The other day, Smile*, one of the banks I have an account with, sent me a new contactless card.
The striking thing about this otherwise ordinary event was that the bank didn’t mention that it was a contactless card. I know it’s a contactless card because it has the contactless symbol on it. But nothing in the letter the bank sent with the card so much as mentioned the new contactless functionality. Logically, one of the following must be true:
- Uncharitably, it could just be that the left hand doesn’t know what the right hand is doing, and the product team forgot to tell the marketing team it was doing anything new.**
- Possibly, some slip meant that my envelope didn’t contain any marketing. But there’s no mention of contactless cards on the bank’s website either.
- Alternatively, the bank simply reckons that the benefits of promoting the contactless functionality are so marginal that it’s not even worth the effort of changing its standard letter (which promotes card protection insurance in extensive detail).
But it got me thinking about why contactless cards haven’t taken off in the UK. It ought to be a promising market for contactless payments: there’s high credit and debit card use, and Transport for London’s Oyster contactless ticketing system means millions of Londoners have used contactless technology every day for the past decade. There are now some 21 million contactless cards in circulation in the UK and around 110,000 contactless points of sale, with most large banks, including HSBC and Lloyds TSB, now rolling out contactless cards. While the first merchants to accept contactless were mostly fast-food retailers like Pret A Manger and McDonalds and, oddly, the National Trust, large high-street retailers like Boots and WHSmith are now committing to contactless including, crucially, supermarkets like Asda, Tesco, and Waitrose. So why have contactless cards failed to take off?
You can lead a horse to water, but you can't make it drink. The introduction of contactless cards in Britain in 2007 came shortly after the successful introduction of chip-and-PIN cards into the UK. I suspect the success of that mandatory change to reduce fraud caused some in the industry to underestimate the substantial difficulties in persuading consumers and merchants to adopt a new payment system. Simply putting contactless cards into people’s pockets is nothing like enough to change their payment habits.
My colleagues in Forrester’s Consumer Product Strategy team have a framework called the Convenience Quotient: to be adopted, any new product’s benefits have to be greater than the barriers to use. Like all the best frameworks, it’s simple but forces you to think. The problem facing contactless cards is that the benefits are too marginal for many consumers to overcome the barriers to adoption in any great hurry:
- Contactless cards are simple and marginally faster. To take off, any new payment system has to be clearly better in some way than the existing alternatives in at least some scenarios. Contactless payments are marginally faster than a contact chip-and-PIN payment or fumbling for coins in a pocket. But that's not enough of a benefit.
- There are few other obvious benefits. Barclaycard has run big TV advertising campaigns to promote contactless payments but has struggled with the message. The ads showed how useful contactless payments are when you’re . . . on a waterslide or on a rollercoaster. Hmm.
- There’s no spark to ignite consumer adoption. People need a reason to learn how to use any new system and change their habits. The Oyster card has ‘must-have’ journeys and a single merchant (Transport for London) willing to double its paper ticket prices to drive adoption. Contactless card payments lack any similar way to ignite adoption. There’s nothing you can only get by paying with contactless.
- There’s a £20 transaction limit.The £20 transaction ceiling — while a big improvement on the original £10 limit — restricts contactless payments to smaller transactions. There’s an effective lower limit too, because many smaller independent merchants (and some big ones) won’t accept card payments below about £3 to £5.
- There’s a risk of fraud. The very simplicity of contactless payments without using a PIN creates a perceived and actual (if slim) risk of fraud, as shown on the influential Channel 4 News.
- Merchants have been sceptical. Accepting contactless payments make most sense for merchants with high volumes of transactions that can profit from a faster throughput. But there simply aren’t that many merchants in that category apart from fast-food retailers. Other merchants have been sceptical of the benefits and are in no rush to start paying interchange fees on small transactions — which is one reason why it’s taken many of them five years to upgrade their point-of-sale systems. As the British Retail Consortium puts it: "any move to replace cash must take into account the very low costs incurred today."
None of this means people won’t use contactless cards. Just don’t expect customer behaviour to change fast.
So, having written off contactless cards, the big question is whether mobile contactless payments offer enough additional benefits to be more successful. But that’s another story. (Forrester clients can read our perspective in my colleague Denée Carrington’s Why The Digital Wallet Wars Matter research.) If you're interested in this topic, I’m taking part in a webinar held by Monitise this coming Tuesday, 9th October, on the evolution of mobile payments in the UK.
Do you think we’re right about contactless cards?
*If you haven’t heard of Smile before, it’s probably because it appears to rely entirely on word-of-mouth marketing. It’s also the only brand I can think of that’s defined in the past tense: smile was the UK’s first full Internet Bank (its words, not mine).
** Before I lose too many friends at the Co-operative Banking Group, I should say that none of the UK’s banks other than Barclaycard and Barclays have done much to promote contactless cards either. I’ve also written nice things about the Co-operative Bank on this blog in the past.