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CONTACTLESS CARDS: AN INDEPENDENT, UNBIASED OPINION

CONTACTLESS CARDS: AN INDEPENDENT, UNBIASED OPINION
Posted: Jul 5, 2018
Comments: 0
Author: Lou Grilli

Two years ago, ThePaymentsReview published an article asking the question “Will contactless payment cards catch on in the United States?” So far, they have not. But if it is up to the major card brands, that will change very soon. 

Most Americans are not familiar with contactless cards, which allow the cardholder to “tap-to-pay”, just like tapping a phone to pay. These cards are also called dual-interface cards, since they can still be used like traditional cards, but also have an antenna that can communicate with a point-of-sale terminal without being inserted or swiped; tapping to pay is the second interface. Contactless cards have a symbol  which will be instantly recognizable if the advertising, which is about to be unleashed to the purchasing public has the intended effect.

Adoption is yet to be happen in the United States, but if the trend seen in other countries is any indication, contactless is inevitable. In the U.K. more than 1/3 of every transaction uses a contactless card, and that number doubles each year. Canada is not too far behind. In Australia one bank reports 81% of all transactions for their cardholders, and another bank reports 95%, possibly reflecting different demographics or regions, but both showing the highest penetration of contactless achieved. The prediction that U.S. cardholders will follow suit seems accurate, but then again, Americans never adopted the metric system.

And so far, not all issuers are onboard. The additional functionality of the cards means that each card costs more to issue, anywhere from 50¢ to $2 more than the single-interface version (times the total number of cards in circulation). And every time there’s a breach and cards need to be reissued, those costs stack up. Many issuers have reissue fatigue, having just gone through the process to get chip cards in their cardholders’ hands. Whereas reissuing a card for a chip card was to reduce counterfeit fraud at the terminal, reissuing to get contactless cards in the credit union or bank’s customers’ hands does not have such an easily quantifiable benefit.  

What are the benefits of contactless?  

 

There are many benefits being touted, some of which are arguable.

Speed This one is not debatable. Contactless card transactions are faster than chip transactions by an order of magnitude; faster even than tapping a phone or watch since there’s no need to put your finger on the home screen or bring up the card on your smartwatch. It saves time in line, which is a benefit to the merchant, and because it is faster, it is responsible for converting cash transactions to card.

Contactless Displaces Cash Transactions under $10 are dominated by cash. In countries where contactless has taken root, issuers are seeing a growth in card transactions in the under $10 category. That is certainly a benefit for any issuer gaining the interchange and top-of-wallet status. However, even in the U.S. where contactless usage is negligible, the conversion from cash to card is happening, albeit at a somewhat slower pace. It is to-be-seen whether contactless drives increased card use, or increased card usage for smaller tickets are moving in that direction naturally.

Security There is an argument to be made that contactless card usage is inherently safer. If a card is not being inserted into a slot that may have a skimmer attached, then skimming can’t occur. While this is logically accurate, skimmers are usually at ATMs and gas pumps, two types of terminals where tap-to-pay is less common. In the U.K., studies have shown that fraud rose with the growth of contactless cards. According to the Daily Mail, “The boom in contactless payments [in the U.K.] has fueled a startling rise in fraud using lost or stolen cards. Official figures have revealed that fraud on the high-tech credit and debit cards has soared 51 per cent in the past year – with almost 1,000 cases recorded each day.” Furthermore, in countries where contactless card usage is high, mobile payments are much lower. This stands to reason, since tapping a card is even quicker and more convenient than tapping a phone. But a mobile payment is tokenized, whereas the credentials on the contactless card is not. Thus, in the case of displacing Apple/Samsung/Google Pay, contactless is replacing a tokenized mobile payment with a non-tokenized one.

Consumer Demand One of the factors being used to convince smaller issuers to put issuance of contactless cards in their plans is that the big issuers will be in the market, and credit union and community bank cardholders will see their friends tapping their cards, and will want to be able to do the same. This may be true, only time will tell.  

So, What’s the Right Answer?  

 

Unfortunately, there is no one right answer. A tech savvy credit union may want to be on the forefront of the contactless wave. For most credit unions, waiting it out until after the first wave is a viable strategy. One caveat to that, just as with EMV, there is lead time in ordering cards, setting up authorization, education, marketing, additional customer support scripts, so these need to be factored into the decision of timing. Credit unions should check with their processors, especially their debit processors. Some may have cards available, but they are not ready for authorization until 2019, which may be the key factor as to when to begin.

Another thing to consider is mass re-issue versus natural re-issue. As opposed to EMV, this is a case where you choose natural re-issue, that is, sending out contactless cards to replace expired, lost, stolen cards, or by request. This will allow customer support and operations to deal with a trickle of new procedures. Of course, internal roll-out first among staff, then friends and families, should be an important part the strategy.

The bottom line is that there is no mandate to credit unions to dive into the world of contactless, but each credit union should make an informed decision, and a plan based on facts. To get help on making the decision and putting together the plan, contact the subject matter experts at Trellance at info@trellance.com.

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Lou Grilli

Lou GrilliLou Grilli

Lou is the Director of Payments Strategy at Trellance and is responsible for providing leadership to the organization on emerging payments and industry trends, as well as managing the product portfolio.

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