Contactless Payment

Contactless payment is a modern payment technology that allows consumers to make secure transactions without physical contact, primarily through radio-frequency identification (RFID) or near-field communication (NFC) methods. This technology, which has gained significant traction since its introduction in the mid-2000s, enables users to pay for low-end purchases—typically under $25—by simply tapping or waving a card or device near a payment terminal. Contactless payments can be integrated into various handheld devices, including smartphones, smartwatches, and specialized payment cards, facilitating faster checkout experiences and reducing wait times in high-traffic retail environments.

The key advantages of contactless payment include increased transaction speed, reduced reliance on cash, and enhanced security features, as sensitive information is encrypted and shared only for the duration of the transaction. However, concerns about potential security risks, such as unauthorized scanning of payment devices, have also been raised. Despite initial resistance, particularly in markets like the United States, the technology has shown promising growth, with major financial institutions and retailers adopting contactless systems widely. As consumer familiarity with digital payment methods continues to grow, contactless payments are expected to play a pivotal role in the future of commerce, potentially transforming the way purchases are made worldwide.

Published in: 2021

By: Dewey, Joseph

Subject Terms

Contactless Payment

Abstract

Contactless payment has emerged as perhaps the single most important development in payment technology since the credit card, thanks to its efficiency, convenience, and low risk. The technology allows relatively low-end payments (usually under twenty-five dollars) to be made securely and conveniently (the preferred term is "seamlessly"), with the use of radio-frequency identification (RFID) or near-field communication (NFC) technology that can be embedded in virtually any handheld device, from a conventionally sized credit card to a mobile phone or even a watch or a specially designed bracelet or hanging fob.

Overview

Purchases, really, of any dimension, are all about transferring not so much money but information about that money from buyer to seller. Unless actual currency is used, retailers have long been given critical banking information to expedite a purchase. Checks, for instance, carried the bearer's name and address as well as bank account numbers and check numbers. Such transactions have long been at the heart of a consumer environment, despite the time-consuming and often frustrating nature of that purchasing dynamic. Distance transactions, or contactless payment, have become one of the most enticing and electrifying buzzwords in global business even though the technology cannot change the basic triangulated dynamic of a purchase—that is, the relationship between a cardholder/consumer, a retailer, and the bank or business that backs the card. But contactless payment can make a purchase quicker. The wide success of contactless payments since their debut in the mid-2000s has begun to revolutionize the conception of purchase transactions. Indeed, given the speed and security of the transactions (often dubbed "wave and pay" or "tap-and-go") and the attractive ease of using the technology even for consumers who may be reluctant to embrace new methods, contactless payments may, within a relatively short period of time (industry analysts predict fewer than twenty years; Heydt-Benjamin, 2009), completely alter the nature of counter transactions.

Contactless payments address the dynamics of the purchase queue and specifically the purchase queue at peak times—a department store during the holidays, a fast food restaurant at lunchtime, a convenience store at rush hour. It is difficult to believe that as late as the 1980s and 1990s, buyers at department stores, convenience stores, movie theaters, grocery stores, and even restaurants routinely clogged sales lines as they wrestled with money, counting out wads of bills or fishing in pockets for coins and then waiting to receive change carefully counted out by register operators. Or consumers would fumble with checkbooks and pen to fill out the five blanks on the check itself, often requiring salespersons to check photo identification or even check with the bank to ensure payment. Or, taking advantage of then-emergent technologies, consumers tendered credit cards to the salesperson and even then inevitably waited for the machinery at the checkout to process the transaction and produce the paper receipts that required, in turn, customer signatures.

All these methods were, and remain, time consuming. And aside from cash transactions, critical financial information would be routinely entrusted to salespersons, granting partial, or in some cases entire, access to private funds by revealing banking information or password numbers. In addition, the process invited human error and, in turn, actually depressed the inclination to engage in the buying dynamic, as customers understood the wait at the checkout point would inevitably involve such snags. Shopping—whether for fast food, gas, a bag of groceries, movie theater refreshments, or coffee and bagel—seemed inevitably to involve frustrations and waits over which the consumer had little control.

Since the initial limited introduction in the United States in 2005 of contactless payment readers (the technology had actually found a far more engaged reception in overseas markets, particularly in Japan and Korea and especially the United Kingdom), however, businesses have realized a significant spike in sales as the small chip technology method allows far more efficient line mobility and actually empowers the consumer to extend their range of purchases. Contactless payment is an example of "just how fast a major technology can be deployed" (Bodhani, 2013). The contactless cards are loaded with secured data that use highly sophisticated encryption protection to guarantee maximum security during the transaction. Customers simply carry a payment card issued by a bank or by the retailer, or the same information is encrypted in a smart chip and then placed in any handheld device (particularly smart phones) or even a wristband. The chip, with an internal memory, has a microscopic antenna that permits quick communication with the contactless reader at the register station through radio frequency transmission or similar technologies.

Proponents of contactless payment systems cite several advantages. There is no longer a need to carry bundles of cash or pockets of change. There is no need to fret over having enough money on hand to cover the cost of the purchase. Indeed, like traditional credit cards before them, contactless payment methods encourage bolder (or, as critics would argue, reckless) spending habits. There is no reason to use checks that make available critical information to salespersons. While these advantages are shared by traditional credit cards, contactless payment does away with the magnetic strip swipe, an often time-consuming and error-prone process that also involves the potential for vulnerable security gaps. Contactless payment virtually eliminates that threat (Yousof, 2008). Meanwhile all the protection that has long been layered around traditional credit card transactions is still in place. Nothing in terms of security is at risk any more than with any digital purchasing such as a magnetic card transaction. Additionally, the need to memorize PIN numbers, passwords, or account numbers is eliminated.

A leading criticism and public fear over contactless payment is the potential for criminals to use electronic devices to remotely scan consumers' cards (or other contactless devices) without their consent simply by being close to them. Examples of such theft have received media attention. However, proponents of the technology suggest that extreme proximity required (generally a few inches at most) makes such incidents rare (Investopedia, 2018). They additionally note safeguards such as transaction amount limits, zero consumer liability policies for fraudulent charges, and scan-blocking wallets or card sleeves.

Applications

Market momentum clearly favors contactless payment, particularly in those venues known for high volume business that traditionally have relied on relatively small amounts of cash. Still,by the mid-2010s, in the United States, contactless payment technology remained relatively limited in area to those places served by major banks and financial institutions such as Citibank, Keybank, Citizens Bank, American Express, JP Morgan Chase, HSBC, Wells Fargo, and Bank of America—that is, largely major urban centers. The cost of upgrading point-of-sale registers to accept contactless payment meant that generally early adopters on the retail side were large chains and upstart smaller merchants already attuned to alternative payment methods. However, as major issue credit card lines and some technology companies introduced and improved contactless payment systems, the technology began to be more widely adopted. Examples of these systems included Mastercard's PayPass, Visa's payWave, American Express's Softcard (later integrated into Google Wallet), Apple Pay, and Android Pay.

Financial institutions, eager to give customers the feeling of being part of hip new technology and themselves quick to realize the potential impact of that technology, established pilot programs and rollout incentives in many areas and through mass market retailers including movie-theater giant Cinemax, McDonald's (as well as Arby's and KFC), Eckerd Drugs, and Walgreen's, as well as a number of regionally strong convenience stores, including Wawa, Sheetz, and 7-11. In addition, contactless payment programs were rolled out and established to service a variety of high-attendance entertainment venues such as concert halls, sports stadiums, large-scale, multiday music festivals, theme parks (most notably the Disney World parks complex in Orlando), and sports/concert arenas where long lines often frustrate—and even eliminate—onsite ticket purchases, critical impulse purchases during the visit, and most often souvenir, food, and drink sales.

Retailers with specific outlet stores can issue contactless credit cards loaded to a predetermined amount, or retailers can accept on premises more open-ended cards much like cash, the cards secured by the customer's bank. Between 2005 and 2006 alone, millions of contactless cards were issued—conservative estimates put the number at 17 million (Heydt-Benjamin, 2009). More than 40,000 merchant outlets—stores, theaters, restaurants—serviced the American buyer as of 2013; by December 2016, chip card readers had become mainstream and more than one-third of retailers were accepting Apple Pay, a smartphone application for contactless payment that connects to participating banks, as Dieter Bohn reported for the Verge. Advocates of the technology are quick to point out that the numbers, although they certainly sound impressive (particularly given that the technology was introduced in 2005) hardly scratched the surface of a national consumer environment that includes more than five million potential outlets.

Growth continued, with market analysts in 2018 estimating the total value of contactless payments worldwide to reach $1 trillion in that year, and expecting the number of global users of the technology to reach 760 million by 2020 (China Telecom, 2018). In many markets this surge was driven by adoption of contactless-enabled cards, representing the more traditional side of the technology. Among contactless payments through mobile devices, tech companies Apple, Google, and Samsung accounted for approximately 60 percent of market share (China Telecom, 2018).

Retailers Benefit. Consumers, liberated from the anxieties and frustrations of purchasing lines and point-of-sale vulnerability, are not the only ones to benefit from contactless payment technology. Retailers realize lower input costs. With fewer hands-on transactions, fewer clerks need to be employed and trained to handle cash and credit card transactions (Gerstner, 2005). Given that sensitive financial information never changes hands, owners can allay fears over worker honesty and potential liability. Given the relative ease of maintaining the technology for contactless payments (a single card reader can handle up to forty-five transactions per hour and require virtually no maintenance or resetting from employees), retailers, enticed to move to an entirely cash-free transaction environment, have embraced the technology because its efficiency and security actually attracts customers (reluctant to patronize comparable businesses that do not offer the system) and helps ensure long-term loyalty.

The benefits of the technology are threefold: speed, ease of purchasing, and trustworthiness. Transactions that can be accomplished by waving the payment card in front of the recording reader station have made payment transactions on average, depending on the service and/or product, anywhere between 30 and 60 percent faster. The payment dynamic thus loses its aggravating dimension—happier customers no longer avoid the opportunity to make purchases. At last, retailers in brick-and-mortar shops have a competitive answer to the relative ease and speed of Internet shopping. Without worrying over exact change or on-hand monies, customers can extend their range of acquisition without fear of being embarrassed at the point of sale with insufficient funds. Business owners report increased impulse sales and greater range of purchases with customers who use contactless payment methods.

Viewpoints

Virtually every market indicator promises that contactless payment technology is an inevitability and that its relative ease will have an enormous impact on the sales dynamic. Still, there has been resistance to the technology, especially in the United States, where adoption lagged well behind many other markets. Industry analysts have examined the nature of this resistance and have generally found that, much as with any sweeping new application of technology, misgivings are attributable largely to misinformation and misplaced paranoia. Industry data designed to measure consumer acceptance of the system have indicated that among the generation most likely to respond to the convenience and efficiency of contactless payment (as well as to its cutting-edge technological feel)—that is, those born after 1985 and hence digital natives raised entirely within the enormous cultural and social influence of computer technology—resist using the convenience of contactless payments because of fears that such convenience brings with it a kind of carelessness, that any process that quick and easy must inevitably put critical personal financial information at risk or make available a particular consumer's financial information that would allow for identity theft and fraudulent purchases.

Despite reassurances, the fear persists. Economic culture trend watchers have termed fear over proximity compromise in near-field communications as "paynuphobia" (Mitchell, 2007). But the fear is real—after all, for the few seconds (estimates are that a contactless payment exchange takes on average eleven seconds) that holder's data are essentially floating out in the open, there for anyone (Pultarova, Hayes & Badhani, 2013). Even advocates of the contactless payment system acknowledge the potential for criminals with access to some type of portable reader could indeed intercept data during the wave-and-pay exchange. Indeed, theoretically, that same would-be thief could actually access any smart chip devices, any number of smart cards at the same moment. "All a local hacker would need is a loop of wire, a cheap off-the-shelf radio receiver, and a laptop equipped with a digital acquisition card" (Britt, 2006). The possibility of such interception by purchasers who share a line at a vendor has raised issues over whether the obvious benefits of smart chip technology should have waited for the development of better safeguards. "Wireless interception kicks up the level of potential fraud" (Liberman, 2013).

But advocates quickly point out that contactless payment systems are actually the first generation of such technology and have been designed to cap at relatively small purchases, usually under twenty-five dollars, thus limiting whatever potential there might be for criminal interception of data. Next-generation contactless payment cards could require identification such as a fingerprint to ensure security (Gerstner, 2005). And, after all, any revolution in payment methods has been scrutinized initially by those who hesitate over embracing the new—there were, for instance, fears over forged signatures on checks and, later, by inadvertently releasing PIN numbers for magnetic swipe card accounts (indeed, in traditional magnetic swipes, cashiers themselves could deliberately intercept critical financial account records through a process known as "skimming"). Even cash transactions run the risk of robbery.

Unlike magnetic card purchases, contactless payment methods are used by a consumer to cover only a specific single purchase, and even that purchase must be keyed into the system by the retail representative. There is no name exchanged or volunteered. No bank account numbers, card number, or passwords are exchanged or compromised. Any information recorded by the contactless payment transaction is just that—information about that purchase encrypted in a once-only digital code. In addition, the smart chip actually numbers the transactions like a kind of protective encryption. Any information that would possibly leak would be simply descriptive, as far as potential criminal activity essentially useless even if the information were decrypted (Heydt-Benjamin, 2009). And traditional purchase surveillance and transaction safeguards that have long protected magnetic swipe credit cards are still in place—cardholder agreements for contactless payment cards routinely protect in writing cardholders from unauthorized purchases in the event that the contactless payment card is lost or even stolen. Even the retailers are protected from unauthorized use of the encrypted data.

Indeed, the technology has important applications that exceed making retail transactions quicker and more convenient—given its security dimension, smart chip card technology has been tested, albeit in experimental protocols, in high security, high sensitive information transactions, including digital passports and business and military identification cards, as well as worker and resident visas. Perhaps the most attractive application of contactless payment systems could be within mass transit systems where waving a card would make access to public transportation from subways to buses to taxis simpler and more efficient. In addition, smart chip technology and smart cards can potentially revolutionize the most aggravating lines that consumers face that involve transferring data—at post offices, motor vehicle departments, hospital admissions offices, and toll plazas, for instance.

In the end, of course, computer software engineers point out that contactless payment is hardly compulsory and that for the foreseeable future (in computer technology measurement, often a decade or two), the technology will be available alongside older payment methods. But although the technology is still considered hip and trendy, business analysts see the reality that contactless payment technology, ever evolving, will become the dominant commerce method by the middle of the twenty-first century, eliminating the need for carrying cash.

Terms & Concepts

Contactless smart chip: An integrated circuit with a secured internal memory that allows efficient purchases of either goods or services as well as secure access to restricted areas and access to personal records including medical and financial data.

Encryption: A process for encoding access information into an integrated circuit, designed to deny access to that information by unauthorized persons.

Smart card reader: The stationary device, located at the point of sales for goods or services or at entrance points to restricted areas (such as medical facilities, military bases, or government offices) that uses electromagnetic force to receive and, in turn, use information sent by a contactless smart card.

Smart card: A plastic card the size of a credit card embedded with an integrated circuit that stores a significant amount of information and that allows, in turn, for efficient purchases of products or services as well as access to secured areas and access to sensitive records, including personal financial and medical data by engaging a stationary reader.

Radio frequency: Any frequency bandwidth used in electromagnetic fields that measures and tracks communications between points of contact in a wireless environment.

Bibliography

Bartlett, M. (2015). Why Apple Pay 'lifts the mobile payment boat' for all providers. Credit Union Journal, 19(2), 13. Retrieved December 22, 2016, from EBSCO online database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=100698630&site=ehost-live&scope=site

Bodhani, A. (2013). New ways to pay. Engineering & Technology, 8(7), 32–35. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89301045&site=ehost-live

Britt, P. (2006). Every day I stand the queue. Customer Relations Magazine, 10(8). Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21851075&site=ehost-live

Contactless mobile payment users to grow to over 760 million by 2020. (2018). China Telecom, 25(6), 15. Retrieved from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=130585384&site=ehost-live&scope=site

Contactless payment. (2018). Investopedia. Retrieved from https://www.investopedia.com/terms/c/contactless-payment.asp

For contactless payments consistency is key. (2006). Microwave Journal, 49(4), 55–56. Retrieved March 22, 2015 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=20597159&site=ehost-live

Gerstner, L. (2005). A smart way to pay? Kiplinger's Personal Finance, 69(1), 58–60. Retrieved March 22, 2015 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=99418838&site=ehost-live

Heydt-Benjamin T., Bailey, D., Fu K., Juels A., & O'Hare T. (2009). Vulnerabilities in first-generation RFID-enabled credit cards. Economic Perspectives, 33(1), 50–59. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=37019178&site=ehost-live

Liberman, P. (2013). Now is the time to fix the flaws. Engineering & Technology, 8(11), 50. Retrieved March 22, 2015 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=92083148&site=ehost-live

Mitchell, R. C. (2007). Hack this card. Computerworld, 22–28.

Pultarova, T., Hayes, J., & Badhani, A. (2013). Is contactless a soft touch for hackers? Engineering & Technology, 8(11), 48–50. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=92083147&site=ehost-live

Surane, J. (2018). The sound of plastic. Bloomberg Businessweek, (4588), 51. Retrieved from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=132295392&site=ehost-live&scope=site

Yousof, H. (2008). Are contactless cards secure? Money, 49.

Contactless Payment

On this Page

Subject Terms

Contactless Payment

Abstract

Overview

Applications

Viewpoints

Terms & Concepts

Bibliography

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