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August 30, 2016updated 04 Apr 2017 3:57pm

Where is contactless taking us?

Contactless has been around for just over two decades but it has already transformed the payments industry. Adopted globally and expected to grow in the next decade, contactless offers new possibilities and benefits for acquirers, merchants and consumers. Jessica Longley writes

By Jessica Longley

Contactless has been around for just over two decades but it has already transformed the payments industry. Adopted globally and expected to grow in the next decade, contactless offers new possibilities and benefits for acquirers, merchants and consumers. Jessica Longley writes

Launched in 1997, the first contactless payment solution was a closed loop offering by Mobil Oil called Speedpass. Still in use today, it offers consumers the possibility to pay at petrol stations using RFID technology developed by VeriFone.

This innovation kick-started a wave of new contactless entrants to the payment solutions market: the first contactless card was introduced by Barclays Bank in the UK in 2007 whilst NFC technology in phones was brought by Nokia in 2006 and NFC wearables were invented in 2014.

Visa launched prepaid contactless rings for Rio Olympics 2016 participants and virtual prepaid cards for buying tickets and making other purchase. Visa has also deployed around 4,000 NFC enabled terminals across Rio to facilitate its usage.

The last two to three years in particular have seen a sudden boost in contactless purchases. Indeed, the entry of payments solutions from valuable global consumer brands such as Samsung and Apple has raised consumer awareness of new payments technology. Today, more and more people are choosing contactless for a faster and easier way of payment.

The increase in number of contactless terminals and the scheme mandates to upgrade terminals have also pushed contactless to be accepted by a wider audience. So has global EMV migration and pervading smartphone penetration.

According to the Ericsson Mobility report 2016, there are more than 3.2 billion smartphone subscriptions in the world, approximately half of the world’s total population, and this is expected to grow at a compounded annual growth rate of 10% to reach 6.3 billion in 2021.

Currently however, contactless is not universally adopted across the world. Europe is at the forefront of contactless implementation with 285 million contactless cards. Asia-Pacific follows not far behind whilst the US and Africa are lagging.

Europe, the leader in contactless payments

The effort by schemes to push contactless cards in Europe by mandating the capable terminals and banks roll out of contactless cards has been one of the major reasons for growth.  According to MasterCard, contactless transactions in Europe grew by 150% annually in 2015 from the previous year.

However, the adoption of contactless is not homogeneous across European countries. Czech Republic, Poland and Slovakia have high adoption while others such as Sweden and Denmark have nascent growth rates, having only begun adopting contactless cards in 2015.

The UK remains the largest contactless cards market in Europe in terms of number of cards in circulation followed by France, in 2015. The number of contactless card transactions in the UK rose by 212.2% year on year in January 2016. As of May 2016, there were a total of 460,000 contactless POS terminals in the country, equivalent to a 50% annual increase.

Romania, followed by The Netherlands, has had the highest growth in terms of number of contactless cards in circulation at 127% year on year.

The growth of contactless payments in Europe and Asia Pacific is robust, providing large scale opportunities for penetration of contactless cards and NFC mobile payments. As a result, the European contactless industry is mainly focused on expanding card acceptance.

Asia-Pacific, following in Europe’s footsteps

Asia-Pacific’s contactless usage grew owing to the market need for financial technologies and consumers’ way of life.

Contactless cards were launched in India in 2015 and today more than eight banks offer contactless solutions. As of June 2016, Visa issued more than one million contactless cards, acceptable at more than 100,000 merchant locations across the country.

Japan, on the other hand, has the most advanced and developed contactless infrastructure in the world with more than one million contactless POS terminals functional.

Additionally, Singapore is fully contactless compliant. The growth of contactless payment in Singapore can be attributed to the spread of contactless payment technology throughout the count.

Lastly, Australia had 37 million contactless cards and on average every individual had 1.6 contactless cards in 2015, according to Timetric.

North and South America lagging behind

In comparison, the region of North and South America is still trailing in contactless payment adoption despite having one of the biggest economies globally.

Deployment in the US has been sluggish, partly because of the consumer inclination towards mobile payments. NFC mobile payments were more successful in the US than contactless cards.

In the US contactless cards have been in circulation since 2009, but due to lack of availability of contactless enabled POS terminals, adoption was not high. Contactless enabled POS terminals were estimated to be 2% of the total POS terminals in the country. However, with the launch of NFC enabled mobile payments from 2014 (Samsung Pay, Android Pay and Apple Pay) onwards the number of enabled terminals has gone up and is currently estimated to be approximately 20% of the total POS terminals in the country.

China and the US together hold more than 50% of the contactless enabled terminals in the world.

Canada is ahead of the US and South America in terms of contactless adoption and although Canada adopted contactless later, in 2009, it has had a faster growth than the US with 75% of its major retailers now accepting contactless payment.

Contactless transactions in Canada are growing at one percentage point a month and by the end of 2015, about 10% of the total domestic card transactions in Canada were contactless. Furthermore, the Canadian government has been proactive in supporting a cashless economy, which has helped contactless gain traction.

Mexico, on the other hand, is a cash dominated and underleveraged economy with approximately 70% of its transactions made in cash and only eight POS terminals per 1,000 inhabitants. The government is pro-change and making efforts to introduce electronic payment  initiatives.

Middle East and Africa

Middle Eastern markets such as Saudi Arabia, the UAE, Kuwait, and Jordan are gradually introducing contactless payment. In May 2015, six banks – UBA, Access Bank, First Bank, Zenith Bank, Skye Bank and Diamond Bank – signed an agreement with payment solution provider Unified Payments to launch PayAttitude to promote contactless payments in Nigeria

South Africa has an unbanked population of over 12 million, posing large potential for the overall payments industry, and the growth of contactless specifically. To address this issue, the National Department of Transport (NDOT) has asked at least one bank in each province to issue prepaid cards. With open loop contactless technology, these cards will have a wider reach and acceptability. These cards will also cater to tourists and students, pushing mass adoption and higher penetration.

Which sectors are best suited for contactless?

Contactless is successful in the sectors where consumers make recurrent and low value transactions such as mass transit, grocery, coffee shops, newspapers, vending machines and fast food joints.

Contactless payment gained momentum in the UK when it was implemented by the Transport for London in September 2014, with more than 400 million contactless journeys undertaken as of May 2016. The number of contactless cards in the UK increased from 52.8 million cards in September 2014 to 86.5 million contactless cards in March 2015.

In Australia, however it gained traction through supermarkets and in 2016 most of the face to face transactions are contactless. Therefore, the adoption of contactless transaction in each country depends on the market dynamics and segment where the consumer has recurrent payment experience.

Mass transit systems are one of the largest segments for payment transactions and as a result, can lead to mass adoption of a given payment instrument. The adoption of contactless payment transactions by various national mass transit systems in countries such as France, the UK, Czech Republic, and Poland have given the necessary thrust to the contactless payments growth in Europe. As of May 2016, more than 400 million journeys have been made contactless on TFL.

Additionally, contactless is adopted mostly by those aged 15-35 years and higher income populations. Somewhat older consumers tend not to be inclined to adopt new technologies such as NFC mobile payments and tend to have more security concerns.

Benefits of contactless for different actors

Moving from cash or chip and PIN to contactless has numerous benefits for acquirers, merchants and consumers alike.

Acquirers benefit from contactless in four ways:

  • Customer retention by providing convenience and a faster payment process;
  • More profit than cash;
  • Replacing low value cash transactions with card transactions improves overall operating efficiency and increases the overall number of card transactions, and
  • Moving low value transactions from cash to card gives acquirers insight into merchants’ business activity (and issuers valuable insight into consumer habits and behaviour)

For merchants, contactless translates to a reduction of queues, a more seamless and sophisticated purchasing experience for customers, with the ideal outcome being repeat custom, increased patronage via word of mouth and, as a result, a potential uptick in transactions overall.

Furthermore, merchants can use customer data acquisition to improve services and design more tailored and better-targeted loyalty and marketing programmes. Early adoption of contactless payment by the merchant gives a lead-time benefit and a competitive edge over other merchants.

For consumers, contactless brings them convenience, cost, accessibility, security and speed.

It takes on average 1-2 seconds to process a contactless transaction; 6-7 seconds to complete in cash. Furthermore, for some customers, the flexibility of being able to use a payment card quickly for low value transactions may encourage them to actually spend more, particularly when they are low on cash and would not otherwise have the correct money.

Drawbacks for providers, merchants and consumers of contactless

Although adopting contactless is profitable in the long run, issuing new cards and putting in place new terminals and infrastructure may be costly to merchants. According to Timetric research, contactless cards are 15-20% more costly than regular chip cards.

For consumers, contactless entails that their purchases are non-anonymous. This could prove a problem if the consumer would like to keep his identity and purchases private. However, contactless also allows the consumer to track his budget more easily by knowing where exactly his money is going. Consequently, you could also argue that the physical limits of cash could be used as a budgeting tool for daily or weekly expenses.

A daily limit of between five and eight transactions could also restrict the customer’s spending on contactless. In addition, a maximum limit is put in place in some countries, therefore meaning that speed is only available for low value transactions

What can we expect from contactless in the future?

According to Timetric research, NFC mobile payments will grow from $25bn in 2016 to $50bn in 2018 and mobile commerce is expected to be the second largest contributor to the growth of mobile payments, second only to the value of total fund transfers.

Europe has seen strong uptake in contactless technology since 2013. The number of contactless cards more than doubled, rising from 130 million cards in 2013 to 285 million in 2015. While the number of contactless card transactions rose by 69.8% year on year in 2015, the transaction value registered annual growth of 82.6%. According to Timetric Research, the trend is expected to continue over the next five years due to mandates by schemes Visa and MasterCard for contactless POS terminals.

Timetric also believes that there are 14 million contactless terminals globally, equivalent to almost 20% of total POS terminals. Visa has 165 million contactless cards in circulation and 3.2 million active POS terminals in Europe and has mandated for all Visa-accepting POS terminals to be NFC-enabled by 2020.

Although the average contactless transaction value remains low, standing at €12.2 in 2016, it is expected to increase marginally to €16.5 by 2020.

 

 

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