Article

Contactless and the ATM?

The industry ponders the impact contactless tech will have on the ATM.

June 6, 2007

Chris Skinner of Boston-based consultancy TowerGroup writes in his May 2006 commentary, "The death of cash," that the ATM as a basic cash dispenser "is dead."

"The traditional ATM was just a cash machine, and the reason why that will not survive is that cash is being targeted for extinction, with a specific focus from contactless payments," he said.

But since the erosion of cash will likely take several years, Skinner writes, the ATM industry has some time to evolve in a way that allows it to play a role in the brave new payments market.

"The ATM has to find a new role in life," he writes. "That might be depositing checks, accepting payments, paying bills, offering advertising, dispensing tickets, topping up contactless payment devices or even downloading back statements to PDAs … but it won't be dispensing cash."

The ATM industry won't likely argue with the inevitable dominance mobile payments, which also rely on contactless technology, will have in the future. Seasoned industry insiders, including the ATM inventor John Shepherd-Barron, have said mobile devices are disrupting the way consumers buy goods and use cash. But will those payment methods replace cash, and ultimately the need for the ATM?

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Most ATM proponents, like Kelly Horton, founder and chief executive of EFT Group Inc., a U.S. partner of China-based ATM manufacturer GRG Banking Equipment Co. Ltd. , say no.

"There will always be a need for cash," Horton said. "And RFID is here now, so why wouldn't it be used at the ATM? You could just approach the ATM, even with your card in your purse, and begin your transaction. Someone could intercept that information, but what do they really get? You would still have to enter your PIN at the ATM. And today, paying with a (RFID) fob at pay-at-the-pump, we haven't seen a big security breach. I don't think security would be a big issue."

Contactless-payment technology is touted for its ability to replace cash. But as more of the payments space moves to contactless options, the ATM will likely play a role, Horton says. As radio-frequency identification becomes the norm for payment cards in the United States, consumers will expect to use the same transmission technology at the ATM, Horton said. The sticking point, however, is that most industry observers agree contactless payments aim to replace cash for low-dollar (less than $25) purchases.

The notion of a cashless society is not new. The advent in the '90s of the debit card and cash-back options at the POS were once deemed threats to the ATM. But research has shown that consumers continue to use the ATM, even if they also regularly use their debit cards to make purchases as well as get cash back at the point of sale.

But the industry is closely watching growth in the contactless space, says Mike Lee, chief executive of the ATM Industry Association.

"We're looking at the future of cash and e-payments. We're doing the research and we see that cash is not going anywhere," Lee said in February during the ATMIA East in Orlando, Fla.

How the ATM will fit into the contactless arena remains to be seen, says Madhavi Mantha, an industry analyst at Boston's Celent LLC. Using contactless cards at the ATM is not unheard of, she says, but it's not something bankers and deployers in the United States have talked much about.

"I'm not aware of any activity in the U.S. that involves using contactless cards at ATMs," Mantha said. "However, I know there's some activity in Japan by Japan Post's savings bank (which is) issuing updated ATM cards that can be used for transit-fare collection. I heard they were also planning to eventually allow the transit and e-cash purse to be reloaded at Japan Post ATMs, although I don't know the status of the initiative."

The contactless boom

American Express, Discover, MasterCard and Visa have all initiated contactless schemes in the United States. According the Smart Card Alliance, since 2005, more than 17 million contactless payment cards have been issued in the United States, and more than 35,000 U.S. merchant locations now accept contactless payments.

According to estimates released this month by U.K. research firm Report Buyer, approximately 777 million contactless transactions were conducted in the United States in 2006; by 2011, Report Buyer estimates contactless transactions will hit 2.2 billion.

Contactless adoption got off to a slow start in the United States, but it is picking up speed, said Elizabeth Buse, Visa USA's executive vice president of product development and management, in October 2006 at Source Media's ATM, Debit & Prepaid Forum in Las Vegas.

"Contactless has allowed us to provide speedy payments at locations that don't have existing payment infrastructures," she said.

From a replacement perspective, merchants with existing payments systems have not been as quick to make the move to contactless; but as the technology takes off, replacement is expected to pick up.

The smart chip vs. RFID

"Contactless" encompasses many things. Ultimately, any transaction that does not require the swipe of a magnetic stripe is considered contactless. Smart chips, which comply with EMVCo LLC's EMV (Europay, MasterCard, Visa) standard, and RFID chips, which are used in the United States, rely on the same technology. But the two differ from a memory capacity and processing perspective.

Both chip types communicate with readers using radio frequency electromagnetic waves. But smart chips, unlike RFID chips, are microprocessors that have a memory capacity of upwards of 512 bytes. RFID chips, on the other hand, typically hold only 92 bytes. Smart chips, because they are computers in and of themselves, provide read-and-write capabilities - enabling communication to and from the reader. An RFID chip can only be read, meaning it can only provide one-way authentication and has no capacity for calculating or retaining information.

And where smart-chip card transactions typically require users to also enter PINs, RFID-chip cards do not.

Brendan Thorpe of Nexus Software Inc. says EMV is much more secure than RFID, although not likely to take off in the United States.

But the Smart Card Alliance touts the security of both methods, saying contactless-payment devices of all types are designed to operate at very short ranges, typically between 2 and 4 inches. (RFID tags used for general purposes often can be read yards away.)

In the United States, contactless payments are being leveraged using the existing mag-stripe processing infrastructure. In other parts of the world, where EMV cards dominate, EMV specifications dictate the processing infrastructure.

Since Triple DES is a standard for mag-stripe transactions, it also is a standard used for contactless transactions, even though the payment-card relies on RFID. The alliance also is quick to note that not all contactless-payment cards and devices transmit all of the card's information. For instance, some do not send a cardholder's name or account number. Instead, an alternate number may be associated with the payment account by the card issuer for processing.

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ATM Industry Association (ATMIA)

The ATM Industry Association, founded in 1997, is a global non-profit trade association with over 10,500 members in 65 countries. The membership base covers the full range of this worldwide industry comprising over 2.2 million installed ATMs.

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