US banks could generate $2.4 billion from rolling out contactless cards

01 August 2018 5 min. read
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Contactless payment cards could generate $2.4 billion in incremental card-related earnings over the next five years for US banks. The convenient, secure, and easy-to-use technology has already seen widespread rollout in other countries like the UK, Australia, and Canada – though it hasn’t in the US. However, already existing infrastructure, favourable consumer opinion, and financial benefits to banks make the technology a winning proposition.

In an increasingly digital world, US consumers still make about 50 billion cash transactions a year – 26% of all consumer payment transactions. And while Americans use cards in 56% of point of sale transactions, only 0.18% transactions use contactless cards. The faster, more convenient, and equally secure as chip-and-pin EMV tech lets customers quickly tap their cards for purchases under a certain amount (like $100). Contactless technology has already seen widespread adoption in top-15 GDP economies like Canada, the UK, and Australia – where 23-27% of card transactions are already contactless.

A new report from management consultancy A.T. Kearney advises US banks to roll out contactless payment cards since the tech will bring benefits to consumers, merchants, and banks – a win-win-win scenario. The report says that contactless advancement could generate $2.5 billion in incremental card-related earnings over the next five years. The move would also lower cash-handling operating costs for banks, while early adopters could strengthen their market leadership and innovation positions and head off the competition.

Merchants would benefit from providing a better customer experience with contactless tech. Shorter lines and faster checkout, reduced time and money handling cash, and improved information about customer buying behavior are among the incentives for merchants. Consumers would benefit from a convenient alternative to cash for low-value transactions, as well as faster checkouts and the same security as pin-inputting chip cards.Contactless roll out in US-like countriesWhen examining US-like countries’ (Canada, Australia, UK, etc.) adoption of contactless cards, the report found that they are used most in frequently used merchant categories with a high share of lower-ticket transactions – namely food and grocery, quick-service restaurants (QSR), restaurants, and drug stores/pharmacies. These categories account for 60% of cash transactions in the US, so contactless represents a good opportunity to shift consumers to card payments at these establishments.

In the six examined countries, contactless cards significantly lifted the number of transactions per card above normal projections, according to A.T. Kearney. The countries experienced a 20-30% lift in transactions per card in three years after the accelerated uptake of contactless cards. Only Canada had a more modest lift, with closer to 10%. Increased checkout speed and convenience drove the highest lift in transactions per card at quick-service restaurants like McDonald’s and Taco Bell.

Meanwhile, smartphone-based wallets (ApplePay, etc.) have marginal penetration of no more than 3% in the US-like countries – while contactless penetration ranges from 21% to 82% of card payments at point of sale.

US market ready for contactless

A.T. Kearney’s report says that rather than having to shovel huge investments into contactless infrastructure, the technology is already in place to a large extent because of the previous 2015 migration to EMV contact chips. Contactless payments piggy-back on the same technology, though some terminals might need software upgrades. Furthermore, though mobile wallets aren’t particularly popular, many merchants are still investing in the payment technology – which is the same tech required for contactless.Contactless-enabled merchants in the USMeanwhile, US merchants’ readiness for contactless is already well-developed in the categories that have the highest adoption of contactless – QSRs, drug stores, and grocery stores. A significant share of card transactions already take place at contactless-enabled merchants – with 79% of the top 50 quick-service restaurants, 77% of drug stores and pharmacies, and 61% of food and grocery stores already having the tech in place.

Rather than being hesitant about the tech, consumers are open to using contactless cards. Research suggests that US consumers see the tech as secure, simple, and even fun. Consumers also view it as the future of payments, which means they’re ready for, and even expect, the technology which has already been advanced in many other western economies. However, some consumers perceive that contactless may be less secure than cash, magstripe, or EMV – which highlights the need to publicize that contactless cards offer the same security as EMV.

As such, the report says that the last piece of the puzzle missing is the crucial one of card issuance. Contactless card issuance in the US was at just 3.4% in 2016. However, A.T. Kearney reports that interest among US banks is high, and that momentum in contactless issuance will grow over the next 12 months.

US contactless cards’ future benefitsBy 2022, contactless cards are projected to contribute an incremental transaction migration impact of 4.6 billion transactions – equal to about 10% of cash transactions in the US. Meanwhile, $188 billion in payment volume will migrate to cards, with roughly half going to credit cards and half to debit cards.

A.T. Kearney expects US banks to majorly roll out contactless cards by 2019 – with all top 10 banks launching contactless by 2020, 70% of the remaining top 50 banks launching them, and 50% of the banks beyond the top 50. By 2022, 56% of cards in force in the US are projected to be contactless.

Contactless migration is expected to bring incremental card-related earnings of $2.4 billion for banks between now and 2022. This translates to $3 per contactless debit cards and $12 per credit card. Furthermore, banks could realize industry-wide cash-handling cost savings of $22.2 billion – which equates to 6% of banking operating expenses. Savings would be driven by branch-related cuts like closings and labor reductions, as well as by the benefits of holding less cash in the retail network (e.g. the cash’s opportunity cost).