With technological advancement continuing its trend of exponential growth, consumers are more readily switching to digital shopping avenues, steadily moving away from the use of physical credit cards. The number of credit card purchases has fallen by 368 million transactions in the past two years, [1] a decrease which can be attributed to a number of factors. One particular factor of note is the rise of contactless payment (CP), which has muscled its way into our day-to-day lives in a variety of formats, from bank cards to key fobs. As this trend continues, we will see noticeable repercussions, not only for the consumer, but also for the companies providing these payment services.

Improvements in Methods of Payments

 The contactless payment method began in 1997 with Mobil’s Speedpass Keychain Radio-Frequency Identification (RFID) capsule. This device was a small payment device for one particular company – Verifone RF250 – and could only be used for Mobil gas pumps and at Mobil convenience stores. However, as the technology has advanced, contactless payment systems have diversified. The first bank to accept contactless payments was Barclays in 2008 with the introduction of Paytag – a sticker with a small antenna placed on the back of a mobile phone, which transmitted information to and from a contactless terminal.

Expansion in the Market

In the years since, technology companies have usurped the lead that banks held in CP technology. Services such as Google Wallet and Apple Pay have begun replacing physical credit cards by opening up accessibility to any terminal – the majority of the card payments now being transacted through these technology companies, rather than the traditional banks. Apple Pay, rather than passing card details to a merchant, uses both a process called ‘tokenisation’[2] and a fingerprint authentication system, [3] and is thus relatively secure. A key benefit being that it is free for all iPhone users – a prominent global market. Along with many other online services, such as PayPal or Steam, it is now possible to conduct most consumer activities without a physical card at all.

The effect that CP has in the retail market has and will alter the way we move money. Without the need to enter a pin or write a signature to make a purchase, queues will be shorter and move quicker, better utilising customer footfall – increasing the potential volume of transactions. Consumers have begun transitioning from cards and cash to CP because the system is easier and faster, thus increasing banks’ revenue on credit and debit card transactions. We will see the positive effects impacting our lives personally but also creating opportunities in financial markets: the relative lack of human interaction and time required to conduct transactions allows consumers on average to create more debt, which can then be securitized into various products by financial institutions.

Future Aspects

 CP is predicted to become increasingly popular in 2016 and we should see the banks’ market share rise in line with this growth. A study has shown that nearly half of Americans would consider substituting their traditional bank account and/or credit card with a mobile wallet if possible.[4]  However, banks have until now been reluctant to invest in this technology, due to a perceived security risk that details may be read remotely by fraudsters.[5] Despite this hurdle, banks need to act now if they want to take back control of the CP market from tech companies as security features become more sophisticated.

Consumers will continue to look to services such as banking wallet to purchase goods directly, rather than using a technology company as an intermediary between the seller and the bank. However, if banks are willing to invest heavily in CP, this would lead to reductions in cost when handling cash and improved profitability. Moreover, as security measures improve, opportunity for theft and fraud are reduced, and therefore risk management will become more simple. E.g. Each card would hold an audit trail of all payments, stored securely and verified by the consumer.

It’s time for banks to take back CP technology development, and if they cannot beat the tech firms, join them and partner to provide this service. The future of the physical credit card is in jeopardy because CP is becoming the new norm. The more sophisticated these services become the less consumers will rely on credit cards, leaving plastic cards to gather dust. Retail banks need to act fast to capture as much of this market as possible – and the associated processing fees – to ensure they do not miss out.

References

[1]: http://www.theukcardsassociation.org.uk/wm_documents/Quarterly%20Market%20Trends%20Q2%202015.pdf[2]: http://www.qz.com/525677/forget-2015-chip-cards-jumpstart-mobile-wallets-like-apple-pay/[3]: https://www.cebglobal.com/blogs/apple-enters-the-payments-market-how-does-this-affect-you/[4]: http://www.inquisitr.com/248206/mobile-wallets-are-scaring-big-banks-and-for-good-reason/[5]: http://www.telegraph.co.uk/technology/internet-security/11758990/Contactless-cards-at-risk-of-fraud-warns-Which.html