US banks following suit on contactless
(8 January 2019 – USA) Contactless credit cards will finally roll out at scale in the US in 2019, giving card-issuing banks a chance to win market share away from cash, but the fact that tap and go payments have taken so long to hit the US emphasises the challenges to financial innovation in one of the world’s largest markets.
In 2017 US consumers made US$6.6 trillion in payments on credit, debit, and prepaid cards according to the US Federal Reserve, eight percent more than in 2016 and totalling less than half of total consumer expenditures. The UK made the shift toward cards with chips by 2006 and Australian merchants uptake of contactless payments methods has been widespread and rapid over the past decade.
Momentum appears to be building behind contactless in the US market. The key catalyst has been JPMorgan, which announced in November that all of its credit and debit card holders would be moved to contactless by the end of 2019. No other major bank has made a similar commitment however MasterCard says it has agreements with its bank partners that will bring contactless cards to customers accounting for two-thirds of its total payment volumes within two years. Visa expects 100 million contactless Visa cards to be issued in the US by the end of 2019. An important catalyst for adoption will be rapid transit. New York’s Metropolitan Transit Authority says it will start accepting contactless payments in 2019, using the same technology provider that built the system in London’s Tube. Some 500 subway turnstiles and 600 buses will be upgraded in 2019. Pat Foye, president of the MTA, said the project is proceeding on time and on budget. “When transit gets enabled through contactless, usage rates go up everywhere, not just in transit but in Starbucks, McDonald’s and so on” said Mr Vosburg of Mastercard.
The move comes to contactless at a crucial times for banks’ card businesses. While consumer credit quality remains strong, competition is pressuring fee revenue. Being first to offer a consumer contactless will confer a key advantage on issuers. “What is at stake for the banks is top of wallet status for their cards,” said Mr Jenkyn of Visa. Contactless tends to be adopted for minor, everyday transactions which puts consumers in the habit of reaching for their contactless card first. AT Kearney, a consultancy, has found that in developed markets the shift to contactless increases the number of transactions per card by 20-30 percent. Whatever card gets pulled out first to set up an online account at, for example, Amazon or Apple ends up capturing all the spending. ‘Top of wallet’ means more now given the first card in a customer’s wallet is often the only card they use.
Currently 42 states allow credit card surcharges, and with ongoing court cases for surcharging in California and New York, legal experts predict more states will soon greenlight surcharging. For merchants charging customers a fee to offset the extra costs for accepting credit cards, the industry norm is a 3.5 percent surcharge, with detailed rules and disclosures required by the card networks. Surcharging may catch on with certain merchants, analysts say. “I don’t think we’ll find a ton of mainstream retailers doing this, but it’s a good fit for certain segments of the market where audiences are captive and competition is less pernicious,” said Rick Oglesby, president of AZ Payments Group. Operators of taxi fleets and stadiums (which have captive audiences) already implement surcharging in some cases. Competition among merchants may be a deterrent for surcharging, though. “I don’t expect surcharging to be something that happens at every location, but it will continue to gain strength in certain markets,” Oglesby said. Maynard was most optimistic about the markets where rewards cards are widely used. “About 80 percent of all credit card purchases are made with rewards cards, and it’s the merchants who bear the extra costs from them,” Maynard said.
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