Wave-and-pay flopped when issuers tried it 10 years ago with mag-stripe cards. Now it’s staging a comeback with EMV and mobile payments. The sequel just might be better than the original, but showtime is uncertain.
After years of false starts and overenthusiastic hopes, the U.S. just might be about to connect with contactless payments.
True, consumers today make fewer than 1% of their general-purpose card payments using a contactless-enabled piece of plastic or smart-phone mobile wallets that hold digitized versions of their cards and facilitate tap-and-go transactions, according to network reports. And perhaps just 5% of U.S. credit and debit cards are so-called dual-interface chip cards that support both contact and contactless transactions.
But thanks largely to EMV—the chip-based payment standard from EMVCo, the standards body owned by the major global payment networks—the groundwork is being laid for widespread merchant acceptance of contactless payments. At the same time, U.S. payment card issuers are getting ready to replace their first generation of chip cards.
Randy Vanderhoof, executive director of the Princeton Junction, N.J.-based Secure Technology Alliance, estimates that up to 800 million EMV cards, predominantly of the contact-only variety, will hit their expiration dates within the next five years.
“We think a significant share of those [reissued cards] will contain dual-interface technology because the costs are coming down, and countries that have implemented this are seeing greater use of the cards,” he says.
EMV cards first found their way into consumers’ wallets in 2014, 2015, and 2016 as issuers labored to meet the card networks’ October 2015 EMV liability shifts meant to finally wean U.S. payments off of the magnetic stripe. The shifts left either the merchant or the issuer holding the bag for any counterfeit fraud resulting from a transaction if the card didn’t have a chip or the terminal couldn’t read chip cards.
For various reasons, most issuers took the contact-only route, which requires the cardholder to insert, or dip, the card into an EMV-capable point-of-sale terminal. Not the least was expense—contact-only cards at the time cost only about half as much as dual-interface cards.
Some banks and credit unions did switch parts of their portfolios to dual interface as EMV gathered steam. A sampling of early contactless converts includes TCF Bank, Capital One, Wells Fargo, and Oklahoma’s Banc First.
And American Express Co., which shared the Hilton HHonors cobranded credit card program with Citigroup Inc., recently acquired the Citi side of the portfolio and reissued about 1 million Hilton cards as dual interface.
On the other side of the payment hill, more than 2.7 million U.S. merchant locations now accept chip cards, according to Visa Inc. Most of these EMV terminals also support near-field communication contactless transactions that meet EMVCo standards; in fact, some 95% of new U.S. POS terminals are contactless-enabled, Visa reports.
Sequel to a B Movie
Should a mass dual-interface conversion come to pass, the concept of contactless payments in the United States will have avenged its defeat from a decade ago, when a few enthusiast issuers provided customers with magnetic-stripe payment cards that also supported contactless payments.
Prominent in this early wave, which arose around 2005, was JPMorgan Chase & Co. with its blink cards, as well as a few other issuers. The contactless card base hit 50 million by 2008, but only 120,000 merchants accepted them (“Can Contactless Stay in Touch?” December 2008).
“At the time, we did not have the acceptance,” says Melanie Gluck, vice president of solution sales and tokenization at Mastercard Inc., who was with the card network during those years. “It didn’t hit its great stride.”
In addition to merchant indifference, the speed gap between contactless and mag-stripe transactions became negligible once the networks waived signature requirements for lower-value payments. That reduced issuers’ motivation to offer contactless cards, according to a Secure Technology Alliance white paper.
So why bother with a sequel to a B movie? The advantages of current-generation contactless technology can’t be denied: NFC transactions take a second or less, warp speed compared with contact-only chip cards, which were especially dogged by slowness in EMV’s first year. And thanks to tokenization and other defenses, security with dual-interface cards and the major mobile wallets is as good as if not better than that of contact-only EMV cards. Call it Contactless II.
What’s more, dual-interface cards and acceptance of contactless payments are becoming the standard in much of the world outside of the U.S. Visa later this year will require that all new credit and debit cards in its Latin America region support contactless transactions. All new POS terminals in the region also must accept contactless payments.
Similar mandates are in effect for Visa’s Asia-Pacific region. And in 2015, Visa Europe, the bank card association that Visa Inc. acquired in June 2016, gave merchant acquirers until the end of 2019 to have all of their terminals contactless-capable.
Mastercard early this year required both issuers and acquirers in all regions except North America to phase in contactless card issuance and acceptance over the next few years.
The current state of contactless payments varies widely. “Some markets, like Australia, [are] heavily penetrated—92% of transactions are contactless,” says Gluck. In others, she says, “it’s embryonic.”
Riding EMV’s Coattails
The U.S. clearly is on the embryonic end of the contactless scale. Progress is most visible on the merchant side, largely because NFC is riding EMV’s coattails on terminals.
It’s up to the merchant, however, to turn that NFC functionality on. Millions still haven’t, especially small merchants.
But many have. According to Visa, seven of the top 10, 14 of the top 25, and 54 of the top 100 U.S. merchants by transactions were accepting contactless payments as of December. Prominent acceptors include McDonald’s, Subway, Walgreens, Macy’s, and Trader Joe’s and other supermarkets.
Contactless payments are ideal for high-throughput merchants such as fast-food restaurants, where cash dominates. “The average ticket we see is under $23,” Gluck says of U.S. contactless transactions.
Since Mastercard’s average tickets for debit and credit purchases are $39.18 and $89.19 (“Reduced Speed Ahead,” March), respectively, contactless is likely pulling in a significant number of what were previously cash payments.
Another promising sector is mass transit. The Chicago Transit Authority and the Utah Transit Authority in the Salt Lake City area, among others, already are accepting so-called open-loop contactless transactions from mobile wallets or general-purpose contactless payment cards. Riders tap the phone or card on a turnstile or reader near the bus door.
Payments executives are excited about what’s coming next. Subway and bus systems in New York, Philadelphia, and Boston all have announced plans for contactless acceptance as they prepare to replace outmoded systems heavily reliant on cash and closed-loop fare cards.
U.S. transit systems are taking their cue from Transport for London, which began accepting open-loop contactless transactions in 2012 on buses and in late 2014 on its massive subway and rail network.
“They saw immediate, and climbing at a steep rate, use of bank-issued credentials,” says Gluck.
For the week ended Dec. 31, TfL recorded an average of 535,267 daily bus journeys paid by contactless cards, and 588,840 subway/rail journeys, according to agency data.
It may be years before U.S. transit systems begin generating such volumes. Still, with the acceptance side coming along, the heavy lifting is most needed on the issuer side, where contactless cards, mobile phones, and wearables are nascent payment media today.
‘Creatures of Habit’
Payment card manufacturing firms and processors say issuers are warming to dual-interface cards as the first waves of EMV cards approach their normal expiration dates.
“There’s definitely been an uptick in interest,” says Keith North, director of product and capabilities at Littleton, Colo.-based card manufacturer CPI Card Group Inc.
Barbara Else, who as vice president of global financial services at First Data Corp. oversees the payment processor’s massive card-production operation for client banks and credit unions, seconds that opinion. “There is a definite trend toward more interest in dual-interface cards in our base,” she says.
One factor working in favor of dual interface is a reduction in price. Several years ago, the average dual-interface card cost about $2 in bulk, twice the price of a contact-only EMV card. Now the spread is down to around 50 cents, and executives note that prices for all EMV cards have come down.
Dual-interface cards, says Paul Kobos, senior vice president of banking and payments at Austin, Texas-based manufacturer Gemalto North America, are “not a specialty product any more.” (See Endpoint)
But executives hedge when asked if a mass conversion to dual interface is at hand. “The banks made a big investment, and it’s going to take some time to get past,” says Kobos. “To me the question of why it hasn’t happened is simply math.”
Adds North: “It was expensive and painful for people to go to EMV.”
Others note that Americans have just gotten used to doing the dip rather than swiping, so issuers fret at the thought of disrupting these newly ingrained payment patterns with yet another round of re-education.
“Consumers, you and I, we’re creatures of habit,” says Kevin Morrison, a senior analyst at Boston-based Aite Group LLC who is preparing a research report about contactless payments. “If we don’t get a consistent experience every time, we go back to what we know works.”
Optimistic … But Cautious
Although the U.S. contactless-accepting merchant base has increased, issuers and their suppliers still would like to see many more locations to reinforce the practice of tapping or waving a card near a terminal.
First Data’s Else notes that the first generation of contactless cards failed in part because so few merchants accepted them that consumers had little reason to learn about tap-and-go payments.
“It takes a while for us to get used to things,” she says. “It has to be available in a lot of places for consumers to get used to using their card in a certain way.”
And while they have come down, prices for dual-interface cards haven’t dropped far enough yet to make the commitment decision easy for many issuers.
“Understanding that dual-interface cards are more costly than contact cards, many financial institutions are weighing the cost versus benefit of dual interface,” Michelle Thornton, director of product for Co-Op Financial Services, a Rancho Cucamonga, Calif.-based processor and technology provider for credit unions, tells Digital Transactions by email.
So while they’re optimistic about the long-term prospects for dual-interface cards, executives on the issuing side are cautious about making short-term projections.
“We are in active conversations today with customers regarding their dual-interface product roadmaps,” Scott Scheirman, CPI Card Group’s president and chief executive, said at the publicly traded company’s March 12 conference call to review fourth-quarter 2017 financial results, according to a SeekingAlpha.com transcript. “But at this time, we’re not factoring dual interface into our 2018 plans in a meaningful way.”
Several issuers contacted by Digital Transactions for this story did not respond to repeated inquiries.
Meanwhile, despite huge amounts of hype ever since Apple Inc.’s NFC-based Apple Pay service debuted in 2014, mobile wallets have yet to give even a modest lift to contactless payments.
Payment executives estimate that fewer than 1% of U.S. face-to-face card-based transactions currently originate on mobile devices. Mobile payments are finding their biggest adoption in merchant-controlled closed-loop systems.
Apple Pay accounts for 90% of U.S. mobile contactless transactions, according to a white paper from the U.S. Payments Forum, a Secure Technology Alliance affiliate, that cites August 2017 research from investment firm Goldman Sachs.
Apple Pay’s chief competitors in the general-purpose mobile-wallet market are Alphabet Inc.’s Google Pay and mobile-phone giant Samsung with its Samsung Pay service. Both wallets use variants of NFC, and Samsung Pay also uses technology that enables it to make payments at POS terminals that only read magnetic stripes.
But the Alphabet/Google wallet, formerly known as Google Wallet and Android Pay, has just gone through yet another rebranding, leading mobile-payments watchers wondering if Google Pay is finally the name that will stick. And after an initial splash when it launched in 2015, Samsung has put only modest marketing resources behind Samsung Pay in the U.S.
Contactless-enabled wearables such as smart watches and fitness trackers have had even less of an impact on contactless payments so far, although they are the subject of considerable development (“Puttin’ on Payments,” February).
Visa highlighted some nifty wearables with this year’s Winter Olympics in South Korea. But Fitbit Inc., a leading wearable manufacturer, is charging an extra $20 for a “special edition” of its new Versa smart watch that includes NFC and the Fitbit Pay payment service, according to the Silicon Valley publication TechCrunch. The implication is that Fitbit might be testing market demand for payments with wearables.
‘Cards Beat Mobile’
With mobile wallets and wearables yet to find their footing, contactless enthusiasts are pinning most of their hopes on dual-interface cards. And for good reason. Even in markets where mobile payments and contactless cards both are viable options, most consumers choose plastic.
“What I would tell you, the majority of contactless transactions around the world are card-based,” says Mastercard’s Gluck.
So it’s no surprise that card manufacturers and other payments executives expect dual-interface card orders eventually to ramp up in a big way, perhaps not this year but not too long afterward.
“It could very well be a race to get ahead of the curve on dual interface, but the race hasn’t really gotten started yet,” says Vanderhoof of the Secure Technology Alliance.
But once the race is under way, “I think we’re going to catch up very quickly,” says First Data’s Else.
The U.S. Contactless Landscape
54% of top 100 merchants accept contactless payments
18% of merchant locations accept contactless payments
95% of new POS terminals are contactless-capable
About 1% of card-based POS transactions are contactless
Apple Pay accounts for an estimated 90% of mobile-wallet contactless transactions
Source: Visa, Mastercard, Secure Technology Alliance
Guess Which Technology Is the Contactless Leader
Sometimes derided as the poor cousin of near-field communication technology, quick-response codes are the clear leader today in U.S. contactless payments.
The prime example, no surprise, is coffee king Starbucks Corp., which has been promoting QR-code payments through its mobile app since 2009. More than 30% of U.S. tender is now on the app, Seattle-based Starbucks said in January.
The app generates a QR code on the customer’s mobile phone. Either the customer or the barista scans the image with a bar-code reader at the counter. Payments are funded through the prepaid Starbucks Card.
Other popular merchant-sponsored mobile-payment systems that use QR codes come from Walmart, Dunkin’ Donuts, Kohl’s, and some others. No. 1 bank JPMorgan Chase & Co.’s Chase Pay app also generates QR codes on the customer’s smart phone. It should be noted that some QR-code stalwarts such as Dunkin’ Donuts also support NFC contactless payments at the point of sale.
“There’s going to be a place for QR codes in the marketplace, particularly merchant-driven mobile-payment apps because they can control both ends of the solution,” says Randy Vanderhoof, executive director of the Secure Technology Alliance trade group.
But Vanderhoof and others point out that QR codes sometimes can be clunky. Retrieving one on the phone requires taps to open an app and display the code. If the system has the merchant generating the code on its point-of-sale equipment, sometimes consumers find it difficult to scan it with their smart phone’s camera. Rewards redemptions may require a separate scan.
“It’s not going to be able to compete ease-of-use and convenience-wise with NFC,” says Vanderhoof.
Paul Kobos, senior vice president of banking and payments at Gemalto North America, says QR codes appeal most to merchants that “want to have more control over the payment cycle … it’s a very workable solution, but not the most elegant solution.”
Gemalto, a leading card manufacturer and provider of payment-related technology, sees enough demand for QR codes that it has a product offering in the niche.
While the U.S. payments market seems to be relegating QR-code payments to a merchant-controlled niche, general-purpose card networks nonetheless are keeping their eyes on them.
“From a Mastercard perspective … QR is part of that overall picture,” says Melanie Gluck, a Mastercard Inc. vice president. “We are still looking at and talking with customers on where that fits.”
Gluck says QR codes are quite popular in Asia and gaining in Africa. China-based payment network UnionPay International said in March that its QR-code service operates in 13 markets.