The Future of Payments in the Era of COVID: Contactless Payments
We aren’t saying that cash will be a thing of the past, but we do believe that contactless card payments will soon be the de facto standard of the future. Just like Zoom has become the norm, so will contactless payments. The COVID pandemic has consumers asking why don’t we have this, and merchants stepping up the conversion of their readers to make customers more comfortable. No one wants to expose themselves to potential health risks by touching cash or a payment keypad. Recent MasterCard data shows that contactless payments increased 40% in Q1 compared to the previous quarter as the global pandemic worsened. This surge will continue according to a recent American Express survey that states 58% of consumers who have used contactless payments in the past are more likely to use them moving forward.
The Psychology of Contactless
Consumer behavior is changing before our eyes. According to recent Visa data, 31 million Americans tapped a Visa contactless card or digital wallet in March 2020, up from 25 million in November, with overall contactless usage in the US growing 150% since March 2019. This follows the global trend, where 60% of Visa transactions outside the US are already using contactless. Consumers want to get in and out of stores quickly with minimal contact during the transaction. There is a new, COVID-caused psychological factor prevailing.
A recent Mastercard consumer survey substantiated those fears around payment transactions. Since the pandemic, half of consumers have an increased preference for contactless payments, with a third of US consumers claiming to use their contactless card more than other cards in their wallet. Nearly half of consumers wipe their payment cards clean after using them, which points to the top reason 77% of consumers prefer contactless payment: it is a “cleaner” way to pay. This focus on hygiene is demonstrated in that more than half of US consumers do not want to provide a signature at the point of sale.
The Business Case for Contactless
The migration from cash to contactless can prove attractive economics to merchants and the banking industry. From a merchant perspective, contactless cards speed up the checkout process and improve the customer experience because it is faster, more convenient and more efficient. For financial institutions, data from A.T. Kearney and Visa show that banks could generate an estimated $2.4 billion in incremental earnings over the next five years due to increased contactless card usage while achieving an industry-wide cash-handling cost savings of up to 6% of annual consumer banking operating expenses. These estimates were based on contactless adoption statistics in markets similar to the US which showed that financial institutions on average achieved an increase of 20-30% in transactions in the three years following the acceleration of contactless cards, which translated to 5-40 new transactions per card per year.
COVID created an inflection point for cash to card migration and the adoption of contactless card payments, but also brings challenges for mobile payments which are complicated by the use of masks and other PPE.
The Digital Wallet vs. Contactless Payments
The technology for tapping a contactless card is virtually interchangeable with digital mobile payments such as Apple Pay or Google Pay. Merchants that accept a tap from a card also can typically accept a tap from a phone. So, what technology will win out? We believe cards have served consumers extremely well for more than 50 years and that adding contactless capabilities to the card is an easier behavioral change than shifting to mobile wallets. This new technology has solved a real consumer pain point and the adoption curve follows. For example, I no longer store 30+ CDs of music in my car or carry a book of paper maps because each of these were not a good consumer experience and were transformed by something significantly better. While COVID will provide an inflection point for cash to card migration and adoption of contactless, I recently tried an Apple Pay transaction while wearing a mask and found using a card for a tap-to-pay transaction was significantly easier.
The latest data from PYMTS.com indicates that digital wallets are actually decreasing in their share of eligible transactions from 6% in 2019 to 5.1% in 2020 with Apple Pay at just 0.9% of retail sales (excluding online and vehicle sales). Pew Research believes this is because of lack of trust for this digital technology. Across all generations, there were persistent concerns about the security of digital wallets and indications that consumers have more trust in traditional methods, such as physical cards.
Digital wallets have been around for more than a decade; however, recent data shows that only 15% of consumers made an in-store transaction with a digital wallet in late 2019. The number one reason for consumers not adopting a digital wallet was “no need/not interested” (36% of non-users). The Forbes article supports what we have seen from our customers: “the near-term contactless cards will have broader market appeal than contactless digital wallets given that they encourage an evolutionary, rather than revolutionary, behavior change.” In fact, A. T. Kearney states: “US consumers are interested in contactless cards as they are perceived as “fun and exciting,” secure and simple. Moreover, contactless cards are the future of payments … given how prominent contactless cards are in other countries.”
The Time is Now
The market saturation is reaching a tipping point according to Visa data. The US now has the most contactless cards of any market globally at 175 million, with nine of the top ten US issuers actively distributing new contactless cards. New analyst research predicts that contactless cards will exceed initial estimates for the year by 110 million because of the coronavirus. This figure will bring the total number of contactless payment cards in worldwide circulation to more than 2 billion by the end of the year.
In the same vein, merchants have been steadily upgrading POS terminals, shipping 47.8 million contactless units globally in 2019, bringing the total to 100.4 million worldwide, which is now 62% of all POS terminals, according to the latest research. Some issuers are seeing nearly 70% of face-to-face transactions in the US becoming tap and pay purchases. We expect this number to explode in 2020 due to the coronavirus. Card issuers are promoting tap and pay usage by raising the purchase limits for contactless purchases. For example, in April, UK merchants saw approximately a 50% reduction in the number of times customers touched the POS because of the increased limits on contactless purchases. Globally, contactless payments continue to multiply with the latest data estimating that contactless terminals will increase at a compound annual growth rate (CAGR) of 12.9% from 100.4 million units in 2019 to 184.5 million units in 2024. This means that by 2024 more than 88% of the world’s POS terminals will be contactless, up from 62% in 2019.
COVID provides a simple and effective messaging opportunity for financial institutions to drive contactless payments in addition to transaction lift. It is a crucial time in our industry because contactless promotes and capitalizes on social distancing in addition to the typical speed and convenience benefits, which are often touted as the primary drivers of adoption.
New concerns and conveniences are shaping the landscape of how consumers prefer to pay. Though unexpected circumstances are driving rapid changes in behavior, it is up to the payment card industry to continue to innovate and issuers to be ready to meet evolving demands.