth about Contactless Payments 3 Two driving forces for consumer adoption of new payment technology are convenience and security. Australian consumers, whilst early and eager adopters of innovation in financial services, still seek high levels of trust, confidence and safety with their service provider. A prime example is EMV1, which is the global standard for credit and debit payment cards based on chip card technology. Often referred to as chip and pin it has been deployed in over 80 countries and has been shown to reduce counterfeit card fraud. EMV cards generate a unique numeric code for every transaction which is the key to reducing fraudulent card activity. This non-negotiable component of the customer/financial services provider relationship is essential as the sector leads the way in increasing Australian productivity and user experience.

6 Innovation, such as the introduction of Contactless Payments provide benefits to consumers and retailers alike, in terms of higher levels of control and convenience for consumers and higher throughput for retailers. Return on Investment The Australian financial services sector benefits from the global investment on research and development to test, create and deploy innovative consumer and business experiences. This includes Payments technology where the large scale of global Payments means the investment can be leveraged in multiple markets. In times of significant competition from existing players and start-ups, gaining a competitive advantage through enhanced customer experience is key, as well as it being imperative to measure the return on such an investment. The return on innovation investment may be calculated by comparing the profits arising from a new service, to the research, development and other costs generated in creating the service.

7 With regard to Contactless Payments there are other indirect costs involved, including the creation of cards; the purchase, rollout and audit of point-of-sale machines; fraud detection and analytics; and the marketing and education of the benefits and risks with such Payments . These are ongoing and not-insignificant investments in both people and resources. Such efforts are inline with the introduction and ongoing functioning of other financial services technology, such as ATM use and internet banking. Contactless Payments Contactless payments2 are becoming increasingly common on a range of devices including pre-paid, debit and credit cards; wearable devices, such as watches and wristbands; and mobile devices, such as smartphones and tablets. 1 EMV is the global standard for credit and debit payment cards based on chip card technology taking its name from the card schemes Europay, MasterCard, and Visa - the original card schemes that developed it.

8 2 Contactless Payments greater than $100 require a PIN verification. The Truth about Contactless Payments . 4 The underlying technology for all of these Contactless payment devices is the same. The Contactless device contains an antenna so that when it is touched against a Contactless terminal, it securely transmits purchase information to and from the terminal. They are designed to allow consumers to make low value transactions quickly and conveniently. In Australia, there has been a 42% growth in Contactless card accounts between 2014 and 2015, along with an increase in average frequency of use per unique Contactless account. Contactless penetration has grown to the point where 74% of all MasterCard in-store transactions are now Contactless . Specifically: 89% of tapped transactions are under $50. 67% of tapped transactions are below $25. 31% of tapped transactions are below $ Benefits for Merchants The introduction of Contactless Payments has allowed merchants to enjoy an array of benefits.

9 The primary benefits include lower costs (as a result of fewer requirements to handle cash), improved operational efficiencies, and reduced maintenance required by Contactless readers. In merchant segments where speed and convenience are key to merchandising and customer service, Contactless Payments also translate into improved customer acquisition and retention. Merchants also benefit from higher sales and customer satisfaction. The cost for a merchant for a Contactless payment is $ per transaction versus $ for a contact transaction. Additionally, the time taken for a transaction to take place, with a Contactless payment average of 20 seconds versus 38 seconds for a contact payment. As a 2 second change in tender time implies a one cent ($ ) change in merchant costs, small efficiency gains or delays can make a large difference to the total resource cost of the transaction and to a merchants bottom Further illumination of the low costs per transaction of Contactless cards is the merchant cost of card-not-present transactions of $ for debit cards and $ for credit By issuing secure Contactless payment devices, financial service providers are not only supplying consumers with a more convenient payment mechanism, they are also increasing transaction volumes.

10 Contactless Versus Cash In todays economy cash often attracts a discount for the purchase of a good or service. On a per transaction basis, cash appears relatively inexpensive compared to other payment methods and this may explain why some merchants promote the use of cash. However, the cost of cash is not trivial; measured as a proportion of the sales value at the average transaction size, the cost of a cash transaction is around Due to the extraneous time costs involved, it costs small business around four times as much per transaction to accept Payments than big business. There may, of course, be other motivations for encouraging cash Payments ; the business may need cash on hand to offer cash-out at the point of sale or to pay staff wages, or may prefer cash as it facilitates tipping. The Truth about Contactless Payments 5 Cash is also favoured in the informal economy , where businesses may prefer cash to keep transactions or revenue from being detected.