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By Pike, Kelly | Independent Banker, February 2006 | Go to article overview
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Pike, Kelly, Independent Banker

Bank cards, contactless gadgets aiming for tiny everyday cash-and-coin payments

Mark Friedman has a payments dream. He pictures the day when he can hop on the Massachusetts Pike on his way to a meeting in Boston and not stop to pay the $2 toll. The same device would save him from digging for quarters in the backseat of his car by electronically paying the parking meter, shorten the time to pay for a cup of coffee and a scone at a café, and let him buy a candy bar from a vending machine.

That day may not be far off, according to Friedman, president and CEO of Peppercoin, a Waltham, Mass., company that develops technology to facilitate small payments. Advances in technology, including contactless technologies and micropayments, and shifting consumer preferences are changing the look and use of credit, debit and stored-value cards.

From the days of metal tags and embossers to today's plastic cards with magnetic stripes, payment cards have offered convenience, flexibility and consumer rewards capabilities that have dramatically changed the way Americans make payments-and will continue to do so in the future.

Wallet cards are clearly outstripping cash and checks when it comes to making purchases. Americans charged an estimated $2.7 trillion in 2005, about 13 percent more than the year before. Of that total, $1.9 trillion was credit card charges and approximately $800 billion was debit card charges, according to CardData. Just 45 percent of consumers' monthly payments were made with cash or checks, down from 57 percent in 2001, according to a Dove Consulting study.

Much of that growth is in debit and prepaid cards. One-third of in-store purchases are made via debit card, compared with 21 percent six years ago. Meanwhile, 32 percent of consumers report using gift or prepaid cards to make at least one purchase per month. In 2003, just 12 percent did so.

"We see enormous growth in consumer interest in accessing ready funds" (funds consumers have on hand), explains Niki Manby, vice president of market and technology innovation for Visa USA. "Consumers want [direct] access to those funds ... whether it's putting it into a prepaid account or using a check card."

Speed is Sacred

Consumer desire for immediacy and convenience is the driving force behind the evolution in card payments. With less free time and even less patience, consumers want to get in and out of checkout lines as quickly as possible.

How concerned are they with the speed? While credit transactions take about 30 seconds to complete and debit transactions, 26 seconds, check payments take about 75 seconds. In a Visa USA/National Markets Measures poll, 49 percent of consumers surveyed reported feelings of frustration when stuck behind someone paying by check. Another 40 percent moved to another line and 11 percent said they left the store without purchasing anything.

This in and out focus held by consumers is a big reason for the push by major card issuers to develop contactless cards-cards that need only be waved at a devise, rather than swiped to initiate a transaction. As expected, these transactions are even faster.

A contactless transaction can shave 12 to 18 seconds from transaction times. They averaged about 12.5 seconds in a recent pilot at drugstore chain CVS in Phoenix. The company was so pleased it implemented 40,000 contactless payment terminals throughout its chain of 5,400 stores in 2005.

Contactless payments have been available in some arenas for years-most notably transportation. Drivers along the East coast have E-Z Pass, a transponder that automatically deducts tolls from a driver's prepaid account when passing through a toll both. And mass transit riders in Washington, D.C., can wave a prepaid SmartTrip pass over a touch pad to ride the subway or buses. Recently, Citigroup has taken the SmartTrip card to the next level, testing a combined stored-value card for transit fares with a regular magnetic stripe card that can be used for other purchases.

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