Smart Card Alliance Smart Card Talk
November 2004 • Volume 9 Number 11


Feature of the Month

Implementing Contactless Payment: A Practical Guide for Merchants

An increasing number of U.S. consumers are paying for purchases with contactless payment devices. U.S. consumers are using MasterCard PayPass cards, American Express ExpressPay key fobs and other contactless devices to speed through payment transactions at gas stations, quick-service restaurants, theaters, and other merchants across the United States. Transit systems are also adopting contactless payment devices to improve consumer convenience, increase throughput, and reduce operating costs in major U.S. metropolitan areas.

For merchants, the launch of new contactless payment methods represents an opportunity to attract customers and increase revenues, especially in retail segments where speed and convenience are mandatory. The benefits of contactless payment for the consumer and the merchant have been proven in numerous implementations. Increased convenience for the consumer has resulted in increased sales and faster transaction times for the merchant. Merchants also enjoy lower costs due to fewer requirements to handle cash, improved operational efficiencies, and lower maintenance costs, resulting from improved reliability of contactless readers.

Both MasterCard International and American Express have been conducting contactless payment pilots in the United States and have reported strong consumer approval and merchant success with accepting contactless payments. These pilots use radio frequency (RF) communication between a contactless device and a point-of-sale (POS) terminal to transmit consumer payment information. Merchants can implement contactless payment solutions quickly and easily and immediately begin accepting the contactless payment devices now being issued by the financial industry. This article provides a practical guide for merchants and describes the changes needed at the POS to accept contactless payments.

Leverage of Existing Payments Infrastructure

The contactless payment implementations being offered in the United States by American Express, MasterCard and Visa leverage the existing magnetic stripe payments infrastructure. These new payment schemes store a secured version of Track 1 and Track 2 financial data on the contactless card chip. The card then uses RF to communicate Track 1 and Track 2 payment information to the terminal. The merchant and the acquiring processor see little change to the payment data, so major changes to POS systems or the processing infrastructure are not necessary. This is quite different from some payment technologies (for example, EMV contact smart cards), where significant investment is required by both merchants and payment processors and where market deployment must allow time to upgrade the infrastructure.

By basing contactless payment on the magnetic stripe payments infrastructure, American Express, MasterCard and Visa can launch programs with the potential to drive rapid acceptance of contactless payment cards by merchants, similar to the rapid growth seen by gift card programs that use the existing infrastructure. This approach and the innovative products being offered by terminal vendors allow merchants to realize the significant benefits of accepting contactless payment cards with minimal investment.

Changes to the POS System

To accommodate contactless payment, merchants must add intelligent contactless RF terminals to their POS payment systems. The new contactless RF terminals support the contactless card applications specified by the payments companies and communicate via RF with the contactless payment cards or fobs to receive Track 1 and Track 2 financial data. The terminals then pass the data to the attached POS payment system. These terminals are tested and certified by the payments companies before being installed in the field.

Since cardholders tap or wave the contactless cards or fobs at the terminals, the terminals must face the cardholders instead of the sales clerks. (This is similar to the approach currently used by multi-lane retailers in the United States.) In table-service restaurants, waiters can carry portable contactless terminals to allow cardholders to make contactless payments at the table.         

POS Solution Options

Merchants can add contactless RF terminals to their current POS systems quickly. Contactless readers that work with existing POS systems are already available, with new POS systems with integrated RF readers being released.

The merchant investment required to upgrade a physical terminal at the point of sale is modest. It is expected that the incremental cost of purchasing a POS terminal with an integrated RF terminal will be $120 or less. For contactless reader retrofits, merchants may pay $200 to $300 per RF terminal including installation, or less than $200 if they install the terminals themselves.


The major payment card companies have agreed to ISO/IEC 14443 Type A and B as the contactless RF payment standard. This decision is the key to future interoperability. Any contactless device that complies with ISO/IEC 14443 Type A or B will be able to communicate with new contactless payment terminals.

American Express, MasterCard and Visa have also developed their own unique specifications for contactless payments. These specifications reflect each company's specific application requirements and security needs. However, the payments companies have ensured that the specifications can coexist in a single RF terminal.

Contactless RF terminal vendors are expected to provide interoperability among the different contactless payment systems. The objective will be to offer a single contactless RF terminal that supports multiple contactless applications and accepts a variety of contactless cards and fobs from the major payments companies.  

POS, Store Controller, and Acquirer Software

Payment card issuers will need to know whether a transaction is initiated by a contactless payment device or a magnetic stripe card.

MasterCard International is adding new values to the current data fields of ISO/IEC 8583 messages (data elements 22 and 61). This requirement will require software changes at the POS system level, possibly at the store controller level. The acquirer will need to carry the required new field through the financial network to a card issuer authorization system. MasterCard International has already communicated this requirement to its member acquirers. Merchants should contact their acquirers to find out when such changes will be available on their system.

Visa will also be implementing system changes using the ISO/IEC 8583 message format to indicate to issuers whether the transaction was made with a magnetic stripe or initiated over a contactless interface.

Short- and Long-Term Strategies for U.S. Merchants

MasterCard International and American Express are rolling out contactless payment programs into specific geographic markets in 2004. The American Express ExpressPay pilot is in Phoenix, Arizona, and MasterCard PayPass pilots are in Dallas, Texas, and Orlando, Florida. Both organizations plan to expand the rollout of their contactless payment programs to other cities in the United States.

These programs primarily target the following:

  • High traffic merchants (quick-service restaurants, convenience stores, video rentals, movie theatres)
  • Unattended point-of-service locations (gas pumps, vending machines, ticket kiosks)
  • Transit applications (parking)

Short-Term Strategy. Merchants, independent sales organizations (ISOs), and acquirers doing business with American Express and MasterCard in the targeted areas can participate in the rollout of both the ExpressPay and PayPass programs.

The advantage of getting started now is to leverage the resources that both MasterCard and American Express are dedicating to contactless payment and gain a competitive advantage in these areas. Success depends on achieving a critical mass, enrolling enough merchants to accept contactless payments and issuing enough PayPass and ExpressPay payment devices to allow merchants to start accepting contactless transactions daily.

Long Term Strategy. Merchants, ISOs, and acquirers who participate in the initial rollout can decide whether it makes sense to expand contactless payment support to other cities and, eventually, nationwide. Initial market data shows that merchants from the primary target industries should see increased revenue, increased efficiency, and enhanced customer loyalty.

The combination of positive consumer experience, standards-based technology, potential to use the existing payments infrastructure, and support from major financial industry players offers compelling business drivers for contactless payment. Merchants who can benefit from faster transaction speeds and increased consumer convenience should assess the business case for upgrading POS systems for contactless payment and take advantage of the nationwide rollout of financial industry-backed contactless payment solutions to create a strategic competitive advantage and increase sales.


This article is extracted from the 42-page Smart Card Alliance report, "Contactless Payments: Delivering Merchant and Consumer Benefits," developed by the Smart Card Alliance Terminal and eTransaction Infrastructure Task Force and published in April 2004.   Lead contributors to the report included: American Express; Atmel Corporation; Axalto; Bank of America; First Data Corporation; IBM; Infineon Technologies; JCB International Credit Card Co.; MasterCard International; U.S. Office of the Comptroller of the Currency; VeriFone; Visa USA; ViVOtech; Washington Metropolitan Area Transit Authority (WMATA).


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