Now that the U.S. EMV transition is nearly four years old, financial institutions can focus on the next phase of digital payments: contactless cards.
While contactless cards have had their fits and starts over the past few years in the U.S., a recent study from A.T. Kearney urges banks en masse to begin issuing plastic with the technology now that the merchants have the necessary payment terminals and consumers are more aware of the “tap” thanks to NFC-enabled mobile payments.
“It’s time to take the next step [from EMV] and fully take of advantage of the technology that is at the point of sale,” Bob Hedges, a partner at A.T. Kearney and one of the report’s authors, told Mobile Payments Today in a recent interview.
Why contactless now?
The payments industry did have a chance to kill the proverbial two birds with one stone when the card networks announced the U.S. EMV migration in 2011 and 2012, but there was a more pressing issue at the time.
“If you recall, EMV was rolled out in a reaction to the data compromises that happened,” Hedges said. “The intent of the rollout was really focused [on security]. The broader strategic opportunity that existed at the time to also enable contactless just wasn’t on people’s minds in the U.S.”
He isn’t wrong.
Cyndie Martini, president and CEO of Member Access Pacific, the largest aggregator of card services for credit unions in the U.S., admits that the FIs her company serviced weren’t prepared for contactless a few years ago.
“Even if the infrastructure was there, I don’t think that our FIs had a grasp of it, planning-wise,” Martini told Mobile Payments Today in an interview. “If merchants aren’t taking it, if consumers don’t know how to use it, it is a waste of [investment] dollars early on.”
While the U.S. painfully migrated to chip cards, A.T. Kearney’s study shows how contactless EMV cards thrived in other countries.
Contactless cards overall have captured more than 20 percent of card-based retail point-of-sale transactions in Australia, Canada, South Korea and the U.K. since their arrival in these countries, according to the study, which was commissioned by Visa.
A.T. Kearney also focused part of its study on what it called “U.S.-like countries”, where “pre-contactless consumer payment behaviors (for example, the percentage of point-of-sale transactions via card versus cash and the percentage of the population who own a payment card) were similar to U.S. current consumer payment behaviors.”
In those countries (Australia, Canada, Ireland, New Zealand, Switzerland, the U.K.), A.T. Kearney found that drug stores and pharmacies, quick-service restaurants and food and grocery stores consistently experienced high adoption of contactless payments.
The study also noted that these types of establishments can be cash-heavy and that contactless cards would lead to more electronic transactions.
Hedges believes that because U.S. consumers visit these these retailers at a high rate, merchants should see a boost in contactless transactions once banks begin to issue contactless cards.
Retailer backlash to contactless?
Of course, merchants actually would need to activate the contactless functionality at their terminals, which isn’t always a given.
Some New Zealand merchants recently decided not to accept contactless payments because of higher interchange fees associated with the transactions. At least one small coffee chain went as far to add a 2 percent surcharge on Visa contactless transactions.
U.S. consumers experienced a similar situation when Apple Pay debuted in 2014 and CVS Pharmacy turned off the contactless functionality at terminals inside its stores due to the company’s association to the now-defunct Merchant Customer Exchange, a multi-retailer collaborative that was working to develop its own mobile payment solution.
Apple revealed in its recent earnings call that CVS will begin accepting Apple Pay later this year.
While the study makes a case that certain retail segments stand to benefit from contactless cards, the National Retail Federation disagreed with some of its conclusions when contacted by Mobile Payments Today.
“This report says widespread use of contactless cards would reduce the use of cash as if that were a good thing. But retailers are not looking to reduce the use of cash,” Craig Shearman, NRF vice president of government affairs, told Mobile Payments Today in an email.
“Retailers welcome cash and many prefer it because cash gives them 100 cents on the dollar,” he said. “When credit cards are used, banks skim a slice off of every transaction. Banks’ swipe fees for processing credit card transactions already drive up retailers’ costs by tens of billions of dollars a year and increase the prices paid by consumers by hundreds of dollars a year for the average family.”
Shearman also took issue with a potential $2 billion windfall to banks, thanks to contactless cards.
“A good portion of that would come out of the pockets of retailers and their customers,” he said. “Retailers are trying to get banks and the card industry to bring card fees under control, not looking for a way to further line the pockets of Wall Street banks. Credit card fees far exceed cash-handling fees.”
Regardless of the NRF’s thoughts about contactless cards, they are coming and are already in some U.S. consumers’ hands.
TCF Bank has advertised contactless debit cards for at least a couple of years. A Costco, Citi co-branded Visa credit card also contains the technology.
When Venmo last month officially launched a MasterCard-branded prepaid debit card that consumers could use as a companion to the popular mobile person-to-person app, many industry observers immediately highlighted the card’s contactless functionality.
While the feature itself didn’t necessarily capture people’s imaginations, its inclusion in Venmo cards points to a trend that is about to pick up in the U.S.
How quickly consumers take to the contactless feature is anyone’s guess, but both Hedges and Martini believe the transition can be a smooth one.
“It’s about getting the right merchant categories to embrace it early and having banks collaborate with them to promote it at the point of sale,” Hedges said.
Martini said her credit unions will be in a unique situation, since members tend to skew older and might not be entirely up to date on technology trends.
“If you don’t see the value in tapping your card, it’s just as easy to pull it out of your wallet and just as easy to do EMV, why would I care about the next level?,” she said. “I think you have to show value. Our credit unions need to help customers understand the value in these different bells and whistles in the cards.”