Is Contactless Payment(Mobile) a threat to banks’ revenue?
Contactless payments are no doubt the future of making payments. It has shifted our world to a whole new level of money transactions in our daily lives. What is a contactless payment? Why is it so important? How does it work? And most importantly, How will it affect the current Banking Model and Revenue? All the answers are coming ahead:
What is Contactless Payment System?
A Contactless Payment system is a secure wireless financial transaction from a customer’s account to the seller’s account by using radio-frequency, Quick Response (QR) Codes, Magnetic Secure Transmission (MST), or near-field communication (NFC) technology. The transaction happens with the help of a chip (connected to the customer’s bank account via the internet) embedded in RFID Cards, tags, and most of all, Mobile phones.
Why Contactless Payments are Important?
As described by its name, there is no physical contact (or touch) involved to make the financial transaction (like with the traditional method where a person hands over the cash or card to another). But why is it so important and gaining so much popularity?
Recently, in 2019, when Covid-19 hit the world, it was studied that the traditional payment method of handing over cash or cards from person to person was a major source of the spreading of the coronavirus. The WHO (World Health Organization) urges governments & private entities to switch to contactless payment methods to slow down the spreading of the virus. As a result, all the financial domains and even the public responded positively and adopted contactless payment as their prime method of payment; thus, as a result, a boom occurred in its popularity.
Now every 3 out of 4 Master Card payments are contactless, while only in the UK 4 out of 5 Visa Card payments are now being made by using contactless technology. While in the US almost two-thirds of the retailers/merchants accept this method. It is predicted that contactless technology will reach a global value of US $6.25 trillion by the end of 2028.
Benefits of a Contactless Payment System?
There are a lot of benefits to this system:
- No physical contact with anyone
- Simple chip Scanning or Swiping
- No PIN or Biometric verification on Merchant’s machines
- Instant Transaction
- Encryption and Automation
- Cashless system
- Globally accepted
The Role of the Banks?
As with all the other financial transactions, banks are the backbone of the contactless payment system too. Upon a transaction, the merchant generates a payment request with his banking details; the customer or buyer accepts that request by scanning his chip to the payment terminal, and the underlying system automatically asks the bank to transfer the amount from His account to the merchant’s account. This all happens in a matter of seconds thanks to automation and is secured by encryption and one-time payment request tokens.
Why it is a Threat to Banks’ Revenue?
No doubt there are many benefits to the contactless payment system. But its rapid growth has raised many concerns about the current banking system. It might have benefitted the banks for many reasons, but on the other hand, there are several threats to the banks’ revenues, listed from least threatening to the worst-night-mare, below:
Like in every tech-related product, Frauds/Scams are one of the biggest concerns with contactless payment systems. This system is even more volatile than many others as there is no verification/identification involved in the transaction. A user just scans the chip and pays. In 2020, UK statistics showed that out of £9.46 billion contactless transactions, £16 million were reported as fraud which equates to 1.8%. Now, this number might seem tiny, but when applied on a global scale, it is scary.
Although banks have established many countermeasures like limiting the amount per transaction, biometric, or OTP verification through the user’s mobile, still it poses a great threat to other non-mobile mediums of contactless payment methods. Which overall reduces customers’ trust in this system.
Hacking is another big concern for banks. Where fraud or scams affect individuals, hacking can do it to the masses. As multiple technologies are working together to run this system, loopholes might occur. Like the servers of a particular app on a mobile phone using this technology for payment could be hacked by hackers and they can make financial transactions from the account of all the users using that app. The worst part is banks won’t even notice it until particularly highlighted because all the transactions might be under the available limit set by the banks. It can drastically affect the overall revenue and reserves of banks.
3. Charges of Stakeholders:
As mentioned earlier, contactless systems are a combination of multiple technologies working together. These technologies aren’t the sole proprietary of banks; there are also other stakeholders involved and they want their share in it too.
Like traditional businesses, banks can’t put the sheer burden on the consumer, thanks to tough competition. They’ve to share their margins or profits with the stakeholders of the system. On a large scale, it affects the overall revenue of the banks and if they don’t come up with a better approach, they might suffer in the long run.
4. Private Groups:
The major competitors of the banks in the contactless payment system are private groups or entities who are offering the same services with more benefits and perks. It becomes even worse when those companies turn out to be the same the banks are currently working with them to run the overall contactless system.
For example, let’s take the Apple Pay service. It is a service introduced by Apple Inc. to utilize NFC technology for contactless payments. It was using credit/debit cards from the banks to pay on the user’s request until they introduced their own Apple credit card, which is in control of Apple Inc. Although it is backed by Marcus bank, but Apple itself cuts the most benefits out of it and only a bare minimum is left for the bank. It attracts more customers to utilize this technology by offering some premium perks like up to 2% cashback on daily transactions while 3% on Apple products.
Like Apple, many other companies are also involved in this with their financial reserves like AliPay, Samsung Pay, and Google Pay. These tech giants with their technologies dominating the market and huge financial reserves, can overtake the traditional banking system in the contactless payment market.
In short, the contactless payment system might not be an inevitable threat to the banks’ revenues, at least for now; but it is still a great point of concern for the whole banking system. If banks didn’t shift their paradigms, they might lose their value in the upcoming future and might even go off as the customer’s main financial custodian.
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