Why America is so behind in contactless payments
So ubiquitous is contactless in Australia that when hapless visitors from the US visit there is inevitable confusion as taxi drivers and restaurant staff try repeatedly tapping the card against the reader in frustration and without effect whilst the confused visitor wonders why her credit card is being beaten like that. Australia is the world’s leading contactless market, over 90% of face to face transactions are contactless whilst in the US its less than 1%.
Now, after years of lagging the rest of the world, the US is finally showing signs of re-assessing the role of contactless and specifically card based contactless in the payments landscape. It seems a good time to look at how and why the US has diverged so much from successful contactless markets elsewhere in the world and what lessons there might be there.
It’s a personal perspective of course and I owe a great deal to the many people I have worked with at banks, networks and within the merchant and processor community, for sharing their insights and experiences over the years in both the successes and failures in rolling out contactless payments in its various forms. I am purposely focussing on NFC as a contactless technology rather than QR codes and excluding the China experience specifically, that can be for another time.
What do we mean by contactless payments?
For the average American contactless payments is Apple Pay, or another mobile wallet. For those outside the US in a market with contactless payments, it’s the ability to tap your normal bank credit or debit card against a terminal and for low value transactions (the amount varies but generally between USD$50-$150) that’s it. A few seconds and you are done, no pin, signature, thumb print or other form of authentication needed. These contactless cards have both a chip and a thin antennae embedded in them that interact with the terminal to make the payment once it’s initiated on the terminal.
Try using a contactless card at one of the relatively rare US merchants that accept both “Apple Pay” and a card based NFC payment and witness the confusion of the cashier from the magic you just performed. Yet this is the normal way the majority of consumers in the developed economies of the rest of the world pay every day.
A global market but not a US one
Australia is not an outlier by any means with New Zealand, Singapore, Hong Kong, Malaysia, Thailand and the Philippines all either an established contactless market or becoming so. In Europe the UK, Spain, Italy, the Nordics, Poland and many others are all strong contactless markets. In contrast, in North America only Canada has followed the rest of the world leaving the US with Japan, Germany and Austria as developed economies that have not seen contactless adoption.
Japan, Germany and Austria are unusual as they are developed economies but have very low card usage vs cash so maybe it’s not surprising they are being slow to take up payment innovation. What is really strange, is why the US would be in the same basket as the these three. The US is one of the most mature card markets in the world, the credit card was invented here, the three major global payment networks Visa, MasterCard and Amex are all headquartered here along with the largest issuers in the world. The US created and is the center of the Fintech industry, it’s the crucible for PayPal, Stripe, Square, Marqueta — and many other leading new payment players. Apple Pay and Google Pay were invented here. It’s the largest most advanced ecomm and mobile commerce market in the world. Amazon.
So what went wrong? All the conditions should have made the US a leading contactless market, not one of the worst.
Does it matter?
I think it does. Contactless is one of the few if not the only payment innovations from the established industry that can actually improves the experience of paying, at least on contactless cards. It’s a quicker, much more convenient way to pay. Many other innovations have increased security and reduced fraud e.g. chip and pin but these have generally come at a cost in usability for the consumer. What Australia showed us is that consumers love quicker more convenient in store payments when given the choice, and consumer choice matters if we want people to use their cards more.
In markets where contactless has become normalised we see a substantial increased use of cards for low value transactions. It’s the foundation for a cashless economy, reducing the cost of cash in the economy, reducing fraud and crime and driving efficiencies in payment collections for merchants and banks.
What went wrong?
Contactless credit cards were initially brought to market around 2002 with Visa PayWave and MasterCard’s Masterpass. The value proposition was to help drive adoption of smaller merchants with a high proportion of low ticket transactions. Many millions of dollars were spent globally on installing NFC card readers, issuing NFC cards and marketing. At that point a contactless card cost a substantial amount more (as much as $10 per card) than an equivalent non NFC card for the issuing bank, reducing banks willingness to issue on a mass basis. Contactless was also assumed to be a product that would be of most relevance for younger consumers like students, so many of the early portfolios were entry level cards. As a consumer you had to go out of your way to find a NFC enabled card and when you did there was almost nowhere to use it.
The results were disastrous with very limited consumer adoption and increasingly apathetic if not hostile merchants, payment processors and issuers. It remained that way until 2011.
Aussie Aussie Aussie, Oi Oi Oi!
In 2011 the two dominant supermarkets in Australia, Coles and Woolworths, started testing contactless cards and acceptance. In doing so they challenged many of the accepted conventions of the market as regards NFC — that it was for a niche youth segment and small independent merchants.
The drivers were to reduce time at checkout for consumers and reduce the variability in time spent at the cash register. Cash payments can be very quick but they could also take many minutes as consumers fumbled for change, limiting efficiency planning. Both companies worked very diligently with their network partners Visa and MasterCard to design and implement an optimal solution. This included selecting the right hardware and software to ensuring proper placement and signage for the the readers and training cashier staff as well as consumer communications.
After careful testing both started rolling out contactless to all their stores in late 2011 and included NFC in their own co-branded credit cards. As the two combined accounted for a substantial majority of card payments in Australia this meant the market standard had been established. In parallel Visa and MasterCard locally worked with issuers to ensure cards were issued on a mass market basis and invested heavily in consumer communications. The results were, to an industry that had largely written off NFC as a failed technology, miraculous. Turns out consumers loved contactless payments when it was done right.
With consumer demand established and the benefits for issuers and merchants increasingly clear the industry started adapting the lessons learnt in Australia for other markets around the world. The cost of NFC cards fell to within almost parity with chip cards which most markets were rapidly moving towards. Seeing the upturn in demand POS manufacturers increasingly enabled NFC functionality as standard. In every successful market the success was based on close cooperation between payment networks, issuers, payment processors and key launch merchants to create a uniform, quick and frictionless customer experience.
The US goes it alone
Whilst the rest of the world pivoted towards NFC, in the US hostility remained entrenched (including the payment networks). One possible reason could be the dominance effect. Payments executives in the US were not expecting or looking to learn from international markets and certainly not Australia — a tiny market the fraction of the size of the US. The US was the market that literally set the standards and led the world on card payments.
Another, was the belief that mobile payments would replace the need for plastic altogether and NFC cards were merely an interim technology that the US would leapfrog. Mobile NFC pilots started as early as 2007 if not before.
Another contributing factor is the size and fragmentation of the US market, the cost of upgrading every contactless reader was astronomical. There was a belief, wrongly as it turned out, that success in contactless required all merchants to upgrade to NFC all at the same time. In actual fact consumers were quite happy to use contactless at some locations and not at others. The most efficient of these in terms of driving adoption were merchants that consumers visited frequently and that had a high proportion of low ticket everyday spend — supermarkets, quick service restaurants, convenience stores, coffee shop chains and pharmacies. In the case of London it was the mass transit system incorporating London Underground and Buses (Transport for London). This meant that the average market took between 3–5 years to hit critical mass — around 8–15% face to face transactions being contactless at which point natural growth became exponential.
One of the biggest missed opportunities in the US was the failure of the main networks to mandate NFC as part of the US chip migration in 2015 — this would not have cost the industry anymore as chip and NFC enabled cards were already at parity especially with US economies of scale included. There was ample evidence by 2015 that NFC cards were the way to establish contactless payments at scale but the opportunity was lost.
The end of the beginning?
In 2017 at the Visa Payments Forum in Florida industry executives from across the Americas gathered to hear updates on strategy and direction of the market and the company. At this event a Video was shown to the assembled executives of how contactless was a pervasive part of the Australian consumer experience and could be in the US too! — the presenter, a Canadian himself, acutely aware of the irony of the moment apologetically advised any Canadians to read their email during the video and subsequent presentation.
It was, to anyone who had lived outside the US in a contactless market a strange experience — like watching a 1960’s commercial for microwave ovens. Still it was a major turning point, Visa, the market leader was making a very public commitment to get the US to parity with the rest of the world in contactless card usage.
That same year we saw Capital One include NFC on many of its largest portfolios (https://www.nerdwallet.com/blog/credit-cards/capital-one-credit-cards-contactless/) as did Costco on their co-branded Citi cards and recently Chase followed suite (https://www.nfcworld.com/2018/11/14/358526/chase-to-issue-contactless-cards-to-millions-of-us-cardholders/). Even more recently Target began to finally accept NFC albeit via Apple Pay, its yet to be seen if this will include NFC cards as well.
All over bar the shouting?
If the US follows the blueprint established internationally it will take 3–5 years to hit critical mass, so sometime around 2021 we should expect the US to be a normalised market for contactless payments.
One of the major challenges will be to create a consistent customer experience, a core part of every successful market launch to date. Many merchants who even accept Apple Pay don’t necessarily support card based NFC payments. Even those that do accept any form of NFC you never quite know what the experience will be — will you need to sign? Even show the card or CVV (many gas stations in addition to signing) it’s a needlessly friction filled experience. It will require a lot of coordination and effort especially between the networks, major merchants and their acquirers as well as issuers to achieve this.
Personally I am confident that the industry has reached a turning point and look forward to a better quicker payment experience in the future. If you are based in the US and want to see the future today you can always take a trip to London, Sydney, Singapore or Canada to see it.