A decade ago, it was still customary to swipe your credit card to make a purchase. Within a few years, card providers added chips to our cards, and a few years later we shifted again toward wireless payment technology that’s making inserting cards obsolete. What are the benefits of contactless payments, and what technology makes them possible?
What you need to know
- Radio Frequency Identification (RFID) allows for wireless communication between a reader device and a device emitting a certain radio frequency. Near-field communication (NFC) is a specific type of RFID used for close communication.
- While the U.S. was slower to adopt contactless payments, the 2020s have seen an increase in familiarity, user experience, and daily usage.
- Contactless payments are faster than any other in-person card payment method, and present a lower risk of data theft compared to swiping or inserting.
History of contactless payment technology
In World War II, different countries experimented with technology that differentiated between allied and enemy planes by the frequency of their radio waves. This technology was further developed in the 1970s, and the first patent for true Radio Frequency Identification (RFID) technology—wireless communication between a reader device and a tagged device—was issued in 1983. A specific type of short-distance RFID called near-field communication (NFC) was later developed and standardized—NFC reads 13.56 megahertz radio waves, allowing for communication between devices that are within 1.6 inches.
In the United States, adoption of these technologies for payments was slow, but the spread of digital wallets and EMV chips in debit and credit cards in the 2010s prepared businesses to quickly adopt contactless payments during the COVID-19 pandemic.
How contactless payments work
Your chipped credit or debit card or your activated mobile wallet constantly emit a short-range radio wave. Modern payment terminals are equipped with a coil that passively waits for that particular type of signal to come within 1.6 inches. (“Tap-to-pay” is a bit of a misnomer, since you don’t actually need to tap the card reader, but the distance is short enough that tapping is often necessary.)
When the terminal detects a card within range, it requests the card’s information, and a card transaction is conducted as normal.
Why use contactless payments?
Contactless payments are the fastest and most secure in-person payment method yet. For them to work, you have to have both your physical card or digital wallet device and the payment terminal present. Your card or digital wallet is encrypted, and no physical contact is required between your card and the payment terminal, making it more difficult for card readers or malware-infected terminals to access your information. In addition, processing a contactless payment is much faster than inserting your EMV chip into a card reader.
Adoption rates and market trends
While U.S. adoption of contactless payments lagged behind other western European nations, a fast transition occurred during the COVID-19 pandemic. A study sponsored by the NFC Forum reported that 85% of customers in nine countries used NFC technology daily in 2022, while cash transactions continue to decline. The same study found that user experience of these technologies was rated very highly, and that 95% of customers consider themselves at least “somewhat familiar” with the technology.
Peer adoption—both between business owners and among customers—continues to drive the economy toward contactless transactions.
Challenges and concerns
Merchants looking to add contactless payment gateways must deal with regulations and industry standards related to digital payments, mostly aiming to prevent financial fraud. Choose a reputable payment processor or merchant account to avoid legal issues.
As with all digital payment methods, customers will still need different payment options in case a payment terminal or payments network is out of order. Most payment terminals still allow for inserting or swiping cards, but customers using their digital wallet won’t be able to make a purchase using the terminal.
Biometrics and facial recognition are already used to unlock mobile devices and bank accounts. It’s difficult to replicate fingerprints or facial features, so there’s a possibility that banking may incorporate these identifiers in the future, though this would require payment terminals to be equipped with fingerprint scanners, cameras, voice identifiers, etc., which raises privacy concerns.
How your business can prepare for increased contactless payment use
The first step for your business to embrace this technology is to add contactless card readers to your in-person point-of-sale (POS) locations. Prepare your staff to explain how customers can use it. Customers who still have reservations about contactless payments can still insert or swipe their cards.
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