What is Contactless Payment? How it Works (2024)

As of early 2022, contactless payments accounted for 20% of in-person credit and debit card payments in the United States. 

In other countries, the figure is even higher. In the UK, Barclays reports contactless users made an average of 220 “touch and go” transactions per person in 2022. Even more, a record 91.2% of all eligible transactions were made with contactless technology. 

This has inspired many retailers—from conglomerates to small businesses—to accept such payments at their points of sale. 

Curious about contactless payments? Ahead, you’ll learn the basics of contactless payments and how to accept them in your store. 

What is contactless payment?

A contactless payment is one that doesn’t require a customer to run a payment card through a machine. That method applies to cards with magnetic stripes or chip cards that one inserts into a payment terminal. 

Contactless payments simply require a customer to hover a card or a device next to the payment terminal. In some cases, a brief tap makes the transaction simpler, which has led to the expression “tap to pay.”

You can make contactless transactions with an RFID chip in a credit or debit card, or a wireless radio in a smartphone or smartwatch. In both cases, the purchaser makes a tap to pay transaction.

A brief history of contactless payment technology 

For decades, when a shopper wished to make a retail purchase via credit card, that meant swiping the magnetic strip on the back of the card. 

While the magnetic strip was a futuristic innovation in its time (it replaced carbon copy imprints of the card’s front panel), no one today regards it as cutting-edge payment technology. The magnetic strips are connected to the customer’s bank account. So if scammers get ahold of the card, they could easily drain funds from customers. 

Today’s merchants and customers have directed their focus toward more secure payment options—those that don’t even involve contact between the customer’s payment method and the merchant’s terminal. Contactless payment methods rank among the most consumer-friendly options in today’s retail scene, thanks to their convenience and security. 

What is a contactless card? 

Near-field communication (NFC) or RFID contactless cards enable secure and quick transactions, without requiring physical contact between the card and the terminal. Paying with contactless credit cards is as easy as tapping or waving your card close to the terminal.

These bank cards have a contactless symbol to indicate to the cardholder it can be used with contactless readers. 

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Why are contactless payments secure? 

Contactless payments are considered secure for several reasons:

• Encryption: Contactless payments transmit encrypted data, which means that only authorized parties can access the information. Transactions use unique codes that reduce fraud risk and make data difficult to intercept or reuse.
• Tokenization: Payments using contactless technology often use tokenization, which replaces sensitive cardholder data with random tokens. Unlike a card number, this token is used only once, so intercepting it will be useless.
• Transaction limits: Contactless payments usually have a transaction limit to avoid unauthorized transactions. Typically, users must enter their PIN or sign for transactions over a certain threshold, depending on the country and issuing bank.
• No physical contact: The card doesn’t have to be handed over or inserted into a terminal, so skimming (copying card data using a compromised device) is less likely.
• Two-factor authentication: Many contactless payment methods require fingerprints or facial recognition.
• Zero-liability policies: Many banks and card issuers offer zero-liability policies, which protect cardholders from unauthorized transactions. Cardholders are usually not liable for fraudulent transactions.

How does contactless payments work?

Contactless payments transmit via cards and mobile devices, but they ultimately run through financial institutions, just like an old-fashioned credit or debit card payment. The exact mechanics vary, depending on whether you make a card payment, mobile wallet, or wearable.

Here’s how it typically works:

• The customer presents the contactless credit card. The customer holds the card over a point-of-sale terminal that accepts contactless payments. Only newer card readers offer this function.
• The wireless chip transmits card information. When the customer hovers their card close to the terminal or, more commonly, taps the card onto the terminal, the radio frequency identification (RFID) chip transmits all of the card information, just like a magnetic stripe would.
• The payment terminal contacts a bank. Now the payment terminal sends a payment request to the financial institution backing the card. This is typically a bank or a credit union. Just as with a normal credit card, the merchant will request the transfer of funds from the card issuer.
• The card issuer transmits an approval or a denial. If the purchase amount aligns with the purchaser’s bank balance or credit limit, the financial institution will allow the sale to go through. The payment terminal beeps to signal a successful transaction. Or, if the purchaser lacks the funds or credit to make the purchase, the bank will deny the transaction.

Types of contactless payment 

Contactless payment cards

Most tap-to-pay transactions involve contactless debit or credit cards. They’ve got an embedded chip that transmits all of your card info to a payment terminal. 

A new credit card issued by your bank within the past year is likely to contain such a chip. Visa, Mastercard, and American Express all issue chip cards.

Mobile wallet payments

A mobile wallet payment occurs through the use of a mobile device like an iPhone or Android phone. It can also occur via a wearable device like an Apple Watch. 

These devices must run a payment app that enables mobile wallet purchases. Such apps include Apple Pay, Google Pay, and Samsung Pay. 

Wearables 

Wearables are devices worn on your body with NFC technology. With an Apple Watch, for example, you can pay at a contactless reader with the information stored in your Apple Pay mobile wallet.

When making a purchase, you simply double-click the side button on the Apple Watch, select the desired card, and hold the watch near the terminal. The transaction is authenticated and completed without needing to take out a physical card or mobile phone.

Advantages and disadvantages of contactless payment

Contactless payments provide clear benefits to both merchants and consumers. Advantages include:

• Security. Contactless payment systems offer greater security than cards that utilize a magnetic stripe. For decades, scammers besieged the credit card industry by skimming consumer information off of magnetic stripes. EMV chip cards and mobile wallets use encrypted systems to transmit customer data, and this has successfully repelled most scammers.
• Convenience. Consumers don’t need to carry around a credit card to make contactless transactions. They can leave the house with only a smartphone, or even a wearable device like an Apple Watch, and get full use of their mobile wallet. Even when consumers do use a physical card, they enjoy the convenience of merely tapping a payment terminal or hovering their card just above it. This makes transactions even smoother than they’d be when scanning a magnetic stripe or inserting a chip card.

For all of their advantages, contactless payments do come with one primary limitation: a lack of universal adoption by merchants. 

While contactless-enabled terminals have become commonplace at major retailers, they appear more rarely at small businesses running on a tight budget. Thus, customers still need to carry cash or a traditional credit or debit card to ensure they can make transactions in every store.