Simplicity

Reports of the death of cash have long been exaggerated; despite years of talk, a cashless society eludes us. Yet it is slowly edging closer with debit card spending set to overtake cash spending, by value, for the first time in 2010 — internet payments accounted for one in four card transactions over Christmas.

Contactless payment, in which cards are waved across a reader to pay instantly for small items, is perhaps the most plausible threat to cash yet. The two main products, Visa’s PayWave and Mastercard’s PayPass, are gaining in popularity. Visa believes that this year will be a “tipping point” for contactless payment and predicts that the number of cards in use will rise from 5 million to 15 million this year. This kind of payment will also start to be used for small purchases — a bottle of water or a newspaper — usually reserved for cash transactions.

“Contactless is as revolutionary as the shift to internet payments was five years ago,” says Steve Perry, executive vice-president of Visa Europe. “It will mean having no notes and coins — it will certainly mean having no coins. It will move us almost to a cashless society.”

Contactless payment is being heavily backed by credit card companies, which are frustrated that plastic has failed to make real inroads into the cash arena; consumers still feel uncomfortable using debit or credit cards for purchases of less than £5, even though many retailers welcome the opportunity to take cash out of their system. Mr Perry says: “Slowly, slowly. We have to get consumers used to it.”

Yet many think that the real contactless revolution may not happen in cards but in mobile phones. Contactless cards are the precursor to mobile phone “wallets” with Near Field Communication (NFC) technology embedded, allowing you to pay by waving a phone instead of a card. Visa already has trials under way and believes that within two to three years the technology will migrate to mobile phones. Barclaycard and Orange are partnering to develop mobile payments. Meanwhile Nokia is believed to be developing a range of NFC handsets.

Dave Birch, a director with Consult Hyperion, an IT consultancy, says: “Contactless [payment] frees you from form factors. Conventionally, new payments had to be a card because that’s the shape of your wallet or the ATM. With contactless it doesn’t have to be any more. You can put it into watches, hats, badges or stickers — as is happening in the US.”

Mobile phones hold a “particularly privileged position”, Mr Birch says, citing a pilot with O2 and Transport for London trialling phones that could be used to enter the Underground. “People weren’t shocked by it — there was an expectation phones would be able to do this anyway,” he said.

In Japan and Korea, phones are beginning to replace wallets. In Japan, 40 million phones have NFC technology and one in six people use their mobile phones to make payments. The phone’s advantage is that it is interactive: the screen can allow people to switch between cards, view recent transactions or enter a personal identification number (Pin).

Mr Birch believes that mobiles could replace cards. He said: “[After cheques disappear] you may well see Chip & Pin going away. The card era that started in the 1950s is not the best structure for the connected world of the future.”

Yet, despite the appeal of mobile payments, limitations abound. The short-term obstacle is a lack of infrastructure. Although transport networks and fast-food outlets have adopted contactless payment, retailers have shown little interest and coverage is mainly limited to London and the South East.

Sandy Shen, a research director for Gartner, a technology research firm, says that banks are “very hesitant” about deployment and that there is no convincing business case for either banks or mobile phone operators, the two main stakeholders, to invest. She said: “From the banks’ perspective, there is limited potential in that market, at least in the short term. Contactless in phones won’t necessarily bring them new revenue streams. Maybe they think it could cannibalise their contactless credit card business.”

A lack of NFC handsets is another problem, Ms Shen says, adding: “The handset vendors are sitting on the sidelines to see how the market will pick up.” Research by Gartner found that customers’ interest was limited and that they would need “more confidence in security measures to start using contactless payment instruments on a regular basis”.

Despite predictions of its demise, cash refuses to go away. Although notes and coins account for only 3 per cent of “all money”, they account for almost two thirds of purchases.

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