February 11 2019
Now that the contactless card form factor is coming to the U.S. in a systemic fashion, I thought it timely to discuss the competition between these cards and the open loop wallets from Apple, Google, and Samsung.
A Push for the Pays
Juniper Research released a report on January 29, 2019 based on its survey of 1,000 users in the U.S. and the U.K. The news for open-loop mobile wallet providers isn’t good. According to the report’s press release:
“Despite high levels of support from retailers, only 14% of U.S. respondents currently use OEM-Pay (payment services provided by smartphone vendors) for instore purchases.”
Survey sample composition is, of course, a major determinant. When we ask the same usage question at a Glenbrook Payments Boot CampTM on either coast, we generally have well over half of attendees say they use Apple Pay, Google Pay, or Samsung Pay regularly. In the middle of the country, the response is slightly more tepid but among payments professionals the PAYS are increasingly popular.
But Juniper’s point is well taken. There’s no sign of a massive adoption wave despite no little effort by the Pays.
No Little Effort
As the curator of Payments News I post, on a monthly basis, an announcement from one of the Pays about bank tie-ups in a new country. Tim Cook’s recent announcement of a doubling of Apple Pay volume in a year doesn’t surprise me. Juniper’s 14% figure still represents growth.
But the uptake remains modest.
Merchant Enablement Less of a Barrier
We can’t blame the merchant anymore. Contactless acceptance has become a standard payments modality of most national brands. Over 50% of consumer payment transactions today are made at contactless-enabled terminals. Even CVS has turned on its stores’ contactless readers and deprecated CVS Pay due to low usage.
Just Two Strong Levers to Pull
In our workshops, we point out that payments providers have just two strong levers to pull that can change consumer payment behavior.
First, the provider’s offering has to offer a financial gain to the consumer. The commonplace choice of reward and cash back cards is ample evidence. But neither Apple Pay or Google Pay are positioned to provide financial incentives above and beyond simply holding the funding card in the wallet. I get the same benefits from my Chase United MileagePlus card whether it’s used in a mobile wallet or swiped at an old school terminal.
In short, the lever of financial advantage is a hard one for Apple and Google to pull. Samsung grasped this reality early on and has made a sustained effort to engage consumers through merchant partnerships, an approach that is hard to scale. Even in its home market of South Korea, Samsung Pay is well below 20% of payments.
The other lever is convenience. U.S. consumers are particularly fond of payment convenience. We’re entranced by the invisibility of an Uber or Lyft payment. Merchant apps like Starbucks push the card behind the payment curtain.
The open loop Pays make a good case for improved convenience. I can leave home without a leather wallet – except if I need my drivers license.
Simplicity Has Value
The fact that a simple experience has value is a Glenbrook tenet of payment economics. The care and sophistication designers take in building a simple user experience has real ROI. Wallet designers take that same care to the payment experience. Staging a cardholder’s preferred payment method when it’s about to be needed is a win for convenience and for usage.
Old Cards, New Tricks
Up until now, I’ve been a big fan of Google Pay. It’s more convenient by far than dipping a card into a POS terminal. And it works despite being a bit fiddly on occasion.
But Americans are about to learn that the old card has a new trick, the contactless tap and go payment.
Timing is Everything
Now that the first wave of EMV cards is reaching its expiration dates, U.S. issuers have climbed on the contactless card bandwagon as they seek ways to maintain or recapture top of wallet position.
My experience with my new contactless card has been nearly flawless. The transaction is initiated in under a second. It’s simple and fast and doesn’t require a charged battery.
I suspect those characteristics, enjoyed in the U.K. and Canada since well before the Apple Pay launch, has depressed mobile wallet uptake in those markets and that some significant set of U.S. cardholders will choose the card form factor because it simply pulls both levers at the same time.
Issuers, despite the added cost for contactless per card (it starts at $0.35 and goes up) are attracted to the card format factor for a few reasons:
1. They control the entire payment experience
2. The card is a physical embodiment of the issuer, and the card network, brand
2. The issuer doesn’t have to share revenue or data with the wallet provider. The 15 bps the issuer pays to Apple on every Apple Pay credit card transaction is both an open secret and material to issuer profitability. The contactless card avoids that cost.
The Transit Forcing Function
Transit system support for open loop payments has been key to contactless expansion, a forcing function able to move the rest of the local payment ecosystem toward contactless adoption. The New York MTA will begin with support for open loop single far rides on the Lexington line in May 2019. It has already accelerated contactless card issuance in that market. Boston and a number of other transit markets are all poised to shift their payments mix heavily toward open loop contactless. The Pays will no doubt want to leverage the transit use case to expand their value proposition as well.
Form Factor Fight
It’s going to be interesting to watch the “competition” between these tricked out, one trick cards and the Pays. Will the contactless card experience help or hinder the Pays proposition? Will contactless cards teach users about the tap and go gesture and raise interest in mobile wallets or will the card’s simplicity and fit-to-purpose dominate?
Based on my recent experience, the card format factor will put pressure on the Pays to improve performance and capabilities. The newer NFC chipsets released over the last several years operate faster than their predecessors so the Pays have even better hardware to optimize the payment experience. We’ll have to wait and see if the new competitive alternative pressures the Pays into pulling the lever of financial advantage.