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What is a contactless payment? How it works in 2024 

10 min read
Zoe Ashbridge

In a time when speed and convenience are the name of the game, contactless payments have emerged as a front-runner in the payment technology race. That's why today, we aim to shed light on what contactless payments are, how they work, and why they're becoming increasingly important in 2023. 

We'll delve into the technology behind it, the security measures in place, and the various types of contactless payments available. But first, a definition. 

What is a contactless payment? 

Contactless payment is a wireless financial transaction that allows customers to make purchases without any physical contact between their payment medium and the vendor's point-of-sale (POS) system. 

You wave or tap your payment device -- be it a chip-enabled bank card or a digital wallet on your smartphone -- near the vendor's POS reader to complete the transaction. These transactions are often referred to as touch to pay, touch-free, tap-and-go, or proximity payments. 

The Wi-Fi symbol on a credit card indicates that it can be used for contactless payments with the help of a contactless-enabled point-of-sale or tap-to-pay app on a phone. 

The beauty of contactless payments lies in their security features. Unlike traditional payment methods where billing or payment information is shared directly with the vendor, all communication in a contactless pay setup is encrypted. Each transaction is tokenized with a unique, one-time transaction number. 

So, even if someone intercepts the wireless transmission, all they would get is a one-time code specific to that particular transaction. 

The adoption of contactless payments has been significantly accelerated by the need for quick, frictionless checkouts and, more recently, by health concerns such as the COVID-19 pandemic. This has made contactless payments not just a convenience but a necessity for many. 

What are the advancements in contactless payments technology? 

The journey of contactless payments has been nothing short of transformative. From humble beginnings to becoming a staple in modern transactions, the technology that powers contactless payments has seen remarkable advancements. 

Let's unpack how this technology has evolved and what it means for the future of payments. 

NFC technology 

Near-Field Communication, or NFC, has been a pivotal technology in the evolution of contactless payments. Initially designed for simple data transfers, NFC has matured into a secure and efficient medium for financial transactions. 

The technology has expanded beyond just plastic cards. It now seamlessly integrates into mobile wallets and even wearable gadgets like smartwatches. 

A surge in mobile wallets and wearable devices 

The advent of mobile wallets like Apple Pay and Google Pay has elevated the contactless payment experience. These digital wallets securely house your financial information and enable swift transactions with a simple tap of your smartphone. 

And with wearables like smartwatches joining the fray, customers can get the same level of convenience and security, right from their wrists. 

History of contactless payments 

The history of contactless payments is pretty interesting and deals heavily with innovation, consumer adoption, and market transformation. For sellers, understanding this history can offer valuable insights into consumer behavior and emerging trends. 

  • Late 1990s: The concept of contactless payments made its debut in Seoul, South Korea, with a bus card system in 1995. Around the same time in the U.S., Mobil introduced the "Speedpass" system for gas stations, marking one of the first instances of contactless payments in a retail setting. 
  • Early 2000s: Philips and Sony collaborated to develop the NFC standard, laying the groundwork for future contactless technologies. Freedompay also entered the scene with partnerships like Bank of America and McDonald's, signaling the technology's potential for widespread adoption. 
  • Mid-2000s: In Japan, the Osaifu-Keitai system was introduced, allowing multiple FeliCa systems like Edy and Mobile Suica to be used primarily on railway networks. This was a significant step in making contactless payments mainstream in public transport. 
  • 2007: Barclaycard in the UK launched the OnePulse card, a hybrid contactless debit card designed for use across the TfL network and at around 6,000 retailers. The initial spending limit was set at £10 per transaction, a move that would influence similar initiatives in the U.S. 
  • 2010-2011: As contactless payments gained traction globally, spending limits were increased. In 2011, the world saw the launch of its first mobile payment device, thanks to a partnership between Barclaycard and Orange, known as Quick Tap. 
  • 2015: The U.S. adopted the EMV standard, prompting thousands of merchants to switch to NFC-enabled terminals. 
  • 2016-2017: Contactless payments on Android were launched. 
  • COVID-19 Era: The pandemic acted as a catalyst for contactless payments. Several banks raised their contactless payment limits, and it became a recommended safer payment method compared to Chip and PIN card payments and cash transactions. 
  • 2023: Apple introduced its Tap to Pay Technology in the United States, revolutionizing the way people make payments using their devices. This technology was later expanded to other countries, making it a global phenomenon. 

According to the banking and finance website UK Finance, contactless payments now account for more than a quarter (27%) of all UK payments

And according to Mastercard, 58% of its global transactions are contactless. Visa notes about a third of its transactions are contactless as well. 

How contactless payment technology tackles security 

Security is a top concern for sellers and consumers alike. While contactless payments have been lauded for their convenience, you might be wondering how they measure up in the security department. Are they even safe? Let's break it down: 

Encryption and tokenization 

One of the standout features of contactless payments is the dual-layer security provided by encryption and tokenization. When you initiate a contactless transaction, the payment information is encrypted, making it accessible only to authorized entities. 

Each transaction then generates a unique, one-time code, commonly referred to as a "token." This token is sent to the financial institution for verification and approval. The beauty of this system is that each transaction has its own unique identifier, making it much harder to crack for would-be hackers. Even if someone were to intercept this token, it would be useless for any other transaction. 

Transaction caps and multi-factor authentication 

Another security feature worth noting is the transaction limit often associated with contactless payments. This limit serves as a safety net, requiring additional verification like a PIN or signature for larger transactions. 

Many contactless payment systems also incorporate multi-factor authentication, such as biometric scans (think fingerprints or facial recognition), adding an extra layer of security. 

Potential drawbacks 

While contactless payments offer robust security features, they're not without their limitations. One notable drawback is that if your card or device falls into the wrong hands, unauthorized transactions can be made without needing a PIN or signature, up to the transaction limit. This is particularly concerning if you have multiple payment methods stored in a digital wallet on a lost or stolen device.

What are the options for contactless payments? 

You can accept contactless payments for your business in a variety of ways. Each brings its own set of benefits and considerations. So now, let's explore the three main contactless payment options that are reshaping the way we think about how transactions are carried out. 

Contactless cards 

Contactless cards are the original touch payment option. These cards come embedded with an RFID chip that allows for secure and quick transactions. All you need to do is tap or wave your card close to a payment terminal that supports contactless payments. 

Visa, Mastercard, and American Express are some of the major players issuing these types of cards. To accept these payments as a seller, you'll need a POS system that is equipped to handle contactless transactions. 

Mobile wallets 

Mobile wallets have turned smartphones into payment portals. Apps like Apple Pay, Google Pay, and Samsung Pay allow you to store your card information securely on your phone. When it's time to pay, you simply hold your phone near the payment terminal, and it's done. The transaction is complete. 

This option is particularly handy because it eliminates the need to carry physical cards. To accept mobile wallet payments, your POS system should be capable of handling NFC technology. 

Wearable devices 

With an Apple Watch, for instance, you can double-click the side button, select your card, and hold the watch near the terminal to complete the transaction. It's as simple as that. Wearables offer the ultimate convenience of making payments without even needing to take out your phone. 

To accept payments from wearables, you'll need a POS system that supports NFC, and you might also consider implementing Tap to Pay on iPhone or Android phone technology for an even smoother transaction process. 

Can contactless payments be made without NFC? 

Absolutely, yes! While NFC gets most of the attention in the contactless payment world, it's not the only player in the game. QR code payments offer a viable and increasingly popular alternative for contactless transactions. 

QR code payments work by generating a unique QR code that represents the transaction details. The customer scans this code using their smartphone camera, which then redirects them to a payment gateway or app to complete the transaction. It's a straightforward and secure way to make a payment without the need for any physical contact. 

For sellers interested in offering this option, learning how to create and accept QR code payment can be a valuable addition to your payment methods. It's a simple process that can be easily integrated into your existing payment system, offering another layer of convenience for your customers. 

What is the future of contactless payments? 

The future of contactless payments is looking brighter than ever, with rapid advancements in technology and growing consumer adoption. Biometric payment cards featuring fingerprint scanners are already available, combining the convenience of a card with the security of mobile apps. 

Services like Cash App are also offering easier ways to transfer money between currencies and people, indicating that the technology will only grow in popularity and availability. 

In the U.S., the adoption of contactless payments has been slower compared to Europe, but it's gaining momentum. It's expected that contactless payments will become more widely adopted in the U.S. and worldwide in the coming years. This is particularly true as new point-of-sale terminals are increasingly being equipped to handle "Tap to Pay" functionalities. 

The bottom line is that contactless payments are not just a fleeting trend. They're a significant shift in how transactions are being conducted. With the dual benefits of speed and security, it's no wonder that this payment method is gaining traction, not just in the U.S. but globally. While NFC technology has been the poster child for contactless payments, options like QR codes are also gaining popularity, offering an alternative for businesses and consumers alike.

For small businesses on the fence about adopting this technology due to budget constraints, it's worth noting that as contactless payments become more mainstream, the cost of implementation is likely to go down. Plus, consumer demand for these quick and convenient payment methods may soon make them less of a luxury and more of a necessity for staying competitive. 

So, whether you're already on the contactless bandwagon or still considering hopping on, the future looks promising. With technological advancements and a growing acceptance among consumers, contactless payments are set to become the new norm rather than the exception. 

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