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PERSONAL FINANCE BANKING

Contactless Payment: History,


Advantages, and Examples
By JULIA KAGAN Updated October 10, 2020

Reviewed by SOMER ANDERSON

What Is Contactless Payment?


The term contactless payment refers to a secure method for consumers to
purchase products or services using a debit, credit, smartcard, or another
payment device by using radio frequency identification (RFID) technology and
near-field communication (NFC).

This payment method works by tapping a payment card or other device near a
point-of-sale terminal equipped with contactless payment technology.
Contactless payment is also referred to as tap-and-go or tap by some banks and
retailers.

KEY TAKEAWAYS
Contactless payment is a secure payment method using a debit or
credit card, smartcard, or another payment device by using RFID
technology and near-field communication.
To use the system, a consumer taps the payment card near a point-of-
sale terminal equipped with the technology.
Contactless payment is considered a quick and easy way to pay since it
doesn't require consumers to input a PIN.
Popular in Australia, Canada, South Korea, and the United Kingdom,
contactless payment has yet to make significant traction with American
consumers.

How Contactless Payment Works


Contactless payment allows consumers to pay for goods and services using
their debit or credit cards with RFID technology—also known as chip cards—or
other payment devices without the need to swipe, enter a personal
identification number (PIN), or sign for a transaction. Merchants that accept
contactless payment have point-of-sale terminals with a special symbol
identifying the technology, which is similar to the wifi logo but turned onto its
side.

Here's how it works. When the merchant's system prompts the customer to pay,
they bring the card between close to the contactless payment symbol on the
terminal. Information is transmitted electronically using information from the
chip from the card to the bank. When the system accepts the tap, it signals the
customer with a beep, green light, or checkmark. Once the approval is received,
the transaction is complete.

With the rise in wireless technology and the popularity of smart devices,
consumers can also connect their credit cards to a device—a smartphone,
smartwatch, or fitness tracker—to pay using the contactless system as well. This
is done by downloading a payment app such as Apple Pay, allowing consumers
to securely store credit and debit card information to make purchases by
tapping a smartphone or Apple iWatch.

In most cases, transaction sizes on cards are limited for contactless payment.
The allowable amount for a contactless transaction varies by country and by
the bank. Some merchants and retailers may set a low limit for their tap system
in order to further prevent fraud, while others still allow large transactions to go
through. Large dollar amounts may require a signature before they can be
approved.

Advantages and Disadvantages of Contactless Payment


Fraudsters are able to steal and clone information from magnetic stripes on the
back of payment cards. This allows them to clone the information and make
new cards, leading to fraud and identity theft. Contactless payment cuts down
the risk to both the consumer and the merchant. That's because they're more
secure than using magnetic stripes on the back of payment cards. Information
submitted through the merchant terminal through contactless payment, on the
other hand, is encrypted, meaning it is difficult to intercept and steal.

Despite these security features, criminals are still able to skim cards in
consumers' wallets using smartphones to read. The range at which a card can
be read is very short and, even if the thief is close enough to grab data, they
can't create a copy of the card. This is not true of cards with magnetic stripes.
That said, chip and PIN cards are still the most secure, as they can't be
duplicated and require data not contained anywhere else on the card.

Consumers are now able to dispute fraudulent transactions and get


replacement cards. There are also protective card sleeves and wallets that
block readers from getting to your card data in the first place. As of 2015,
merchants and credit card companies became liable for any fraudulent activity
that took place through their systems if they had no chip technology in place. [ 1 ]

History of Contactless Payment


Contactless payment has been around since the 1990s with only a handful of
merchants and retailers using the technology during that period. Since then, it
has spread out to include thousands of banks, credit card companies,
merchants, and retailers around the world.

South Korea's transit authority in Seoul offered one of the world's first
contactless payment systems. Launched in 1995, the system later became
known as UPass, offering riders a quick and easy way to pay for bus trips using
the contactless system. [ 2 ] Mobil offered one of the first contactless payment
systems called Speedpass in 1997, allowing customers to pay for gas using a
special fob loaded with cash at participating gas stations. [ 3 ]

The contactless system became popular in the United Kingdom after London's
transit agency implemented its prepaid contactless Oyster Card system for
transit riders to use on the Underground. [ 4 ] In 2014, the agency started offering
commuters the option to use contactless credit and debit cards to use on the
transit system. [ 5 ]

The U.S. market has been considerably slow to adopt contactless payment.
Roughly 20% of the transactions that take place in Australia, Canada, South
Korea, and the United Kingdom are conducted using contactless payment
methods, according to a 2018 report from consultancy firm A.T. Kearney.
Americans still use physical cash more than payment cards, to the tune of
almost 50 billion cash transactions each year, or 26% of all consumer payment
transactions, according to the report. Because of the volume of retailers and
banks, the American market is more fragmented. [ 6 ]

Tip: Treat a digital wallet the same way you would cash—use the
locks on your device and set up notifications on all your credit cards
in case of fraud or theft.

Examples of Contactless Payment


Contactless payment is available through banks and other financial institutions.
But other companies have also jumped on board offering their own versions of
contactless payment. For instance, Google and Android introduced pay systems
compatible with their devices using NFC in 2011 while Apple jumped on board
with Apple Pay—its own version of the digital wallet—in 2014. [ 7 ] [ 8 ]

Apple Pay
Most Apple devices already come equipped with the Apple Wallet app. It allows
users to store credit and debit card information onto their device—notably an
iPhone or iWatch—to make purchases in stores. The system also allows
purchases to be made online and through other apps. Users can also send
money to friends and family through their text message system using Apple Pay.
[ ]
9

Google Pay
Google allows users to make payments at participating brick-and-mortar and
online retailers through a secure method via the Google Pay app. Instead of
using a credit card number, Google shares an encrypted number tied to the
user's payment card with the retailer. Just like Apple Pay, users can also send
and receive money by using an email address or phone number. [ 10 ]

Samsung Pay
Samsung also launched a digital wallet, allowing users to store their payment
card information onto the app to use at merchant terminals. Samsung Pay
users can also earn cashback and other rewards by using their phones to make
purchases. Users simply take a photo of their card or of a barcode and tap to
check out. [ 11 ]

How Safe Is Contactless Payment?


Contactless payment is one of the safest forms of payment. Each transaction
generates an encrypted one-time code that is extremely difficult for hackers to
duplicate. However, because contactless payments don't require a PIN, lost or
stolen contactless cards can be used to make fraudulent transactions.

How Many Contactless Payments Can I Make in a Day?


There's no limit on how many contactless payments you can make in a day.
However, from time to time, your provider may ask you to re enter your PIN
manually. This is done to verify your identity and prevent fraud.

What Happens If the Terminal Is Not Contactless-Enabled?


Your contactless card can still function as a regular card for chip or swipe
transactions. Simply insert or swipe your card and enter your PIN.

The Bottom Line


A contactless payment doesn’t require cash or even swiping a card, eliminating
any physical contact between the buyer’s card or smartphone and the seller's
POS. All you have to do is tap or hold your contactless card over a compatible
card reader. Most smartphones are also equipped with contactless payment
technology. The terminal automatically connects with your bank account and
the purchase is completed within seconds.

Contactless payments use either radio frequency identification (RFID) or near-


field communication (NFC) technology and they are safer than payments made
with magnetic-stripe cards, which are easier to clone.

Most vendors are now accepting contactless payments. Simply look for the
contactless symbol (four curved lines) on the vendor's POS terminal.

ARTICLE SOURCES

Related Terms
What Is a Mobile Wallet?
A mobile wallet is an app that stores payment card information and other on a mobile
device. more

EMV: What it Means, How it Works, Limitations


EMV Chip is a global standard relating to integrated circuit cards, point-of-sale terminals,
and automated teller machines, currently managed by EMVCo. more

Chip-and-PIN Card: Definition, Features, vs. Chip-and-


Signature
A chip-and-PIN card is a type of credit card that requires the cardholder to authorize the
transaction by entering their personal identification number (PIN). more

Interchange Rate: Definition, Calculation Factors, Examples


The interchange rate is a fee charged to retailers by banks for the sake of covering credit
risk costs. Discover more about interchange rates here. more

What Is a Digital Wallet?


A digital wallet is an application on an electronic device that stores payment information
and allows you to securely make purchases without carrying cash or cards. more

Apple Pay: What It is, How It Works, Growth


Apple Pay is a contactless payments system created by Apple and in use by over 441
million customers. more

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