Article Highlights

Key Takeaway:

The promise for banks to capture open-loop fare payments might encourage them to roll out more contactless EMV cards, but it depends on the city, surveys show. Also, debate continues about whether more open-loop transit payments will make a real impact on use of contactless at the retail point of sale.

Key Data:

A survey of financial institutions by the U.S. Federal Reserve found that only 18% of respondents rated the importance of support for open-loop transit payments high, “which may correlate to FI locations in or near cities with transit systems that accept open contactless payments,” said a U.S. Federal Reserve Bank of Boston report. Another 44% of respondents rated support for open transit payments as of “medium” importance.

Organizations Mentioned:

• Visa
• Mastercard
• Federal Reserve Bank of Boston
• eMarketer

(This premium article was originally published in January 2020. © Mobility Payments and Forthwrite Media.)

With contactless EMV cards expected to have a significant footprint in the U.S. in 2020, the debate continues over whether the rollout will promote or harm take-up of NFC mobile payments and whether contactless open-loop transit payments will make a real impact on use of contactless at the retail point of sale.

Big U.S. banks finally started to issue dual-interface EMV cards in substantial numbers in 2019 and that rollout will accelerate in 2020. At the same time, more and more U.S. merchants–along a small but growing number of transit authorities–are accepting contactless EMV card and NFC payments. With this, it looks like the U.S. might finally begin to catch up with other developed countries in the use of contactless payments–although that process will be years in the making. Meanwhile, the shape of contactless adoption in the U.S. remains to be seen.   

An article this week from eMarketer, based on a report released by the firm earlier in the month, predicts that users of NFC mobile payments will account for just under one-third, or 30.6%, of all U.S. consumers carrying smartphones in 2020. While eMarketer set a low bar for what qualifies as NFC mobile payments users–those conducting at least one transaction every six months–the firm predicts that mobile NFC mobile payments will continue to grow in the U.S. And this growth won’t be impeded by use of contactless EMV cards, as has been the case in the UK, Canada, France and other countries, said the firm. 

“Though it’s possible the same scenario could play out in the U.S., we anticipate the opposite effect,” said Yoram Wurmser, eMarketer principal analyst and author of our report, saying that the rollout of contactless cards would also boost not inhibit use of NFC mobile payments. 

Contactless Cards to Spur Use of NFC Devices?
But, as Mobility Payments’ sister publication NFC Times reported earlier this year, some experts are noting that contactless payments with NFC smartphones and wearables–using such services as Apple Pay and Google Pay–offer little in the way of incentives to American consumers. As such, use of contactless EMV cards could surpass payments from NFC phones by the end of 2020, despite cards being rolled out much later than NFC-enabled wallets.  

With such NFC payments services as Apple Pay, users have to authenticate themselves on the devices to make a payment. While this and tokenization of the card numbers in the wallets make NFC payments from devices more secure than cards or cash, consumers have been slow to grasp these security advantages–even as surveys continue to show that many consumers harbor fears about perceived risks of using mobile payments.  

At the same time, the added convenience of using contactless EMV cards–not having to insert their cards into POS terminals or to authenticate themselves on their phones–could sway consumers to tap contactless credit and debit cards to pay rather than smartphones or wearables. That’s despite the fact that NFC wallets began rolling out more than five years ago.

A report last April from the Payments Strategies Group at the Federal Reserve Bank of Boston, which conducts research and analysis on digital payments, addressed this question head-on in its report, “Tap to Pay: Will Contactless Cards Pave the Way for NFC Mobile Payments in the U.S.?” 

But after talking with a dozen industry “stakeholders,” including representatives of card networks, financial institutions, payments processors, in addition to conducting secondary industry research, the report’s authors were unable to definitively answer the question posed by the title of the report.  

And in new report issued by the Payments Strategies Group last week on mobile financial services, based on the group’s regular survey of banks and credit unions, it again did not draw a definitive conclusion. “Contactless cards may offer a faster user experience at the POS when one considers the staging required to open a mobile NFC wallet, particularly for a new user,” said the report’s authors, adding that it is “still too soon to see if contactless cards will increase consumer awareness and adoption of NFC mobile payments in the U.S., but mobile NFC payments have additional benefits.”

Rollout of Contactless Cards by Major Banks
The big U.S. banks began rolling out contactless EMV credit and debit cards within the last 12 to 15 months, led by JPMorgan Chase, the largest credit card issuer in the U.S., which began its massive contactless card rollout late in 2018 for new and replacement credit cards and followed with Chase debit cards in the second half of 2019. Chase is mainly a Visa card issuer. 

Wells Fargo, another major Visa card issuer and the nation’s largest debit card issuer by purchase volume, also began its contactless rollout for all new and replacement debit cards earlier this year, along with its consumer credit cards.  

As Mobility Payments’ sister publication NFC Times reported in July, Visa Inc. CEO Al Kelly said Visa expects that more than 300 million Visa-branded debit and credit cards in the U.S.–around one-third of the total number of Visa cards on issue in the country–will be enabled for contactless by the end of next year. The payments network, the largest in the U.S., had earlier estimated that there would be 100 million contactless Visa-branded cards on issue by the end of 2019.  

At the same time, major Mastercard issuers are also rolling out contactless-enabled credit and debit cards, including Citi and Capital One. Mastercard said earlier in 2019 that it had received commitments from issuers making up around two-thirds of consumer purchase volume on the Mastercard network that they would roll out contactless cards over the following two years–or by around the end of 2020. That does not mean that two-thirds of Mastercard-branded cards in the U.S. would be converted to contactless by then, but it would amount to a significant number. 

The Federal Reserve report released last week also seemed to make it clear that smaller banks and credit unions in the U.S. are not nearly as aggressive as the largest banks in rolling out contactless (dual-interface) EMV cards. 

The survey, which netted responses of more than 500 U.S. banks and credit unions but none of the top 25 financial institutions, showed that only 5% of respondents currently issue contactless cards, while 21% plan to do so within two years and another 18% in two to five years.  

It means 68% of small financial institutions, those with less than $100 million in assets, have no plans to issue contactless cards. And while 57% of respondents from large banks or credit unions–with assets of more than $500 million–said they plan to issue contactless cards within the next five years, 43% of these banks said they have no plans to issue contactless cards.  

Open-Loop Transit as Reason for Supporting NFC Payments 
In the same survey, financial institutions in the U.S. rated the reasons for supporting mobile payments services, such as Apple Pay, Google Pay and Samsung Pay. By far, the biggest reasons banks and credit unions gave was to stay competitive with other financial institutions and also with digital payments services providers, such as Amazon, PayPal and the Pays wallets themselves–with 81% and 63% of respondents, respectively, rating these reasons highly. In addition, 49% of respondents also said they were supporting the services, such as Apple Pay, because their customers demanded it.  

By contrast, only 18% of respondents rated the importance of support for open-loop transit payments high, “which may correlate to FI locations in or near cities with transit systems that accept open contactless payments,” said the Federal Reserve report. That was the lowest of the six specific reasons offered for this question. Another 44% rated support for open transit payments as of “medium” importance. 

To date, only a handful of transit agencies in U.S. cities–where mass transit is generally less important than in Europe and Asia–enable customers to pay fares directly with contactless credit and debit cards or these card credentials on NFC devices. They include New York City, Chicago, Miami and Portland, Ore., with plans by transit officials in Boston, Philadelphia and some other cities to also accept open-loop payments.  

Because of the prospect for acceptance of transit fares via credit and debit cards, another of the largest card issuers in the U.S., Bank of America, in June began issuing around four million new contactless-enabled Visa credit and debit cards to all cardholders in New York, Boston and San Francisco–whether their cards were expiring or not. The cities are being targeted for their high penetration of merchants supporting contactless payments and the fact that transit authorities in two of the cities, New York and Boston, accept bank cards for collection of fares or plan to do so. The bank said it would first assess take-up among the four million cardholders before rolling out contactless more widely in the U.S. 

But transit agencies and operators in some other metropolitan areas, including San Francisco, have no plans yet to accept open-loop payments and have opted instead to further develop their closed-loop cards, including enabling the closed-loop cards to be loaded onto NFC devices. 

Accepting contactless open-loop cards for transit fares in the U.S. will “definitely have an impact” on encouraging consumers to also use their contactless credit and debit cards for retail payments, Randy Vanderhoof, head of the Secure Technology Alliance industry trade group and the affiliated U.S. Payments Forum, told NFC Times, adding: “However, we need a few more years to educate cardholders to use the cards and readers in the market already to begin to see a preference for tap to pay become pervasive, but we are trending towards that goal.”

It appears likely it will take at least the next few years before the U.S. approaches large-scale take-up of any type of contactless EMV payments. But 2020 is expected to see the first significant adoption. 

© Mobility Payments and Forthwrite Media. Mobility Payments content is for individual use and cannot be copied or distributed without the express permission of the publisher.