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Retailers of all sizes share a common dilemma: how to increase customer volumes and get them to spend more per visit without slashing prices.

MasterCard, Visa and Oyster are among the payment services trying to convince stores - and, eventually, the public - that they have the answer: a 'contactless payment card' consumers can wave at the till to pay for low-value purchases, shortening queues by doing away with PINs, card-swiping, slip-signing and waiting for authorisation.

MasterCard is in advanced talks with a number of UK retailers and issuing banks about running pilots for its PayPass system (Marketing, 22 June), while Visa says it is in discussions with banks and retailers about a small UK trial, and is about to run a pilot with a German grocery chain.

Both card companies have been running tests in the US for several years, and have been increasing the number of pilots.

Transport for London has begun shortlisting potential partners authorised to deal with e-money, such as credit card companies, to extend the Oyster card system for Londoners to use in shops for non-transport purchases. Starbucks and Eat Cafe were among interested retailers that attended a recent Oyster roadshow.

Potential uses

The prize the credit card companies have their eyes on is replacing cash with plastic at outlets where lots of low-value transactions take place, such as fast-food outlets, the express lines of supermarkets, petrol stations and newsagents.

Visa estimates that UK consumers make 27bn cash transactions a year totalling £250bn, more than 80% of them for purchases costing less than £10.

The hurdle is marketing the concept to both sceptical retailers, who are still bedding down the introduction of chip and PIN, that they should give bankers a slice of sales made via yet another payment system, and to consumers who have used coins and notes to buy items such as chocolate bars since childhood.

Explaining the concept to consumers is likely to be a communications challenge, but the technologies being used are relatively simple, cheap and, importantly, compatible with one another.

A contactless payment device is a simple plastic card (or even a mobile phone or key fob) embedded with a computer chip and a tiny radio antenna.

Once the cashier has rang up the purchase, the customer touches their card on an attachment, likely to cost about £50 each, that is plugged into the retailer's existing POS payment equipment.

The technology is 'platform-agnostic' and can be used with credit, debit or payment cards, says Guido Mangiagalli, Visa Europe's head of new channels.

Each card can be personalised by the issuer, so that each purchase is limited to £10 or no more than £50 can be spent in a week without a PIN or signature, for example, so that if a card is lost or stolen, losses are limited. Missing cards could be quickly cancelled.

Graham Lloyd, head of retail financial services at PA Consulting, believes that contactless payment is a good technology that will eventually take off, but widespread public adoption may take longer than people expect.

'We have been reading about ideas such as stored-value cards replacing cash for years,' he says. 'But people like the feel of cash. They can understand and apply a £5 note. Most people need a real reason to change the habits of a lifetime.'

Beyond convenience

The success of Oyster, which launched in May 2003 and now has more than 3m users, bodes well, but Transport for London has something of a monopoly and travellers are a captive audience.

Convenience is a major consumer driver, but a contactless card has to do more than speed us through a checkout queue. We have to be able to use the same card at all the shops we regularly visit.

'The challenge of cashless payment is to offer convenience and ubiquity,' says Lloyd. 'Sooner or later someone will get it right, and I believe that contactless cards are probably the way to crack it.'

With credit and debit cards, the retailer pays the bank issuing a card a percentage of each transaction. There are also costs associated with dealing with cash, but retailers will still have to be convinced of the merits of a new system.

Countering costs

The US pilots suggest that transaction costs could be offset by increased consumer spending and more consumers moving through tills quickly. In September 2003, MasterCard completed a nine-month trial in Orlando, Florida, involving 16,000 cardholders and 60 retailer locations. The system has been rolled out to selected branches of McDonald's, starting in New York, while convenience chain 7-Eleven plans to test PayPass in 170 stores ahead of a 5300-store roll-out.

Earlier this month, American Express showed its interest by issuing Blue from American Express with ExpressPay, a feature it began testing in 2002, in all 50 US states.

MasterCard has begun limited US advertising for PayPass, promoting 'Tap N Go' payments to try to win over consumers. Jeremy Nicholds, MasterCard senior vice-president of European sales and marketing, says the pilot began with direct mail packs to existing credit cardholders, as well as in-store activity.

When it launched chip and PIN last year, trade body the Association for Payment Clearing Services (APACS) unveiled a £10m mass-market ad campaign to encourage consumers to tap in their four-digit code. But contactless card backers could be disillusioned by the hard slog APACS has gone through with chip and PIN. Indeed, the payment system has not taken off as quickly as expected, with some major retailers still hanging back.

However, both Nicholds and Mangiagalli believe that once the UK pilots are completed, contactless payment will be taken up by the masses. And once this happens, credit card companies are likely to start advertising the system - and making it pay.