In a world where social distancing is the norm, technology that lets you pay in a store without touching the credit-card reader seems a no-brainer. But the burgeoning industry of so-called “contactless” payments is still feeling its way.
Even as overall consumer spending volumes plunged over the course of this year, shares in companies such as
Visa,
Mastercard,
PayPal
and Square have not. Instead, investors are betting that digital payments will emerge from the pandemic stronger than ever.
Partly that is fueled by a surge in e-commerce spending, as people avoid physical shopping. But even when shoppers return to stores, many anticipate that far fewer payments will be made in cash, or even by swiping or inserting a card in a machine—and much more by tapping or waving cards or mobile devices at a terminal, with no need for any touching.
Contactless payments have long been a laggard in the U.S., even as they have grown to a majority of face-to-face transactions in some countries. Tap-to-pay tends to be a faster alternative to chip-insertion cards. Still, in the U.S. likely less than 5% of in-person transactions were via contactless methods at the outset of this year, according to Bernstein estimates.
That’s been a drag on tech companies that have sought to gain a foothold in payments through their devices.
Apple Inc.
tried to jump-start contactless in late 2014 by launching Apple Pay with iPhones. More than five years later, Apple Pay likely accounted for less than 5% of in-person and online card transactions pre-pandemic, according to Bernstein estimates. Analysts surveyed by Visible Alpha estimate that Apple Pay generated just under $1 billion in revenue for the company in its most recent fiscal year, less than 3% of its total service revenue.
Now the pandemic has accelerated contactless usage, including in the U.S. Visa and Mastercard reported 40% year-over-year global growth for tap-to-pay or contactless transactions in the first three months of this year. PSCU, a U.S. credit-union service organization for payments, reported that over 12% of in-person transactions on contactless-enabled debit cards were by tap in late July and early August, up from about 8% in mid-January.
But there remain roadblocks. Only around one third of U.S. debit cards will have near-field communication, or NFC, technology needed to tap by the end of year, according to a recent forecast by consulting firm Oliver Wyman. It also notes that some contactless transactions aren’t entirely touch-free, because some merchants’ terminals may also prompt keypad touches or signatures.
There’s even a new wrinkle: Masks. The latest smartphones have moved from fingerprint identification to face scanning to make a payment, which doesn’t work as well with masks. New York’s Metropolitan Transportation Authority—which was rolling out more contactless turnstiles just as the pandemic decimated ridership—reportedly sent a letter to Apple earlier this week seeking help to prevent riders from pulling down their masks to pay with phones. A recent software update from Apple was designed to ease this problem.
Still, investors’ enthusiasm for any momentum is justified. Cash’s stronghold tends to be small-dollar, in-person payments, where contactless technology is also typically used. Networks such as Visa, Mastercard, American Express and Discover win any time a card is used, whether tapped, swiped or in a digital wallet. “They don’t care if it’s telepathy, they just care that it’s not cash,” says Autonomous Research analyst Craig Maurer.
But how people tap matters for players such as Apple, PayPal,
Alphabet Inc.’s
Google and
Samsung Electronics.
Each offers a digital wallet that stores cards and other payment types for paying online or in stores.
PayPal is using QR codes to help it seize the moment. Those barcode-like scrambles, which are scanned via a camera or reader rather than tapped, may not be as familiar for paying in the U.S. as they are in China. But they also allow a non-device maker like PayPal to quickly deploy in-store and can work with any smartphone. Merchants as small as a lemonade stand can now print out a code and accept PayPal.
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Apple is a device maker. It even reportedly recently acquired a company, Mobeewave, that turns phones into tap card readers to allow them to accept payments. But Apple’s integration has also sparked a probe by the European Union into whether it inhibits competition by only allowing its own apps to use iPhones’ NFC.
A long menu of contactless options—many merchants have their own store-payment apps too—can also sometimes confuse consumers. Cash and traditional cards have the advantage of near-universality. Wallet providers are investing in a bevy of other features, including banking services, as incentives to pay with apps.
At the same time, many retailers are trying to phase out checkout counters altogether, such as by expanding pickup. In addition to digital payments companies, investors have also bet heavily on firms that enable virtual storefronts such as Shopify, whose shares are up over 150% this year.
The pandemic has been a petri dish for payments. It is just not clear yet who will win most from the experiment.
Write to Telis Demos at telis.demos@wsj.com and Dan Gallagher at dan.gallagher@wsj.com
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