The Contactless Disruption

Credits: NFC Payments via Vecteezy.com

Unfortunately, nothing in this world is free. We always pay through some means or another. Through money, effort, or in kind. In fact, from barter in 6000 B.C. to banknotes today, the manner of payments has possibly gone through as many iterations as there have been generations. Despite this, the pace of innovation in the payments industry lately seems nothing short of astounding. Take payment cards, for example.

Seventy years ago, the number of payment cards worldwide was hardly in the early thousands. But today, that number has reached over 20 billion according to some estimates. Enabled by financial literacy, the proliferation of issuing banks, growth in number and size of business corporations, and lower trade boundaries — payments through debit, credit, prepaid cards have today become mainstream. Obviating the need for carrying money physically, cards serve the dual-purpose of lowering the transaction cost and of incentivising people to invest money in alternate assets, instead of hoarding it. A considerable behavioural shift.

Saying that, cash today still rules the roast — especially in developing countries. In India, ~72 percent of the physical transactions still take place with cash. Moreover, the country still accepts 70 percent of e-commerce payments through cash-on-delivery (COD), a mode of payment preferred by ~83% of Indian consumers, according to Nielsen’s Global Connected Commerce Survey.

But these numbers do not truly reflect the story of the last five years in the Indian financial services industry. The disruptions in the last few years have actually come thick and fast. This article is intended to only briefly cover those disruptions, and then discuss in depth the trends and potential of one fast-growing payment technology.

Disruptions in Payments

Any major shift in the economy can be a disruption to the payments industry if it affects any of the three: the number of cards or cash in circulation, the # of transactions, and the dollar or rupee value of transactions. Each of the following has influenced one or more of the three in a significant way:

1. Goods and Service Tax (GST): The new tax regime introduced in 2016 worked to formalize the unorganized population, making the addressable market larger by millions for the payment players
2. Digital India: A government initiative that, with Jan Dhan Yojana, has focused in part on financial inclusion — making the low-income group banked and bracketed. The key principles of ‘Mobile First’ and ‘Language Localisation’ in the Digital India paradigm are among many improving awareness about the FintTech solutions, and hence driving their usage in the country.
3. Jio and the Internet Push: With dirt-cheap data and heavy capital arms, Jio’s entry into telecom arguably bought over a hundred million users to the internet mix. And within the reach of digital payments. Although the internet users had been steadily growing since the start of 2010s, the ~50 percent Y-o-Y increase in 2017 stands out as an exception. Today, around half of the country’s population has access to the internet — a cumulative increase of 150 percent in the last five years. The situation has improved so much so that India last month saw more rural internet users than urban users for the first time ever.
4. Unified Payments Interface (UPI): Developed by NPCI, and lifted further by demonetization, UPI enables instant real-time payments and inter-bank transactions. With 155 banks live on UPI today and >1.2 billion transactions worth ~INR 2.18 trillion in May ’20, the mobile-based transfers are growing at ~200% per year and pose the biggest danger to the incumbents in the payments industry. Moreover, UPIs today account for the highest volume share of digital transactions, although the bank transfers still stay at the top on value parameter.
5. Smartphone Explosion: The Reliance Jio services, Jio Phone, and government initiatives have all led to an explosion in smartphone usage across the socio-economic strata. The impact of Jio’s entry was there in plain sight — with 60 percent mobile data coming from Jio data services in just its first year of launch. Such has been the impact that there are ~629 million mobile internet users today in India, with the total internet users around 687 million. Importantly, the smartphone evolution has driven the adoption of the payment modes such as UPIs and cards at an incredible pace in the last five years.

The idea of covering the above trends and initiatives was to highlight how big and real the opportunity of a cashless Indian society is, and the entry of new players in the payments ecosystem and fast-rising number of transactions only reinforce the rhetoric.

Especially, with the new reality that surrounds us today, India, fortunately, finds itself in a position of being able to leverage its several sophisticated modes of digital payments. But in times when even swiping a card is judged with pinched eyes, the payment focus invariably shifts to absolute touch-free payments — even in the physical space. In short, towards contactless payments.

Contactless Payments

Considered a secure method, a contactless payment uses cards — debit, credit, smartcards — similar to traditional cards but equipped with radio-frequency identification (RFID) technology or near-field communication (NFC) to make a transaction at a point-of-sale (POS) terminal. Quite simply, a purchaser has to wave the card one or two inches above the payment terminal equipped with the contactless technology — recognized from the contactless symbol on the payment terminal (much like a rotated WiFi symbol) — and the payment is done.

Image: Universal Contactless Card Symbol used on compatible payment terminals

Realising the simplicity of contactless payments, the banking and merchant circles also refer to it as tap-and-go payments. The merit of the technology appears even broader once we consider the following:

1. Contactless payments, unlike the mobile UPI payments, are made by the consumer in close physical proximity and do not require a signature or PIN verification. This vastly increases the transaction processing speed — busting down the lengthy store queues. For consumers, it is thus quite literally, tap-and-go. But because of the absence of filters such as PIN codes, the technology invites fraudulent purchases. And to fight back, merchants and banks naturally limit the transaction sizes on such cards.
2. Contactless-enabled cards can even connect to devices such as smartphones, smartwatches, and fitness trackers and the cardholder then just has to use the NFC facility of the devices to make payments — reducing the need to even carry the cards physically. Some of such widely successful payment apps that use the technology include Apple Pay, Samsung Pay, Google Pay, and Fitbit Pay.
3. More commonly, the technology is already tested and used in stored-value cards by big-box commerce stores such as McDonald’s, KFC, Burger King, Tesco, and so on. This attaches more credibility to this mode of payment.

Historically, the technology came into being in the 1990s and into prominence with Mobil offering a contactless “Speedpass” for gas stations in 1997. Twenty years later, thousands of merchants, retailers, and banks have adopted the technology with the UK, Australia, South Korea as some of the success stories for the technology. In India however, although positive headwinds have developed over the past two years, a majority — 80 percent — of merchants are yet to digitise their payments. This presents a great opportunity and with COVID, digital and contactless are not mere government or business jargons but necessary changes in how we all live our lives.

Government Directive and Indian Adoption

Reserve Bank of India (RBI) gave the go-ahead five-years ago for customers to transact contactless up to Rs. 2000, an amount above which a PIN for authentication would be required for transactions. This limited the transaction value for all contactless payments. However, last month, it allowed payment networks to process tap-and-go worth any value through a contactless route — although a PIN is still required for transactions above Rs. 2000. Essentially, the change implies that the burden is now on card issuers to make the pin authentication touch free as well. But to issuers’ benefit, this would mean that consumers would be able to experience the convenience of going contactless for all transactions., irrespective of the transaction value.

Recognising the possibilities of the tap-and-go physical payments, firms such as Pine Labs, Apple, Samsung have been aggressively building PoS terminals and virtual card functionalities in smartphones over the last three months. And to the government’s credit, the Ministry of Urban Development had sensed the opportunity earlier and built the contactless functionality under National Common Mobility Card (NCMC) for transit and smart city projects, with three going live already.

Presently, several major payment networks provide the contactless processing facility to banks, merchants, and consumers in the Indian market — Mastercard, Visa (Visa payWave cards passed 20 million sales in 2018), Rupay, PayTm among others. With the market movements highlighted in the next section, it would not be surprising if these networks see an exponential jump in such transactions.

How will the experiences and behaviours change?

The opportunities contactless payments bring are enormous and underreported by contemporary media coverage. Over 80 percent of retail transactions in India are under INR 2000, and although overall payments volume has taken a hit due to depressed incomes, a survey of 42000 by a consultancy firm Local Circles estimates that 42 percent of Indians have increased their usage of digital payments during lockdown — a shift that may be structural. Moreover, some FinTechs are seeing growth in three-four months that they expected over several years. For example — Zaggle, formerly a prepaid-card services company, saw demand for virtual cards rise a huge 600 percent during lockdown.

The shift to digital and contactless is not only COVID-driven, with Mastercard experiencing a 40 percent jump in contactless payments in Q1 of this year. Moreover, contactless is now becoming commonplace in countries outside but around India with 41 percent of face-to-face payments in the Asia-Pacific region now made contactless.

Of the many benefits, the speed and ease of transaction along with device-convertibility are in my opinion the core drivers for the next-stage mass adoption of contactless payments. Moreover, the trends below highlight the large-scale adoption in the country is already underway today.

1. Metros: The Ministry of Housing and Urban Affairs (MoHUA) last month planned to release an SOP for making contactless travel cards mandatory for all metro travels. The smart cards will enable touch-free entries as well as lower queue sizes across stations. Moreover, low-ticket size and high throughput in metros transit make it a super-efficient platform for the technology. Mexico, Singapore, and Saudi Arabia are other countries that have already made these technologies pervasive or are planning to for state metros.
2. Retail Outlets: In the United States, contactless has become the go-to word for payments with major retailers such as Walmart and Kohl’s, and even liquor shops, adopting it. As major retail stores in India open gradually, expectations are similar from large retailers such as Big Bazaar, McDonald’s, Central, Reliance, etc. to leverage their tie-ups with Visa and Mastercard and push harder towards contactless payments. We are even seeing innovate ways to make payments touch-free, with Ikea in Hyderabad adopting a click-and-collect approach that asks consumers to make online payments and only collect the items from stores. As consumers gain awareness and contactless payments become mainstream, the impact will be felt on the store designs as well. For example, an Apple Store in the U.S. has no checkout counter but rather an associate walks up to the user to facilitate the checkout experience. And with Amazon Go stores, we have already seen how transforming payments can change the entire shopping experience, and we should keep a keen eye on store designs as the contactless payments evolve.
3. Restaurants: Unicorns such as Paytm and Zomato have been building on the ‘contactless dining’ experience over the last couple of months, with both offering QR based menu-scanning, orders, and payments. And while Zomato already boasts of over a 100,000 restaurants on its platform, Paytm hopes to add a similar count on its platform soon. There is little doubt then that card providers will also want to utilise on designing and handling this pivotal user experience for the restaurants.
4. Airports: the Indian airports are following much the same route with contactless payments being made the standard operating procedure. This is bound to drive the adoption of contactless cards to millions of passengers that travel through Air India, Indigo, Spice Jet, Go Air, and Air Asia.
5. Cabs and Buses: While much of the shared mobility payments already digital, Uber and Ola have started offering contactless payment options as well at multiple pick-up points. As for the population travelling in personal vehicles, FASTags — working on RFID technology — were attempted to be made mandatory in December of the last year. Moreover, with the fear of the pandemic on the horizon, NHAI had suspended cash toll collections on national highways in March itself. These developments again favour contactless payments in the low-ticket value segment of car and cab payments. Early trends in bus transit throw up a similar story. Bangalore Metropolitan Transport Corporation (BMTC) has gone completely cashless, although UPI seems to be the preferred payment option for now. But the contactless cards will not be too far behind in thought, with Yes Bank already launching a card for bus passengers.

The list can drag on further but hope the point is clear. Today, only about a quarter of cards are contactless in India and they account for just 15% of the total card transaction value. Tomorrow, we can see contactless cards dominate and become the norm for every experience we have outside our homes — from travel to dining to shopping.

But even as we keep a close eye on all the above spaces, we might want to focus on the spending behaviour of the card users the most. A study by Mastercard Advisors in 2012 showed a 30% increase in average spend across all consumer segments on the first year of contactless payments card adoption — irrespective of their prior expenditure habits, with the contactless card taking the top of the wallet. As hyperbolic as it may sound, could contactless cards then be a part of the solution for the government and businesses to get demand back up in the post-COVID world?

Surely an interesting thought experiment for some other time.

Final Thoughts

At a time when health has taken precedence over state surveillance and monetary security, the consumer behaviours that seemed second nature now invite second thoughts. For firms in the financial technology space, this presents a great opportunity to take control of and to dictate several such consumer experiences in both physical and online spaces. And of all that might unfold in the financial domain for the next year or so, the ubiquity and the obvious need for contactless payments might be the biggest shift of them all.

Hope you found the article informative. Feel free to add a response below or to share your thoughts with me on Linkedin. Thank you for reading!