What can drag U.S. contactless cards out of limbo?
Contactless card volume is soaring in key markets around the world including the U.K., Australia and Canada, raising the question of how long the U.S. must wait before issuers and merchants broadly support the format.
The U.S. missed out on the recent contactless card payment boom, in part because most merchants and issuers skipped the steps needed to support contactless cards during the slow and messy EMV migration, but that situation may be changing.
The catalyst could be when several million EMV cards—among the first batch issued in the U.S. in 2014—reach their three-year expiration date, and issuers must decide whether to continue issuing contact-only EMV cards or switch to the dual-interface format, with contactless technology included.
Issuers would still need a reason to invest in the added contactless technology, even if the card networks may play a role in nudging them in that direction.
Payments industry observers expect to see a push to drive contactless payments in the U.S. in 2018, though specifics are hazy, said Thomas McCrohan, managing director for Mizuho Securities USA.
“It doesn’t seem logical for issuers to produce or reissue dual-interface cards unless there is some incentive or competitive disadvantage,” he said, noting that unlike some regions in Asia and the U.K., the U.S. lacks any single mass-transit system that could get a critical mass of issuers and merchants excited about backing contactless card payments.
McCrohan speculates it may fall to the card networks to help break the stalemate by nudging issuers through incentives, promotions or subsidies to commit to producing more EMV cards with contactless capabilities to help drive broad contactless payments adoption for both cards and mobile wallets.
“To overcome merchant resistance, interchange concessions might need to be offered to merchants, but card-issuing banks would first need to get on board, given any concession would be coming out of (the banks’) pocket,” he said.
There is precedent for the networks to get involved in helping issuers and merchants come together for contactless.
A dozen years ago Visa and Mastercard provided incentives through contactless card pilot programs in key markets including New York, and issuers including American Express Co. and Chase pumped millions of contactless cards into the marketplace. But merchant terminals weren’t ready on a national basis, and usage fizzled.
Years later, more U.S. payment terminals added Near Field Communication technology to support mobile contactless payments via Google Wallet, followed by Apple Pay, Android Pay and Samsung Pay, but currently only about 20% of the estimated 5 million U.S. merchant locations are NFC-enabled, according to Mizuho's research.
Visa appears to be pushing contactless. In an email, a Visa spokesperson said: “Visa is committed to working with our clients and partners to bring contactless cards to consumers in the U.S.," but the network didn't name any issuers getting on board.
Mastercard has a similar stance.
"Issuers have strong interest in building business cases around issuing contactless cards in the U.S.," said Melanie Gluck, Mastercard's vice president of North America security solutions for contactless payments.
But issuers may need more persuasion before committing to support contactless cards across their portfolios.
"Customers haven't demanded (contactless cards) yet," said Jason Martin, Bank of America's senior vice president of checking and debit product management, on a recent panel focusing on debit industry trends during SourceMedia's annual PayThink conference this week in Phoenix.
Some U.S. merchants still balk at supporting NFC because they fear that the card networks’ Honor All Cards rules will force them to accept all mobile wallets on uncertain terms; merchants also worry they’ll lose control of payment data and the ability to easily route debit transactions if they open the doors to contactless cards, according to McCrohan.
“To overcome merchant resistance, interchange concessions might need to be offered to merchants, but card-issuing banks would first need to get on board, given any concession would be coming out of their pocket,” McCrohan said.
A few issuers already have committed to producing EMV cards with contactless technology, which could give them a market advantage if more merchants start to accept them.
American Express Co. issues contactless versions of EMV cards to its consumer credit card customers—and many small-business cardholders—upon request.
HSBC’s Mastercard Platinum card is available with contactless technology, and Wells Fargo & Co. and Capital One also issue some of their credit cards in a contactless format.
Citibank has made the biggest investment in contactless cards, adding NFC to its entire portfolio of 11 million Costco Anywhere Visa credit cards currently in circulation, a Citi spokesperson confirms.
Citi’s Costco card is somewhat unique, and is configured to work only at terminals certified for EMV contactless transactions, unlike some other issuers’ contactless cards that work at all NFC-enabled terminals.
This is a potentially frustrating experience for consumers. Only a few major U.S. merchants—including McDonald’s and Walgreens—have software to support that narrower category of EMV contactless card payments along with general NFC transactions; most U.S. terminals and vending machines do not support Citi’s Costco EMV contactless card.
“Probably just 1% to 2% of U.S. payment terminals are equipped to accept EMV contactless transactions, which means people with a contactless card programmed only for EMV can’t use those cards in very many places,” said Allen Friedman, vice president of payment solutions at Ingenico.
But Citi and Costco appear to have big plans for contactless card usage in the U.S.
Costco is one of the few merchants already poised for contactless acceptance at the gas pump. The Kirkwood, Wash.-based warehouse store chain is replacing gasoline pumps at all of its U.S. locations with terminals equipped to accept contactless payments, though it hasn’t switched the capability on yet. (Costco has long supported contactless payments in its stores in Canada, where it offers a cobranded EMV contactless Capital One Mastercard.)
Other merchants have the hardware, but not the software needed to support contactless, Friedman said. “A lot of large merchants bought hardware that can support contactless, but when preparing for the 2015 liability shift, they focused on certifying terminals for contact-only EMV and postponed preparations for EMV contactless,” he said.
In most cases, merchants would need to pay a third party to develop or add the application necessary to process EMV contactless payments and costs would vary, Friedman said.