Contactless electronic payment cards – are they for us?

Even a casual visitor to Hong Kong will not fail to notice the ubiquitous purple, yellow and green signs marked “Octopus” — displayed on everything from shop counters to vending machines to trains and buses. You will see locals of all ages waving similarly colored cards over readers in almost all cases where you would usually expect them to use coins. “Octopus” is a contactless smartcard — simply waving it over a reader will deduct a specified amount from your personal account, which can be reloaded with money electronically.

The scheme in itself is nothing new or fascinating. What is fascinating is that the system has been in operation since 1997 and 95% of the region’s population use it with ease for a variety of purposes, generating about HK$130 million worth of transactions every day.

It is also fascinating that the system has never been successfully hacked. While many North American and European cities use similar smartcards for their public transport systems, the Octopus card is used almost everywhere. Wherever a credit card reader is present, an Octopus card reader will most likely be present as well. You could even board buses that look as dilapidated as the private buses you get in Colombo, and find a card reader near the door. Hong Kong is a case study in how such a system may be practically implemented.

Colombo is a city that clearly has bigger needs that a contactless payment card, but let us look at the hypothetical pros and cons nonetheless.

Coins have become an expensive problem for the Sri Lankan mint — they have become more expensive to produce than the value they represent. While the government has responded by reducing the mass and composition of the coins, much greater savings can be achieved by switching to a contactless smartcard for making small payments (such as bus fares).

There are significant differences between using a contactless smartcard and a credit card. The smartcard never leaves your hand (you wave it over the reader when the cashier tells you or the machine prompts you) and it cannot be used to perform CNP (“card not present”) transactions by using a number (as in online transactions). The card has to be physically present. Readers usually display your card’s balance immediately after the deduction is made — no monthly bills or interest are involved. However, like credit cards, they can be cancelled if stolen — these cards are not transferable.

Yet another thing to consider is consumers’ tendency to overspend with credit cards — unless an SMS alert system is setup, there is no running balance indication. Since an Octopus-like system displays an immediate balance, consumers may be less likely to overspend. They will definitely not spend beyond their means because the system is based on debit.

In terms of difficulties, the biggest problem would be getting vendors to adopt the system and the initial capital cost of deploying readers at vendor premises.

Bus conductors are unlikely to look at the system kindly, given how it might put them out of a job. Getting the general population — especially in and around Colombo — to adopt the system is less likely to be a problem.