Just over two years ago, my colleague Doug King penned a post lamenting the lack of dual interface, or "contactless," chip payment cards in the United States. In addition to having the familiar embedded chip, a dual interface card contains a hidden antenna that allows the holder to tap the card on or wave it near the POS terminal. This is the same technology—near field communications (NFC)—that various pay wallets inside mobile devices use.
Doug is now doing his daily fitness runs with a bigger smile on his face as the indicators appear more and more promising that 2019 will be the year of the contactless card. Large issuers have been announcing plans to distribute dual interface cards either in mass reissues or as a cardholder's current card expires. Earlier this year, some of the global brand networks launched advertising campaigns to make customers aware of the convenience that contactless cards offer.
So why have U.S. issuers not moved on this idea before now? I think there have been several reasons. First, for the last several years, financial institutions have focused a lot of their resources on chip card migration. Contactless cards will create an additional expense for issuers and many of them wanted to let the market mature as it has done in a number of other countries. They were also concerned about the failure of contactless card programs that some of the large FIs introduced in the early 2000s—most merchants lacked terminals capable of handling the technology.
The EMV chip migration solved much of the merchant terminal acceptance problem as the vast majority of POS terminals upgraded to support EMV chips can also support contactless cards. (While a terminal may have the ability to support the technology, the merchant has to enable that support.) Visa claims that as of mid-2018, half of POS transactions in the United States were occurring at terminals that were contactless-enabled. Another factor favoring contactless transactions is the plan by major U.S. mass transit agencies to begin accepting contactless payment cards. According to the American Public Transportation Association's 2017 Ridership Report, there were 41 transit agencies in the United States with annual passenger trip volumes of over 20 million trips.
Given that consumer payments is largely a total sum environment, these developments have led me to ask myself and others what effect contactless cards will have on consumers' use of other payment forms—in particular, mobile payments. As my colleagues and I have written numerous times in this blog, mobile payments continue to struggle to obtain consumer adoption, despite earlier predictions that they would catch on quickly. There are some who believe that the convenience of ubiquity and fast transaction speed will favor the dual purpose card. Others think that the increased merchant acceptance of contactless will help push the mobile phone into becoming the primary payment form.
My personal perspective is that contactless cards will hinder the growth of in-person mobile payments. There are those who claim to leave their wallet at home and never their phone, and they will continue to be strong users of mobile payments. But the reality is that mobile payments are not accepted at all merchant locations, whereas payment cards are practically ubiquitous. While I am a frequent user of mobile payments, simply waving or tapping a card appeals to me. It's much more convenient than having to open the pay application on my phone, sign on, and then authorize the transaction.
Do you believe the adoption of contactless cards by consumers and merchants will be as successful as it was for EMV chip cards? And do you think that contactless cards will help or hinder the growth of mobile payments? Let us hear from you.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed