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Next Gen Insights | Glenn Geil |
08 May 2019

AND WHY NOW IS THE TIME THAT IT IS POISED TO TAKE OFF

Contactless payments are a primary form of non-cash payment for small transactions throughout the world, but this is not the case in the US. Europe has led the way in the adoption of this new payment technology, with 50% of all in-store card transactions reported to be contactless. This same technology enables Europeans to use public transport without tickets or preloaded cards. In fact, it is estimated that by 2020 all payments terminals in Europe will support contactless.

So why did contactless fail to launch in the US?

A number of factors contributed to the situation, but there are three key reasons which really impacted contactless use in the US, namely:

1. The US consumer was afraid of contactless cards.

Between 2005 and 2008, Visa introduced the Paywave contactless card, and working with issuers automatically provided them to cardholders. Visa then partnered with a number of retail chains including Target to install contactless terminals.

As is usually the case with payment methods, they are generally safe, but technically capable of being compromised. Researchers had found a way in lab experiments to extract the card data from contactless cards. A powerful contactless wand, designed to emulate a card reader, could pull the card information if it was allowed to get within a few inches of a card. This was almost impossible to perform in the real world, but in the days before data breaches it made for great sensational reporting.

Just as millions of contactless cards had been put in cardholders’ wallets and purses, and after many merchant chains completed installing their contactless terminals, the press reported that card information could be stolen from a consumer’s purse or back pocket without them even knowing it. Suddenly the press and social media was flooded with unsubstantiated reports of contactless fraud, and the fear spread. Consumers were urged to wrap their cards in foil or cut them up and demand a ‘safe way to pay’ from their banks.

Consumers were not willing to trust a technology that allowed the possibility of a new kind of fraud. Instead, they wanted to stick with their mag-stripe technology that was proven to allow fraud. Consumers bragged about refusing to use a contactless card to avoid fraud, as they handed their mag-stripe card to a stranger at a restaurant, who would disappear to swipe the card to pay for their meal – a prime opportunity for just the thing they were trying to avoid.

Very quickly, the banks abandoned contactless cards, reissued standard mag-stripe ones, and the merchant chains pulled their contactless readers. This resulted in a substantial financial loss for Visa, the banks and retail chains involved.

Contactless, while taking off in the rest of the world, was dead and buried in the US.

A proactive information campaign and advances in the contactless standard could have allowed a reset and retry, but the pain of the losses and the next two factors ensured the contactless card would stay buried.

2. The US only moved to EMV chip-and-pin based cards in the past 2 years, and the pain of EMV is what gives contactless its benefits.

Elsewhere in the world, all transactions required a chip card to be inserted into a machine and a PIN entered. When contactless was enabled for small transactions, it was a noticeable reduction in friction. In the US, the signature requirement was removed for small transactions, so all that was required was a quick card swipe. This was considered by consumers to be easier than contactless, as they just gave the card to a clerk, or knew where to swipe their card. Contactless readers were more effort, and confused many consumers, who were unsure about where to place their device, how close they had to hold it to the reader, and for how long. The inability of contactless to reduce friction stunted the adoption of Apple Pay, Android Pay and other contactless payment methods, and prevented a return of the contactless card.

Once chip cards had obtained critical mass adoption in the US, the inconvenience of having to place a card into the reader for 10 seconds or longer and enter a pin increased the friction and made the concept of a contactless phone payment seem easier. Contactless payments finally started gaining traction after the chip card rollout and liability shift.

3. For a consumer to switch to a new payment form there needs to be almost complete ubiquity before they will make it their first choice.

Having been burned with the first rollout of contactless readers, merchants were slow to adopt support for Apple Pay or the other *Pays. Without being assured that the phone payment would work, most consumers stuck with what they knew worked everywhere they needed it to. This is because US consumers are loath to be at the checkout and have problems paying for their goods. Back in the earlier days of cards, the embarrassment of having a card declined could bring consumers to tears, so a card that was declined for any reason would quickly move to the “back of the wallet”. The modern-day equivalent for US consumers is trying to pay using their mobile phone and being told that the store doesn’t support it. They pull out their card to pay and keep using the card.

Given the growing trend toward cashless payments, now is the time that contactless can truly take off in the US. Contactless support is near the ubiquity point and has resulted in the recent growth in mobile contactless transactions in the US. Consumers are now familiar with contactless, so acceptance of contactless cards should follow.

But this alone will not ensure success, to do so three key things must take place:

  1. There must be a common card that supports both contact and contactless payments and fits seamlessly into the mobile payment wallet.
  2. There must be a solid marketing campaign to proactively remove the fears that were instilled during the initial rollout fiasco
  3. There needs to be a push on the acceptance side to clearly show that contactless is accepted.

The consumer needs to know walking in the door that their contactless payment method is accepted. If this can be accomplished, we should be a fully contactless card market within the next couple of years.

This change in the US consumer market will allow for a more complete blend of people’s physical and digital lives and will drive cash further from the picture. From there it will be critical for payments companies to ensure their platforms, regardless of form factor, meet more than just their customer’s immediate payment needs, and can provide a value-add through the likes of recognition, rewards and benefits programs.

Glenn Geil

SVP Payments Delivery

Glenn has over three decades of experience in both retail payments and banking. He is responsible for delivering strategy and development services to Endava’s global payment industry clients ranging from PayFac’s and Acquirers to Real-Time Payment facilitators and Crypto-Currency exchanges. When he isn’t challenging himself to help clients create innovative payment solutions, Glenn likes the challenge of hiking up the likes of Rainbow Mountain and Machu Picchu.

 

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