Debit Digitization 2020: The Acceleration of Contactless

Long before the global pandemic caused consumers to think twice before touching common surfaces, many U.S. financial institutions were already expanding their card portfolio to include contactless cards. According to the 2020 Debit Issuer Study, commissioned by PULSE and conducted by Oliver Wyman, the percentage of issuers offering contactless debit cards nearly tripled from 10% in 2018 to 29% in 2019. 

 

Even though nearly one-third of financial institutions started issuing contactless cards in 2019, penetration was still sitting at a relatively low 11% at the end of the year. This was primarily because contactless cards were being issued gradually, to new account holders and to replace expiring lost, stolen or damaged cards. Based on issuers’ plans as of early 2020, contactless penetration is projected to reach 87% by the end of 2022.

 

Oliver Wyman expects the pandemic will accelerate the adoption and use of contactless cards. Since some cardholders consider contactless “safer” from a health perspective, the analysts at Oliver Wyman expect some issuers to accelerate their plans for getting contactless cards into circulation and to increase limits on dollar amounts for contactless transactions. 

 

Meanwhile, merchants are similarly responding to increased customer demand for contactless by marketing their tap-and-go capability to customers and changing their checkout configuration to make self-checkout contactless transactions simpler.

Nonetheless, driven by COVID-19 health concerns and increases in financial institution participation, card penetration and usage, overall industry volumes for contactless are projected to grow significantly in the coming years. 

 

Issuers identified contactless cards as their top priority for debit in 2020 – surpassing both fraud management and fundamental debit KPIs (penetration, activation and usage), which held the top two positions in 2019. According to the study, 66% of issuers plan to have contactless cards in circulation by the end of 2020.

 

While the study found that just 9% of issuers currently have no plans to issue contactless, even those who remain on the sidelines are watching developments closely. “We are still in a wait-and-see approach,” said one credit union executive who participated in the study. “In the regions we operate in, we don’t see enough merchant acceptance of NFC [Near Field Communication].”

 

It’s an oft-cited “chicken or egg?” argument. Which comes first – merchant acceptance or issuance and cardholder adoption? 

 

Merchants have long followed consumer behavior in an effort to not lose out on transaction volume. As issuers focus on investing in new payment instruments, merchants ramp up capabilities and acceptance. In other words, the chicken and the egg are interdependent.

 

Getting contactless cards into circulation doesn’t necessarily mean those cards can immediately be used broadly for contactless transactions. When EMV chip cards were issued, most merchants had not yet deployed terminals capable of accepting chip transactions. Five years later, swiping a card’s mag stripe is happening less and less. 

 

The 2020 Debit Issuer Study found that the same thing is happening with contactless. Among cardholders with a contactless debit card in 2019, issuers reported that only 2.3% of those were tap-and-go. Among all debit transactions, just 0.3% – about 200 million debit transactions – were contactless.

 

To put that in perspective, the study has shown in recent years that mobile transactions have been slow to take off. But the tide may be turning. Issuers reported that the total number of mobile debit transactions doubled in 2019, and was more than six times the number of contactless transactions. 

 

Another bit of positive news from the study is that contactless transactions are expected to take a bite of cash transactions, which has the potential to result in incremental debit transactions for merchants and issuers. Use cases for contactless include merchant categories with high-volume, low-ticket purchases such as transit, quick-service restaurants and vending machines.

 

“The overriding thought behind contactless is that of displacing cash transactions,” said an executive with a national bank. “…[But] our driver to explore contactless is not just incremental new transactions. Instead, we would lose market share and be behind if we did not issue contactless.”

 

Other drivers for contactless issuance include reduce costs associated with producing contactless cards, network incentives, increased merchant acceptance and cardholder awareness. All of this leads to a better customer experience. 

 

“We are taking a customer-centric approach to contactless,” said an executive with a regional bank. “The current transaction process takes a lot of time. We want customers to be able to take advantage of the cleaner, faster and easier tap-and-go functionality.”

 

If you’re among the 62% of issuers who plan to issue contactless cards but are just getting started down that path, here are some initial steps:

You may even want to consider a change in card brand if the timing is right with your network contract. To make this decision, you’ll first need to better understand your current network expenses.

 

PULSE supports contactless payments and offers cryptogram validation services that can help issuers get to market faster with contactless cards. To hear more about how PULSE can help you with your contactless service, contact your Account Executive. 

 

PULSE cryptogram validation services apply to contactless transactions that use Discover, Visa and Mastercard cards co-branded with PULSE. These services can be especially helpful for issuers whose processors do not support contactless, or those that connect directly to PULSE and act as their own processor.