From our Obsession
Future of Finance
New technology is upending everything in finance.
Contactless payments are set to finally become widespread in the US, posing a renewed challenge to the use of cash.
The US has long been a laggard when it comes to payment technology. But several factors, from changes in how fraud liability is handled to the biggest credit card issuer’s embrace of contactless technology, are now coming together (paywall) for a reboot. Even the Federal Reserve is contemplating how best to upgrade the country’s payment plumbing to make it real-time and available 24 hours a day.
Britain’s experience with contactless payments shows how it gives physical cash a run for its money. Spending using contactless cards rose to £3 billion ($3.8 billion) in 2017, up from £117 million in 2014, according to the UK Cards Association. A CMSPI consultancy case study of a large fast-food chain found that contactless payments catch on quickly, “cannibalizing both cash and card payments.” The study showed that contactless transactions increased by 64% in one year to account for 27% of all purchases, while cash declined by 11%.
“In the UK, contactless payments have been key in digitizing low-value high-frequency payments,” Bernstein research analysts wrote in a report this month.
Contactless payments in the UK also got a boost when the London underground tube network began using them. New York City’s subway is adopting the same technology, which is expected to go online this year.
Other research shows similar results. In developed countries comparable to the US, the rollout of contactless payments boosted the number of card transactions by as much as 30% within three years, according to AT Kearney. The consultancy noted that the near-field communications (NFC) technology that enables contactless-card transactions can also be used by smartphone services like Apple Pay, but tends to benefit cards more. The switch to contactless could boost annual card payment volume by $78.4 billion by 2021, according to the firm’s estimates.
The US, encumbered by entrenched interests and aging transactions systems, has been slow to change. But the massive data breach in 2013 at retail company Target helped spur the shift away from the magnetic stripe, an older and more vulnerable way of processing payments. Since then, a change in fraud liability (pdf) has given merchants, like stores and restaurants, an incentive to switch to EMV chip technology that’s more secure. Merchants, instead of card issuing banks, have been on the hook for fraudulent magnetic stripe payments since 2015. While the US has lagged behind in NFC and contactless payments, “that is rapidly changing” given the recent overhaul in payment terminals, Bernstein wrote.
JPMorgan is also driving the shift by rolling out contactless technology on its payment cards, which could mark a tipping point. The biggest US credit card issuer has said all of its Visa credit cards will be enabled for contactless payments by June, and debit cards will have it by the end of the year. Visa has said there will be 100 million contactless cards in the US by the end of the year.
Contactless payments could accelerate a shift that was already gradually taking place. About 30% of US adults make no purchases using cash during a typical week, compared with 24% in 2015. A Pew Research Center survey found that the share of adults who make or almost all of their weekly purchases using cash has also fallen slightly, from 24% in 2015 to 18% last year.
As the banks and card network look to upgrade, the US central bank is weighing how to speed up all transactions, making them real-time and available 24 hours a day. The move would could enable wider use of peer-to-peer payments and further undermine cash in everyday transactions.
One option is for the Fed to build the electronic plumbing, while another is to rely on a private-sector system like the one operated by The Clearing House (TCH), which is owned by around 20 of the biggest banks.
Responses to a Fed request for comment show the industry is divided. While everyone agrees that real-time payments would be better, TCH and the banks behind it say their own real-time payment network would be better to keep up with evolving technology. They say a Fed-run system would fragment the market and undermine the work they’ve already done.
On the other side is just about everyone else, including an academic, community banks, Google, Amazon—and even a trucker association. Smaller banks say they don’t want to be beholden to larger lenders that could charge prohibitive prices. And Walmart executives argue that the Fed is the only organization in a position to provide an upgrade that would be widely helpful to all stakeholders.
“The United States has continued to operate an archaic payment system wherein certain incumbents are enriched by preventing disruptive innovation from coming to market,” Walmart wrote. “The result is a payment system that is slower, more expensive, less reliable, and more fraud-prone than any other industrialized nation in the world.”