The introduction of contactless tech predate me (and Monzo) by quite a bit, so I don’t know why contactless has become a big thing. But I can speculate based on what I know about banks, merchants and card networks.
I suspect the original contactless cards were pushed by merchants, card networks and credit cards. All of these parties stand to win quite a lot from more spending, even with higher fraud rates.
Merchants win simply due to more sales, so do card networks (who take a cut of every transaction). Credit cards also win from more spending, more spending means more interest. (Barclaycard where the first to intro contactless in the UK).
In the early days I don’t think there would have been much incentive for putting contactless on debit cards. While it increases spending, the extra earned for banks from interchange almost certainly doesn’t make it worth while.
Longer term I suspect that banks started issuing contactless cards as a method to bring in new customers. So providing contactless to existing customers probably wasn’t worth much, but providing it to new customer and getting them to switch almost certainly was. (Banks are happy to pay you £100 to switch, that should show you how much money they think they’ll make off you before you leave again).
Given enough time providing contactless cards just becomes expected. It’s no longer a competitive advantage, but just table stakes (like unlimited SMSs on a phone contract).
I don’t think the banks had any interest in driving this change. Ultimately if providing a feature costs money, a bank will find a way to recuperate that money. Indeed most banks had contactless limits long before SCA forced them. Especially as most banks do offline contactless, rather than online contactless like Monzo (which is why Monzo contactless is slower that other banks). Without limits every card they printed would be able to perform an unlimited number of contactless transactions the bank would have to pay for, and no way to disable the card.
The SCA requirements are very much about protecting customers, not banks. You can see this if you compare the interchange rates (the money the bank and card network make on each transaction) between the EU and the US.
In the EU they’re capped by the EU, in the US they’re not. Interchange in the US is almost 10x the EU, and this extra money is used to pay for all the extra fraud in the US.
With SCA the EU quite explicitly said that they expect banks to keep fraud rates low. They can’t just collude with merchants and card networks to add the cost of fraud to every transaction.
In short the EU demands that financial transactions are cheap, and it demands that banks reduce fraud, rather that passing on the cost as hidden fees.
So while the contactless limits may feel annoying and misguided, protecting customers from costs that banks pay anyway. That only applies if you look at SCA from an individual level. If you take a broader view, you can see the PSD2 and SCA should force fraud rates down, and pass those savings onto customers, not banks.
If you take some time to read the regulations (and not just short news articles), then it’s quite clear what the intent of SCA is, and in my opinion it does quite a good job of realising that intent. Even though there are a couple of slightly rough edges.