BY MARTIN BAZELT AND ROBERT HEINZ
Introduction: studies/publications regarding increased usage of contactless payments
There has been a trend to mostly contactless payment in German stores. So far Germans used to prefer paying cash, the trend by now not only goes towards cashless, but actually contactless payments. By the end of the first half of 2019, only around 25% of all payments were contactless girocard payments. Within a year, the percentage has doubled. In December 2020, Concardis even reported that for several months, about 70% of all transactions in Germany (debit- and credit cards) in stationary retail were carried out contactless. There has been an establishment of contactless payment in Germany only recently within a very short period of time, which was not expected to happen in such a short time span. With this article, we want to describe the reasons for this development and give an outlook on how the situation could continue to develop.
What is contactless payment?
Paying contactless means paying at a POS terminal with your card without having to enter the card into the machine. The card must be held close enough (minimum 4cm) to the card reader. Instead of paying with card, customers can also use a smartphone or smartwatch to pay, as long as the device supports the necessary technology and an app (e.g. “wallet”) is installed accordingly with a creditcard or girocard registered on the app.
This works via NFC (near field communication), a technical transferring standard allowing the contactless exchange of data. The technology itself is not as new, as can by seen with the first phone with NFD technology, the Nokia 6131 NFC (2007). Even though most smartphones have been equipped with this technology for years, it has hardly been used so far. In the past, NFC was mostly used for entrance controls, e.g. in office buildings or public transport.
Why is it used so often now and what are the requirements for success?
In order to enable contactless payments, it is necessary for both the card terminal as well as the card or smartphone to be equipped with NFC technology.
The two main drivers for this development of most (credit-)cards and terminals working contactless are the creditcard schemes Mastercard and VISA. The aim was to have all European card terminals accept contactless payment by 2020. New terminals, in order to cooperate with Mastercard, already require contactless payment functions since 2016.
Additionally, the most important card in Germany, the girocard, has supported contactless payment since July 2017. By the end of 2019 around 75 million out of 100 million girocards in Germany were compatible with contactless payments. At the same time, more than 80% of the about 840.000 terminals, so 680.000 terminals, also allowed contactless payments. In spite of those numbers, only about 35.7% of all transactions in December 2019 were contactless (even only 19% in January 2019). How come, the number of contactless transactions has more than doubled within one year?
One important reason is that originally expected security concerns so far had not been confirmed. At least so far there is no known case of incorrectly carried out contactless payments, of e.g. scammers withdrawing money by holding a terminal close to someone’s wallet. Even if this scenario seems plausible, an acquirer or network operator who knows the retailers and therefore terminal owners well is responsible for the actual cashflow, as he has identified the retailer before providing him with a terminal.
Another aspect is the technological development which allows an integration of digitalized cards on smartphones or smartwatches for contactless payments. In the beginning, only credit cards could be integrated, which could have lead to problems in Germany especially for smaller retailers. Retailers who (mostly due to costs) only offer girocard or ELV payments, were not able to offer payments via smartphone. At least iPhone users with the “right” bank by now don’t have that problem anymore, as by now girocards can also be integrated in ApplePay (if the bank has the necessary agreements with Apple).
An additional reason for the increased usage of contactless payments is the increased speed of the payment process at the checkout points. Unlike non-contactless payments, entering a PIN is only necessary after a certain amount (often 50 euros) is reached.
Regarding the general acceptance and usage of contactless payments, there has been a significant impact by the covid-19 pandemic. While a year ago one could have received irritated stares when paying by holding ones card or even smartphone to the terminal, by now retailers often encourage their customers to pay cashless and contactless.
How will this continue to develop?
We believe that contactless payments will continue to gain relevance and perspectively remain the only payment method. Just like the EMV-chip lead to a disappearing need of magnetic stripe readers in Europe (except for the case if credit cards of specific American banks still want to be considered), one can soon get rid of chipcard readers if terminals only need NFC readers. In addition to the very quick handling with equal security, another argument are the cost savings regarding the terminal hardware.
Furthermore, the usage of digital cards in smartphones and smartwatches will continue to increase. This assumption can be based on an increased desire for convenience, that users don’t need to constantly carry their wallet and that they don’t have to remember their PIN (which for the payment process can be replaced by unlocking the smartphone). Even if someone forget ones wallet, it is still possible to pay if they carry their smartphone with them (which is typical for a majority of all consumers). Additionally, an increased usage of digital cards also makes sense for sustainability reasons, especially considering the amount of plastic that can be saved if around 130 million cards in Germany (that are replaced every four years) were to exist only virtually.
Another likely development is that smartphones will not only be used for payments by consumers but also for the acceptance of payments by retailers. Especially for cost sensible retailers this could be an attractive alternative, to be able to accept payments without investments in payment hardware by installing an app accordingly that can be activated and used within a few minutes after a successful boarding process. In addition to card acceptance, additional apps could easily be installed on the smartphones (e.g. cashout systems, product catalogues, inventory management). This could lead to “all-in-one” solutions on smartphones, especially for small and medium sized companies. Therefore, both customers and retailers would fulfill all requirements that allow even smaller retailers to provide “real” omnichannel solutions.