A contactless payment is a wireless financial transaction in which the customer authorizes monetary compensation for a purchase by moving a security token in close proximity to the vendor's point of sale (PoS) reader. Popular security tokens for contactless payment include chip-enabled bank cards and smartphone digital wallet apps. Contactless payments may also be referred to as touch-free, tap-and-go or proximity payments. When goods or services are purchased through a contactless payment, the process may then be referred to as a frictionless checkout.
Contactless payments are known for being secure because the customer does not share billing or payment information directly with the vendor. Instead, all communication is encrypted and each purchase is tokenized with a one-time transaction number. Should a wireless transmission be intercepted, the only information the attacker will get is the one-time code that was used to identify a particular transaction.
The adoption of contactless payment has been accelerated by COVID-19 and a desire for consumers to avoid person-to-person contact when making in-store purchases. The U.S. Payments Forum and EMV (Europay, Mastercard and Visa) are responsible for setting the technical standards for smart payment cards, as well as for the PoS readers that accept them.
History of contactless payment
A timeline of contactless payments:
- 1995: The Seoul Bus Transport Association launches the world's first-ever contactless payment card for commuters.
- 1996: The first version of the EMV security standard is published in 1996.
- 2004: Contactless cards used for the first time in U.S.
- 2008: Visa, American Express, and MasterCard all start offering contactless credit cards.
- 2011: Google Wallet and Android Pay are launched, allowing contactless payments through smartphones rather than cards.
- 2015: The U.S. implements EMV, prompting thousands of merchants to switch over to NFC-capable terminals that enable contactless payments.
- 2018: Google Wallet and Android Pay unify as a single system named Google Pay.
- 2020: Concerns about COVID-19 increase contactless payment adoption in the U.S.
Standards that support contactless payments
Frictionless checkouts are supported by the Near Field Communication (NFC), Radio Frequency Identification (RFID), Magnetic secure transmission (MST) and quick response code (QR code) standards. According to the National Retail Federation, two-thirds of retailers in the United States now accept some form of contactless payment. Visa, Mastercard and American Express offer contactless-enabled bank cards, while Apple Pay, Google Pay, Samsung Pay and Venmo are among the most popular digital and mobile wallet apps for smartphones.
How do contactless payments work?
Contactless payment cards and authorized mobile devices have an embedded RFID microchip, transponder and an antenna. To make a purchase, the customer must be in close proximity to the vendor's reader. Neither Apple Pay nor Google Pay process or authorize transactions. Instead, they tokenize the shopper's payment card and simply pass that information on to the appropriate credit card network.
The microchips used in contactless payments generate new verification values each time a card or authorized device is used in a transaction. This approach is very different from how magnetic stripe cards transmit data. When a traditional magnetic card is swiped, the customer's billing information is transmitted to the card reader each time the card is swiped. That information can be intercepted and used by another person, or perhaps sold on the dark web. When a transaction is conducted wirelessly, however, the only information that can be intercepted is the unique authentication code that identifies that specific transaction has occurred.
Because a new code is generated each time a chip card is used, it is very difficult for thieves to clone the card and try to make purchases. The dynamic authentication technology is simply not capable of being duplicated in a manner that will return the same dynamic codes as those that would be returned by a valid chip card. In addition, smartphones will have added security methods for before initiating contactless payments -- for example, requiring the user to authenticate their identity via a method such as FaceID.
Besides security, what other benefits do contactless payments offer?
Contactless payments take somewhere between 30-50% less time than standard credit card payments and are over 60% faster than cash transactions. This makes them a good fit for micropayments and other low-dollar-value purchases. Contactless payment methods are popularly used to increase throughput for public transportation turnstiles, parking garage checkout terminals and road tolls. Although the actual amount of time saved per transaction may be less than a minute, the minutes saved can add up and significantly reduce the time customers spend waiting in lines.
As the technology gains acceptance, nontraditional banking institutions and third-party payment providers such as PayPal have begun to experiment with ways to improve frictionless checkout. For example, some payment providers are exploring ways that GPS technology can be added to help mobile customers locate financial services, such as ATMs, or opt in to loyalty promotions conducted through targeted geofenced campaigns.