The time for contactless cards is … now? After early lag, contactless may be ready to take off The time for contactless cards is … now? After early lag, contactless may be ready to take off

Boston Fed paper: More use could boost contactless mobile payment adoption, payments security Boston Fed paper: More use could boost contactless mobile payment adoption, payments security

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August 13, 2019

Is now the time for “contactless” credit and debits cards to take off in the U.S.? Or will history repeat itself?  

About 15 years ago, contactless cards debuted on the U.S. payments scene, but the initiative flopped, crippled by high costs, low merchant adoption, and consumer indifference.

Now, a paper by the Federal Reserve Bank of Boston says conditions are right for contactless cards to take hold. And researchers say more contactless card use could spur greater adoption of mobile device payments, because the “tap-to-pay” actions are similar. They say that would ultimately result in a safer and more efficient payments system.

“Mobile device transactions are more secure, and they open up marketing opportunities for merchants,” said Boston Fed Vice President Marianne Crowe, one of the paper’s two co-authors. “Contactless card adoption can be a bridge to that.”  

Initial U.S. contactless card rollout proves premature

Contactless credit and debit cards look like today’s standard plastic, but their chip has an antennae that emits radio waves and communicates with payment terminals from a couple inches above them. The cards are considered highly secure because they transmit a unique one-time code for issuer authorization with each transaction. This dynamic technology makes the system tougher for data thieves to crack.

When contactless cards rolled out around 2003, Chase and American Express were among the issuers, and merchants including McDonald’s and CVS accepted contactless payments. But according to the Boston Fed paper, the cards never caught on for several reasons, including:

  • Limited availability and low merchant acceptance made it difficult to inspire customers to change behaviors.
  • Customers didn’t see the cards as much faster than a magnetic swipe card.
  • With low consumer and merchant adoption, issuers decided the added cost to include the chips in the cards wasn’t worth it.

After contactless cards faded, infrastructure emerged to support them

There isn’t a huge groundswell for contactless cards today, but the Boston Fed paper says advances with card and mobile payments have created the conditions for a conducive U.S. market. The biggest developments? The switch by merchants to “EMV chip cards” and the launch of Apple Pay. 

EMV chip cards, which began wide use in the U.S. around 2014, feature an embedded chip that communicates payment information when inserted into payment terminals. Their technology is identical to what’s found in a contactless card (except there’s no antennae), and the security is just as robust. In fact, it’s so superior to the magnetic strip cards that  major card networks (Visa, Mastercard, Amex and Discover) have required merchants to accept the EMV chip cards, or assume liability for any fraud, since October 2015.

Meanwhile, Apple Pay also launched in 2014, (followed by Google Pay and Samsung Pay for Android phones) that proved to be another driver for merchants to install payment terminals that are compatible with contactless cards.

So while contactless cards fell off the radar for consumers, the infrastructure that enables their use is more widely installed and growing. The cost of issuing contactless cards has also dropped significantly, so conditions are ripe for a return, Crowe said. The question is how forcefully card issuers will push contactless cards now.

Coordinated efforts essential for contactless cards to succeed

The paper says for contactless cards to take hold, merchants and issuers must coordinate efforts to increase consumer awareness and education and create a consistent contactless payments experience. If that happens, an increase in payments using mobile devices could soon follow, said paper co-author Elisa Tavilla.

“Contactless will create comfort in tapping, instead of inserting or swiping, and hopefully that will get people comfortable with using mobile, too,” she said.

Tavilla added that because a mobile phone offers a raft of information users can share with marketers – their location, transaction history, etc. – it opens the door for more personalized or location-specific marketing opportunities.  

Most importantly, Crowe said, mobile delivers higher security through tokenization, a process during which a surrogate number for a customer’s 16-digit account number stored in the mobile phone or in the cloud is combined with a dynamic cryptogram and transmitted with each purchase. That means a customer’s account number is never in the open during the payment process – unlike with an EMV card purchase.

If contactless cards succeed this time and boost mobile device payments along the way, the whole payments system will be more efficient and secure, Tavilla said.

“I think the time is right for this,” she said.

Check out the paper, Tap to Pay: Will Contactless Cards Pave the Way for NFC Mobile Payments in the U.S.?  




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