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Contactless Cards: Organically Growing Card Transaction Volumes

Updated: Sep 27, 2019

What is a Contactless Payment?

A contactless payment is made either by using a contactless EMV card or a mobile wallet to complete a payment transaction. Just as a mobile wallet uses a smartphone’s antenna to communicate with a POS terminal via radio signals, a contactless card also communicates using a small antenna inserted during the card manufacturing process. 


Contactless payments are dual-interface EMV payments. Without an antenna, an EMV chip card is single-interfaced, meaning its EMV chip can only be read by dipping it into a POS terminal. With an antenna, contactless’ dual-interface means a card can also be tapped or waved at a POS terminal to complete a transaction. 


Contactless cards or mobile wallets (which already use smartphone antennas) need only be within three inches of an upgraded merchant POS terminal for a handshake to happen between the card’s issuer and the terminal. That handshake is the issuer sharing a cryptographic code with the POS terminal that the card is genuine.


While transaction approval with a single-interface EMV card can take 8 to 10 sections, the approval handshake for a contactless card takes 300 milliseconds. Yes, that is 1/3 of a second. The need for only proximity is why contactless payments go by a variety of names including Tap-and-Go and Wave-and-Pay.


Didn’t We Just Start Dipping our Cards?


The first iteration of EMV payments was the inclusion of a non-duplicable EMV chip computer into the face of a debit or credit card. In 2015, in an effort to obviate the fraud costs of counterfeit plastic cards, Visa and Mastercard mandated that merchants or card issuers would bear the full brunt of those fraud costs if they were the party that did not issue or accept EMV transactions. That put issuers and merchants in competition to see who could upgrade fastest to avoid the costs associated with card-based fraud. 


Issuers and merchants responded with the mass issuance of EMV chip cards happening in tandem with the mass acquisition of upgraded, EMV-compliant POS terminals. Those new terminals were manufactured to accept EMV cards that were dipped (contact) or waved/tapped (contactless).


Does Contactless Solve any Actual Problems?

Yes!


Speed: Consumers continue to believe that cash transactions are faster than card payment transactions, which leads them to frequently choose cash as their payment options when they are making fast, small dollar purchases. However, a contactless transaction is (essentially) instantaneous which makes it even more attractive than cash. And unlike cash, a debit or credit card transaction can earn rewards points or cash back. 


Interchange on New Transactions: In 2016, the Federal Reserve’s Diary of Consumer Payment Choices found that on average, consumers reported making 46 retail transactions per month. Of those, 14 (31%) were cash, 12 (27%) were debit and 8 (18%) were credit. In the U.S., approximately 60% of in-person payments under $10 made using cash. Because contactless transactions both feel, and are, so fast, they can drive cards to be the preferred payment method for even the smallest value transactions. 


Consumers love that contactless payments feel instantaneous. But issuers also need to ensure the security of card transactions which means there is a limit on the dollar value of purchases before cardholders need to type in a PIN as an additional level of security. That means that contactless is most perfectly suited to fast, small dollar transactions.

Elizabeth Rowe

Banking Research Associates

September 2019

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