Fed weighs future of contactless payments

You can call it 'cash 2.0': a new age of wireless payment technology that may replace even the smallest cash transactions in the coming years with the wave of a credit card or mobile phone. 

But as major corporations like CVS, McDonald's, and Walgreens begin deploying new RF, or "contactless," payment technology, the Federal Reserve is taking a closer look at the technology and is asking the payment industry and card companies, among other questions, whether the new payment systems are secure.

The rapid deployment of RF-equipped contactless payment technology was behind a meeting at the Boston Federal Reserve in May. According to interviews with those at the meeting, the payments industry argued that, while not foolproof, the new RF payments systems are a vast improvement over existing, "magnetic stripe" payments technology and that Americans' casual handling of their credit cards poses a far greater risk to sensitive financial information than wireless hackers that might target the cards.

Contactless payment technology uses RF technology embedded in credit cards, mobile phones, or USB devices to negotiate credit and debit transactions. As opposed to older generation magnetic strip technology, the RF cards can be waved in front of a card reader.

While most consumers in the U.S. have yet to use the new cards, the availability of contactless payment technology is growing by leaps and bounds. Between 18 and 20 million RF-enabled credit and debit cards were issued between 2005 and 2007, according to Randy Vanderhoof, executive director of the Smart Card Alliance, an industry group. Payment card company Visa has issued seven million of the cards globally, the majority of them in the U.S., said Brian Triplett, a senior vice president of emerging product development at Visa.

"Adoption is growing at a faster rate than any other payment technology introduced in the last 50 years," said Vanderhoof, with banks like Chase Manhattan, Wells Fargo, and Keybank among the first to issue the cards.

The major advantages of the cards are speed and convenience, especially in the realm of "small value transactions" under $25, he said. That's because RF equipped credit cards reduce the time it takes to complete a transaction by almost two thirds from cash transactions and take less than half as long as traditional credit or debit card transactions, according to a presentation given at the Federal Reserve by Peter Nash, CVS's director of store treasury operations.

That decrease in checkout time means increased customer volume for high-traffic retailers like CVS and McDonald's, compared with cash or traditional credit card transactions. And studies show that consumers who use credit cards for small purchases tend to buy more with each purchase, said Avivah Litan, an analyst with Gartner.

RF cards are also being used by transportation authorities in cities like Boston and New York, where subway riders now use contactless cards instead of tokens to pass through turnstiles.

So far, the biggest obstacle to commercial adoption has been merchant acceptance of the new platform, which requires them to purchase and install RF reader terminals and pay higher costs per transaction than with traditional magnetic stripe cards, said Litan.

Still, one security expert on the RF enabled payment cards says that bigger problems are lurking behind the scenes with contactless payments technology, about which too little is known for consumers to be put at ease about the security of their financial information.