The Octopus Card - Assignment Example

THE OCTOPUS CARD: FINAL PROJECT EXECUTIVE SUMMARY Octopus Card is contactless smart card that would serve as electronic payment system (e- payment) for paying at public transport, cosmetic shops, fast food joints, supermarkets, schools, cinemas and hospitals. Using Octopus smart card, end users would be able to make purchases at Octopus enabled outlets. Currently existing offerings in U.S. include general purpose smart cards like debit and credit cards. Octopus Card can be used as Multipurpose Card for buying a wide variety of goods and services from different retailers thus ending the need for carrying cash. Octopus’s contactless feature can help make transactions fast and convenient. The analysis done in the project suggests although the product can bring considerable benefits to consumers and merchants alike in terms of convenience and speed but a careful approach is desirable for proceeding with this product. The research has shown that gaining “critical mass” is a decisive factor in the success of this product. Another important factor is that the demand for the product must come from consumers and merchants alike. Limited time and resources prohibited sufficient research and analysis on several factors. Additional research on consumers’ perception of product (or consumers’ perceived value of product), willingness to adopt and pay for the product the product, consumers’ concerns regarding safety of contactless transactions, is needed to help assess the prospects of product and arrive at any definite decision. Replies to the significant comments made on previous papers have also been included. REPLIES TO QUESTIONS RAISED ON THE PROPOSAL Comment: Any figures on more recent growth? Reply: There has been considerable growth in e-payments especially in contactless smart card transactions during the last few years. A study by market research firms ACI and Global Insight (a leading forecasting company) has forecasted that e-payments will experience explosive growth in the upcoming years too. This study has provided the projected growth rate for the year 2004 to 2009. It shows that e-payments would grow at the compound annual growth rate of 12.9 per cent during the period 2004-2009. According to 2009 report of RNCOS, the use of contactless smart cards for e-payment transactions will grow at compound annual growth rate of more than 30% through 2012 (Smart Card Market Forecast to 2012). Comment: Any evaluations or comparisons of existing products? Reply: Some existing solutions include general purpose smart cards offered by major credit and debit companies. These products offer similar services but vary somewhat in form, technology used, no. of cards in circulation, no. of merchants accepting these cards and maximum transaction limit. In U.S., 35 million cards have been issued (Smart Card Alliance, Contactless Payments: FAQ) and more than 25,000 merchant locations accept contactless payment devices (Smart Card alliance Report: Contactless Payments: A New Era of payments). The categories include convenience stores, theaters, pharmacies, quick service restaurants, sports venues and other such as vending and parking. The company-wise data regarding number of cards in circulation and number of merchant locations accepting these cards could not found. Table 1: Some Existing Solutions Product Name of Company Technology used Micro-Payment Limit ( No Signature Transactions) Year of launch Available in Forms PayPass card MasterCard Magstripe & Contactless Under $ 25 2002 Card, phone payWave card Visa Contactless Under $25 2007 Card ExpressPay American Express Contactless Under $ 25 2003 Keychain devices, Blue card with ExpressPay QuickWave Bank of America Contactless Under $ 50 2002 Mini Card SpeedPass ExxonMobil Contactless NA 1997 Key fob, watch, transponder Source: Smart Card Alliance Report, Contactless Payments: Delivering Merchant and Consumer Benefit These contactless payment devices can also be used for larger transactions (more than $ 25) but these transactions usually need PIN or signature. Comment: Implications (Gaining Critical Mass) Reply: Gaining “Critical Mass” is a vital factor for the success of this venture. Creating a unique value proposition can help to get “critical mass acceptance” of consumers. The value proposition of Octopus Card is convenience, greater ease of use and speedy transactions. If the benefits are well communicated to consumers then they are expected to adopt the new product more quickly. The research has shown smart card technology is more likely to be used by tech-savvy people. So the awareness of the benefits of this technology can be aggressively communicated to potential users through online media such as by writing FAQ’s, articles on e-commerce publications such as Ecommerce Times, Internet Retailer or technology sites such as BNET. Merchants can be given incentives to invest in the infrastructure needed for the product. Incentives will encourage the merchants to adopt the product. Comment: Implications (Table 2: Retailers Who Accept Contactless Payments in U.S.) Reply: The information shows that in U.S., a limited number of retailers (Table 2) accept the contactless cards. Merchant adoption will likely be a big challenge for the proposed product. Adopting new technology will not be a feasible option for retailers until there is enough number of consumers using the system. The issuers need to provide incentives to merchants to encourage merchant adoption. Comment: Mass acceptance of proposed product may depend on a number of factors like consumer behavior, legal environment, regulatory changes, additional costs (interchange fees). What are some specifics here? Reply: The market acceptance of the new payment product will largely depend on: Consumer behavior: How consumer perceives value? The reactions of consumers about new products can be known by conducting pilot projects. Visa, American Express and MasterCard conducted pilot projects for their contactless payment programs in the U.S. to know the consumers’ perceived value of the product and merchants’ willingness to adopt the technology. To gain market acceptance, the new product must provide more benefits to consumers. Complicated legal environment, high interchange or transaction cost have negative impact on the feasibility of new product. TENTATIVE ASSESSMENT OF PROSPECTS This project was undertaken to fulfill the requirements of a course. The study was mainly based on secondary data. No primary data was collected due to limited time and resources. Due to non availability of primary data it is not possible to present a complete evaluation of the potential of this venture. Many factors could not be evaluated as the study is based on secondary data. The discussion below is tentative and need additional information to support a meaningful decision on the feasibility of launching this venture. Primary research is needed to get information about consumers’ perception of product (or consumers’ perceived value of product), willingness to adopt the product and pay for the product, consumers’ concerns regarding safety of contactless transactions needs primary research. On the whole, this study suggests that a careful approach is desirable regarding launch of this venture. Based on the analysis so far, it appears that U.S. presents a huge market for contactless based micropayments and the venture has strong potential to displace cash for many lower-value payments. The product appears to have the potential to serve as a compliment to existing products or substitute to cash payments. But research has shown that despite the fact that U.S. has huge potential market, previous e‐purse solutions (e.g. VISA Cash, Mondex) have not achieved much success in the market. The feasibility of the product is subject to the following serious limitations: Gaining “critical mass” or consumers’ acceptance will be one of the major challenges. In U.S., single purpose credit cards are in use for years now but multi purpose stored value smart cards have a week niche i.e. demand is yet to be created. Further it has been found that adoption of contactless technology in U.S. is comparatively modest. Although consumers are adopting contactless technology but penetration rate is much slow. Only nine percent of the U.S. population has a contactless credit or debit card (Market Wire, 1). Cultural and psychological factors are likely to impact the demand for this product. To change the payment habits of customers is highly difficult as number of cultural, psychological factors also affect their decisions. For example; American people may feel more comfortable paying through credit card as compared to any other payment method. The reason behind this choice may be that they are culturally and psychologically inclined towards credit card technology. So brining a new payment product to U.S. will pose a great challenge. Another potential impediment Octopus smart card will likely face is a “chicken-and-egg” dilemma. The consumers will not use the product until there is sufficient level of system at the merchant side. Merchants will not consider the product unless there are enough users of the system. Although issuers may provide incentives to merchants to invest in the infrastructure needed for the product but it is not clear where the demand will come from. Convincing consumers about the need of a new payment system is a big challenge. Customer switching and adoption time will also be a decisive factor. How quickly will the consumer be able to adopt the new product? What will be the cost of switching? Consumer will switch to new solution only if it provides superior gains as compared to existing product. These issues need to be assessed thoroughly before rolling out the proposed product. Additional research is needed on these issues. People also have high concerns regarding safety of wireless transactions and customer services. Creating awareness regarding safety of transactions will be highly desirable. Read More