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Contactless payments lead the way in move to digital financial services

A Picture of Alejandra Rodriguez
By:
May 19, 2020 | Topic: Financial  
Contactless payments lead the way in move to digital financial services

Contactless payments are enabling people to make secure, effective and fast purchases and transactions amid social distancing measures. At the same time, the technology is providing retailers and banks the means to deliver new services and products to consumers.

Contactless technologies have come to the fore during the COVID-19 crisis. A survey in mid March found 30% of respondents had started using contactless payment methods since the beginning of the outbreak. 70% of them expect to continue after the pandemic ends.

Many people who were used to traditional payment methods have quickly become familiar with contactless payments. It is another reflection of how Covid-19 has driven the digitalization of diverse activities. The banking sector therefore needs to be ready to address the increasingly digital needs of consumers during this new era.

Adoption of contactless technologies has skyrocketed since the pandemic began

People around the world are increasingly adopting contactless payments. More than half (51%) of people in the US are now using mobile wallets such as Apple Pay and tap-to-go credit cards. Mastercard reported a 40% increase in contactless payments during the first quarter of the year. 58% of people in the US are now more likely to use contactless payments than they were prior to the Covid-19 pandemic.

The largest credit issuers including Wells Fargo, Bank of America, Chase, Citibank, Capital One and U.S. Bank increased their issuance of EMV cards (chip-and PIN credit or debit cards which also support contactless payments). Visa expects that 300 million contactless cards will be in circulation by the end of the year.

In Germany, a country where cash remains dominant, contactless payments went from 35% to more than 50% after the crisis began. In China, adoption rates are higher than anywhere else in the world, where people who use e-wallets purchase at a rate 23% higher than those who pay with cash.

Contactless payments

The technology behind contactless payments

One of the reasons why some people are reluctant to adopt contactless technologies is because they think they might be more exposed to fraud and hacking. However, contactless cards and e-wallets are more secure than traditional payment methods.

There are two main types of contactless payments currently in use: contactless cards and digital wallets. Let’s see how they work and why they provide a more convenient service.

1- Contactless cards

When users make a transaction with a contactless card, it communicates with the point of sale (POS) terminal through radio frequency identification (RFID) or near-field communication (NFC). Then the card creates a code that is unique for each transaction, which makes it safer.

As no PIN or signature are required, contactless payments have a limit per transaction, known as Cardholder Verification Limit (CVM). The CVM is one way to protect users’ accounts. As contactless cards are becoming the primary method of payment, and in order to enable customers to make transactions during the shutdown securely, financial institutions around the world are increasing their CVM limit.

Mastercard is working with regulators and partners in order to increase the CVM to satisfy customer’s requirements while boosting a new payment trend. For instance, the company aims to enable contactless payments up to $250 CAD in Canada and in the UK the CVM went from £30 to £45 and to an equivalent amount in 29 other European countries.

2- E-wallets

Electronic wallets or e-wallets enable people to easily make payments. There are numerous examples of digital wallets, from Apple Pay and Google Pay, to Venmo, and others such as Masterpass from Mastercard.

Tokenization is a pivotal element in the development of e-wallets. During the tokenization process, sensitive data is replaced with a value or token, which protects card numbers and other sensitive data that can be prone to fraud. This means the actual account number is never stored on the device.

Tokenization along with radio-frequency identification provide quick and safe transactions at people’s fingertips.

Contactless technologies are part of a broader transformation of digital financial services

Banks and fintech companies will need to continue to expand their technology capabilities in order to meet the demands of customers who are becoming ever more comfortable with digital services.

A collaborative approach between fintechs and traditional banks

Payments have been one of the areas that fintech companies have most successfully targeted. As fintechs have matured and offered highly valuable, user-friendly services to customers, so we have seen increased collaboration between traditional banks and fintechs. This collaborative approach has brought a win-win situation: on the one hand fintech startups gain access to the scale of banks and their existing infrastructure, while the banks learn and develop innovative capabilities and solutions.

This collaboration between banks and fintechs goes beyond just payments. We’re seeing strategies such as bank incubators, and providing mentorship to early-stage startups. Other collaborative forms are accelerators and innovation labs which can help banks adopt emerging technologies, often key to developing applications that support touch-free and innovative transactions.

Open banking leads to increased digital innovation

One of the key drivers of digital services in recent years has been that of open banking and the European Payment Services Directive (PSD2). In particular, these regulations enable banks and third party providers (TPPs) to harness customer-permissioned financial information to strengthen the relationship with their users through innovative services and applications.

Open banking involves decentralized practices where people can securely share data with their banks to better manage their finances and get access to different payment methods. Application programming interfaces or APIs allow banks and other financial service providers to analyze customer transactions, and customer financial history to suggest products and services that better suit them.

Increased personalization and focus on the customer experience

In the race to provide improved digital financial products, customer experience is the top priority. Ultimately it is the experience of using a digital wallet or contactless card that will determine whether there is widespread consumer adoption. Here, digital wallets have an advantage, as they enable banks and payment providers to better understand their customers and their purchasing habits – which in turn means they can provide highly personalized products and services.

Meanwhile, to encourage the adoption of digital payments, onboarding strategies need to be as smooth as possible and a key part of this is to implement an effective eKYC (electronic know your customer) process. Research shows that over 50% of retail banking customers abandoned their attempt to acquire new financial services online because of a long onboarding process.

Final thoughts

The Covid-19 pandemic has been one of the biggest drivers of digitalization around the world. This has been particularly the case for payments, but it will also impact a broader array of financial services. Banks and fintechs need to be ready to provide effective and secure digital services amid the shutdown and beyond.

Retail – COVID-19

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