Contactless Cards Work: Evidence from Developing and Mature European Card Markets
A comparison of the U.K. and the Czech Republic illustrates that contactless cards can be a strong catalyst for growth in a variety of market conditions. The U.K. and the Czech Republic have the third and fifth-highest penetration of contactless cards in Europe, respectively, but have significant differences in terms of market size, penetration of cards vs. cash (cards are 69% of consumer payments in the U.K., vs. 22% in the Czech Republic), consumer and merchant attitudes towards cards, technical and product attributes, and the degree of overall market maturity.
Figure 1: Contactless Penetration in Europe
Cardholder usage of contactless in the U.K. and the Czech Republic has increased dramatically, and growth in contactless transactions now accounts for most of the POS transaction growth in each market. In the U.K., POS transactions grew 9% in 2014-2015 vs. steady state in 2013-2014, and contactless accounted for 83% of POS transaction growth between 2014 and 2015. In the Czech Republic, POS transactions grew 70% in 2014-2015 vs. steady state in 2013-2014, and contactless accounted for 66% of POS transaction growth.
Figure 2: POS Transaction Growth in the U.K. and the Czech Republic
1 Horizontal axis scale begins at 8.5 billion transactions.
Note: subtracts estimated e-commerce transactions from total published card transactions.
Source: UK Cards Association, Czech Bankcard Association and First Annapolis Consulting estimates.
Contactless has had a dramatic impact on card usage in the Czech Republic. Contactless accounted for 79% of transactions in Q1 2016, and was largely responsible for a jump in transaction growth from 23% in 2013-2014 to 69% in 2014-2015. Contactless has also driven increases in card acceptance and taken share from cash: although the number of businesses in the Czech has decreased in recent years, card accepting outlets grew 18%, and although retail sales have grown 1% to 2%, card volume grew 20%. Based on a comparison of historical growth rates, much of the growth in recent years can be attributed to contactless.
On a less quantitative level, contactless in the Czech Republic has changed both merchant and cardholder behavior. Many merchants have shifted from actively promoting cash to prompting customers for “cash or card?” at the POS, and card acceptance has visibly increased at smaller shops and in smaller towns. Whereas in previous years, paying via card created social pressure for cardholders (e.g., having to ask the merchant to take out their terminal, perception of slow transaction times holding up other customers in line, etc.), making card payments for small value transactions is now perceived as normal (albeit usage varies greatly by demographic).
Figure 3: Contactless Penetration and Cards Market Growth in the Czech Republic
In the U.K., a market characterized as ‘mature’ contactless cards are still having a significant impact on card usage rates and transaction growth. Between June 2014 and June 2016, contactless increased from 2% of total transactions to 18% of total transactions (including e-commerce), and as noted above, contactless accounted for 83% of POS transaction growth between 2014 and 2015.
Figure 4: Contactless Transactions and Cards in the U.K.
The success of contactless in the U.K. and the Czech Republic has been driven by several factors:
- Strong value proposition for cardholders centered around convenience for cardholders (faster transaction times, no need to enter a PIN for many purchases below the market-level threshold amount);
- Strong value propositions for merchants (faster checkout times, lower interchange rates on some contactless transactions in the U.K., competitive pricing from Czech acquirers due to commercial incentives from the card schemes);
- Commercial incentives and consumer education/market awareness efforts from the card schemes; and,
- Support from issuers and acquirers based on the strategic logic of paving the way for mobile NFC payments, stealing share from cash, and as a tool to expand merchant acceptance.
Although markets around the world differ greatly, the experience of the U.K. and the Czech Republic show that contactless cards can be a powerful driver for growth in both cash-centric and mature cards markets. We also believe that the developing affinity to contactless cards is one possible cause for a slow start to Apple Pay in the U.K. Maybe the calls for displacement of cards as a form factor are a bit premature?
For more information, please contact Erik Howell, Senior Manager, firstname.lastname@example.org, specializing in Credit Card Issuing and Europe Initiatives.
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