EMV Phase Two: Contactless Payments

With EMV migration still ongoing, is the U.S. ready for dual-interface cards?

With the market and industry analysts buzzing with news of contactless payments, dual-interface payment cards and mobile payments, it would be easy to think that the digital payment revolution is well underway. However, the precursory step of full EMV migration to chip-and-PIN cards in the U.S. is still far from complete. So are we getting ahead of ourselves?

Merchant Disconnect

The drive toward EMV adoption continues to progress with around 38 percent of U.S. storefronts now accepting chip cards. The big-name stores and chains have moved quickly, particularly in the larger cities. But adoption by smaller merchants, especially in less urban areas, remains well below 30%, whereas coastal states proudly boast merchant adoption rates of over 70 percent. This is in sharp contrast to the state of play in the rest of the world where the EMV chipcard migration is essentially a completed exercise.

The main difference in the U.S. is that there has never been a formal regulatory mandate to force the move; the migration is entirely voluntary, and this is unlikely to change. Therefore, EMV migration for issuers and merchants is driven by the business case, making it variable across the country. This is in sharp contrast to the rest of the world where it is common practice for EMV POS terminals to be everywhere; the POS device comes to your restaurant table; the taxi driver has an EMV POS in the cab; the card never leaves the cardholders view and they control the whole process. Yet in the U.S., about 40 percent of main street merchants have EMV terminals.

One, Two, Contactless

With EMV migration far from complete, is it prudent to roll out more new payment mechanisms in the U.S.? The next step is for cards to be contactless, allowing payments to happen with a simple tap and go; no need to sign or enter a PIN, just tap the card on the reader and you are done.

The good news is that EMV chip cards can be issued as dual interface. This means that a single bank card can make EMV chip transactions and also contactless payments where the POS terminal permits. To achieve this, dual-interface cards must be issued to consumers and merchants need to upgrade the POS to accept them. However, only about 15 percent of EMV supporting terminals are ready to accept contactless payments. Despite this, the move to contactless payments seems inevitable, especially when we consider how the rest of the world is moving where dual-interface cards and POS terminals have been rolled out for some years now.

There are strong indications that some late adopting issuers and merchants are looking to move directly to dual-interface capability in order to take advantage of the convenience that comes with simple tap and go payments. But it is likely to depend strongly on the merchant sector in question; without a strong need for ultra-quick transactions, the contactless paradigm adds little value. Fast food restaurants and transit systems are the likely first movers to contactless payments given the advantage of speed and convenience where customers can pay without even removing the card from their wallet.

Though the process in moving slower than the rest of the world, the market and big brands still want contactless card payments in the U.S. Major top tier banks have already announced contactless launches for later this year and into 2018, and this is likely to drive more merchants to adopt. It remains a chicken and egg problem. Can issuers take the lead and ensure significant numbers of dual-interface cards are in circulation, or will they insist on delaying until enough merchants are ready to accept them? Outside the U.S., for the years before widespread adoption of contactless, the issuers had been replacing expired cards with dual-interface cards, and likewise, the POS terminals for EMV were dual-interface in readiness.

Contactless and Mobile Synergy

Another driving factor for contactless and dual-interface card adoption is that the underlying technology can also accommodate mobile payments including Apple Pay, Android Pay and Samsung Pay. It is not an either/or question, they are complementary. From a cardholder’s perspective, the payment experience is similar and many now feel that the hype surrounding mobile payments – with the big tech brands behind them – can also drive the contactless card migration.

But once again, we can expect merchant adoption of mobile to match the interest in contactless with merchants needing absolute speed of transaction leading the way. Therefore, we assume that fast-food restaurants and transit systems will become the first adopters. But this does not cover the fact that payments from mobile phones remain more cumbersome than a simple tap and go from a contactless card (the need to unlock the phone, find the app, select card, etc.). To combat this, it is likely that mobile payment providers will need to add loyalty schemes and reward programs to bolster the mobile payment experience to provide some true added value. Also, the various mobile pay solutions may have to take steps toward interoperability between their apps in order to simplify the user experience if they are to maintain their momentum.

Step by Step

The U.S. can learn a lot from the experiences in Europe and the rest of the world where EMV migration is largely completed and the move to contactless card payments is more advanced by between three and seven years. Contactless became the second phase of EMV, and the U.S. will inevitably follow. Elsewhere, issuers got ahead of the game by issuing dual interface well before their mandated change became an obligation; in many countries, such as Canada, the UK and much of Europe, over 80 percent of credit and debit cards in circulation are dual-interface EMV compliant. In the U.S. this is a voluntary exercise, so we anticipate a slower more protracted process.

EMV has had a dramatic impact on counterfeit fraud with card present fraud rates dropping. Possibly as a consequence of the increased EMV security, chip or contactless, countries that are already well down the EMV migration route have seen marked increases in card, not present fraud.

While the drive to contactless card payments may also advance the cause of mobile smartphone payments, the likes of Apple, Google and Samsung still need to provide additional value to users as a dual interface tap and go will likely keep the contactless card top of wallet for most consumers.

EMV with chipcards are first, but contactless payments – from the same dual-interface cards – normally follow within two or three years. Merchants and issuers need to be in sync, but who will move first? With so many U.S. merchants not currently accepting chipcards, widespread dual-interface card acceptability is still a long way off: EMV is still winding up, not winding down!