Octopus Card: Secondary Market Research - Essay Example

THE OCTOPUS CARD: SECONDARY MARKET RESEARCH PROPOSAL: 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. The Changing Environment: From Paper to Electronic Payments Precious metals were for a long time used as a method of transaction but gradually this system was replaced by paper money and coins, thus making the transactions much faster and efficient. In the last decade of 20th century, a new system of payment i.e. e-payment gained momentum. Now a growing number of transactions are occurring via electronic payment systems that serve as alternative to cash. This growth in e-payment has been fueled largely by smart card technology. Smart Card technology evolved in the mid 80’s but initially it was not much in use. During the last decade of 20th century, there was rapid increase in its use for diverse activities. Nowadays people are recognizing the potential of smart card technology for e- payments and are becoming more dependent on smart cards for their transactions. “Nowadays, most popular payment methods are based on cards i.e. magnetic cards, smart cards, contactless cards” (Ondrus and Pigneur, 2). E-Payments experienced a compound annual growth rate of 12.3 % globally during 1999 to 2004 (Global Electronic Payments Market Study and Forecast, 7). Today consumers, banks, merchants and retailers prefer electronic transactions. In U.S. alone, e-payments accounted for more than two-thirds of non cash transactions in 2006. In U.S. the electronic payment methods including debit and credit cards are displacing paper checks and cash payments at an accelerating pace (Wall Street Journal). Electronic money transactions are carried out mainly by three methods: credit, debit and stored value prepaid cards. Credit Card: Credit cards are based on buy-now-pay-later strategy. Examples of credit-based payment are Visa, Master and American Express smartcards. Credit cards are most popular payment method in the U.S. Debit Cards: Debit cards have a similar cost structure as that of the credit cards. But unlike credit cards, the amount from the account of the consumer is debited immediately. Consumer needs to enter a PIN in debit card transactions that proves time consuming for micro payments. Both credit and debit cards are neither economical nor convenient for micro payments or small value transactions (Worthington and Edwards). Contactless Stored Value Cards: Third type of e-payment method is stored value smart cards. The stored value smart cards may be single purposed cash cards, multi-purposed payment cards or can be a simple transit card. Multi-purposed stored value smart cards can be used as electronic purses (e-purse) that allow payments be made from funds loaded on the card. The time required to process a transaction is less as transaction is not authenticated and cleared through a central network. Merchant fee is also lower than that for credit and debit card. Micropayments cause much frustration to customers and retailers as small cash or coins are required. Stored value cards offer efficient and economical solution for micropayments. Contactless Stored Value Smart Cards: Key to Cashless Economy Stored Value contactless smart cards are picking up as a new method for micropayments displacing the use of cash. These smart cards are embedded with wireless communication (or RFID) chip that increases the speed of transactions (Bourdeau, para 1). The transaction can be made just by waving or tapping the card at point of sale (POS) RFID reader. The contactless stored value smart card serve the purpose of e-purse and can be used anywhere from paying for bus fares, grocery items to buying a burger from a fast food joint. Stored value smart card is basically aimed at replacing or substituting the cash in the micro-payment areas such as vending machines, convenience stores, parking meters, fast food joints and transport. Contactless smart card technology can prove highly useful in micropayments as it provide convenience and speed (Government and Micropayment Applications 2). Studies by major credit card companies have revealed that contactless transactions can save 30-40% of time at point of sale (POS) and are 63% faster than cash and 53% faster than credit card transactions (Smart Card Alliance,3). Vice President and Chief Operating Officer, Federal Reserve Bank of Boston has emphasized the role of contactless smart cards in establishing a cashless society. He anticipated that in America “these have the potential to displace cash for many lower-value payments.” Micropayments may seem insignificant individually but are considerable in the aggregate. A study by Federal Reserve Bank of Boston has revealed that in America there are 400 billion micropayments transactions annually representing potential of $500 billion that can be paid with debit/credit cards, smart cards or cash. The micro-payment mix by purchase type includes convenience stores (representing 40% of total micro-payment transactions), incidental cash (representing 30%), fast food (representing 12%), vending (representing 7%), transportation (representing 5%), online video, ring tones, music (representing 4%) and parking (representing 2% of total micropayments). Contactless Stored Value Smart Cards: Existing Solutions “The idea of having a cashless world has long been around” (See-To et al, 63). People have always imagined a multipurpose card that would let them pay for their groceries, vending-machine, snacks and daily bus or train ride using a single card. “Major credit card operators and financial institutions, including MasterCard (Mondex) and VISA (Visa Cash), had been trying to capitalize on such business opportunities since the late 1980s” (Chau and Poon). These companies have promised a “Multipurpose Card” for years that would displace the need for cash payments for small purchases. While these e-cash solutions (like Mondex and Visa cash) claimed to create a cashless society but none of these managed to get mass acceptance of consumers. “A ‘survival mass’ of merchants and consumers is required for the market to exist and a ‘critical mass’ for the acceptance levels to take off and remain stable”. (See-To et al 64). None of these products including those supported by world’s major credit card companies like Visa Cash and Mondex had been able to achieve that “critical mass” and therefore had to exit the market. All these major credit companies have now launched “contactless” e-purse solutions (Table 1) that are also based on the previous smart credit card structures. The products are same in functions and scope but are based on different technology i.e. RFID chip has been added to make them more convenient for consumers. Table 1: Some Existing Solutions Some Existing Contactless Smart Cards Product Name of Company PayPass card MasterCard PayWave card Visa ExpressPay American Express QuickWave Bank of America SpeedPass ExxonMobil Discussion This research suggests that there are currently a large number of products (launched by major credit or debit card companies such as Visa, MasterCard, American Express, Table 1) in U.S. that offer to eliminate the use of coins or cash in everyday small purchases. These products are direct competitors of the proposed product. Products are based on the same technology but vary somewhat in function and scope. The existing products offer to work as “Multipurpose Card” but consumers are yet to accept them as a substitute for cash. None of the existing products has proved to be a real “Multi-Purpose Card”. Although these products have been launched by major financial or credit card companies yet products lack ubiquity i.e. cards are accepted at few selected outlets (Table 2) only and have not been adopted by diverse retailers. The proposed product is well tested in Hong-Kong market. In Hong-Kong the product has been extensively in use by consumers and a large number of merchants have also adopted the product. Hong-Kong has over 17 million cards are in circulation (Davis 2, Rotman) and the product has more than 95 % penetration rate (Dai 2). The product will be launched as “Multipurpose Smart Card” in U.S. and will bring considerable benefits to consumers and merchants alike in terms of convenience and speed. People will be able make payments at convenience stores, grocery shops, parking, vending-machines and snack shops with single card (Lam 2, Poon and Chau). They will need to simply tap or wave their card over a RFID reader and the due amount will be deducted from the microchip in the card automatically (Clark 1). Challenges and Obstacles Customer and Merchant Adoption Although consumers are adopting contactless technology in the US (there are 35 million contactless cards in circulation) but penetration rate is much slow as only nine percent of the U.S. population has a contactless credit or debit card (Market Wire, 1). U.S. has huge potential market but previous e-purse solutions (e.g. VISA Cash, Mondex) have not achieved much success in the market. The research has shown that to make the new payment product successful in the proposed market, the demand for the product must come from consumers and merchants alike. Merchants may not feel inclined to support the new payment method because technology infrastructure may cost them more because of lower customer base. In America only top retailers (Table 2) accept the contactless cards. It is quite evident from the research that “chicken-and-egg problem” is likely to obstruct the spread of proposed product in the short run. Gaining “critical mass” will be a major challenge for the proposed product. “ In a survey conducted by Visa and MasterCard lack of customer response was cited as major reason for holding off on contactless payment systems” (Pachner 2).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. This flaw will have to be tackled to make the proposed venture a success. Table 2: Retailers Who Accept Contactless Payments in U.S. 7-Eleven, Inc. Jack in the Box Boater’s World Marine Centers MacDonald’s CVS/Pharmacy Regal ( Theaters) Entertainment Group Meijer Stores Ritz Camera Sheetz Wawa AMC Theaters Good Times Burger Arby’s KFC Carl’s Jr. RaceTrac Cold Stone Creamery Subway Duane Reade United Artist Theaters Eckerd Walgreens Source: Smart Card Alliance, 2006 Customer Switching: Factors Affecting Demand for Product The customer switching is also a crucial matter. How quickly will the consumer be able to adopt the new product? What will be the cost of switching? These issues need to be assessed thoroughly before rolling out the proposed product. Initially consumers may be reluctant to use the new payment method. All the competing products are supported by major credit card companies or financial institutions and all these companies have a huge client base. Mass acceptance of proposed product may depend on a number of factors like consumer behavior, legal environment, regulatory changes, additional costs (interchange fees). 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. People also have high concerns regarding safety of wireless transactions and customer service as contactless technology is relatively new to them. These factors have not been discussed in the articles. These issues will need to be assessed through primary research. Cost Structure Demand for product also depends largely on price. Consumers expect an affordable price as compared to other existing products. Incentives to consumers and merchants may give a boost to new product. Price or ‘cost of transaction’ is another issue that is not discussed in these articles so it may also be taken through primary research. Works Cited Bourdeau, Annette, Back To the Future: RFID Portals Poised To "Personalize" The Retail Experience, Strategy, Mar 1 2007, Retrieved from ABI/INFORM Global, ProQuest. Chau, Patrick, Y.K. and Poon Simpson, Octopus: an e-cash payment system success story, Communications of the ACM, 2003, 46 (9) Clark,L. Carol, Shopping Without Cash: The Emergence Of The E-Purse, Economic Perspectives, 4Q/2005 Contactless Payment: Try It, Youll Like It; Nine Percent of Consumers are Using Contactless Payment and Loving It, Market Wire, September 17, 2008, Retrieved from LexisNexis Academic. Dai, S. Alex, Hong Kong’s Octopus Goes to the UAE, while Challenges Emerge at Home, Prepaid Trends, Vol. 3(3), p 6, Feb. 11, 2008, Retrieved from LexisNexis Academic Davis, Chris, More Transactions on the Cards, South China Morning Post, Jan 11, 20008, Retrieved from LexisNexis Academic Federal Reserve Bank of Boston, Emerging Payments – The Changing Landscape, 2008 Global Electronic Payments Market Study and Forecast, 2006, ACI Report Government and Micro-payment Applications Boost Contactless Smart Card Market Growth, PR Newswire US, March 13, 2007, Retrieved from LexisNexis Academic Lam, Grace, Wider Application for Octopus Cards, The Standard, Oct 29, 2004, Retrieved from LexisNexis Academic Love Contactless Tap-And-Go Payment. But Will Customers Sign On? The Globe and Mail (Canada), September 27, 2007, Retrieved from LexisNexis Academic Noreen, Macdonald, Multipurpose Smart Cards in Transportation: Benefits and Barriers to Use, UCTC Research Paper, 2000 Octopus Card Not Vulnerable To Hacking, System Operator Says, News, South China Morning Post, March 25, 2008, Retrieved from LexisNexis Academic Ondrus, Jan and Pigneur, Yves, Towards a Holistic Analysis of Mobile Payments: A Multiple Perspectives Approach, Electronic Commerce Research and Applications, 2006 5(3) Pachner, Joanna, Paying For Goods - On the Fly; Retailers and Credit Card Companies Poon S.and Chau P. Y.K., Octopus: The Growing E-payment System in Hong Kong, Electronic Markets, February 2001, Volume 11(2) pp. 97-106 Rego, Laura, View from Abroad: Hong Kong’s ‘Octopus Card’ Technology Puts Even Credit Card to Shame, The Badger Herald. The University of Wisconsin-Madison, February 5, 2004. Rotman, Sarah, Smartcard-based electronic-cash providers: Octopus in Hong Kong, March 3, 2009, CGAP Technology Blog See To et al Analysis of Electronic Micro-Payment Market, Journal of Electronic Commerce Research, 2007, 8(1) Smart Cards Key to Mobility and Security from Payment to Personal Healthcare Records; More Highlights from Smart Card Alliance Annual Conference, M2Presswire, October 15, 2007, Retrieved from LexisNexis Academic. Smart Card Alliance, The What, Who and Why of Contactless Payments, 2006 Wall Street Journal, E-Payments, Cards Trump Paper Checks, Dec 11, 2007 Worthington, Steve and Vic Edwards, Changes in Payments Markets, Past, Present and Future: A Comparison between Australia and The UK, The International Journal of Bank Marketing, 2000, 18(5) pp: 212-221. Retrieved from ABI/INFORM Global, ProQuest. Read More