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Contactless Payments Systems are the Future

Contactless payments systems in their various stripes are the future of retail point-of-sale systems, and banks still own the networks. But unless they stop trying to control the process, they could lose the system to merchants with their own private-label card programs, thinks Bruce Cundiff, a research analyst with Javelin Strategy and Research.

There’s really nothing to stop such merchants from outmaneuvering the banks, if they want to, he says. “The possibility exists among those merchants considering contactless, and really have a robust card issuance card network to begin with. They’re well-versed in credit, debit, and closed-loop card operations—and they see their private label brand as a lower cost channel.”

The merchants have plenty of good reasons for moving away from bank-owned cards. Doing so would not just give merchants more money from each transaction, it would also reinforce customer loyalty—making for more repeat business—and enrich marketing programs by giving merchants better access to the customer data in the payments stream.

Merchants increasingly view private-label, contactless payments as their best bet for driving revenue. According to Cundiff’s research, 20 percent of merchants considering enhancements to point-of-sale payments consider the technique among the most productive choices they can make. Only signature debit (31 percent) and ACH payments (33 percent) scored higher among merchants as possible new payments options.

Even worse news for banks: Cundiff’s survey of 900 retailers included all sorts of merchants, from large chains to the iconic Mom-and-Pop store. “We reached out to all types of merchants, even to those with only one location,” he says.

The irony here is that banks started this phenomenon in the first place.

“Contactless payments are the wave of the future because issuers like (JPMorgan) Chase got into the game,” he says. It was Morgan Chase’s decision to jump into contactless payments with both feet that solved the chicken-and-egg question surrounding contactless payments, because it was a signal to cell phone manufacturers that there would be a market for RFID (radio frequency identification) chip-enabled cell phones that can facilitate payments. “Prior to that, merchants were saying ‘It’s not broke, and I’m not going to fix it. They didn’t think people were going to come in and ask ‘Where’s your contactless terminal?’”

But that historical fact is irrelevant to the future, because with the genie out of the bottle, the challenge for issuers is to do everything they can to enable the technology now, before merchants do it for them. And since, as Cundiff’s research indicates, those merchants are a substantial fraction of the overall universe, the prospect that banks could be disintermediated by these merchants is a very strong possibility.

The fact that banks will have laid the foundation for this turn of events by educating merchants about the benefits of the technology is merely one of life’s injustices; the most disturbing element in this scenario is that bank disintermediation is entirely avoidable, if institutions will just make it in the merchants’ interest to work with the banks—even if that won’t be so easy. “If I’m Macy’s, and I’ve invested millions of dollars in contactless, I’m going to make sure that as many transactions that flow over that system are going to be Macy’s cards,” says Cundiff.

That prospect will be made easier by the widespread availability of cell phones that can make payments, he adds. The logic is perfectly clear, if brutal: With so many people carrying payments-enabled cell phones, he says, it makes perfect sense for stores to offer to download their own card onto a customer’s cell phone at the point of sale. Then, unless the banks have already beaten the merchant to it, more and more payments volume will go to merchant cards—edging out the bank and cutting into the fastest-growing segment of payments-fee revenues.

How to avoid this? “They (banks) need to consider the fact that they need to work with the merchants in a more integrated fashion—especially a large merchant that has a high profile and has plenty of locations and payments volume,” he says. A promising tactic to make sure the banks are still involved is to approach the merchant and offer to issue a co-branded, contactless card.

But to do this, banks have to recognize that contactless payments are the key to the future at the point of sale, and that they either turn the lock, or don’t. And if they do, they either continue to insist that everything be done their way, or they can start working with their customers to integrate themselves into that next generation of payments.

Luckily, the best banks already get this, says Cundiff. When Morgan Chase went to market last year with their Blink contactless cards, for instance, “they were talking about how they had to approach merchants and not only build acceptance, but build affinity for the product with both cardholders and merchants—that meant co-marketing agreements and signage,” he says.

But what this also means is an apparent shift in the balance of power between issuers and merchants. While some will argue that issuers have always valued their customers and tried to accommodate them, that posture is undermined some by the ongoing interchange war: After all, if the issuers had always been so accommodating, the years of complaints from merchants that interchange was too high would have resulted in adjustments—not lawsuits.

At this point—as many observers have argued—the better part of valor for issuers may be collaboration with merchants instead of battle, lest contactless, private-label cards prove to be yet another army rising on the issuers’ flanks. (Contact: Javelin Strategy and Research, Bruce Cundiff, 925-225-9100)