Contactless Payment: How It Works And How It’s Changed The Financial World

During the COVID-19 pandemic, millions of people had to reconsider how they shop in public – from freely touching surfaces to now worrying about how they can protect themselves and others. It’s safe to say the way we shop has progressed rapidly. According to a Mastercard global consumer study, “79 percent of respondents worldwide say they are now using contactless payments citing safety and cleanliness guidelines.”

As a result of social distancing, the popularity of contactless payment methods has surged. You no longer have to hand over cash or your debit card. By holding a smart card or your phone near a payment terminal, your purchase is complete, without having to touch an otherwise high-contact surface.

What Is Contactless Payment?

Contactless payment offers customers a secure way to pay for goods and services without touching a person or device at the point of sale. This is made possible using contactless technology like radio frequency identification (RFID) and near-field communication (NFC). Some examples of contactless payments include a credit card, chip card or mobile wallet.

A Brief History Of Touchless Payment

Contactless payments are not a new phenomenon – they’ve been in use since the 1990s. The first contactless payment system in the world was presented by South Korea’s transit authority in 1995. The system, known as the UPass, provided residents a swift way to pay for bus trips. In 1997, Mobil launched the “Speedpass™ key tag, the first mobile payment device.” In 2004, contactless cards were used for the first time in the United States.

Financial services such as Visa, American Express and MasterCard presented contactless credit cards in 2008. Contactless payments through smartphones were introduced by Google Wallet and Android Pay in 2011. Following this, Apple Inc. announced the Apple Watch that included wearable touchless payment technology.

Popularity During The COVID-19 Pandemic

During the COVID-19 pandemic, cashless payments have become more common to increase safety, and the demand for touchless payments is projected to accelerate. The international contactless payment market is expected to surge up to $4.6 trillion by 2027.

According to Dynata, a market research firm, contactless payment adoption has increased to 19% through July of last year in the U.S., and globally 59% of patrons preferred contactless payments over other forms of payment.

How Does Contactless Payment Work?

Contactless payment cards contain a chip that emits short radio waves. An antenna is built into the card to secure the connection from the waves to the contactless reader. This type of contactless technology is known as RFID.

To make a payment, the buyer will hold their contactless card near the RFID reader so it can pick up the signal. Instantly, the RFID reader communicates with the card to process the payment.

NFC is a form of contactless communication between various devices. This kind of communication allows a consumer to not touch their smartphone or card to an NFC device. When completing a purchase, the consumer needs to wave their mobile wallet, contactless card or smartwatch over a compatible NFC device at a short distance.

Contactless Payment Companies And Systems

Since contactless payments are becoming more common in the U.S., financial services and banks have adapted to providing credit cards with contactless technology. The following contactless payment companies and systems have created their version of tap-and-go payments.

Apple Pay

Apple Pay replaces your physical debit and credit cards to ensure a safe and secure transaction on your iPhone or Apple Watch. For each transaction, Apple Pay creates a unique dynamic security code, so your card numbers are concealed from merchants. Your cards are stored in a digital wallet, an application that already comes with Apple devices.

Payments are completed using Touch ID or Face ID, so you can make online and app purchases in an instant. Apple Pay also enables you to send money through text messages when you select the Apple Pay icon.

Google Pay

Google Pay is a digital wallet app connected to your Google account. Like Apple Pay, Google Pay also replaces your physical cards. Google Pay can be used to send or request money, make transactions in-app, online and at brick-and-mortars.

For contactless payment, Google Pay uses NFC. When making a payment, unlock your phone near the payment terminal and your default card will open, then the payment will be accepted. If you connected a Chase debit card to your Google Pay, you can withdraw money from a Chase ATM with a contactless reader.

Samsung Pay

Samsung Pay is powered by NFC and Magnetic Secure Transmission (MST), which is why Samsung Pay works at most retailers. The digital wallet generates a magnetic signal comparable to outdated payment cards being swiped.

Every time you make a payment, two signals are sent. The first is a 13-digit token, used to represent your card number, and the second signal is a one-time code produced by an encryption key. This prevents your card information from being shared.

Samsung Pay also allows you to store membership cards, loyalty cards and gift cards in your digital wallet. To make a payment, swipe up from the home button, select your payment card and then hold your phone near a reader.

Venmo

Venmo is a mobile app that allows you to send or request money using a username, email address or phone number. If the person you’re sending money to is close by, they can scan a QR code from the Venmo app. The last step is typing a memo for what the payment is for, then the transaction is complete.

PayPal

PayPal is a financial service that lets consumers pay for items with a protected internet account. After you link your credit card or bank account, paying is simple. During a transaction, click on the PayPal icon on your phone, log in and your payment will be made with your default card connected to your PayPal account.

Cash App

Cash App permits you to send or receive money from anyone. After downloading the app, link your bank card. You may need to link a bank account as well. For people to identify you on Cash App, you can create a $Cashtag that has a maximum of 20 letters. Cash App will create a personal URL for you to share. When receiving money, the money will automatically be sent to your Cash App account.

Pros And Cons Of Contactless Payment

The use of touchless payments has increased tremendously worldwide. Consumers now have a better shopping experience while keeping a safe distance. However, as good as contactless payments may sound, they can come with disadvantages.

Pros

• Paying is faster and easier without swiping or inputting a PIN number.
• Your information is more secure than with magnetic-striped cards.
• Contactless payments can be done using your phone.
• Reduced points of contact increase safety and hygiene for customers and merchants.

Cons

• Contactless payment cards come with lower credit limits than other types of cards.
• A lost or stolen contactless payment card can be used by anybody, as it doesn’t require a PIN number.
• Not all companies or small businesses have adapted to the technology, limiting contactless payment in certain areas.

FAQs About Contactless Payment

How Do I Know If My Card Is Contactless?

Cards that can be used for contactless payment will have a symbol on them known as the contactless indicator  which is usually on the front or back of the card. If your card doesn’t have that symbol, you can still use it by swiping the magnetic stripe or inserting your chip card. 

How Secure Is Contactless Payment?

Contactless payments are safe. Your card contains a micro antenna that sends a signal to the terminal. This signal comes either in a one-time cord or digital token that hides your card information. The code is not permanent; it’ll change each time you buy something.

Most importantly, NFC and RFID cannot be used long-distance. The optimal distance for NFC or RFID to be used is four centimeters away from the terminal, and it will not work longer than 10 centimeters from the terminal.

Additionally, encrypted data prevents fraudsters from making a copy of your card, unlike with traditional magnetic-stripe cards.

Where Can I Use Contactless Payment?

Contactless payment cards and mobile wallets can be used at any retailer that has a compatible payment terminal. These terminals will carry the same contactless indicator symbol as the one on your card.

The Bottom Line: Is Contactless Payment Here To Stay?

Even though we have to social distance to protect ourselves and others, contactless technology has become popular by making shopping safe and secure. Worldwide, 59% of people prefer contactless cards and payment apps.

Keep in mind, contactless payments have been in effect for decades before making their debut in the U.S. Since then, with the help of encryption concealing our card numbers, contactless payments are highly secured to prevent fraudulent activity.

Read more about managing personal finances at the Rocket Money^® Financial Learning Center.