We see it more and more. A consumer taps or hovers a card over the wave-like symbol until the light turns green and the terminal beeps. They’ve just made a frictionless payment using the same secure encryption methodology as an inserted EMV card in a fraction of the time.
Consumers may have just adjusted to insertion a couple of years ago, but the pandemic accelerated contactless card migration at a rapid rate. 451 Research found that 86% of consumers plan to keep making contactless payments even when the pandemic is behind us.
Many industry experts have written about the benefits of dual-interface EMV before, but now we have more consumer data to confirm them. And it didn’t take nearly as long for consumers to embrace the contactless shift as it did for inserted EMV cards. Contactless cards’ ease of use leads to an improved customer experience and a transactional lift, which results in higher interchange for financial institutions.
Why Embrace Contactless Cards
Whereas fraud liabilities incentivized financial institutions to shift from magstripes to inserted EMV chips, contactless cards may not seem like a critical need. In CSI’s recent 2021 Banking Priorities Executive Report, only 15% of executives listed it as their highest payments priority.
However, contactless cards can be a revenue generator for financial institutions. They also continue to rise in popularity, especially among younger consumers. Institutions that embrace contactless can therefore maximize and better monetize their card programs while simultaneously benefitting consumers and merchants. Consider the following trends that emerged in Visa’s research. With contactless cards:
- Consumers benefit from the speed and convenience of transactions. Many consumers use digital wallets, but a significant number either don’t have a smartphone or are more comfortable with the habit of using a physical card.
- Issuers benefit from higher interchange revenue with each tap. Consumers also tap contactless debit cards at a higher rate than credit cards (4.9% compared to 2.8%), and CSI found that consumers use contactless cards approximately 3-4 times more per month.
- Merchants benefit from additional transactions (consumers spend roughly $125-$200 more per month) and the speed that mitigates customer checkout bottlenecks. As a result, 95% of new terminals shipped have contactless capabilities.
While digital wallets make up a large portion of contactless sales, contactless card users are distinct from mobile wallet users. Over 90% of cardholders who have tapped in stores via card have never done so by digital wallet. This trend suggests that consumers favor digital wallets like Apple Pay for eCommerce but cards in physical stores.
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How COVID-19 Accelerated the Demand for Contactless
A few years ago, the transition to inserted EMV debit cards presented a groundswell in the payments space. But adoption in the United States was slow-moving. According to Visa, the technology saw just a 1.6% increase in payment volume in 2015. However, by 2019, EMV card payments represented 99% of overall payment volume in the United States.
Dual-interface EMV has been a different story. The United States initially lagged due to higher costs and low consumer demand. But as awareness of its convenience and security spread, so did the demand. By 2019, these contactless-enabled cards had already begun to boom.
During 2020, the COVID-19 pandemic amplified contactless card appeal as consumers reframed spending habits and sought ways to decrease cash and physical contact. Aite found that 1 in 5 consumers made a contactless payment for the first time during the pandemic. 56% of them were from contactless cards.
Throughout the pandemic, contactless debit cards have become critical for everyday non-discretionary spending. Through the uncertainty of a global pandemic, debit outperformed credit overall. This trend partly stems from consumers preferring to spend money they already have rather than the money they may have in the future.
In all likelihood, many of the habits and preferences formed throughout the pandemic will continue once it subsides, as consumers have experienced contactless firsthand.
“COVID-19 has been more effective at bringing awareness to the advantages of a contactless checkout than any marketing campaign could have ever hoped to achieve. Consumers are looking for opportunities to use contactless and merchants want to respond with both mobile and card-based solutions to meet the broadest audience possible,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator Advisory Group.
“Financial institutions have moved up their contactless card issuance projects to meet their customers’ and members’ needs while also hoping to capture more transaction volumes as users opt for contactless over cash at the point-of-sale,” she added.
Consumers are looking for opportunities to use contactless and merchants want to respond with both mobile and card-based solutions to meet the broadest audience possible,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator Advisory Group.
Continued Retailer Holdouts and Promising Trends
Presently, contactless terminals enjoy roughly 67% market penetration overall and are poised to expand. For some issuers, that majority isn’t persuasive enough, as popular merchants such as Walmart have not yet installed contactless terminals in their stores.
However, trends from previous major retailer holdouts suggest that even those businesses could soon follow suit. Many that joined the Merchant Customer Exchange (MCX) to provide their own payment scheme were met with controversy and a consumer push to diversify their payment capabilities.
As consumer frustration seemed to hurt the bottom line for companies like Kroger, many began to enable payments via EMV contactless cards and digital wallets such as Google Pay or Apple Pay. Best Buy, Walgreens, CVS and eventually Target all eventually conceded to consumer pressure.
“Contactless payments are now mainstream. COVID-19 health and safety measures raised both merchant and consumer awareness of contact-free ways to pay. While the pandemic accelerated contactless in 2020, payment providers and merchants now see that no-contact POS transactions can be a differentiating strategy to engage and expand their customer base through 2021 and beyond,” said Raymond Pucci, director of merchant services at Mercator Advisory Group.
Walmart remains a holdout in the United States, as the company continues to promote Walmart Pay. However, after a concerted effort, Walmart locations have begun to accept contactless cards across Canada, where contactless has become the dominant form of in-person payment. Walmart’s branded Capital One credit card is also contactless enabled, which could be a promising sign for the future.
With shifting consumer preferences and habits, experts expect contactless payments to increase. Until such time, dual interface users can still insert the chip to transact as usual or use its magstripe as a last resort for those terminals that do not provide contactless capabilities.
Contactless Debit Cards Moving Forward
Perhaps more telling, merchants in everyday spend categories are adopting contactless-enabled POS terminals at a faster rate. According to Visa, 73% of face-to-face transactions occur at a contactless-enabled merchant, with exceedingly high adoption at quick service restaurants, convenience stores and grocery stores. This is fantastic news for issuers and consumers, as these “everyday spend” merchants have seen the most debit card use over the past year.
Also, many gas pumps that haven’t already done so will finally implement EMV-accepting hardware to eliminate magstripe fraud. These terminals will almost universally add contactless capabilities.
Concerning the cards themselves, Aite found that 52% of all payment cards are contactless, and forecasts 56% by 2022. Card issuers can meet the growing consumer demand by embracing contactless EMV cards and promoting their availability and use.
Refer to CSI’s Digital Payment Trends in Banking white paper for a wider examination of the latest payments trends, and the role each plays for financial institutions.
Matt Herren is the Director of Payment Strategy at CSI. With a strong focus on emerging technologies and how they apply to the financial industry, Matt has led CSI’s effort to drive innovation in the payment space. In his role, Matt has worked to enhance customer experience and helped direct innovative product offerings to increase bank profitability, allowing banks to realize industry-leading results and maximize program performance.