As cash looks to be going the way of the cheque in modern transactions, James Lawson speaks to Mike Cowen, MasterCard’s head of emerging payments products for the UK and Ireland, and Kevin Jenkins, managing director, Visa UK and Ireland, about the perceived dominance of mobile payment technology.
UK customers are moving towards a cashless society - and contactless payment is playing a leading role. In 2014, for the first time, cash amounted to less than half the total number of transactions. In April, the Halifax reported that notes and coins make up just £18.33 of every £100 spent in the UK.
Many forces are driving this: increasing self-checkout in supermarkets, shopping online rather than on the high street, and a general desire for speed and convenience. The latter is particularly marked among young adults: over 60% of 25-34-year-olds would prefer never to carry cash and around 10% are already card-only consumers.
Contactless payment suits them perfectly. In 2014, contactless transactions accounted for £2.32 billion but, in the first half of 2015 alone, their value exceeded £2.50 billion.
It took a lot of work to get this far, with initial trials in the US starting almost 20 years ago. Leading payment networks Visa and Mastercard took a two-pronged approach to adoption: consumers needed the right cards and they needed somewhere to use them.
"We started to roll it out in the UK from 2008 onwards," says Mike Cowen, head of emerging payments products for the UK and Ireland, MasterCard. "It grew slowly for the first few years."
Visa and MasterCard point to Barclaycard as a catalyst for wider adoption. "Barclaycard was crucial as it influenced both sides of the equation," says Kevin Jenkins, managing director, Visa UK and Ireland. "It committed to introduce contactless on the card and the terminal side."
Field of play
Today, there are around 400,000 merchant terminals in the UK with the near field communication (NFC) capability that contactless requires. That's 40% of the total but, as those converted tend to be high footfall, they cover a much larger percentage of the consumer market.
"There were a number of significant hold-outs but we've almost cleared that hurdle now," says Cowen. "All the major supermarkets have committed to it and their installations will be complete by the end of 2016."
MasterCard mandates that every new terminal must support contactless from 1 January 2016, making sure that NFC terminals replace old ones as part of natural wastage. Every European merchant must offer contactless by 1 January 2020.
Ad campaigns and promotions have advocated consumer adoption for the past three years, with Visa's 'Everyday Britons' national campaign the most recent. Issuers like TSB and RBS have also promoted contactless: those signing up to TSB's 555 account receive 5% cashback on the first £100 of contactless debit card payments made each month.
What is holding the remainder back?
Some consumers worry about fraud. But, unlike cash, the cardholder is covered for any losses and contactless fraud has thus far has been extremely low at less than 0.1% of transaction volume.
Any remaining reluctance is more down to habit, so persuading consumers to make that first 'tap' payment is critical. Once tried, the benefits quickly become apparent and they tend to start to use it more widely. Transport for London's (TfL) pioneering system is a particularly effective gateway experience.
"People were already comfortable with using contactless there in the shape of Oyster," says Cowen. "The additional step to using payment cards was actually quite small."
Research has shown many customers thought the £20 contactless payment limit was too low, so increasing it to £30 should help pour petrol on the fire: 75% of all Visa transactions are £30 and under. Next, now that contactless cards have passed the tipping point, the focus is shifting to mobile payment.
Via Apple Pay, these debuted in the UK earlier this year. To pay, consumers open the payment app, select a card and tap their device against the terminal. Mobile promises even more convenience, with wallets left to gather dust at home.
All research predicts a much steeper adoption curve for mobile compared with contactless cards as NFC-enabled phones become the standard. For example, Visa expects 60% of Britons to use their mobile devices for payments at least once a week by 2020, accounting for £1.2 billion of the weekly spend.
With consumer ad campaigns starting imminently, the UK's contactless-enabled merchant terminals give it a big head start in switching to mobile. From the terminal's perspective, a mobile payment looks much like a card being tapped.
"We have the world's best NFC point-of-sale infrastructure and, here, that's also the dominant technology," says Jenkins. "In the US, they have a lot of different competing payment options like QR codes and that detracts from the consumer experience."
NFC's support for phones and cards encouraged McDonald's to be an early adopter, adding contactless to all its outlets in 2011. This effectively re-engineers its restaurants for mobile apps that will let customers order and pay for food before arrival.
McDonald's successfully trialled a mobile ordering and PayPal payment app across 80 French restaurants in 2013 and has now extended that to 80% of its French network. In the UK, TfL is again playing a leading role, with passengers already able to tap in with Apple Pay.
But despite a mature infrastructure, UK mobile contactless is still limited to the latest Apple devices. The other two platforms - Android Pay and Samsung Pay - are due for launch imminently but only a minority of phones will initially offer NFC support.
"Soon, the type of phone you have will not be a limiting factor," says Cowan. "I think we will see penetration grow significantly in the next 12 to 18 months."
First out of the gate
Barclaycard is at the forefront again, ahead of even Google in offering Android payments to UK customers. Its app launched in November 2015.
To allay any security concerns, payment networks have settled on host card emulation (HCE) or tokenisation rather than storing card data on the phone itself. Using encryption, the phone securely links over the internet to a remote 'token vault' to acquire these limited-use virtual cards. Just like a contactless card, the phone's token code also avoids the need to connect to the internet to verify every single payment.
Although tokens have in-built safeguards and can be quickly disabled remotely, there is still fraud potential. For example, thieves might clone a phone and request card information or insert mobile OS malware that reveals token codes. That means user authentication for initial card enrolment and to open the payment app at the checkout is vital.
Enrolment can require typing an SMS-delivered code into the mobile payment app, in a similar way to authorising a new online banking payment. However, biometrics - fingerprint scanning - has emerged as the standard authentication technique.
"We were looking at fingerprinting 20 years ago but the scanners were very clunky," says Jenkins. "Now the technology is much more compact and the user experience is excellent."
Other options include entering a conventional PIN (used by Barclaycard to allow contactless payments of up to £100) or employing the phone's camera for face recognition. The customer's phone location can also be compared with the terminal's to ensure they are the same.
Combining checks like these helps builds a unique profile for each consumer and their device, supporting a risk-based or tiered approach to security. So where identity is clear, minimal checks can streamline the payment process. If initial identity checks are unsatisfactory, phones can automatically escalate and ask for further corroboration.
"With mobile, I think eventually it will be the individual consumer and bank together that decide which transactions and which amounts will go through without cardholder verification," says Jenkins.
A token gesture
Visa, MasterCard and American Express all offer token-based systems. These API-style payment infrastructures provide a way to securely build payment into all kinds of digital services and networks. Secure access means consumers can transact irrespective of which channel, web or device they are on.
Peer-to-peer payments is one example, with Facebook adding payment options to its Messenger app earlier this year. Consumers are already registered and recognised, so the transaction becomes near frictionless. MasterCard's Qkr trial with Wagamama demonstrates the convenience integrated payment can bring. The mobile app automatically allocates customers a table number when they enter a restaurant and lets them place their orders immediately, with each person ticking their items in order to split the bill fairly. Finally, they pay from within the app and walk straight out.
"A quarter to a third of the time spent in the restaurant was spent waiting to pay or paying," explains Cowen. "That can be frustrating for the consumer and it ties up table space for the restaurant."
For banks, more frequent contactless use means higher engagement between consumers and card issuers. This combined with convenient lifestyle-driven payment processes help boost loyalty or 'stickiness' - one reason so many high-street banks are encouraging adoption.
"Today, consumers spend their lives on their phones and tablet," says Jenkins. "Mobile payments put the bank and the payment brand at the forefront of that engagement experience."
Building contactless mobile payments into banking apps is the obvious next step; Barclaycard's new app already effectively does this. With the ability to associate payment behaviour with each device, mobile also offers endless marketing insights for banks, payment brands and retailers alike.
So, with mobile contactless fast becoming the new standard, it's not just cash that could be heading for the dustbin of history. Does the iconic plastic card also now have a limited lifespan?
"Eventually, we will get to the point where the phone is the primary device and the card is the back-up companion," concludes Jenkins. "But cards will still be around for a very long time to come."