The coronavirus outbreak is first and foremost a human tragedy, infecting and killing hundreds of thousands of people. It will also have an impact on our beliefs and behaviors. Pre COVID-19, very few amongst us thought twice about touching a PIN pad while paying for a pizza. Such norms will change forever. Our desire for contactless experiences, including how we pay for pizza, groceries, or transit to work, will increase.
Contactless payments are already common in many developed nations like Australia, South Korea, the UK, and Canada. Paradoxically, the US, the cradle of modern payment modes: credit card and mobile wallets, has lagged in the adoption of contactless payments (Figure 1: Penetration of contactless payments).
Why has contactless payment not caught on in the US?
In a payment ecosystem, there are three main actors: banks, merchants, and consumers. All actors must have a credible incentive to adopt a new payment mechanism. The banks will not incur the incremental costs of issuing contactless cards until they know they will get a positive return on their investments; the merchants will not deploy contactless terminals until they know consumers want to pay using contactless options; and the consumers will not use contactless cards until they know the cards are secure and acceptable at most POS terminals. In the US economy, where market evolves largely on its own and where there are thousands of banks and retailers, this chicken-and-egg problem is difficult to resolve. Besides, many US customers believe that “tap & go” might not be as secure as “swipe & go” with a magnetic stripe card or as “dip & wait” with an EMV chip card – a misconception further fueled by data breaches at some US retailers.
Figure 1: Penetration of contactless payments
On the other hand, the markets like Australia, UK, South Korea, and Canada are much smaller and have a handful of large banks and large retailers. It’s easier to make a concerted effort towards a change in a less fragmented market.
Is there a case for contactless payments in the US?
Case for the banks
Countries like Australia and South Korea experienced 20-30 percent lift in the number of transactions per card in the three years following the acceleration of contactless payments. Consumers in these countries started replacing cash with contactless payment, which resulted in higher interchange fee and net interest income for the banks issuing the contactless cards. US is an unusually high cash-using economy with more than one-fourth of the total consumer transactions conducted in cash. With contactless payments, the banks will also benefit with the decrease in the cash-handling activities and decrease in the related network costs, for example, branches and ATMs.
In US, several large financial institutions have begun offering contactless cards, including J.P. Morgan Chase, Capital One, American Express, Discover Network, and Citi – a sign that US is finally getting ready for contactless payments.
Case for the merchants
Contrary to the conventional wisdom that the merchants need big investments for contactless enablement, the US merchants, to a large extent, already have the infrastructure to accept contactless payments. The fraud liability shift in Oct 2015 from the banks to the merchants forced merchants to set up new POS infrastructure for EMV chip cards. Contactless payments ride on the same secure EMV infrastructure as EMV chip cards, though some POS terminals will require software upgrades to for contactless enablement. In fact, more than 60% of merchants, in sectors such as QSR (Quick Service Restaurant), drug stores and pharmacies, and food and groceries that are hotspots for contactless payments, are already enabled for contactless.
In London, UK, contactless payments took off when city’s transportation authorities started accepting “tap & go.” The New York Metro Authority and the Boston Transit Authority have announced their plans to implement contactless payment systems. The move might serve as a factor for the surge in contactless adoption.
Case for the consumers
Security is the main driver behind consumers’ adoption of a new payment method. US consumers perceive contactless payments as less secure than cash and magnetic stripe or EMV chip cards. However, the perception of risk is misplaced as contactless payment uses the same secure EMV infrastructure. Moreover, post COVID-19, the actual risk of infection would outweigh the perceived security risk associated with contactless payment.
The convenience offered by contactless payments will stand out to current US consumers who must “dip & wait” with their EMV chip cards for even low-value transactions. Prior to the EMV-era, the magnetic stripe cards didn’t require a customer signature below a certain transaction threshold. Handing over the card to clerk to swipe seemed as easy as tapping through a contactless card, which is why the convenience of contactless option did not stand out to the customers when US made its foray into the contactless options in mid-2000s.
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Banks |
Merchants |
Consumers |
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Financial benefits & branding |
Speed & better customer experience |
Contactless & seamless experience |
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Table 1: Benefits of contactless payment to actors in a payment ecosystem
What must banks, merchants, and policymakers do for contactless payments?
Post COVID-19, with the change in consumer behavior, the case for contactless payment is stronger in the US than before. The missing pieces of the puzzle are educating the consumers and placing contactless cards in their hands.
Merchants can display contactless signage to indicate the capability on contactless-enabled POS terminals. An EMVCo symbol indicates the acceptance of both contactless and mobile wallet payments. Cashier training is also vital to help consumers during checkout.
US banks must commit to an extensive rollout for contactless cards for both new and existing accounts. There’s a benefit for the banks in moving fast with the implementation. One can imagine that a card that gets declined on a tap could quickly go to the back of customer’s wallet – a dreaded scenario for the issuing bank. The banks must also educate consumers about the security of contactless cards to allay any fears in consumers’ mind. Marketing campaigns through traditional and social media could be creatively used to educate consumers.
Most countries have a threshold for contactless payments beyond which the customer must use the PIN pad. The limit is in place for a good reason. However, during the coronavirus outbreak, there could be no reason bigger than avoiding the risk of infection off the PIN pad. Trade association UK Finance has increased the limit by £15 to £45 recently. Policymakers in the US could also increase the limit for contactless payments in view of the pandemic.