The launch of contactless payments for transit systems in major U.S. cities might lead to more widespread use nationwide and boost transaction volume for card issuers.
Just two years ago, the U.S. payments industry dismissed the idea that contactless payments would benefit the major card brands. Now, experts think metro transportation systems allowing consumers to simply tap their card or phone to pay for their ride will be the spark to jump-start the payment option, increasing the number of transactions and revenue for card players like Visa Inc., Mastercard Inc. and American Express Co.
Once customers grow accustomed to the ease and speed of contactless payments for daily travel, they will start using the payment method in other areas, according to attendees and speakers at the PayThink conference in September. Chicago, Miami, New York City and Portland, Ore., have already launched contactless payments in their transportation systems, and at least six other cities — Boston, Dallas, Los Angeles, Philadelphia, San Diego and San Francisco — are either discussing or launching the payment feature.
Adoption of contactless payments could result in more overall card transactions. Guggenheim analyst Jeff Cantwell expects a 5%, 10% and 20% transaction lift from cash displacement caused by contactless transactions in 2021, 2022 and 2023, respectively. That means an additional 17.6 billion transactions for Visa, an extra 8.0 billion transactions for Mastercard, and an added 1.5 billion transactions for American Express in 2023.
"Looked at another way, we expect the increase in transactions per active card will be roughly [2 to 3] per month once contactless has reached significant penetration on both the cardholder and acceptance sides of the equation," Cantwell said in a June 21 note. Assuming $15 per average transaction, the analyst estimated that Visa and Mastercard could each see a 5% bump in U.S. volumes, while American Express could add 2%.
Worldwide, one-quarter of Visa transactions are contactless, according to Julie Scharff, the company's vice president of consumer products. Excluding the U.S., the share of tap-to-pay transactions rises to half. The payments behemoth expects 300 million Visa contactless cards will be enabled in the U.S. by the end of 2020. Visa had 337 million credit cards and 575 million debit cards in circulation in the U.S. at the end of 2018.
Speaking on a panel at the PayThink conference with Scharff, a Wells Fargo & Co. executive described the industry's hesitation to jump back into contactless payments, noting that it was a long process for the bank to ultimately decide to issue contactless cards.
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"There was a lot of resistance within the bank," said Kathy Yee, senior vice president of debit and prepaid cards product management and development in the deposit products group. Executives at the time believed that they should focus efforts on the digital wallet.
"We had the pain of a few years ago when we tried contactless and there was an inconsistent experience. Sometimes it worked; sometimes it didn't," she said.
"[The industry] is very mature abroad, so why are we to think the U.S. is not going to follow in the same footsteps?" Yee said on the panel. Wells Fargo and other major banks like JPMorgan Chase & Co. and Bank of America Corp. have started to issue contactless cards.
In a February note, Bernstein analyst Harshita Rawat called contactless "a powerful catalyst" for accelerating conversion of cash transactions to card payment.
"These payments are a great tool for habit formation in digital purchases through very sticky everyday use-cases such as transit," she said, pointing to the U.K. as an example.
The success of contactless in the U.S. might come down to merchants, though. More than 60% of U.S. card transactions are done at contactless-enabled terminals, according to Rawat. But customers and merchants alike are unfamiliar with the method. Many stores have not trained employees on how to accept touchless payments.
But after a deep dive into New York City's launch of contactless transit payments, Guggenheim's Cantwell concluded that the payment method will "see significant uptake" in low-dollar-value use cases where a faster transaction will create a better customer experience. These include payments at grocery stores, drugstores, vending machines, gas stations and movie theaters, Cantwell said.
If other countries are any example, then the U.S. will eventually adopt contactless payments in full force. In Australia, about 90% of in-person transactions are contactless. In Canada and the U.K., more than 50% of in-person transactions are contactless.
Rawat does not think growth in contactless will accelerate until 2021 or later. Based on prior launches in other countries, it typically takes about two years for "rapid growth" to set in, the analyst said.