Swipe, Dip, Tap: Contactless Offers A New Way To Pay

The pandemic has changed the way Americans use cards. That behavior might never be the same.

 
 

Top-Level Takeaways

  • Before COVID-19, only 30 million Americans paid by contactless card or digital wallet. Now more than 160 million do.
  • Three credit unions — MSUFCU, Navy FCU, and American 1 Credit Union — have introduced contactless cards in recent years to great success.

Credit and debit cards have long been a popular payment method in the United States. In 2016, card purchases in the United States represented 56% of all transactions. Yet cultural, operational, and behavioral factors all have contributed to slow adoption of contactless payments by American consumers. In 2016, contactless payments accounted for only 0.4% of all payments. By contrast, in China, where card purchases represented 6% of all transactions, 16% were contactless.

The technology for contactless cards hit the market in the mid-1990s, with Seoul, South Korea, employing it for ticketing and transit means. Major cities across the globe adopted it for their own transportation systems throughout the late 90s and early aughts. In the mid-2000s, VISA, American Express, and MasterCard transitioned the technology into the payments space with contactless debit and credit cards.

Big tech companies entered the mobile payment and digital wallet space in the mid-2010s. Apple launched Apple Pay and rolled out the iPhone 6, the first phone that included contactless payment integration, in the fall of 2014. Samsung and Android followed suit with Samsung Pay in August 2015 and Google Pay (then-Android Pay) in September 2015.

Despite the availability of contactless options, the dearth of contactless-friendly terminals in the United States presented an early friction point to adoption. The EMV liability shift in 2015, however, prompted merchants to deploy NFC-capable terminals. In turn, terminal availability opened the floodgates for issuers of all sizes to start offering contactless options.

Michigan State University Federal Credit Union ($5.7B, East Lansing, MI) made its VISA signature cashback card contactless in July 2019. In February 2020, Navy Federal Credit Union ($135.7B, Vienna, VA) launched a contactless card as well.

The availability and accessibility of contactless cards has slowly improved their reach, but the market started to drastically change in early 2020. According to MasterCard, between February and March 2020, contactless transactions grew twice as fast as traditional credit card transactions at groceries and drug stores; by April, VISA data shows 60% of its in-person transactions were contactless.

CU QUICK FACTS

MSUFCU
Data as of 12.30.20

HQ: East Lansing, MI
ASSETS: $5.7B
MEMBERS: 302,576
BRANCHES: 20
12-MO SHARE GROWTH: 23.5%
12-MO LOAN GROWTH: 9.4%
ROA: 0.95%

A Contactless Inflection Point

Contactless cards offer numerous benefits for issuers and consumers alike, says Diedre Davis, chief marketing officer at MSUFCU. For issuers, they increase card usage and help the institution attain top-of-wallet status. For consumers, they offer a better member experience.

“Typically, a contactless payment takes one or two seconds to complete, compared with up to 45 for cards with chips,” she says. “It’s faster, easier, and more secure.”

In early March 2020, however, another possible benefit emerged. That’s when the World Health Organization warned cash might be capable of carrying and spreading the novel coronavirus. Contactless transactions — and cards in particular — became a more sanitary alternative payment method for many.

“A contactless payment takes one or two seconds to complete, compared with up to 45 for cards with chips. It’s faster, easier, and more secure.”

Deidre Davis, CMO, MSUFCU

“When the pandemic struck, we saw the desire for contactless cards change as sanitation drove further adoption,” says Tynika Wilson, senior vice president of debit card and fund services at Navy. “Our strategy was not driven by the pandemic, but the timing was convenient.”

Nationwide, the adoption of contactless payments has been stark.

In April 2020, MasterCard reported a 40% jump in contactless payments. And according to a November 2020 poll from MasterCard, 51% of Americans were using contactless payments, citing safety and speed as two main drivers for doing so.

American 1 Credit Union ($515.4M, Jackson, MI) was converting its card processor to enable contactless payments when the pandemic struck. Despite the challenges inherent with converting a major processor — during a pandemic, no less — the additional capability was worth the work.

CU QUICK FACTS

American 1 Credit Union
Data as of 12.31.20

HQ: Jackson, MI
ASSETS: $515.4M
MEMBERS: 59,080
BRANCHES: 17
12-MO SHARE GROWTH: 25.7%
12-MO LOAN GROWTH: 4.6%
ROA: 0.62%

“The pandemic solidified our decision that this was the best move for our members,” says Nicole Patrick, the credit union’s vice president of payments.

American 1 reviewed card usage trends and other economic events to determine the best time to complete a mass reissue of its cards. Then, during a single day in February 2021, it shut off all existing credit cards and activated the new contactless cards for every card-carrying member.

Before the switch, American 1 made thousands of phone calls to verify addresses and educate members about the coming change. It also used newsletters, in-branch signage, email, social media, and postcard messaging to spread the word and minimize friction on the day of the conversion. And in its messaging, it referred to the change as an “upgrade” rather than a “conversion.”

“This supported the idea the new cards were enhancements and the pain in transitioning to a new card was truly for the member’s benefit,” Patrick says.

Elsewhere in Michigan, MSUFCU is reissuing contactless credit and debit cards as they expire — with the exception of its signature card, which is already contactless — and replacing current cards ahead of expiration upon request.

“They just need to let us know they’d like one,” Davis says.

The Future Of Contactless

Contactless payments among Americans increased because of the pandemic, but data suggests the country has reached an inflection point.

According to an April 2020 report, “North America Online Payment Methods 2020 & COVID-19’s Impact”, nearly one-third of U.S. consumers started using contactless payments during the pandemic, and the majority plan to continue using the feature once the pandemic has ended. The report projects that contactless card payments are projected to increase more than eight times between 2020 and 2024.

At Navy, more than one-third of debit users and nearly half of credit card users are now contactless enabled, Wilson says. In fact, contactless transactions are outperforming mobile transactions thus far in 2021 at the nation’s largest credit union.

Contactless card volumes at MSUFCU are also up. Every time a member opts to tap instead of swipe, Davis says they see how fast and easy contactless can be, which encourages more transactions in the future. At American 1, the credit union is still early in its contactless journey, but feedback has been “extremely positive.”

“Our members have made it clear they like the convenience, safety, and security our contactless cards provide,” Patrick says.

CU QUICK FACTS

Navy FCU
Data as of 12.31.20

HQ: Vienna, VA
ASSETS: $135.7B
MEMBERS: 9,927,166
BRANCHES: 345
12-MO SHARE GROWTH: 29.3%
12-MO LOAN GROWTH: 8.3%
ROA: 0.65%

The expectations for future contactless volumes are high, and there’s room for credit unions to grow the share of card users who take to the tap. Part of that growth will come from education, says Navy’s Wilson — for merchants just as much as members.

According to Wilson, encouraging merchants to accept contactless payments is the first step. She notes that some large merchants still do not accept contactless payments. However, contactless cards are more secure than magstripe cousins — they don’t transmit the account holder’s name, card number, or three-digit code — so there’s no reason every merchant shouldn’t accept contactless payments.

The availability of the COVID-19 vaccine across the United States coupled with loosened restrictions will likely lead to a rebound in consumer spending. Such a return to normalcy will play a large role in the increase of contactless card adoption and transaction volumes, the Navy SVP says.

“As in-store shopping begins to recover, you’ll see contactless cards continue to grow,” she says.

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