Despite our industry’s preoccupation with mobile payments, here at Glenbrook we’ve been keeping a sharp eye on the state of the U.S. EMV® migration. Let’s call the U.S. approach, based on contact EMV only with no PINs on our credit cards, EMV Phase 1. That’s where we are today. While EMV technology has been settled science for some time, the velocity of the U.S. transition has implications not only for EMV providers and users but for the mobile payment ecosystem as well. Just to level set, EMV Phase 1 looks like this:
Asymmetric Deployment
Anyone who uses payment cards recognizes that there are significant differences in how chip cards have been issued and where those chip cards are accepted. I doubt it’s only Glenbrook’s payment geeks who keep a mental tally of which merchants take “the chip” or, for that smaller subset of “Pay” users, accept NFC-based contactless payments. Compared to the good old days of a simple swipe, we’re in an awkward phase where how to pay is uncertain.
Card Issuers
Glenbrook’s latest market scan shows that card issuers are out ahead of the acceptance side by a wide margin with some 81% of credit cards and 46% of debit cards chip-based at the end of 2016. Our forecast gets the U.S. to the vicinity of 100% chip issuance by the end of 2018. That said, the largest issuers have already shifted back to the traditional reissuance and card expiry pace of three years, with some portfolios moving to a four or five year replacement cycle.
Merchants
Merchant EMV acceptance continues to lag the issuer pace. And no wonder, given the greater difficulties of EMV acceptance. EMV requires the replacement of every POS terminal, the certification of point of sale software that connects to those terminals, and non-technical, non-trivial steps like staff and customer education. (A significant proportion of our recent merchant work has focused on EMV deployment concerns, on topics ranging from optimized payments infrastructure, transaction speed, and data security.)
Glenbrook’s forecast for U.S. merchant chip acceptance gets us to 90% chip acceptance no sooner than Q4 2019. At that point, we will have reached the important milestone of 90% of transactions executed chip-on-chip, where both the card and the POS terminal conduct an EMV-based dialog.
If we make that schedule, the U.S. migration, despite all the sturm und drang, will outpace the rate set by other markets that have historically required six years to complete. Not bad for the biggest POS market with the most legacy gear.
What Does Phase 2 Look Like?
We’re frequently asked “what’s next for EMV in the US? What about contactless card issuance? Any chance of putting a PIN on a credit card?” Those are, as they say, good questions.
Before we go there, let’s back up a bit. We have to thank Apple’s launch of Apple Pay, coincident with the U.S. EMV rollout, for giving a big push to the expansion of the U.S. contactless acceptance footprint. Because every payment terminal was headed for replacement to support contact EMV and the incremental cost of contactless support had dropped to a matter of a few dollars, the POS terminal base is now set on a path toward ubiquitous contactless ability if not acceptance.
But we’re not even close to that ubiquity. Contactless activation lags EMV contact acceptance by some 30%. While not necessarily turning off contactless payments (yes, CVS has), some large merchants like Walmart and CVS have opted for their own wallet apps using QR codes at the POS for the richer data this method provides. Compared to payments-focused wallets like Apple Pay and Android Pay, these commerce-focused merchant apps attempt to improve the customer experience and to help the merchant sell more.
A broad merchant contactless acceptance footprint awaits. While 100% of new EMV POS terminals ship with contactless hardware, today we estimate only 70% of EMV-enabled terminals—and as of Q1 2017 those are just 43% of all POS terminals—have contactless acceptance turned on.
Not on their Screen
Card issuer competitive differentiation remains based on rewards, perks, rates, and cachet, as the current metal card infatuation demonstrates. The dual interface contactless card’s role as a differentiator is waiting on a compelling, everyday use case. My theory is that, while Chicago’s Transit Authority has made open loop payments possible at the turnstile, there aren’t enough bankers living in that market to stimulate issuance. Once the New York MTA goes open loop and all those bankers see what’s possible, then dual interface issuance will happen in a New York minute. But that’s going to take until 2020 which also corresponds to the time when the first wave of EMV cards hit their expiry dates. Then Phase 2 will occur, the second issuance wave. We’ll have to wait until then for the release, if any, of new features such as dual interface contactless, PIN-protected credit cards, and perhaps (but very unlikely) offline authorization.
NFC Pays and Dual Interface Cards
NFC-based payments have a long way to go. While the growth rate for Apple Pay and Android Pay transaction volumes is impressive, it remains minuscule in the overall payment mix, below 2% even at tonier merchants like Whole Foods. While it’s prudent to be cautious with such stats (in some markets, Apple Pay and Android Pay usage is higher) a recent Wall Street Journal article pointed out that “Apple Pay Promised to Make Plastic Obsolete. Then Came Wary Shoppers, Confused Clerks.”
What about cards? A glance to our north demonstrates Canada’s success with contactless cards. 100% of Mastercard-branded cards are contactless. Major retailers accept contactless. Interac’s Flash contactless debit cards are issued by BMO, RBC and Scotiabank and over 170 credit unions. Across the pond, UK cardholders and merchants are pushing contactless card usage rates; Londoners use contactless for some 30% of transactions.
Questions for the U.S. include:
Could contactless cards be the training wheels for NFC payments in the U.S? Should those examples guide our expectations for the U.S.? We’ll have to wait and see, but if anything makes a contact EMV transaction look better, it’s a contactless, tap-and-go payment.
Are U.S. issuers hoping mobile wallets catch on so they can skip contactless card issuance, and its higher cost, altogether? Or are they just waiting for a major competitor to add contactless capability to its card offerings? On those questions, the jury is out and we expect a lengthy deliberation to conclude towards 2020.
The New Normal
Of course, physical world payments continue to diminish as a portion of our overall transactions. For issuers, a huge question is how to gain and maintain “top of the digital wallet” position. In today’s digitally mediated world, where subscriptions for goods and services (Dollar Shave Club, Netflix) are assuming a larger share of overall transactions, the card or payment method that’s on file with the merchant might not change for years. Dominance in digital payment channels is on every issuer’s agenda. But that’s a discussion for another post.
I welcome your comments and thoughts!
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