Whilst much of the current growth is down to Barclays’ decision to issue contactless cards as standard for all UK customers, the other UK banks are likely to be more aggressive shortly.  We in Expense Reduction Analysts’ Banking Team expect to see most of the major High St Bank’s card acquiring arms working with retailers to encourage wider adoption.

Visa believes the recent rise in the contactless transaction limit from £10 to £15 is helping to make the cards a more attractive proposition for users and retailers.

Currently around 26,000 outlets are enabled for contactless and average transaction values are around the £4.30 mark, with evidence emerging of a surge in use among cardholders. Mark Austin, head of contactless at Visa Europe, said that in the last six months they had seen an increase of 100% in transaction volumes. So a groundswell of acceptance of the technology is growing. I will blog around that issue when I have more information.

For many of our clients its not around being an early adapter but more around recognising how customers, and potential customers, wish to carry out low value/high volume purchases. Moreover, maintaining the profitability of transactions is absolutely crucial. For my part that means ensuring that the actual real transaction costs are understood, rationalised and – where uncompetitive, challenged.

In its ‘The Way We Pay 2010′ report, the UK Payments Council notes that cash, on the face of it, still appears incredibly popular, accounting for 60% of transactions, but this is down from 75% just 10 years ago. What’s more, of the 21 billion consumer cash payments made in 2009, 80% were for less than £10.

In just five years, cash transactions are expected to represent less than half the total for the very first time. The value of cash used is dwindling even faster compared to wealth and spending, rising only 7% in the last 10 years, while overall consumer spending has doubled.

The trend will accelerate over the next 10 years and by 2018 the amount of cash used in the UK will fall by 20% after adjusting for inflation, even though total spending will rise by around 15% in real terms, according to the report.

Technology and cultural changes are driving the move, with debit cards and contactless technology taking over from cash, particularly among younger generations.

Debit card usage has risen fourfold in ten years – to £264 billion in 2009 – four times as fast as overall spending, and will double again by 2018. Each adult now uses a debit card 158 times per year, almost every other day, up from a little more than once a week in 1999 and by 2018, one in four of all transactions will be on a debit card, up from just one in twenty ten years ago.

Whilst debit cards have have begun to replace larger credit card and cheque transactions they are also taking over from cash for lower value payments and this will continue with the rise of contactless payments.

Mike Bowman, head, policy and markets, Payments Council, says: “Contactless payment for small purchases has the potential to drive debit card usage even higher. With 18 billion cash transactions less than £15, there’s a huge opportunity for us to replace billions of these with a quick swipe past a card reader.”

The Council cites the way Brits pay in pubs and clubs as an example of this shift in technology and culture. In 1999, nine out of ten pints were bought with cash. Now only 40% of pub spending involves notes and coins and pub goers are much more likely to be eating out as well as drinking. By 2018, the report predicts cash spending in pubs will fall to just 25%.

Bowman says: “Although cash won’t disappear in our lifetime, the continuing payments revolution will make it an ever smaller part of our spending. Even the traditional sight of people waving tenners at the bar is fast vanishing. They’re more likely to brandish their debit cards now as they compete to get served.”

Not only are Brits less likely to pay in cash now, they are also no longer being paid in cash. In 1999 one in eight received their wages in cash. This was down to one in 20 by 2009 and is predicted to fall to one in 50 by 2018.

“More and more people have opened bank accounts in the last ten years, and fewer and fewer have jobs in manufacturing where a weekly wage packet is more common. As a result far fewer of us get wages cash-in-hand,” says Bowman.

Brits have therefore turned to ATMs to access their cash. There are 63,000 holes in the wall in the UK today, two-and-a-half times more than ten years ago. In 1999 62% of cash withdrawn from accounts came from an ATM – by 2009 it was 85%.

Meanwhile, cheques are continuing their slow death says the council, accounting for just two per cent of personal transactions in 2009 as increasing numbers of retailers stop accepting them. The group says that even if it does not embark on its controversial policy to officially phase them out, volumes will more than halve to just 248 million in 2018, making up just 0.8% of all the personal payments.

The council concedes they remain popular for person-to-person payments – accounting for a third in value – but claims the advent of online banking, and especially faster payments is accelerating the decline.

Around 22 million UK adults now operate their accounts online, while the report predicts that Faster Payments will see rapid growth, accounting for £836 million by 2018, up from £294 million in 2009.

Looking further ahead, the Council speculates that cash could be all but dead within 40 years ………..

“By 2050, using cash could well be a minority activity, much more the preserve of informal transactions. With around a billion bank notes created, distributed, collected and destroyed every year, the production and secure transportation of notes is an expensive and environmentally costly business paid for by the tax payer. A progressive move away from cash could hold many benefits,” says the report.

Stephen Whitlam of Expense Reduction Analysts says “negotiating reduced transaction costs for those clients accepting cards is something we are long-experienced in. It is a competitive market and so often we find that businesses use the services of their main bank, either through inertia or a lack of awareness of who the alternatives are. Moreover, published tariffs do not really reflect the alternatives properly as negotiation is a given. And its at tyh enegotiation point where we can make a difference, because we know the market, we understand the acquirer’s cost base and can cut a straightforward path thgrough any technical issues”.

In Expense Reduction Analysts we believe that it is key that retailers who adopt this method enjoy a more competitive set of costs than previously, or any margin on the low value goods sold can be all too easily lost. Pivotal in this is a full appreciation of the differing costs the acquirers themselves face; as contactless payments are priced differently for them by both Visa and Mastercard.

We are in a long-term strategic game here, where the card issuers and acquirers want to see a critical mass behind this payment variation and see it replace cash. And do not forget, a card is only one medium…..the technology can be embedded into anything, e.g. phones, mp3s &c.

MasterCard’s research has found that 53 per cent of consumers are enthusiastic about contactless payment because of the convenience and speed.

Some 38 per cent of people think they will be using cash less in five years’ time.

Those retailers who see spends per customer at or below £15 will latch onto the research finding that showed 16 per cent of people said they often did not make everyday purchases such as newspapers, sweets or cigarettes because they did not have change or did not want to break a note.

The steady move towards widespread contactless card payments has been given a major boost as the government launches a public transport e-ticketing programme.  It could see England’s nine major urban areas go paperless within five years.

The Smart and Integrated Ticketing Strategy will see an infrastructure put in place based on the government-backed ITSO smartcard specification which will enable ‘tickets’ to work anywhere in the country.

Travellers could then use Oyster-style cards, mobile phones and bank cards equipped with microchips to pay directly for journeys by tapping them against readers.

The nine largest urban areas in England outside London – Greater Manchester, West Midlands, Tyne and Wear, Merseyside, South Yorkshire, and West Yorkshire, Nottingham, Leicester and Bristol – will implement the technology with the rest of the country planned to follow by 2020.

To incentivise bus operators to install smart ticketing systems, the government will also give an eight per cent increase in the Bus Service Operator Grant if they have ITSO smartcard infrastructure on their buses.

The government estimates that the benefits of ‘integrated smart’ ticketing, that allows travel across operators and across modes, could be worth over £1 billion per year.

A recent survey commissioned by the department of transport indicates that the technology could attract up to 25% more people onto the system and that a pre-pay smartcard with a daily ‘cap’ could increase some individuals’ trip rates by over 14%.

Andrew Adonis, transport secretary, says: “The benefits of smart ticketing to passengers are clear – quicker, easier and potentially better value journeys on trains, buses and trams, whichever company runs the service. We could even see the death of the paper ticket as direct payment and mobile phone technology picks up pace.”

Stephen Whitlam of Expense Reduction Analysts says that all the major card fulfillment providers will see this as a target area for volume growth. “I expect competition that will be backed up by innovation. Certainly we will enjoy the challenge of ensuring that our clients in this sector achieve not only competitive tariffs and cost-saving, but also reliable technology that enhances service levels.”

The “Contactless” card payment acceptance market is set for step growth.
A recent independent report suggests the number of retail locations that accept contactless payments is set to surge by more than 12.5 million within 5 years.

The report by IMS Research suggests that the number of contactless-enabled points of sale in existence will grow six times faster than any other face-to-face channel.

Expense Reduction Analysts Head of UK Banking, Stephen Whitlam, says: “Retailers have been hard hit by the downturn but the successful ones have not taken their eye off the long-term horizons for both cost control and meeting the demands of customers. Aimed at low-value quick transactions – typically below £10 – the heavy overhead costs of both cash handling and cash processing can be attacked. In my opinion the UK market is leading the world in this particular field. What is also interesting is that it is the “chip” which is key, not the card. So mobile phones, pens….literally anything…can be the means of payment. It is always on our agenda when we undertake projects – albeit where transactions are a low average ticket value”.

Westminster City Council is to trial ‘wave and pay’ parking meters in 2010.  Motorists can then use contactless credit or debit cards to pay for parking in central London.

The trial run of the new meters will be at 20 locations and if it is a success it will be rolled out across Westminster.

The council removed all its old-style coin meters in March due to repeated vandalism. Some replacements  incorporate Chip and PIN readers, but most require users to set up an account and pay by mobile phone.

It will be the first test of contactless payments at parking meters in the UK, and will be watched with interest by other Local Authorities as they seek to maximise revenues while reducing costs.

The cost savings which flow will be both operational as well as the obvious reduction in cash handling costs.