What They Are & How They Work (2022)

For decades, when shoppers wanted to make grocery purchases via credit card, that meant swiping the magnetic strip on the back of the card. Although the magnetic strip was a futuristic innovation in its day (it replaced the carbon copy print on the front panel of the card), no one today considers it to be advanced payment technology.

Today’s merchants and customers have turned their attention to other payment options—those that do not involve the connection between the customer’s payment method and the merchant’s terminal. Contactless payment methods rank among the most user-friendly options in today’s retail environment thanks to their convenience and security.

This has inspired many retailers—from conglomerates to small businesses—to accept such payments at their point of sale. As of early 2022, contactless payments account for 20% of face-to-face credit and debit card payments in the United States. In other countries, the figure is even higher—in Australia they account for 92% of card payments.

What is contactless payment?

Contactless payments are payments that do not require the customer to run a payment card through a machine. The method is applied to cards with magnetic strips or chip cards that are inserted into payment terminals. Contactless payment only requires the customer to point the card or device next to the payment terminal. In some cases, a simple tap makes transactions easier, which has led to the expression “tap to pay.”

Contactless transactions can take two forms: using a radio frequency identification (RFID) chip embedded in a credit or debit card, or using a wireless radio in a mobile device such as a smartphone or smartwatch. In both cases, the buyer makes a “tap to pay” transaction.

How does contactless payment work?

Contactless payments are sent through cards and mobile devices, but ultimately through financial institutions, just like credit or debit card payments. The exact mechanics vary depending on whether you’re making a card payment or a mobile wallet payment.

Card payment

The majority of tap-to-pay transactions involve a physical credit or debit card. The card comes with an embedded radio frequency identification (RFID) chip that can transmit all your card information to the payment terminal. If your credit card company has issued you a new card within the past year, it most likely contains such a chip.

When a customer pays with a wireless chip card, the interaction is as follows.

• The customer presents the card. The customer points the card at a point-of-sale terminal that accepts contactless payments. Only newer terminals offer this functionality.
• The wireless chip transmits card information. When the customer hovers their card near the terminal or, more commonly, taps the card on the terminal, the radio frequency identification (RFID) chip transmits all of the card’s information, just like a magnetic stripe.

• The payment terminal contacts the bank. Now the payment terminal sends a payment request to the bank that supports the card. This is usually a bank or credit union. Just like a regular credit card, the merchant will request a transfer of funds from the card issuer.

• The card issuer send approval or denial. If the purchase amount is in line with the buyer’s bank balance or credit limit, the bank will allow the sale to proceed. The payment terminal beeps to indicate a successful transaction. Or, if the buyer lacks funds or credit to make the purchase, the bank will deny the transaction.

Mobile wallet payments

Mobile wallet payments take place through the use of a mobile device such as an iPhone or Android phone. It can also happen through a wearable device like the Apple Watch. The device must be running a payment app that enables mobile wallet purchases. Such apps include Apple Pay, Google Pay and Samsung Pay. Here’s how the process works:

• Customers tap or point to them mobile device. This works just like the card model. Phones or wearable devices communicate using near field communication (NFC) radio, which is a close cousin of RFID chips.
• In some cases, customers must enable payment apps. Some mobile devices instantly default to certain payment apps, and you don’t even need to launch them to make a purchase. You just tap your device, and the purchase continues. In other cases, the customer must launch the app, or they must authenticate the purchase with a thumbprint or Apple’s Face ID.

• Application link to the bank. The payment app links back to the financial institution or credit card that provides the actual funds for the transaction.

• The purchase is approved or denied. Again, the underlying bank either approves or denies the customer’s purchase. This happens almost immediately.

Advantages and disadvantages of contactless payments

Contactless payments provide clear benefits to both merchants and consumers. Advantages include:

• Safety. Contactless payment systems offer better security than cards that use a magnetic stripe. For decades, fraudsters have plagued the credit card industry by skimming consumer information from magnetic strips. Tap-to-pay cards and mobile wallets use encrypted systems to transmit customer data, and this has successfully fended off most fraudsters.
• Comfort. Users do not need to carry a credit card to make contactless transactions. They can leave home with just a smartphone, or a wearable device like the Apple Watch, and make full use of their mobile wallet. Even if users use a physical card, they enjoy the convenience of simply tapping the payment terminal or hovering their card right over it. This makes transactions smoother than when scanning a magnetic stripe or inserting a chip card.

For all its advantages, contactless payments come with one major limitation: the lack of universal adoption by merchants. While contactless-enabled terminals have become commonplace at major retailers, they’re less common at small businesses running on tight budgets. Therefore, customers still need to carry cash or a traditional credit or debit card to ensure they can make transactions at each store.

Contactless payment FAQ

How do you know if a card is contactless?

Contactless credit and debit cards come with a radio frequency identification (RFID) chip embedded in the card’s plastic housing. If your card has such a chip, it will have an icon consisting of four semicircles that look like radio transmissions. Look closely: this icon may be either on the front of the card or on the back of the card.

What are the different types of contactless payments?

There are two main types of contactless payments. One type sends through a traditional credit or debit card equipped with an RFID chip. Another type sends from a smartphone, tablet or wearable device equipped with an NFC chip. NFC stands for “near field communication”, and it allows devices to communicate with payment terminals via very short-range radio waves.

Are contactless payments safe?

Contactless payments are much more secure than traditional magnetic stripe credit card payments. Fraudsters have mastered the art of skimming customer data from magnetic strips, which do not encrypt customer data. Contactless technology, on the other hand, encrypts customer data. However, for the most secure type of transaction, choose a credit card chip reader. Chip-reading technology includes an additional security barrier—a rapid series of encrypted messages between the payment terminal and the financial institution—that makes fraud nearly impossible.

source: https://www.shopify.co.id/blog/contactless-payment