Feature: Can the humble card still pack a punch?

Some experts say cards are a legacy technology while digital wallets and alt-pays are the future. But more powerful cards with multiple functions and better security are fighting back. So will cards get knocked out in the fifth, or are they set to go the distance? James Wood plays referee…

For some time, consultants and experts too numerous to credit have been saying digital wallets are the future of payments, predicting that by 2030 around half to two-thirds of transactions will take place using wallets.

Card proponents retort that since many of today’s wallets are linked to cards, such a distinction is purely one of form and card rails will remain the dominant transaction method for the next decade.

Our own research in the Digital & Card Payment Yearbooks 2021-2022 predicts cards will account for just under half of all electronic transactions in 2030 – a drop from today, certainly, but still a force to be reckoned with.

Before ringing the bell for round one, let’s size up where all fighters stand to see who might win this payments heavyweight championship of the world.

The tale of the tape

It’s important to give a little context before comparing the main contenders. First, all kinds of electronic payment are expanding fast: according to McKinsey’s Global Payments Report 2021, electronic payments will grow at around 6 percent per year for the rest of this decade.

Meanwhile, estimates for the use of alt-pays such as account to account (A2A), crypto and Request to Pay (R2P) solutions range between 8 and 15 percent.

Despite Cap Gemini’s 2021 prediction that instant payments will account for one in four electronic transactions by 2030, it’s safe to say the dominant payment methods will be either cards or digital wallets ten years from now – barring any technological miracle, of which more later.

According to NFC World, there will be 4 billion digital wallets in use by the end of 2023 and more than one trillion transactions.

FIS Global claim digital wallets are already the dominant transaction method for online shopping, driven by mobile transactions; they say that digital wallets will account for more than half of all e-commerce by the end of next year.

“There will be 4 billion digital wallets by 2024, used for more than a trillion transactions.”

If that sounds impressive, then in the other corner we have the reigning heavyweight champion: cards.

According to The Nilson Report, there will be 29.13 billion payment cards in circulation by the end of next year. Although usage growth on these cards is much less impressive than digital wallets, ResearchandMarkets.com still foresee a 1.6 percent rise in card use next year, with the major card brands responsible for around half a trillion transactions in their own right.

That doesn’t take into account national schemes, retailer own-brand schemes and many independent salary and gift cards.

“Though cards are growing at just 10% the rate of wallets, they are five times more numerous today.”

While card numbers and volume are growing at just one-tenth the rate of digital wallets, plastic cards are five times greater in number than their digital rival and it would take at least a decade for digital wallets to surpass cards, numerically speaking.

The problem with this kind of number-crunching is that ignores the fact that a younger, rising demographic prefers the digital wallet, meaning usage is likely to increase faster – and that wallets are possibly preferred in the online environment by this younger demographic.

Round One: Usage and utility

Having established the relative growth trajectories in numbers and use of digital wallets and cards, let’s look at what’s happening now.

In the last couple of years, card use has been reinvigorated thanks to the widespread adoption of contactless card transactions during COVID-19.

An early 2020 study by Nordic banking infrastructure specialists Tietoevry showed more than seven in ten European consumers preferred using contactless cards over any other method when paying in person, while a US study from Visa and the Strawhecker Group found 69 percent of consumers were more comfortable paying with cards in any situation.

“More than 7 in 10 Europeans preferred paying face to face with cards.”

For industry veteran Charles Rosenblatt, CEO of PayQuicker, these results are unsurprising: “There’s a clarity to using cards in payments – a payment card is made for that purpose. What’s more, the rise in contactless transactions during the pandemic has made paying with cards more convenient.”

New developments, including the advent of more powerful cards with 32K or 64K chips as opposed to the standard 16K could mean we’ll see more powerful payment cards that combine – for instance – credit, debit and loyalty functions with a Buy-Now-Pay-Later (BNPL) option all stored on the card.

“The rise in contactless transactions during the pandemic has made card payments more convenient.”

Brent Warrington, CEO of Planet, a specialist FinTech that connects merchants with a wide range of payment solutions, agrees with Rosenblatt that, “cards will be here for a while yet, and more powerful chips are an interesting development that would enable cards to carry more data and functions on them.”

If cards are becoming more powerful, then they’re responding to the almost limitless functionality of digital wallets. Go to China to see the true power of digital wallets: apps such as WeChat and AliPay act as social networks while offering everything from debit to Peer-to-Peer (P2P) transactions, micro-lending and insurance products.

The ease of concentrating one’s financial life on a single device no doubt appeals to the young, although nightmares such as the recent Rogers internet outage in Quebec, Canada, show the utility of having a payment method that doesn’t need a battery.

Judges’ scorecard: a dead heat – though cards might have taken a cut above the eye.

Round Two: Security, acceptance, networks

Fans of digital wallets will tell you that – very much unlike cards – they are almost unbreakable and inherently safe to use.

Proponents of digital wallets say they have a level of physical protection that credit and debit cards lack because they are locked with a Personal Identification Number (PIN).

Given that smart phones can also be locked with a PIN, this creates a level of security cards lack – to say nothing of the heavy encryption digital wallets apply to user’s financial information.

“Cards look set to sustain and increase their leadership in point-of-sale transactions.”

While recognising the improvements made to the EMV consortium’s 3D Secure (3DS) security protocol for e-commerce alongside new security measures that are keeping fraud down, paying with cards remains riskier than wallet transactions.

That said, the arrival of cards with greater computing power has meant biometric factors such as fingerprint and iris scans can now be stored on-card, greatly enhancing their security. While this development is potentially good news for cardholders, it will come at a price as the average biometric card costs around four times as much as a regular card.

If digital wallets are more secure than cards, then their acceptance in physical retail locations remains an issue. Data from Worldpay shows that cards will sustain and even increase their leadership in the real world, rising from 43.2 percent of all POS transactions in 2020 to 48.6 percent by 2023.

While wallet use is growing faster – from 21.5 percent to 29.6 percent over the period – it remains just over half that of cards at POS.

“Biometric cards will enhance security, but they come at price, costing four times as much as a regular card.”

That said, the infrastructure for cards is more than 50 years old, and is arguably too complex and expensive.

To a certain extent, such complexity encourages a bias towards cards, as Brent Warrington notes: “Companies such as Planet are looking at parts of the existing ecosystem where the value proposition can be improved, and are taking action. There’s a degree of card networks being supported by interests that benefit from its provisions – such as interchange.”

“In a world where any payment can be tokenised, cards are really just a form factor.”

Dante Siracusa, Chief Product Officer at issuer processing platform Carta Worldwide, agrees: “In a world where any payment can be tokenised, cards are really just a form factor. For some time, Visa and Mastercard have been investing outside their traditional area of competence because they recognise that the acceptance network as it stands is something of a legacy technology. What matters is a more efficient movement of funds, for instance moving from a multi-step authorisation and settlement process to more modern arrangements.”

Judges’ scorecard: even on points, with cards looking a little punch-drunk …

Round Three: a knockout punch?

Digital wallets have been making huge inroads into cards’ traditional dominance over the last decade, and are unquestionably more secure and more powerful in terms of the capacity to extend their functionality in real time over-the-air.

Looking at what’s happening in China and elsewhere in South-east Asia, it’s hard to imagine wallets won’t come to dominate a wide range of financial activities over a wider time frame of, say, thirty years.

In the more immediate future, the card segment has taken steps to increase the utility of our flexible friends, as well as beefing up security.

Perhaps the biggest factor in favour of cards is psychological: people like using them, they find them convenient – and they understand them.

The relative failure of payments experiments such as “just walk out” trials run by Amazon, Tesco and others show that many people want to know they are paying, and want confirmation that they have paid via some form of physical or digital token such as a receipt.

Against this, cards are becoming more costly, both from an environmental point of view and in terms of raw operational expenditure.

According to Vijay Sondhi, CEO of NMI, prices for first-use plastic cards will increase by up to 20 percent this year, with prices for chips also expected to increase between 10 percent and 20 percent by the end of 2022.

In either case, comparisons between digital wallets and cards could fade into insignificance in the event that blockchain-enabled transactions realise their promise.

In that scenario, the choice of card or wallet would matter less than the promise of having fully traceable and secure transactions executed almost instantaneously, irrespective of the device or form factor use.

“If blockchain fulfils its potential, then a revolution in payments infrastructure can happen.”

According to Dante Siracusa, however, a number of things that need to happen for a blockchain-led future to become reality: “blockchain is exciting, but needs significant change. There needs to be a business case for people to make money, risk and compliance issues need to be resolved, and products need to be brought to operational readiness that meet market demand.”

The judges’ verdict:

Digital wallets may very well be the future of payments. But to bowdlerize British novelist L.P. Hartley, the future is another country, and they’ll do things differently there.

For the present, card payments have shown a remarkable instinct for reinvention, taking leaps to improve their functionality and security even as their acceptance network outstrips that of digital wallets by several multiples.

If this fight for the future of payments really were a boxing match, then the judges would be calling for a rematch in a few years’ time, since it may be that a young contender, in the shape of blockchain, will come and change the rules of the game.

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