Various clues are signaling that contactless payments will become the rule rather than the exception much sooner than we think.
Contactless payments allow consumers to pay for goods and services with a debit card, credit card, smartphone or some other device at a point of sale (PPOS) without actually making physical contact with another human being. This is achieved through radio frequency identification (RFID) or near-field communication (NFC) technologies. “Tap-to-pay”, one of the most common methods, entails tapping a card or device against a point of sale (PoS) terminal, and the transaction is done.
Quick-response code-based payments (QR codes), represent another commonly used form of contactless payment. One advantage of QR codes is that they can be used/scanned from a few feet away, which is an improvement over tap-to-pay from a social distancing perspective.
These methods of paying are much faster than swiping or dipping a card into a payment reader, and just as secure. They are also more hygienic, a consideration that has risen in importance lately.
The Bank of International Settlements (BIS) brought this point home in a report that sheds some light on the role of physical cash and card payment methods in transferring viruses. The report concluded that card payment terminals and PIN pads can spread the coronavirus more easily than paper currency, since the virus survives best on non-porous materials such as plastic or stainless steel. Cash is no better, apparently. A 20-year-old study on the bacterial contamination of paper currency revealed that 94% of dollar bills tested carried many pathogens and other nasty surprises that can stay on money for days.
Given the heightened fears of the virus living on bank cards and cash, we are seeing a concerted push by governments, card networks, retailers and consumers around the world to speed up the use of contactless payments at the point of sale.
Spending Limits Go Up
One strategy governments are employing is to increase the contactless payment limit on consumer cards. France, for example, just raised its limit from €30 to €50, and timed the rule change to coincide with the lifting of the country’s lockdown on May 11. This means, a customer who uses a bankcard issued by a French bank does not need to enter their PIN into the terminal or sign their receipt, as long as the transaction is €50 or less. New Zealand opted for a more aggressive increase of 150%, going from NZ$80 (US$48.77) to NZ$200 (US$121.92).
Altogether, more than 50 countries worldwide announced they were raising contactless limits on cards for greater consumer convenience during the lockdowns.
The freedom of being able to pay without providing a PIN carries certain risks, which is why the spending limits on contactless transactions tend to be low. At issue is how best to prevent fraud if restrictions are fully removed. This security issue is paving the way for next-generation formats such as biometric payment cards or solutions that apply the concept of multi-factor authentication to contactless transactions.
Global Consumers Switch to Contactless Cards
Contactless payments have taken the world by storm. Visa says 48% of its in-person transactions outside the United States are contactless. In Western Europe, that figure is higher: nearly two-thirds of all transaction happen via tap. And in Canada, Central Europe, the Middle East and Africa that figure is closer to 60%. Asia Pacific lags behind the global average somewhat, with one-third of all in-person transactions happening via contactless card.
A Mastercard study that included participants from 19 countries revealed that nearly half of the respondents (46%) had recently swapped out their top-of-wallet card for one that allows for contactless payment. In fact, contactless transactions grew twice as fast as non-contactless transactions in the grocery and drug store categories between February and March. Mastercard’s data shows that, in the first quarter of 2020, contactless transaction volumes increased by 40% compared to the same period in 2019.
Even cash-heavy countries have seen contactless payments grow. For instance, Germany has seen contactless payments go from 35% to 50% of card transactions since it raised the cap from EUR 25 to EUR 50.
US Consumers Finally Join Along
There’s been one no-show in this race: The United States. Although 60-70% of terminals in the U.S. are capable of processing payments through contactless NFC processes, the functionality has yet to be activated in most cases. A.T. Kearney reported a few months ago that just 0.18% of the country’s point-of-sale transactions were contactless. Indeed, the U.S., being five years behind in the adoption of contact chip payment technology, is now roughly as far behind in contactless payments, according to the International Card Manufacturers Association (ICMA)’s 2020 State of the Card Industry report.
But that’s all about to change.
Amid the COVID-19 outbreak, Americans too are avoiding cash and seeking ways to quickly get in and out of stores without touching payment terminals. Like their international peers, they have started turning to contactless payments in droves. Banks and card issuers have also done a better job at boosting awareness which is helping spur demand. According to a survey conducted by payments provider Paysafe during the second half of April, Americans are using contactless payments more than ever before.
Dan Sanford, global head of contactless payments at Visa confirms as much, saying the U.S., buttressed by the adoption of EMV technology, is now leaving behind its status as the global outlier where contactless is concerned.
US Retailers Contribute to the Shift
U.S. retailers have contributed to that shift by enabling contactless technology at the POS. Square Inc. (SQ) announced during its Q1 earnings call that its POS contactless technology, which used to account for about a third of gross payment volumes, moved to “well over 50%” since April as retailers began to adapt their store operations to the pandemic era. The company expects more merchant signups to follow as their brick and mortar stores come back. Retailers preparing for store re-openings have also announced plans to encourage touchless payments.
Pending Legislation: The Touchless Transactions Act of 2020
Politicians are also doing their part. U.S. Congressman French Hill has put forth a bill titled the “Touchless Transactions Act of 2020” which seeks to eliminate the need to touch a terminal for a point-of-sale (POS) transfer. If the legislation is passed, any swipe, dip, or tap transaction at a merchant POS terminal won’t require a signature from the payee. The bill, which was presented to the House Committee on Financial Services on March 12, still has to be approved by both sides of Congress and be signed by the President before it becomes law.
The bottom line here is that contactless payments are at a big tipping point. The biggest economy in the world has finally opened up to the trend; More card issuers are delivering contactless cards to consumers; Retailers are coming on board; The country’s big transit systems in New York and Chicago are contactless-equipped, with other big cities to follow; And there’s a big mobile payments push from popular titans such as Apple and Google.
All of this bodes well for software and hardware providers specializing in this space.
How to Invest
Investors can gain exposure to payment companies through ETFs such as the ETFMG Prime Mobile Payments ETF (IPAY) and the Global X FinTech ETF (FINX).
Managing Director, Research
McAlinden Research Partners