CATEGORY - PAYMENTS

What is Contactless Payment? How does it work?

Payments - 25 Mar, 2024

Table of Contents

Contactless payment is a tool that enables a customer to purchase goods and services using debit or credit cards powered by RFID technology. Contactless payment is prevalent in business circles, facilitating face-to-face transactions by easing payment without physical contact. Continue reading to learn more about contactless payment and how it works.

Transactions are becoming more and more convenient, easy, and fast. This is explicitly seen around the globe with the rise in technologies that impact the mode of payment of just about anything, one of which includes contactless payment.

What Is a Contactless Payment?

Contactless payment eliminates the necessity of cash or card swiping. Instead, customers simply tap or wave their card over a reader, transmitting card data. Subsequently, the terminal accesses the bank account and processes the payment instantaneously.

How Does Contactless Payment Work?

Experience the speed and convenience of contactless payments for your daily purchases. But how is this magic done? What kind of technology does it use?

The Power of Proximity: NFC vs. RFID

The two primary technologies that enable contactless payments are Near Field Communication (NFC) and Radio Frequency Identification (RFID). Both use radio waves to transfer data wirelessly, but with one distinguished difference:

NFC: this is the prevalent technology used for contactless payments. It enables secure authentication by allowing two-way communication between the card and the terminal.
RFID: RFID is more accessible to use and involves one-way communication. Though utilized in specific payment systems, it is less safe for financial transactions.

Tokenization Security:

Tokenization is the act of adding a level of security. In order to increase security even more, contactless payments use a technique known as tokenization. Here’s the summary:

During the transaction, your current credit card information is not being transmitted.
A distinct digital token is generated exclusively for the transaction.
This token is transmitted to the terminal for approval, ensuring the safety of your actual card details.

Authentication: Confirming who you are

Contactless payments still need verification even if a PIN is not used. There are a few ways in which this can occur.

Static password: Certain cards come with a pre-set transaction cap, enabling contactless payments without extra validation.
Dynamic password: Secure cards create a distinct password for every transaction, making it challenging for scammers to intercept.

How quickly contactless payment happens:

You place your card (or connected device) close to the contactless symbol on the terminal.
The card uses NFC to send the token and other important information to the terminal.
The terminal transmits the data to your bank for approval.
Your bank will send a confirmation to the terminal once it is approved.
You will be alerted with a sound or light signal showing that the transaction was successful.

Accepting mobile wallets

The ease of use extends beyond just cards. Phonepe, Paytm, Amazon Pay, and Google Pay mobile wallets enable you to securely save your card details and make contactless payments with your smartphone or smartwatch. This completely removes the requirement to bring physical cards.

Contactless Transaction Limits

Contactless transactions frequently come with a spending limit in order to prevent potential fraud. This restriction differs depending on the country, financial institution, and sometimes the seller. Although a signature may be necessary for more significant purchases, the convenience of contactless payments shines through in the quick and hassle-free process of smaller transactions.

The next time you use your card or phone for payment, think about the hidden technology working to ensure quick and safe payment operations.

Advantages of Contactless Payments

Contactless payments are changing the way we pay for things and making payment gateway transactions quicker and more convenient. Here’s a closer look at some of them:

Faster Checkouts: No more fumbling with cash or swiping cards. Contactless payments take just a simple tap or wave, significantly reducing the time spent at checkout. This feature is incredibly convenient for small purchases and should help do away with checkout lines.
Increased Public Service Efficiency: Commutes and errands are made much easier with contactless payments. Even public transport and parking fees or tolls are payable with one tap, reducing waiting and queues.
Frictionless Checkout Innovation: The rise of contactless payments has spurred an innovative frictionless checkout, with location-based services personalizing promotions and loyalty rewards businesses can provide consumers.
Advantages for Businesses: Happier customers result from quicker transactions, while decreased cash handling decreases security risks for businesses as well. It benefits both parties!

Disadvantages of Contactless Payments

Security Concerns: Lost or stolen contactless-enabled cards can be used for small purchases without a PIN.
Privacy Issues: Transactions may not require a signature or PIN, leaving less of a trace for budgeting or purchase verification.
Compatibility Challenges: Not all terminals or devices may be equipped for contactless payments, limiting usability.
Accidental Payments: Brushing against a terminal with an enabled card could lead to unintended purchases.

History of Contactless Payments

A Timeline of Tapping and Paying

1990s: Smart card technology emerges, laying the groundwork for contactless payments. Early adopters include prepaid transit cards.
2000s: NFC chips gain traction, enabling contactless payments in phones and credit cards.
2005: London’s Oyster card emerges, laying the groundwork for widespread adoption of contactless transit systems.
2010s: The rise of mobile wallets like Phonepe, Paytm and Google Pay transforms payment dynamics, ensuring convenience and security in everyday transactions.
Today, Contactless payments reign supreme, delivering speed, cleanliness, and safety, revolutionizing the financial landscape.

Conclusion

The ease and speed of contactless payment have majorly driven its surge in adoption. Customers like how they can do the transaction quickly—swift completion without physical contact, and in some cases, without even entering their PINs—reducing time wastage while carrying fewer amounts of cash. It thus provides a secure and effective way of handling payments.

FAQ's

What types of cards or devices support contactless payment?

Many contactless cards and devices are available for quick and easy transactions. Look for the contactless symbol (four wavy lines) on your credit card, debit card, or smartphone with a mobile wallet.

Where can I use contactless payment?

You can use contactless payment at most places that accept credit cards, offering a convenient alternative to swiping or inserting your card. Look for the contactless symbol at checkout terminals in stores, restaurants, and even for public transportation fares.

What is the transaction limit for contactless payments?

The transaction limit for contactless payments in India varies depending on the merchant and your card issuer. In India, RBI has enhanced limits for contactless card payments ₹2000 - 5000, but some cards may allow higher limits for larger purchases. Be sure to check with your bank for specific details.

Are there any fees associated with contactless payments?

Contactless payments are generally accessible to you. However, some merchants may have fees for accepting contactless payments similar to those for regular credit card transactions.

Is contactless payment secure?

Yes, contactless payment is secure. Transactions use unique tokens that change with each purchase, adding an extra layer of security. This makes it difficult for fraudsters to steal your information, even if they manage to skim your card.