Separating Hype from Reality of Contactless Payments Through Data
You have read the headlines: contactless payments in the U.S. are skyrocketing, booming-insert your favorite hyperbole here-due to consumer concerns during the global pandemic about the hygiene of the point-of-sale (POS) terminal that every preceding individual has touched during checkout.
After reading these headlines, one could come away with the impression that consumers in the U.S. are madly tapping and waiving their cards to the exclusion of all other payment types, with the exception of the disenfranchised of course, who are still using cash.
But there is a reluctance to share the actual number of contactless transactions. With what data has been made available, Mercator Advisory Group estimates that 3.9% of total non-prepaid debit card transactions are currently conducted as a contactless transaction.
When reading the details behind all the headlines, some interesting patterns emerge in the way the growth of contactless is described:
- Much of the data shared comes from consumer survey data, which is very helpful in understanding trends and directions, but doesn't pinpoint the number of transactions that have been completed contactless.
- When transaction information is provided, it is presented from a global view, including nations such as Australia and the U.K. where contactless is a far more mature product and has traditionally been the preferred way to pay. Data for just the U.S. are missing.
- Percentage growth of transactions from 2019 to 2020 has been shared, but without the acknowledgment that less than two percent of transactions last year were contactless, so an extraordinarily large percentage of not much at all still results in a small number.
Why All the Obfuscation?
While conspiracy theorists may want to think that something is afoot in this lack of transparent transaction data, I think the explanations are likely to be rather simple.
- First, we know that not all the databases that provide transaction data are actually capturing the signal that defines whether an in-person transaction is contact or contactless. More on this issue can be found in a recent report from Mercator Advisory Group: COVID 19: The Power Behind Contactless.
- Second, the actual transaction data may not be telling a newsworthy type of story or providing the kind of sound bite that would create a fear-of-missing-out reaction among issuers and merchants who, to date, have not joined the ranks of the contactless. Networks, processors and card fulfillment providers would appreciate this kind of reaction and a heightened need for their services.
- Additionally, there are several transaction shifts taking place during the global pandemic, including a net decline in the overall number of debit, credit and prepaid debit transactions. So while contactless transactions may be increasing, the number in total may not be significant enough to catch attention in light of the overall decline in card activity and a particularly sharp decline in cardholder-present activity. Figure 1 shows the recent decline in debit and credit card activity during the first half of 2020.
Figure 1: Total Mastercard and Visa dollar volume and transactions trends
Sources: Mastercard and Visa Q2 financial performance release and Mercator Advisory Group
- Finally, during the pandemic when only essential stores were open, most activity occurred in stores that had already installed contactless: grocery stores, home improvement locations and pharmacies. Once more shopping venues are open and consumers go back to shopping at more locations as they did in the past, these numbers will include shopping at more shops that haven't installed contactless acceptance capabilities, and the data may show a stall in growth.
Data, REAL Data.
The exception to the contactless reporting void is PSCU, the Florida-based credit union service organization. PSCU has been tracking and openly reporting the progression of contactless activity on a weekly basis. While PSCU's data represents member transactions from their owner credit unions, the data do represent a mix of transactions from across the U.S. and include cardholders from rural, suburban and urban locations.
Below we share some of their recent findings, which offer a detailed view of contactless card and wallet growth on a percentage basis from early February to early August 2020. The view in Figure 2 includes the percentage of contactless debit card activity (transactions and spend) as a percentage of the total in-person transactions being conducted on contactless enabled cards.
Figure 2: Contactless debit “Tap and Go” activity as a % of total transactions on contactless debit cards.
Here are some of the key takeaways I see:
The number of debit card transactions, as opposed to dollar volume, is an important metric to follow. More transactions build a lasting payment habit, meaning that the user is more likely to use contactless at that location again and may try it at other stores. When many states enacted shelter-in-place orders and numerous stores were temporarily closed around March 15, the data show that the number of contactless transactions were 11% of all in-person debit transactions; they peaked the week of July 19 at around 13%, and in the last week measured, Aug. 8, transactions were running at about 12%. While these growth numbers do not necessarily provide a sizzling headline, this is good growth as it represents a change in consumer behavior, which often can take years to accomplish.
The insight that contactless was on a steeper growth curve prior to March 15 suggests that as consumers return to the so-called new normal in their payment habits, contactless transaction growth will likely continue. The most recent decline in activity in late July to early August likely represents transactions being conducted at a broader range of merchants now that more stores are opening up, including those that have not certified their terminals for contactless.
Interestingly enough, the use of mobile wallets at the point of sale saw a much greater drop-off than did cards in late first quarter and second quarter. Mobile wallets at POS had further to fall, since that technology was more broadly available and adopted than contactless cards prior to the onset of COVID-19. It has since begun to return to pre-COVID levels, although it is not yet quite as brisk as in early February, as shown in Figure 3.
Figure 3: Percent growth in contactless mobile wallet transactions, 2019 to 2020
Another point PSCU's data disclose is that contactless is being used for smaller transactions. While contactless has been eking up in average value, as have all debit card transactions, it remains below that of contact, in-person transactions and certainly well below total debit card transactions, which also includes card-not-present (CNP) transactions. This suggests that contactless debit cards are, in fact, being used as a replacement for lower value transactions that are typically conducted in cash.
Figure 4: Average contactless debit card transaction values
The information that has been provided by PSCU represents a convincing picture for the future growth of contactless activity. As financial institutions (FIs) continue to replace expired cards with contactless capable plastic, as they promote mobile wallet use, and as more FIs initiate projects to launch contactless cards, the growth will be further fueled. Merchants that have recently re-opened are likely to pursue contactless certification to appeal to those consumers who prefer to keep their distance from the POS device and, even more important, are wary of cash. We are also seeing more marketing support for contactless by issuers and in merchants' stores that did not exist prior to the COVID-19 pandemic.
The data provided by PSCU provides a more clear picture than attention-grabbing headlines, suggesting that, while the growth in terms of an absolute number is small in comparison to the total number of debit card purchases and transactions, it is headed in a positive direction at an admirable pace - albeit not necessarily in a straight, upward sloping line as the market adjusts to the new payment reality.