Everything You Should Know About Contactless Payments
For years, shoppers in Europe and Asia have been paying with contactless methods such as mobile wallets and contactless cards. While U.S. consumers have traditionally been slow to adopt this payment method, they’ve recently begun making up for that delay.
The rising popularity of contactless payments in the U.S. is largely due to its hygienic aspect amidst COVID-19 worries. However, U.S. shoppers are learning what overseas shoppers have known for years—that contactless payments are also faster and more secure than other payment methods.
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Whether you’re a merchant or developer, understanding contactless payments will be sure to help you take your business to the next level. Keep reading to learn all about contactless payments: their surprisingly long history, the technology that supports them, and how they benefit merchants and consumers.
What Contactless Technology Is and How It Works
A contactless payment transaction uses near field communication (NFC) technology, which is a short-range wireless connectivity technology. NFC uses a radio frequency (R.F.) field that has a base frequency of 13.56 MHz. Radio frequency has, of course, been used for decades as radio frequency identification (RFID) to tag and track products in stores, warehouses, and other businesses.
NFC technology isn’t limited to monetary transactions. It can be used for other types of data to exchange contact information, share images, or use digital coupons. You can read more about NFC’s real and envisioned uses on the NFC Forum website.
In the case of contactless payments, phones and cards with embedded NFC chips share data with NFC-equipped reader devices. In case you’re wondering how NFC fits in with EMV (EuroPay, Mastercard, Visa) chips, NFC technology uses the EMV standard to encrypt payment information (Keep reading to learn more about EMV technology).
One of the main benefits of using NFC technology for contactless payments is the speed in which the NFC reader connects with an NFC card or phone—less than one-tenth of a second. The connection starts automatically when the phone or card comes into close range (a few centimeters) of the NFC reader.
Birth and Growth of Contactless Payments
Contactless payments appeared in the late 1990s as a touchless payment method at Mobil gas stations as well as the South Korean transit system. However, the technology behind contactless payments didn’t gain momentum until 2004, when three major companies (Nokia, Philips, and Sony) founded the NFC Forum.
Over the course of 18 months, the NFC Forum created a formal outline of the NFC technology architecture. In 2007, Nokia released the first NFC-enabled flip phone.
Not to be outdone, Google and Android began to manufacture phones to support contactless payments in 2011. Apple followed suit with its iPhone in 2014. The popularity of the contactless payment method continued to grow as both the United Kingdom and New York City transit systems introduced contactless payments in 2014 and 2017, respectively.
Contactless Payments in Asia and Western Europe
Contactless payments are prevalent in Asia and Western Europe, with Visa reporting in June of 2018 that contactless payments outside of the U.S. make up two out of every five face-to-face transactions.
Interestingly, New Zealand-based consumers are some of the highest users of this payment method; from January 2017 to January 2018, the number
of contactless payment transactions rose by 48.8% (from 16.8 million to 25 million).
As more consumers use contactless payments, it feeds the innovation and growth of businesses in the payment processing sector. A forecast study predicts that the European contactless payment market size will grow at a compound annual growth rate of 11.7% from 2019 to 2026.
The Recent Growth of Contactless Payments in the U.S.
Because of the U.S.’s size and fragmented nature of its marketplaces, American consumers have been slow to adopt the contactless payment method. However, once COVID-19 asserted itself, shoppers began using mobile wallets and contactless cards in droves:
Even once the pandemic winds down, shoppers are unlikely to return to their previous payment methods now that they’ve experienced the benefits of contactless payments firsthand. Tap-to-pay is faster than paying with cash or swiping/inserting EMV-chip and magnetic stripe cards, which gives customers a strong incentive to continue using contactless payments.
What Makes a Credit or Debit Card NFC-Enabled?
For a credit or debit card to use NFC technology, it must have an embedded microchip (also called an NFC tag) with an antenna surrounding it. The NFC tag stores the data, while the antenna provides one-way communication to a reader device via radio waves.
The microchip is embedded in the plastic and does not need a power supply to work. What “wakes up” an NFC-enabled card is when the shopper brings it within a close range of the NFC reader. It is the reader that provides the power to the antenna that sends the data.
As of this writing, almost all major credit card issuers—from American Express to Wells Fargo— currently issue contactless credit cards:
- American Express led the shift toward contactless before COVID-19 arrived. The company began issuing contactless cards for all new U.S. consumers and small businesses in July 2019.
- Visa reports that there will be about 300 million contactless cards issued in the U.S. by the end of 2020. In 2019, Visa had originally predicted 100 million.
- Mastercard has stated its intention to fill contactless card orders over the next two years from issuers, which will represent about two- thirds of their total U.S. consumer volume.
How Mobile Wallets Enable Contactless Payments
In 2007, the Nokia 6131-NFC flip phone was the first mobile phone to have the NFC chip. The phone went through a trial period in the New York City transit system with the Mastercard PayPass (now Mastercard Contactless). The first smartphone to carry the NFC chip was the Nokia C7 in 2010, though the software to enable it wasn’t available on the phone until a year later.
Thirteen years of continuous smartphone production has resulted in a plethora of NFC-enabled phone models—541 to be exact. In 2017, the NFC Forum predicted that by 2020, 2.2 billion smartphones with NFC chips would be in use worldwide.
Smartphones require a mobile app to work with NFC readers in brick-and-mortar businesses. Currently, the Apple Pay, Google Pay, and Samsung Pay apps serve this function. Some companies have created their own mobile wallet apps, such as Starbucks, McDonald’s, and Kohl’s.
The Many Benefits of Contactless Payments
At the time of this writing, the ability to make a payment without touching germ-ridden surfaces reassures shoppers. But, contactless payments must demonstrate more than hygienic benefits to remain a preferred payment method among customers.
Fortunately, that’s the case here, as contactless payments offer better security and faster checkout. Plus, they can be easily integrated with loyalty card programs. Let’s take a closer look at these benefits:
Enhanced Security and Less Fraud
The improved security of NFC-enabled cards is directly associated with its technological predecessor, the EMV chip. NFC chips are based on the same technology as EMV.
In the mid-1990s, credit card companies began adding EMV chips to credit and debit cards to help reduce fraudulent transactions associated with magnetic-stripe-only cards. Unlike magnetic cards, the data that EMV chips store is encrypted, making it harder for thieves to steal information. Furthermore, the complexity of EMV chips makes them difficult to counterfeit.
The EMV liability shift in 2015 forced many businesses in the United States to upgrade to EMV terminals. Between September 2015 and December 2018, the use of EMV chip cards in the U.S. reduced counterfeit fraud for card-present transactions by 76%.
It might be possible for a rogue NFC reader (standing very close by) to steal data from a card with an NFC chip. However, it would not be possible to obtain all of the information necessary to make either a counterfeit card or complete online purchases. Additionally, the data is encrypted and cannot be unlocked without a unique virtual key.
In addition to these benefits, mobile wallets offer even more security features:
- Consumers can keep their phones locked with a PIN.
- Consumers can configure facial or fingerprint recognition on their mobile wallet app to prevent unauthorized access.
- Mobile wallet apps save credit card data as a token, which is useless to a thief.
Faster Checkout Process
Customers appreciate short, speedy checkouts—especially at convenience stores, transit turnstiles, and pharmacies. Contactless payments are faster than using cash, magnetic stripe cards, or EMV chip cards. However, it’s hard to pin down a single number to quantify NFC checkout speed versus other methods because payment processors measure and quantify it differently:
- Chase: 30 – 40% less customer time at the point-of-sale
- MasterCard: 12 – 18 seconds faster than cash at drive-through windows
- American Express: 63% faster than cash and 53% faster than a traditional credit card
American Express also reports that 83% of surveyed merchants agree that contactless payments enable a quicker checkout process.
Can Be Easily Connected to Customer Loyalty Programs
Another contactless payment benefit for consumers and merchants is the ability to link a mobile wallet to a loyalty program. Financial institutions and merchants have digitized more of their operations, making it easier than ever to integrate with loyalty programs.
Thanks to mobile apps, it’s also easier for consumers to replace flimsy loyalty cards with mobile wallet loyalty programs and redeem rewards at the point-of-sale. A 2017 survey reported that 76% of respondents wanted to redeem deals tied to their cards when swiping at the point of sale.
Of course, the success of a loyalty program relies on much more than just technological wizardry. Popular mobile wallet loyalty programs from Starbucks and DSW illustrate this with personalized marketing communication and customized coupons. The credit for these programs’ success relies on the consumer data gathered from the loyalty program itself.
Are You a Developer or ISV?
Here’s How to Enable Contactless Payment Processing For Your Merchants
If you’re a developer or Independent Sales Vendor (ISV), know that setting up merchants to process contactless payments is quite straightforward. First, the merchant must have a contactless-enabled EMV terminal. This is likely already the case since the EMV liability shift in 2015 forced many businesses to upgrade to EMV terminals. Most EMV terminals, such as those from PAX, Verifone, and Ingenico, already support contactless payments.
Second, assuming the merchant has a contactless-enabled terminal, they will need to integrate with a contactless- ready payment gateway service. The key here is to work with a provider whose gateway is robust and feature-rich, with a well-documented SDK and API—like Cardknox. Developers have found that it’s easy to integrate a wide range of contactless payment terminals with the Cardknox payment gateway.
Note: If your merchants are already set up with contactless-enabled payment terminals and the Cardknox gateway, you’ll just need to download the latest Cardknox Payment Engine update onto the terminal to ensure they can accept contactless payments.
Contactless Payments and the Future—Let’s Get There Together
Configuring your business for contactless payments provides benefits for you and your customers alike. They’ll appreciate that you took steps to improve their in-store checkout experience, while you can enjoy stronger customer loyalty that withstands the test of time. For assistance in setting up contactless payments, contact Fidelity Payment Services at (855) 794-7348 or our Cardknox technology subsidiary at (844) 227-3566.
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