To tourists from much of the rest of the English-speaking world — the UK, Canada, Australia — a visit to New York can feel like a trip into the past. They tap their credit cards against subway turnstiles or shops’ card readers and wait for something to happen. Nothing does.
Contactless cards, taken for granted in many countries, will at last roll out at scale in the US in 2019, giving card-issuing banks a chance to grab market share away from cash and, potentially, one another.
But the fact that tap and go payments have taken so long to hit the US shows the challenges to financial innovation in one of the world’s biggest markets.
In 2017, according to the Federal Reserve, US consumers made $6.6tn in payments on credit, debit, and prepaid cards, 8 per cent more than the year before — and a little less than half of total consumer expenditures on goods and services. That proportion could be even higher, analysts think, if the US did not lack cutting-edge card payments networks.
“Free enterprise is an inhibitor of progress in payments in the US, not the enabler — we get the privilege of living in chaos,” said Thad Peterson, consumer payments analyst at Aite, a research firm.
In smaller markets, the shift to new payment standards is effectively mandated by common agreement between banks, with support from standard-setting bodies. The UK made the shift toward cards with chips “quickly, efficiently, and well” by 2006, Mr Peterson said, opening the way for contactless shortly thereafter. The US only just completed the move to chip cards.
The age, size, and complexity of the US market has been a barrier. The US was where the card industry began, “and is arguably the most complex market in the world, with over 50 years of legacy systems”, said Craig Vosburg, president of Mastercard North America. There are thousands of banks — compared to a handful of major ones in other markets — tens of millions of merchants, and a fragmented industry that provide payments technology. This makes it hard to settle on ubiquitous solutions.
The US industry muddled along with magnetic stripes and improvements to back-end technology. “Then Target happened” said Oliver Jenkyn, head of North America for Visa, referring to the retailer’s massive data breach in 2013, which included credit card numbers. “Everyone was saying ‘I shop at Target’. It was a major tipping point.” It pushed issuers to issue cards with chips, which are much harder to counterfeit.
The crucial move to make chips ubiquitously acceptable in the US was a shift in liability rules at the card networks. After October 2015, merchants rather than banks became liable for fraudulent transactions using magnetic stripe cards, giving the merchants a strong incentive to update their card-reading equipment.
Once terminals that accept cards with chips are in place, the move to contactless only requires updated cards. So the delay on chip cards put the US way behind on contactless. Visa says that outside the US, more than 40 per cent of face-to-face transactions with Visa cards already occur with a tap. The number is 90 per cent in Australia, 60 per cent in Canada, and nearly 50 per cent in the UK. In the US, the number is in the low single digits.
Momentum appears to be building behind contactless in the US market, however. “Card issuers have changed their approach in the last six months — from sticking a toe in the water to a cannonball,” said Kevin Morrison, retail banking analyst at Aite. “They were thinking of doing it with one or two card types, premium ones, but now they are all in with credit and debit . . . The smaller banks said ‘if the larger institutions move, we have to go too.’”
The key catalyst has been JPMorgan Chase, which announced in November that all of its credit and debit card holders would be moved to contactless by the end of 2019. No other major bank has made a similar commitment, but Mastercard says it has agreements with its bank partners that will bring contactless cards to customers accounting for two-thirds of its total payment volumes within two years. Visa expects 100 million contactless Visa cards to be issued in the US by the end of 2019.
An important catalyst for adoption will be rapid transit. New York’s Metropolitan Transit Authority says it will start accepting contactless payments in 2019, using the same technology provider that built the system in London’s Tube. Some 500 subway turnstiles and 600 buses will be upgraded in 2019. Pat Foye, president of the MTA, said the project is proceeding on time and on budget.
“When transit gets enabled through contactless, usage rates go up everywhere, not just in transit but in Starbucks, McDonald’s and so on” said Mr Vosburg of Mastercard.
The move comes to contactless at a crucial times for banks’ card businesses. While consumer credit quality remains strong, hot competition is pressuring fee revenue and stoking a rewards war.
Being first to offer a consumer contactless will confer a key advantage on issuers. “What is at stake for the banks is top of wallet status for their cards,” said Mr Jenkyn of Visa. Contactless tends to be adopted for minor, everyday transactions — coffee and fast food — which puts consumers in the habit of reaching for their contactless card first.
AT Kearney, a consultancy, has found that in developed markets the shift to contactless increases the number of transactions per card by 20-30 per cent.
Whatever card gets pulled out first to set up an online account at, for example, Amazon or Apple ends up capturing all the spending, said Mr Peterson. “Top of wallet means much more now — the first card in your wallet is often the only card [you use].”
