The U.S. has been slow to embrace tap-to-pay transactions, but history suggests that a turning point may be near.
As New York City’s Metropolitan Transportation Authority begins to allow contactless payments at the terminal for some subway and bus riders, financial technology companies are betting that U.S. consumers will warm to the idea of tapping a card or phone to complete a transaction, which is already the norm in many international markets.
“Urban transit seems to be the catalyst,” said Mizuho analyst Thomas McCrohan. Though U.S. retailers have accepted mobile wallets like Apple Pay and Samsung Pay for years, shoppers haven’t found these options to save much time over a traditional swipe or dip of a physical credit card. The hope for companies like Mastercard Inc. MA, +0.70% and Visa Inc. V, +0.70% is that consumers will see value in tapping their credit cards at a subway turnstile, rather than waiting on line to buy or refill a fare card.
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Mastercard and Visa have seen success in countries such as the U.K. and Canada, where contactless cards are more prevalent and where transit systems have long allowed customers to tap and pay. More than half of all commuters in Vancouver use their cards to access the transit system there, said Linda Kirkpatrick, Mastercard’s executive vice president for U.S. merchants and acceptance. “That’s an everyday use case that puts this kind of model on steroids,” she told MarketWatch.
While consumers have become accustomed to using their cards for expensive items, many still opt for cash when making smaller purchases, a behavior Mastercard and Visa have been trying to change. “We think this migration based on everything we’ve seen in other markets will accelerate the cash-to-card displacement that we’ve been talking about for a couple of years,” Dan Sanford, Visa’s global head of contactless payments, said of the coming transit launch.
In London, where tap payments for transit access have been accepted for more than four years, Visa has seen “a meaningful lift in overall card usage versus nontransit users,” Chief Executive Al Kelly said on a recent conference call with investors.
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Mizuho’s McCrohan estimates that Visa could see about $40 million in revenue from the One Metro New York launch by 2021, assuming a full rollout, while Mastercard could see $27 million in revenue. While such figures would only amount to 0.1% of overall revenue for these companies, he agreed that the transit launch helps get people “habituated to using a card for small-ticket transactions.”
In addition, New York represents “just one subway system and it’s still creating billions of additional transactions for the card networks annually,” McCrohan said.
The New York City rollout, which will begin on all Staten Island buses as well as portions of the 4, 5, and 6, subway lines, isn’t the transit system’s first attempt to bring tap payments to the turnstiles. Mastercard and Citibank tried to introduce a contactless payment option for the New York City subway system more than a decade ago but struggled to gain traction. Consumers may be better equipped to embrace tap-to-pay this time around, as mobile-wallet adoption picks up and as card issuers start sending out more cards that support tap payments.
Visa’s Sanford said that he heard of at least one issuer that was focused on cardholders who ride the New York City transit system when determining which customers would initially receive contactless cards.
JPMorgan Chase & Co. JPM, +0.98% which is leading the tap-to-pay rollout on the issuer side, has shipped out some 20 million contactless-enabled cards and expects that nearly half of its active cardholders will have a contactless card by the end of the year. Abeer Bhatia, who heads Chase’s tap-to-pay program, said that customers who have already received tap-enabled cards are making contactless payments two to three times as frequently as those who are using mobile wallets.
“While there’s some overlap between the two segments, a lot of people using contactless cards never used a mobile wallet,” Bhatia said. Mobile wallets require that users register credit cards on their smartphones and authenticate payments with facial recognition or a fingerprint reader, whereas physical contactless cards are easier to use straight out of the envelope.
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Apple AAPL, -0.38% Chief Executive Tim Cook called out the MTA launch as a potential catalyst for Apple Pay adoption, and a key debate is whether new transit use cases will actually drive people to use mobile wallets given that card issuers are also in the process of sending out physical cards. Chase’s Bhatia said that contactless cards are still preferable to mobile wallets in markets like Australia, but Mizuho’s McCrohan expects that consumers who are already used to holding their phones all day will realize that tapping a mobile device to pay is quicker than reaching for a wallet.
Visa shares have gained 23% in 2019 so far, while Mastercard has gained 33%. The Dow Jones Industrial Average DJIA, +0.37% which counts both payment companies as members, has gained 10% and the S&P 500 SPX, +0.14% has gained 13%.