Walmart snubs contactless payments -- but should small businesses?

Walmart snubs contactless payments -- but should small businesses?

For contactless payments to move full speed ahead, a number of parties have to work together. Card networks need to make cards with contactless payment capabilities. Merchants need to update their payment terminals. And consumers need to be willing to use the technology.

In May 2012, Walmart (one of the mega retailers that could make or break developing payment technologies) delivered what many consider a blow to contactless payments, telling payments news leader PaymentsSource (subscription required) that it has no plans to support them.

Yet small businesses have needs that are drastically different from those of retail giants like Walmart. Rather than letting Walmart's lead determine their futures, retailers of all sizes should consider the advantages and challenges of contactless payments before deciding whether to adopt this technology. The bottom-line question is this: What can contactless payments do for your business?

What are contactless payments?
Contactless payments are non-cash payment transactions in which there does not need to be any physical contact between the point of sale (POS) and the payment device. Contactless payment devices come in a variety of forms, including mobile phones, key fobs and traditional credit and debit cards that have been outfitted with chips for contactless payments.

"Contactless payments" is an umbrella term that encompasses several interrelated types of technology. First of all, there's EMV, the "chip-and-PIN" technology that's already widespread in Europe. EMV cards are more difficult to counterfeit, meaning a significant decrease in skimming and other types of card-related fraud associated with magnetic-striped cards.  Because card fraud can create time-consuming and expensive liability issues for small merchants, EMV cards present a potential money-saver.

Then there's near field communication (NFC) technology. NFC allows two devices (a smartphone and a payment terminal, for example) to exchange information without touching. NFC-enabled terminals can also read EMV chips, allowing the cards to be waved in front of or tapped on a payment terminal (no swiping required). That's why EMV cards are often considered the first steps toward the wide-spread use of NFC smartphone payments and mobile wallet apps.

Contactless challenges
A conversion to contactless payments is not an easy or inexpensive process for merchants. Mercator Advisory Group's EMV Essentials for the U.S. Merchant research brief states, "To accommodate EMV, every POS terminal and every ATM's card acceptance sub-system will require either replacement or enhancement."

While these upgrades are significant and costly, both MasterCard and Visa have offered incentives to retailers who upgrade their equipment to EMV-compliant technology that accepts both contact-based and contactless payments. One of these incentives includes the ability to opt out of yearly data security compliance audits if a certain percentage of transactions involve EMV technology.

Yet such incentives may not be enough for Walmart, according to PaymentsSource. Because of its size and scope, it's already invested a lot of time and money in data security, leaving no good reason for updating all its payment terminals to accept contactless payments. While Walmart plans to roll out acceptance of EMV chip-and-PIN cards in the U.S. over time, it seems to be embracing contact-required terminals that accept both magnetic stripe cards and EMV chip cards. It is decidedly opposed to completely contactless payments.

NFC applications may be less secure than EMV cards, Mario de Armas, Walmart senior director of international payments, told PaymentsSource. So the benefits of upgrading to more expensive NFC-enabled equipment is questionable. Merchants may be better off simply getting contact-based card readers that accept EMV cards, according to de Armas.

"My advice to merchants is, save money and don't focus on contactless, just worry about contact (EMV) card readers," de Armas told PaymentsSource.

Contactless advantages
While large retailers like Walmart may see converting to contactless as an unnecessary inconvenience, nimble small businesses might find benefits and cost savings in the technology.

For retailers, the most touted -- and valuable -- advantage of contactless payments is the potential for increased revenue. Research from a variety of card networks and merchant processing suggests that contactless payments make customers buy more.

MasterCard Advisors' PayPass Adoption Study (released May 2012) analyzed the changes in purchasing behavior after customers started using MasterCard's contactless-enabled card, PayPass. Within the initial 12 months of their first contactless transaction, account holders using PayPass spent an average of 30 percent more -- regardless of the spending segment researched -- than they had before they had that card.

Meanwhile, the results of an American Express ExpressPay pilot test show that average transaction size increased 20 percent to 30 percent compared to cash spending at participating merchants, according to the Smart Card Alliance report, Contactless Payments: Delivering Merchant and Consumer Benefits. Some fast-food merchants have reported sales increases of 10 percent to15 percent with contactless payments, according to S1 Corporation's 2010 Contactless Payments: Is the Timing Right for Retailers?  report.

Revenue lifts and money savings come from a variety of sources, according to the S1 report and First Data's 2010 white paper, Contactless Payments: The 'Tipping Point' Is at Hand. Key contactless financial benefits for retailers include:

• Merchant service charge savings. Although cash is still the "free" transaction for merchants, service fees for low-value contactless payments are lower than those charged for other card payments (especially for small businesses dealing with low volume), according to First Data. Exact rates vary by acquirer.
• Possible competitive benefits. Contactless payments save time, leading to faster checkout transactions and shorter lines, according to First Data. While contactless payments are only a few seconds faster than using alternative forms of payment, the time savings may increase with technology improvements.
• Increased customer loyalty. Customers who "value the expediency of contactless payments" are likely to come back to the retailers that let them use their mobile wallets, according to First Data.
• Unattended use capability. Hiring an additional employee is a relatively big expense for small businesses. Because contactless readers allow the customer to complete a payment unassisted by a cashier, they could get more customers comfortable with unattended payment terminals. That could help retailers "provide more customer convenience without adding to personnel costs," according to S1's report.

See related: Small business owners find silver lining in cloud-based POS systems, Eventbrite enters portable register fray

Published: June 6,2023