Why US banks are missing the contactless wave
- Contactless cards, which have taken off in the U.K., Canada, and Australia, have been slow to catch on in the U.S.
- Digital wallets such as Apple Pay may be a means for U.S. banks to roll out their contactless payment strategies, analysts say.
In recent years, “riding the contactless wave” has been a defining slogan for payment modernization, especially in markets like the U.K., Australia and Canada. The convenience of being able to tap a card instead of inserting it is thought to have made payments faster and easier. In the U.K. alone, over 107 million contactless cards were in use as of March of this year. Australians have been so enthusiastic about Visa payWave and Mastercard PayPass that many don’t care about mobile payments, and Canadians’ use of contactless cards doubled between 2014 and 2015.
The U.S. by contrast, has been slow on the uptake of contactless cards. Contact cards — whether chip or old-fashioned magnetic swipe — still rule the roost with no major brands getting into mass distribution of contactless cards. Bankers and analysts said that the U.S. hesitance to go fully contactless is due to the sheer volume of card issuers compared to other countries, and lessons learned from pilot projects that just didn’t work.
“Ten years ago, a lot of banks [in the U.S.] tried it and it was unsuccessful,” said Brendan Miller, principal analyst at Forrester Research. “There weren’t a lot of point-of-sale terminals that could accept contactless payments — it was a chicken-and-egg issue — and some consumers had cards in their wallets but couldn’t use them.”
Three years ago, Chase discontinued contactless Chase Blink cards it rolled out in 2005, and US Bank scrapped them after an unsuccessful test run a few years ago. Although some transit providers have made inroads in the adoption of contactless cards (e.g. Chicago’s Ventra Card, and more recently Philadelphia’s SEPTA Key Card), U.S. banks are more cautious. Among major banks still offering contactless cards, Capital One has included the feature on some of its cards as of April of this year. The wait-and-see approach among many U.S. banks underlies their nervousness about whether contactless cards will catch on among customers.
“We know consumers prioritize simplicity and ease of use, and that means being able to easily discern whether or not a merchant accepts contactless payments,” said Dean Rowley, senior vice president of payments at TD Bank. “Right now, that isn’t always clear, so it’s simply easier and more convenient for consumers to swipe or insert their card. Slow adoption of cardless options like Apple Pay and other mobile wallets by both consumers and merchant terminals indicates low consumer demand,” he said, adding that cards that allow for contact and and contactless transactions (the so-called dual interface cards) are costly.
Another major impediment is the fragmented nature of the U.S. banking system, compared to Australia, Canada or the U.K., where fewer banks means an easier route to standardization.
“In those three countries, banking and merchant acquiring are both highly concentrated with just four or five banks doing all of the card issuing and merchant acquiring [the bank that process cards for merchants],” said Michael Moeser, director of payments at Javelin Strategy and Research. “The retail sector in the U.K., Australia and Canada is much more concentrated as well — so when a new technology needs to be deployed in the U.K., it is very easy for the banks, acquirers and merchants to work together.”
But the lag on pay-by-wave cards doesn’t mean the door to mobile payments is closed. The growth of digital wallets such as Apple Pay offers an opportunity to break the logjam of customers and retailers who are reluctant to embrace contactless, Moeser said.
“Today, issuers see Apple Pay as a new contactless strategy since it is an alternative and leverages Apple’s brand,” he said. “Since there is no need to issue a contactless card at additional expense, consumers who want to use their phones to make payments will simply load the card into their phone.”
Since the traditional checkout counter could eventually be replaced by mobile payments, some say banks are thinking this is reason enough to skip contactless and jump on mobile.
“The traditional checkout line we think of today is going away,” said Miller. “Why wouldn’t you just walk in and the store will have your card on file and recognizes your face or voice — it’s eliminated the idea that you have to tap your card and you can walk in and pay seamlessly and that’s where we’re going.”
Still, others argue the banks will not want to give up on owning the payments infrastructure.
“There is no leapfrog to mobile payments in our future over the next few years,” said Randy Vanderhoof, executive director of the Secure Technology Alliance. “Mobile wallets are still in their infancy [in payments industry terms] and financial institutions are not going to turn over control of how consumers transact to a third party.”