What Is Contactless Payment?

Contactless payment is a secure method for consumers to purchase products or services using a debit, credit, or smartcard—also known as a chip card—by using RFID technology or near-field communication (NFC).

To make a contactless payment, tap your card near a point-of-sale terminal that is equipped with the contactless payment technology. Since contactless payments do not require a signature or a personal identification number (PIN), transaction sizes on cards are limited. The allowable amount for a contactless transaction varies by country and by the bank. 

Contactless payment is also referred to as tap-and-go by some banks and retailers. Examples of non-credit or debit card contactless payments include transit cards, Apple Pay, Android Pay, and Google Wallet.

Understanding Contactless Payment

Contactless payment is a popular way to make purchases at participating retailers. It 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.

Some merchants and retailers may set a low limit for their tap system in order to prevent fraud, while others still allow for large transactions. Depending on the merchant and type of transaction, larger dollar amounts may require a signature.

Most banks offer contactless payment cards and terminals that are fully equipped for the system. These cards come with a symbol indicating they are ready for tap payment. Although smaller shops may not offer tap capabilities, many national chains have moved to tap capable payment terminals.

The main advantage of contactless payment is that it speeds up transactions by eliminating the need for a customer to enter a PIN. Tap customers speed up the line so that both the merchant and customer save time when contactless payment is used. Another benefit of contactless payment cards—at least for banks and credit card issuers—is that consumers who tap tend to use their cards more frequently.  



How It Works

When you make a purchase, look for the contactless payment symbol on the merchant's payment terminal. This symbol is similar to the wifi logo but turned onto its side. When the system makes the prompt, the customer can then bring the card between one to two inches from the contactless symbol on the terminal. 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.

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.

Key Takeaways

  • Contactless payment is a secure payment method using a debit, credit, or another smartcard by using RFID technology or 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 their PIN.
  • Popular in Australia, Canada, South Korea, and the United Kingdom, contactless payment has to make traction with consumers in the U.S.

History of Contactless Payment

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.

Mobil offered one of the first contactless payment systems called Speedpass in 1997. Customers were able to pay for gas using a special fob loaded with cash at participating gas stations.

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. In 2014, the agency started offering commuters the option to use contactless debit and credit cards to use on the transit system.

Google and Android introduced pay systems compatible with their devices using NFC in 2011. Apple jumped on board with Apple Pay—its own version of the digital wallet—in 2014.

If you use a device as a digital wallet, treat it 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.

Contactless Payment in the U.S.

Contactless payment systems have been remarkably slow to permeate the U.S. market, despite being popular in other parts of the world. 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. South Korea had the highest rate of contactless cards in force, at almost 96% in 2016. The U.S., on the other hand, had less than 3.5% of contactless cards in force that same year.

Americans are still making more cash transactions than anything else, according to the report. This amounts to almost 50 billion cash transactions each year, or 26% of all consumer payment transactions. One of the main reasons behind the popularity of cash and the lag in contactless payment adoption is that the U.S. is a much larger consumer market than other countries. There are just too many retailers and banks, which makes the market much more fragmented. Consumers have also been slow to jump on the contactless system because of security concerns. Many still worry that their card information can be compromised by cybercriminals.

A.T. Kearney suggests U.S. banks stand to profit if they adopt contactless payment systems, with the potential to earn about $2.4 billion between 2018 and 2023. In order for that to happen, merchants need to have the infrastructure in place, consumers need to consider tap payments as a viable method of payment, and card companies need to actively market contactless payment systems to merchants and the public.

Problems With Contactless Payment

Even with the convenience of contactless payment, many consumers are worried about the security of their cards. There have been stories in the media about criminals skimming card data using smartphones to read tap cards in consumers' wallets. The range at which a card can be read is very short and, even if the criminal is close enough to grab data and do a transaction, he cannot create a copy of the card. This is not true of magnetic strip cards. That said, the chip and pin card are still the most secure, as they can't be duplicated and they require data (your pin) that is not contained anywhere on the card.

If a skimmer gets your card data, his next step is to find a website that doesn't require the three-digit code printed on the back of the card and run transactions under the credit limit. If a criminal steals your physical card, he'll likely head to the nearest store to buy gift cards with small balances using a tap. While annoying, you can dispute the transactions and get a new card issued. There are also protective card sleeves and wallets that block readers from getting to your card data in the first place. 

If you do detect fraud on your card from a contactless payment system, there is recourse. 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.

Popular Mobile Tap Systems

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.

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.

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 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.