Contactless tap-and-go cards are finally rolling out in the US. Mastercard, Amex, and Visa execs told us why it took so long.
Graham Rapier / Business Insider
- The US has consistently lagged other markets in adopting new credit card tech.
- We reached out to execs at Visa, Mastercard, and American Express to understand what's behind the US lag, and whether it was possible for the US to skip full contactless card adoption and go all-in on digital wallets.
- "You're going to have a certain swath of the industry that's going to adopt mobile, but it's not for everybody," said Dan Sanford, global head of contactless payments at Visa.
- The US contactless environment will likely feature both tap-to-pay cards and digital wallets in the coming years.
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Will the US leapfrog contactless card adoption and go straight to digital wallets?
That's a question that was raised by moderator William Hernandez, a fintech reporter for American Banker, on a recent panel discussion at the FinovateFall 2019 conference in New York.
It seems a fair question. The US has consistently lagged other markets like Europe and Australia in adopting new card tech. For instance, the UK fully adopted EMV chip technology in 2006, and advanced to contactless tap tech by 2014, when the London Underground started accepting contactless fare payments in turnstiles.
The US was still using magnetic stripe ("magstripe," in industry lingo) cards back in 2014, but high-profile breaches at retailers and pressures from card networks finally drove adoption of EMV chips in 2015 - meaning consumers had to become accustomed to inserting cards into chip readers, instead of swiping.
Now, the UK and other markets like Australia and Canada have mature contactless tap environments.
But in the US, contactless cards still haven't really caught on. And 80% of the first million taps of the New York MTA's contactless subway fare pilot were done with mobile wallets, not cards.
That's why some are wondering if it's possible card issuers in the US will focus on digital wallets as their contactless strategy, and prioritize that over the entire process of (and costs related to) issuing contactless cards, influencing merchants to enable point-of-sale card readers, and shifting consumer behavior toward tap-to-pay.
We spoke with execs at Mastercard, American Express, and Visa to understand what we can expect for contactless tap, and get a better idea of why it's taken so long for the US to catch up to other markets. The US contactless environment will likely feature both tap-to-pay cards and digital wallets in the coming years.
Switch to chip
European markets transitioned from magstripe to EMV chips starting in the early 2000s. It was more or less a cost-driven decision, given the high telecommunication costs associated with the magstripe payment authentications that have to happen online.
EMV chip transactions create unique codes that are validated at the point of sale, instead of having to confirm each transaction online.
The US, by comparison, wasn't facing the same telecom costs. Given the size of the market and sheer number of magstripe cards and readers, there was little incentive for card issuers to upgrade to EMV chip.
"The U.S. is a complex and layered payments market, and large-scale adoption of any new technology takes time and participation across the industry," Liz Karl, vice president of payments consulting at American Express, told Business Insider in emailed comments.
A transition from magstripe to EMV chip cards would require costly hardware updates at merchant checkouts. For payers, a behavior change from swiping to inserting a chip would complicate checkouts.
"We were behind on all of it partly because we could never get a business case on chip cards," said Zachary Aron, US banking & capital markets payments leader at Deloitte Consulting. "It was a solution looking for a problem, and no one found the problem."
"When [the US] was moving to EMV, it was driven by a lot of the data compromises," said Dan Sanford, global head of contactless payments at Visa. "We were getting a lot of inquiries from policymakers in D.C.," Sanford said. So in 2014, chip cards entered the US market.
It wasn't until 2015 that the EMV chips really caught on. Following the high-profile data breaches and subsequent pressure from regulators, the EMV card networks rolled out a liability shift policy in the US that went into effect October 2015. EMV - which stands for "Europay, Mastercard, Visa" - is a standards body that counts several major US credit card networks as members.
The policy basically said that in a chip-enabled market, any fraud traced to the point-of-sale would be a liability to the least secure party. For example, if a merchant did not have an EMV chip enabled reader but the customer did actually have a chip card that was swiped, any fraud on the transaction would be the merchant's responsibility.
"The liability shift created a natural motivation for each of the players to make a move," said Linda Kirkpatrick, EVP of US merchants and acceptance at Mastercard. Both merchants and card issuers were now incentivized to upgrade points-of-sale and issue EMV chip cards to their customers.
However, issuers did not send out dual-interface (meaning both chip and contactless-enabled) cards to customers at that point.
"There has to be some motivation for issuers to take on the incremental cost," said Kirkpatrick. At the time, there simply wasn't any consumer demand for contactless tap in the US.
"I think they wanted to wait and see if there was a consumer imperative, and now there is," she said.
There was something else happening in 2014 - that's when Apple Pay launched. Given the hype over mobile payments and the prohibitive costs of issuing a dual-interface card, mobile payments became the card issuers' contactless strategy, said Sanford.
"Mobile really hasn't taken off in the US, and we've created the same challenges in the US point-of-sale environment around introducing friction with EMV," said Visa's Sanford.
So the likelihood of all US consumers adopting mobile wallets as their primary way to pay is low.
"We realized that to really move the market in the US, we needed to migrate toward contactless cards, that it couldn't be a contact chip and mobile-only strategy, because you're going to have a certain swath of the industry that's going to adopt mobile, but it's not for everybody," Sanford said.
As of July 2019, all new American Express consumer and small business cards being issued were contactless-enabled (and new corporate cards were contactless as of October 2019). Existing cards will be upgraded in natural cycles, unless specifically requested by customers.
"Whether by card or digital wallet, we believe contactless as a payment option is quick, convenient, and secure," said Karl.
Commuters and their coffee
Similar to London, public transit is a strong consumer use case that may be the driver behind contactless tap adoption in the US.
"There really isn't any other use case, other than maybe heavy caffeine users, where consumers are using their Visa cards one or two or even three or four times in a given day like they are in places in New York with the MTA," said Sanford.
In May of this year, New York City's MTA launched its public pilot of OMNY (One Metro New York) on the 4/5/6 subway line. OMNY is a contactless fare payment system, accepting both mobile digital wallets and contactless-enabled cards.
In the first few months of the OMNY launch, the MTA reported 80% of taps came from digital wallets, as opposed to contactless cards.
"If you're comparing the two right now, mobile adoption is further along because it's more mature than where we are in terms of card issuance," Sanford said, in regards to these results.
"Nine million commuters every day are now experiencing the incredible user interface at the turnstile, where they can simply tap a card and go through," said Mastercard's Kirkpatrick. "That's created a ton of buzz in the industry, and really created the imperative for consumers to want a card that has contactless capability."
Visa expects to see 100 million contactless-enabled cards by the end of 2019, and 300 million in circulation by the end of 2020. Sanford thinks that in a few years, the US will look a lot like other markets ahead of the US.
"Much of that is going to happen across different demographics. Certain consumers will select and be heavy mobile users, and the other will be more comfortable using their card," Sanford said.
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