A U.S. contactless card wave is coming—but it's slow, and won't jump-start mobile
JPMorgan Chase, Capital One, Citigroup, Pentagon Federal Credit Union and a handful of others have pumped more than 100 million contactless credit and debit cards into the U.S. market recently, but it’s a drop in the bucket in the world’s largest card market.
The goal, as always, is to create a faster and more convenient alternative to cash at the point of sale. Contactless cards also give merchants more justification for buying the NFC-enabled terminals necessary for Apple Pay and Google Pay — but may not shift consumer habits enough to convince consumers to start tapping their phones for payment.
Most issuers—including Chase—will take an incremental approach to converting their credit and debit card portfolios to Near Field Communication technology that enables tapping instead of swiping at contactless-ready payment terminals. Chase last year said it will spread contactless cards through reissuance whenever an existing card comes up for renewal and for all new credit and debit accounts.
“One hundred million contactless cards sounds substantial, until you look at the total U.S. market of 1 billion cards in circulation,” said Randy Vanderhoof, director of the U.S. Payments Forum, which tracks payment card industry issues.
Based on the fact that most cards in circulation have a lifespan of three to five years, Vanderhoof estimates it will be about two more years before 50 percent of U.S. payment cards are equipped with NFC technology. It could take five years altogether to complete the U.S. contactless migration, analysts predict.
One reason issuers are moving slowly is that contactless technology costs about 50 additional cents per card to add an NFC antenna and a dual-interface EMV chip, according to analysts. This expense comes just a few years after the costly and painful migration to EMV chip-enabled cards.
Another factor that was causing issuers to hold off on issuing contactless cards was the relative scarcity of NFC-enabled payment terminals, but that’s changing as more retailers enable tap-to-pay technology.
Target recently announced it will support POS contactless payments, following in the footsteps of other large merchants like CVS, Walgreens, 7-Eleven and McDonald’s. With more eateries and small businesses joining the contactless movement, many banks have decided the extra card expense is worth the trouble, especially if it might drive up credit and debit volume.
In Canada, the U.K. and Australia, contactless payments took hold several years ago; NFC now accounts for more than half of all U.K. transactions and the vast majority of low-ticket purchases because of the format's speed and convenience.
Visa admits that contactless cards are an improvement over contact-only EMV cards that seem to take longer to process at payment terminals than the older, fraud-prone magnetic-stripe cards. The card networks pushed the U.S. to adopt EMV by implementing a fraud liability shift in late 2015.
“With EMV, it’s not really a swipe. It’s inserting a card in the terminal, and while the chip has solved a lot of security problems in pre-breach environments, it’s introduced more friction at the POS,” said Dan Sanford, Visa’s vice president of consumer products and head of global contactless payments.
Contactless card transactions, by contrast, take only a few seconds when consumers tap or wave their card near an NFC-enabled terminal, Sanford said.
Sanford expects to both issuers and merchants to broadly embrace contactless technology in the next few years to speed up the payments process.
“Every large retailer that comes aboard with contactless will drive momentum, encouraging other retailers that may still be on the fence,” Sanford said.
The majority of issuers that have committed to contactless are pursuing a slow rollout by shipping consumers NFC-enabled cards only for new accounts or replacement cards.
Pentagon Federal Credit Union late last year began seeding its card portfolio with contactless cards, accelerating the pace in January, said John Kelly, executive vice president of consumer banking.
“We saw the speed of merchants adopting contactless and thought we were at a tipping point that could improve the cardholder experience,” Kelly said.
Kelly estimates it will take a year or so for the majority of its card portfolio serving 1.7 million customers to be converted to contactless.
Another reason PenFed took relatively early action compared to other institutions is its heritage as a credit union serving federal workers who travel overseas often.
“We have a lot of members who work and travel to markets outside the U.S. where there’s broad merchant adoption of contactless, so we’re meeting a need and adding convenience for those customers,” Kelly said.
Mobile payments stall
But one area where Kelly doesn’t expect to see a growth surge is mobile payments.
PenFed’s digital wallet has long supported mobile and online payment options including Apple Pay, Samsung Pay, Google Pay and Visa Checkout, but usage is not widespread, according to Kelly.
“Tapping to pay with a phone or wallet is down to the individual user, and because there are a lot of different devices and mobile payment methods it’s caused a bit of fragmentation,” Kelly said.
Mobile payment usage will likely continue growing slowly, but Kelly predicts contactless card payment volume will soar past it.
“I think the tap-to-pay experience with contactless is the best of both worlds right now, because it’s the middle ground. We’re building on consumers’ familiarity with using cards and until we have a full contactless ecosystem it’s the next step,” Kelly said.
Competition may be another factor driving issuers’ decisions to go contactless. Cards that are quicker and more convenient to use are more likely to drift to the top of customers’ wallets, said Oliver Manahan, the Canada-based director of business development at chip manufacturer Infineon Technologies.
Top of wallet
Contactless cards also provide a way to preserve bank brand identity, which isn’t necessarily the case with third-party mobile wallets, where banks' cards are filed alongside other payment options without fanfare.
“Many issuers still fear a loss of brand association when their card is listed within a wallet like Apple Pay. But a contactless payment card keeps the bank’s brand constantly surfacing whenever consumers tap it to pay,” Manahan said.
As U.S. card volume rises, issuers will see per-card costs for contactless cards decline, which was the case in markets outside the U.S. where contactless cards are ubiquitous, Manahan predicts.
Some U.S. issuers will move faster than others to contactless, according to the U.S. Payments Forum's Vanderhoof. Some may also take the opportunity to redesign their cards, which would likely slow down their contactless rollout road map by four to six months, he said.
“It generally takes two refresh cycles to convert the majority of a market to contactless,” Vanderhoof said.
Certain large issuers may achieve 100 percent conversion to contactless sooner; Citi made its entire Costco Anywhere Visa cobranded card portfolio contactless when it launched in 2016. And some issuers may opt to stick with contact cards for the foreseeable future, Vanderhoof said.
"Ultimately, full market penetration of contactless in the U.S. will depend on when the high-net-worth, high-volume issuers adopt it," he said.