Since American Express launched its first contactless-payment pilot in 2002, financial institutions across the United States have taken interest in swipe-and-go payments.

In her report, "Contactless and the Dawn of a New Payment Era," Celent analyst Ariana-Michele Moore profiles the growing trend of contactless payments and the industry opportunities taking shape because of the technology.

Moore says more than 30,000 U.S. merchant locations are capable of handling contactless transactions, and more than 13 million consumers have contactless devices. She estimates that by 2011, contactless payments will capture 15 percent of the target market.

But others in the industry don't see the business case for contactless, at least not now. During SourceMedia's ATM, Debit & Prepaid Forum, Elizabeth Buse of Visa USA said it's hard to make a contactless value proposition for some merchants.

"They don't want to replace their existing infrastructure," she said.

That written, Buse said she does see opportunity in closed-loop contactless payments for retailers.

In her report, Moore writes that contactless transactions are ideal for high-volume, low-ticket markets with histories of accepting only cash. Those markets include movie theaters, limited-service restaurants, gas stations and convenience and drug stores.

McDonald's, 7-Eleven, Arby's, Walgreens and AMC Theaters are a few of the merchants that accept contactless transactions. But, that acceptance is regionalized, Moore says.

"Many of these merchants have concentrated locations while others have committed to accepting contactless in select regions. As more banks launch contactless programs, we expect the number of regions to grow," she writes. "This is particularly the case as more regional banks become committed to the technology."

Banks that currently issue contactless devices are Wells Fargo, Bank of America, Citibank, Chase, American Express and KeyBank.

Consumer concerns

Despite a broad range of contactless-payment acceptance, hurdles still exist.

Moore said the proliferation of radio-frequency identification technology in industries such as retail will help some consumers understand contactless technology while others will improperly compare the two.

For example, consumer-rights groups are concerned about privacy with RFID tags, as well as the perception that consumers wearing RFID tags can be tracked.

"There is a lot of confusion in the market," Moore said. "More and more merchants and supply-chain operators are using (RFID). That's why the industry is labeling this as contactless cards."

In addition, consumers are of the belief that their card information will be read without their consent - that it will be sent "through the air," or that thieves will be able steal the information simply by brushing up against someone.

Ultimately, Moore said the industry needs to help consumers understand the difference between the two technologies, even though the technology is basically the same.

The road ahead

For consumers, contactless transactions have the ability to become more convenient than cash, debit or credit. According to Moore's report, contactless transactions are 60 percent faster than cash transactions and 50 percent faster than magnetic-stripe transactions. This has created a 270 percent increase in MasterCard PayPass transactions, she says.

Also, as the industry develops contactless-form factors, such as key fobs and mobile phones, momentum and contactless initiatives will increase.

The United States is already testing near field communication, a short-range wireless connectivity technology that enables two-way interactions between electronic devices.

Visa, Chase and Cingular conducted a trial of the technology on mobile phones between December 2005 and June 2006. MasterCard, Nokia and Cingular also have partnered to conduct their own tests over the past two years.

Moore said the initiatives offer a glimpse into the future of payments, but mass adoption will likely occur over time.

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