Data: Who wants contactless cards?

August 16, 2018 11:42 AM

The U.S. may be next to see a surge of contactless credit cards, following other major markets around the world. In many locales similar to the U.S., consumers tap to pay for about 20% of all in-store transactions using Near Field Communication-equipped cards, far surpassing the number of mobile payment users.

But it’s unclear whether enough U.S. consumers are interested in contactless payments for issuers to make the investment.

U.S. issuers previously shied away from contactless cards for several reasons, including the relatively low number of NFC-enabled merchants and the cost of overhauling card portfolios just a few years after the painful 2015 EMV liability shift. But recent moves by key merchants and issuers could spark a change, depending on how consumers respond.

The main reason the U.S. lags behind other global markets in contactless adoption is the low level of support for NFC payments at the point of sale.

Most U.S. payment terminals are built to accept NFC, but many merchants—including influential giants like Walmart and Kroger—balk at enabling the contactless feature for their own reasons.

But changes may be afoot. Two major NFC holdouts—CVS and 7-Eleven—will soon add contactless payment support in stores, Apple Inc.’s CEO Tim Cook told analysts in late July. And this month Costco activated in-store contactless payments, rounding out the use case for 7 million-plus U.S. consumers with an NFC-enabled Costco Anywhere Visa credit card. (Citi, which issues Costco’s cobranded card, made the decision to add NFC to the entire portfolio when it launched two years ago.)

The U.S. Payments Forum reports that active contactless-enabled payment terminals are approaching 20% of the U.S. market, an increase of more than 100,000 terminals within the last year. That pace is expected to continue, said Randy Vanderhoof, the forum’s director.

Some recent studies indicate U.S. issuers are poised to unleash more contactless-enabled cards. It’s still theoretical, because less than 5% of cards in circulation in the U.S. have contactless technology and no major issuers have disclosed plans for a mass issuance of contactless cards.

Burned a decade ago by overestimating U.S. merchant interest in the first wave of contactless cards, most U.S. issuers pulled back sharply on NFC, and focused solely on making credit and debit cards EMV-compatible. The U.S. Payments Forum indicates many banks will begin issuing contactless versions of credit and debit cards beginning next year, when the first generation of EMV cards begins to expire.

A.T. Kearney, in a new report based on data from Visa and other payments industry providers, predicts a sharp increase in the critical mass of contactless cards over the next two years, resulting in 4 in 10 U.S. cards equipped with contactless technology by 2020.

“Many card issuers have dual-interface cards in the plans for the next reissuance cycle,” said Vanderhoof in the U.S. Payments Forum’s recent summer report on the state of cards.

Public transportation agencies around the world have found a strong use case for contactless cards, which speed passenger flow by eliminating time-consuming cash transactions and friction around kiosks for reloading passes. In key global markets including China, Japan, Russia and the U.K., public transit agency adoption of contactless payments has accelerated contactless card issuance and usage, experts assert.

In London, contactless payment cards or mobile devices account for half of all subway and train journeys, according to Transport for London. This summer, London riders using contactless cards gained the ability to view their journey history and check payments as they go via a mobile app.

Several major U.S. cities’ transit agencies are in the process of adopting broad acceptance of contactless cards. Portland, Ore.’s TriMet recently switched on open-loop contactless card support for its new Hop Fastpass system, and demand far exceeded expectations, according to reports. Chicago completed its upgrade to open-loop contactless card support a couple of years ago, while Boston and New York’s MTA are in the process of phasing in open-loop NFC support over the next few years. Philadelphia will roll out open-loop contactless card acceptance later this year.

In Salt Lake City, the Utah Transportation Authority (UTA) recently suspended its support for open-loop contactless cards, nearly a decade after pioneering NFC-based payments for the city’s buses and light rail. The UTA shut down contactless payments in April of this year, explaining on Twitter that less than 1% of riders used NFC-based payments and it was too costly to support. The agency was unavailable to comment on future plans.

“Salt Lake City is an outlier, because there’s no doubt contactless payment support is coming to all the major cities in the U.S.,” said Peter Quadagno, CEO of Quadagno & Assoc., an industry consultant for prepaid and transit payment systems. Salt Lake City’s transit agency was beset by other priorities and will return to supporting contactless payments, he predicts.

“Utah was way out in front of the pack experimenting with contactless, and they’ll regroup, but it’s not surprising that some transit agencies have struggled with this because they’re in the business of moving people, not finances, so payments technology often needs a champion,” Quadagno said.

As more U.S. merchants add contactless support, signs suggest issuers would consider adding NFC technology to encourage heavier card usage.

The evidence from global markets with denser merchant NFC support indicates healthy consumer interest. Nearly 30% of all in-store card transactions in Australia—where 67% of all cards are equipped with NFC—are tap purchases, according to A.T. Kearney’s report. In the U.K., Canada and South Korea, where each country has 50% or higher penetration of contactless cards, at least 20% of all face-to-face transactions are contactless.

For low-ticket, meals and household restocking purchases, contactless card usage in these markets is significantly higher. Grocery stores see the highest use of contactless cards across the board, followed by quick-service restaurants, sit-down restaurants and drug store/pharmacies, the Kearney report said. According to that logic, issuers interested in staying top-of-wallet could enhance their odds by adding contactless technology to credit and debit cards.

The notion some circulated a few years ago that mobile payments technology would eliminate the need for payment cards was certainly premature.

Hopes were high when Apple Pay launched in the fall of 2014, but as time passed, consumer usage remains low. Even today in global markets where most merchants have enabled NFC at the point of sale, far more payments leverage contactless cards than mobile devices, A.T. Kearney’s data suggests.

Mobile payments adoption is growing—especially for in-app payments for digital goods and e-commerce—but consumers around the world seem to prefer using cards for now. Recent data from ABI Research indicates that global contactless card production will surpass 2 billion within a few years, while Europe-based Eurosmart forecasts the total contactless card shipments will top 3 billion this year.