The slow and difficult EMV migration has slowed major adoption of contactless cards, but there are signs that momentum may be turning around.
Contactless card volume is soaring in key markets around the world including the U.K., Australia and Canada, raising the question of how long the U.S. must wait before issuers and merchants broadly support the format.
The U.S. missed out on the recent contactless card payment boom, in part because most merchants and issuers skipped the steps needed to support contactless cards during the slow and messy EMV migration, but that situation may be changing.
The catalyst could be when several million EMV cards—among the first batch issued in the U.S. in 2014—reach their three-year expiration date, and issuers must decide whether to continue issuing contact-only EMV cards or switch to the dual-interface format, with contactless technology included.
Issuers would still need a reason to invest in the added contactless technology, even if the card networks may play a role in nudging them in that direction.
Payments industry observers expect to see a push to drive contactless payments in the U.S. in 2018, though specifics are hazy, said Thomas McCrohan, managing director for Mizuho Securities USA.
“It doesn’t seem logical for issuers to produce or reissue dual-interface cards unless there is some incentive or competitive disadvantage,” he said, noting that unlike some regions in Asia and the U.K., the U.S. lacks any single mass-transit system that could get a critical mass of issuers and merchants excited about backing contactless card payments.
McCrohan speculates it may fall to the card networks to help break the stalemate by nudging issuers through incentives, promotions or subsidies to commit to producing more EMV cards with contactless capabilities to help drive broad contactless payments adoption for both cards and mobile wallets.
“To overcome merchant resistance, interchange concessions might need to be offered to merchants, but card-issuing banks would first need to get on board, given any concession would be coming out of (the banks’) pocket,” he said.
There is precedent for the networks to get involved in helping issuers and merchants come together for contactless.
A dozen years ago Visa and Mastercard provided incentives through contactless card pilot programs in key markets including New York, and issuers including American Express Co. and Chase pumped millions of contactless cards into the marketplace. But merchant terminals weren’t ready on a national basis, and usage fizzled.
Years later, more U.S. payment terminals added Near Field Communication technology to support mobile contactless payments via Google Wallet, followed by Apple Pay, Android Pay and Samsung Pay, but currently only about 20% of the estimated 5 million U.S. merchant locations are NFC-enabled, according to Mizuho's research.
Visa appears to be pushing contactless. In an email, a Visa spokesperson said: “Visa is committed to working with our clients and partners to bring contactless cards to consumers in the U.S.," but the network didn't name any issuers getting on board.
Mastercard has a similar stance.
"Issuers have strong interest in building business cases around issuing contactless cards in the U.S.," said Melanie Gluck, Mastercard's vice president of North America security solutions for contactless payments.
But issuers may need more persuasion before committing to support contactless cards across their portfolios.
"Customers haven't demanded (contactless cards) yet," said Jason Martin, Bank of America's senior vice president of checking and debit product management, on a recent panel focusing on debit industry trends during SourceMedia's annual PayThink conference this week in Phoenix.
Some U.S. merchants still balk at supporting NFC because they fear that the card networks’ Honor All Cards rules will force them to accept all mobile wallets on uncertain terms; merchants also worry they’ll lose control of payment data and the ability to easily route debit transactions if they open the doors to contactless cards, according to McCrohan.
“To overcome merchant resistance, interchange concessions might need to be offered to merchants, but card-issuing banks would first need to get on board, given any concession would be coming out of their pocket,” McCrohan said.
A few issuers already have committed to producing EMV cards with contactless technology, which could give them a market advantage if more merchants start to accept them.
American Express Co. issues contactless versions of EMV cards to its consumer credit card customers—and many small-business cardholders—upon request.
HSBC’s Mastercard Platinum card is available with contactless technology, and Wells Fargo & Co. and Capital One also issue some of their credit cards in a contactless format.
Citibank has made the biggest investment in contactless cards, adding NFC to its entire portfolio of 11 million Costco Anywhere Visa credit cards currently in circulation, a Citi spokesperson confirms.
Citi’s Costco card is somewhat unique, and is configured to work only at terminals certified for EMV contactless transactions, unlike some other issuers’ contactless cards that work at all NFC-enabled terminals.
This is a potentially frustrating experience for consumers. Only a few major U.S. merchants—including McDonald’s and Walgreens—have software to support that narrower category of EMV contactless card payments along with general NFC transactions; most U.S. terminals and vending machines do not support Citi’s Costco EMV contactless card.
“Probably just 1% to 2% of U.S. payment terminals are equipped to accept EMV contactless transactions, which means people with a contactless card programmed only for EMV can’t use those cards in very many places,” said Allen Friedman, vice president of payment solutions at Ingenico.
But Citi and Costco appear to have big plans for contactless card usage in the U.S.
Costco is one of the few merchants already poised for contactless acceptance at the gas pump. The Kirkwood, Wash.-based warehouse store chain is replacing gasoline pumps at all of its U.S. locations with terminals equipped to accept contactless payments, though it hasn’t switched the capability on yet. (Costco has long supported contactless payments in its stores in Canada, where it offers a cobranded EMV contactless Capital One Mastercard.)
Other merchants have the hardware, but not the software needed to support contactless, Friedman said. “A lot of large merchants bought hardware that can support contactless, but when preparing for the 2015 liability shift, they focused on certifying terminals for contact-only EMV and postponed preparations for EMV contactless,” he said.
In most cases, merchants would need to pay a third party to develop or add the application necessary to process EMV contactless payments and costs would vary, Friedman said.
As a large furniture retailer in South Florida, City Furniture had to decide whether to move quickly to upgrade terminals and avoid the October 2015 EMV chip card liability shift, or stay on track with a process they were already engaged in for a mobile point of sale system in its showrooms.
It chose the latter, and now considers itself future proof and in a position to give customers an improved payment experience through an Ingenico mobile POS card reader and iPad-based system.
"At the time of the huge EMV push, we allowed the liability to shift to us as the merchant because we weren't going to be forced into the deadline, knowing we had this mobile development forthcoming," said Steve Wilder, chief financial and information officer for City Furniture.
City Furniture was able to get its back-end system partner IBM to sit down at a conference table with Apple Inc. in Cupertino more than a year ago to help design the best way for iPads to communicate with IBM equipment, Wilder said. It uses the upgraded Ingenico RP750X mobile POS.
Many retailers likely felt the same pressure to either shift solely to EMV or hold out for something more robust, with some experimenting with mobile wallet apps, others simply trying to determine whether Near Field Communication or some other mobile technology made more sense.
The decision actually gets easier with time, said Thad Peterson, senior analyst with Boston-based Aite Group.
"Every day that goes by, it gets easier to implement EMV as it gets more standardized and there are more solutions around to accommodate it," Peterson said.
City Furniture's journey points to how "old school" the furniture industry can be in its payments and back-office networks if a retailer chooses to stick with legacy equipment, Peterson added.
"It's also an indication of the challenges retailers face with omnicommerce," he said. "A new system can be elegant in the store, but it has to be linked very closely to what is going on with their online presence."
For City Furniture, it was far more important to take a big step away from its current system and make the conversion to something future-proof than to simply have EMV bolted on, Wilder said.
"We wanted to move away from the green [POS] screen and dragging the customer back to a desk to be able to get information and for them to be able to pay," he said.
The Ingenico reader and Bluetooth-connected iPad will allow that, being small enough for sales staff to move around the showroom floor and accept magstripe, EMV, PIN debit and NFC tap-and-pay.
City Furniture will run up to 90 applications in communicating with back-office IBM equipment and MobileFirst apps, and is in a position to advance its omnichannel presence through Ingenico Group's mPOS EMV software development kit and decryption web service.
Of critical importance is that the Ingenico software will allow the 15 City Furniture and 12 Ashley Furniture showrooms in South Florida to accept and decrypt the company's private label finance cards and gift cards.
"We knew we didn't want a bulky one-pound sled [tablet] for this project," said Chad Simpson, business and research analyst at City Furniture. "Those get set down, and employees forget about using them. That would have been a complete failure for us."
Rather, the company sought to "knock people's socks off" with how sleek the operation was and how easy it was to initiate and accept payments in the store, Simpson said.
"We did not take any steps back in this process," Simpson said. "We are taking all payment types now, and previously we only took magstripe credit and debit."
Ultimately, City Furniture concludes it was in the right place at the right time. IBM and Apple, two fierce competitors, came together to work with the retailer, and not long afterward Ingenico released its mobile POS card reader and SDK. City Furniture finally received its EMV certification in the summer of 2016.
"The timing just worked in our favor," Wilder said. "We were very fortunate."