Credit Cards

How Do Contactless Credit Cards and Payments Work?

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Credit card payment methods have evolved dramatically over the years, from manual credit card imprinters to magnetic strip cards to cards with a computer chip that are inserted in a reader device.

Get ready for another evolution.

Contactless credit card payments – now possible with many newer credit cards and at an increasing number of merchants – are about to hit it big in the U.S. in 2019 and 2020. This allows for tap-and-go payments with the same strong security assurances as chip cards. It’s a bit of a technological catch-up for physical credit cards, as many U.S. consumers already use credit cards wirelessly through mobile payment platforms on smart phones or watches.

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What Are Contactless Credit Card Payments?
Contactless credit cards are powered with technology known as near-field communication to allow the card to communicate with a contactless-enabled checkout terminal for payment.

To determine whether your card is enabled for contactless payments, look for a graphic with four curved vertical bars on the front of your card that looks similar to a Wi-Fi symbol. If the merchant has a card reader terminal that’s activated for contactless payment, your card can connect with it.

The communication between the high-frequency radio waves generated by the terminal and the chip in the card allows the consumer to tap the card on the terminal and go, as long as the card is within a couple inches of the reader, says David Tushie, CEO of Magellan Consulting, which provides advisory services in the global payment and secure ID card industry.

“We’re just starting the rapid growth rate” in contactless cards, Tushie says. “Expect over the next three years’ time frame, we’ll start to see the majority of cards in the U.S. issued with dual interface.” Dual interface cards can be inserted into an EMV chip reader terminal or used for contactless payments.

Contactless Credit Card Payment Security
Transactions with contactless-capable credit cards that have EMV technology are just as secure as if you put the credit card into the card reader at the point of sale. EMV chip cards, which became widespread only a few years ago in the U.S., have dramatically cut down on the amount of counterfeit credit card fraud.

“The security is the same as a contact chip card – it uses the same chip in the card, same authentication and encryption protocols that the chip card does,” Tushie says.

Since the communication between the card and terminal is wireless, some might worry about potential interception of the signal between them. But contactless transactions require that the card is placed within about two inches of the reader, so Tushie says it would be noticeable if someone put an illegal device very close to both the card and terminal during a transaction. Additionally, the information that’s shared between the card and reader is not useful for making counterfeit cards or fraudulent online purchases. Specifically, the transaction is completed with a dynamic one-time code – information that’s not of any use outside of that one transaction.

Jack Jania, vice president of product management and innovation at CPI Card Group, a payment card production firm, says, the data from the card “is unique to the transaction, cannot be replayed and is unique to that particular card. So value of that data is particularly low.”

In contrast, older contactless technology relied on a credit card’s magnetic strip. This method provided the same data for every transaction, making that information usable for other purchases and much more attractive to counterfeiters.

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The Advantage of Contactless Card Payments
A quicker purchasing experience is one of the top reasons consumers and merchants prefer contactless card payments over typical EMV card reader transactions. You can tap your card at the terminal for one to two seconds, instead of waiting for the card reader to beep its approval.

One of the primary reasons merchants such as Starbucks and Dunkin’ have turned on the contactless payment capability is to move the line faster, says Linda Kirkpatrick, executive vice president, U.S. Merchants and Acceptance for Mastercard.

“In addition to being very safe, the consumer experience is outstanding,” Kirkpatrick says. The businesses “don’t want anyone waiting a second for coffee or a meal. To be able to take out a card, tap a terminal and move on is incredibly streamlined. They’ve got that everyday use case where speed matters.”

If a store or restaurant doesn’t have contactless capability, the dual interface cards can still be inserted into a card reader or swiped with the magnetic strip.

Jania says, “They’re designed that way to be able to fall back and give merchants the most options when it’s time to conduct a transaction.”

Contactless Payment Use Worldwide
The use of contactless cards is much more popular around the world than in the U.S. More than 40% of in-store transactions globally with a Visa card occur with a tap. Also, according to Visa research:

About 70% of transactions $50 or lower in Canada are paid by tap.
Close to 100% of all payment terminals in Poland allow tap to pay.
More than 80% of terminals are tap to pay in Costa Rica.
Early types of contactless payment methods in the U.S. included the Mobil Speedpass developed in 1997 and FreedomPay, which was used by merchants such as McDonald’s. But the early contactless credit cards developed by issuers such as Chase were based on magnetic strip technology and didn’t catch on.

“Other countries went to EMV chip technology well in advance of the U.S., and they had a refurbishment of their terminals to accept the chip technology, which came with capacity for contactless,” Kirkpatrick says.

It’s likely the number of contactless cards in use will explode, Kirkpatrick says. The U.S. is catching up to the rest of the world with its use of EMV chip cards, and card reader terminals are much more common. About 60% of Mastercard transactions are at contactless-capable terminals.

Mastercard has commitments from issuers representing two-thirds of its volume to issue cards with contactless capability by the end of 2020, Kirkpatrick says. Also, Visa expects to issue 100 million contactless cards in the U.S. by the end of 2019.

“Consumers are going to have these products in their wallet by end of 2020, and it’s happening now. It will ramp up by the end of next year in a more ubiquitous way,” Kirkpatrick says.

Where You Can Use Contactless Payments Now
Currently, the most popular places for wireless payments are coffee shops, fast food restaurants and stores where you’re likely to make a quick purchase that’s less than about $30. In fact, according to Mastercard, about 80% of all contactless transactions are less than that amount.

Growth in contactless payments will come through other retailers when they obtain new EMV card readers, almost all of which are contactless-enabled. Already, 78 of the top 100 Visa merchants by transactions in the U.S. are able to offer contactless checkout.

Contactless credit card payments for transit systems – in which contactless credit payments replace cards issued by the transit authorities – will also help expand use.

For example, according to Mastercard, tap-and-go payments are available in New York City’s bus and subway system, and Boston will introduce a new fare payment system that includes contactless in the next two years.

“Based on what we’ve seen in other markets, transit is the tipping point because it’s just so habitual and becomes more of your day to day,” Kirkpatrick says.

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Contactless Cards vs. Mobile Payments
Contactless credit cards and mobile wallets use the same near-field communication technology to interact with the EMV point-of-sale terminal. Both are quick and secure.

Devices such as mobile phones, wearables or laptops can use a mobile payment application such as Apple Pay, Samsung Pay or Google Pay. Mobile payments often use tokenization, which is a way to protect private information, such as your credit card number. They typically require additional user authorization, such as a fingerprint ID or password.

The extra security step and limited ability to use tokens beyond a particular transaction make mobile payments more secure than other types of payment methods.

There is a tremendous amount of overlap between credit card companies, mobile phone providers and retailers. For example, a credit card could be used on its own with a contactless terminal, in a payment portal set up by Visa or Mastercard, or in a mobile device provider’s digital wallet.

It will be up to the consumer to figure out which methods survive and thrive in the years to come.

“For us, it’s all about choice,” Kirkpatrick says. “The consumer ultimately decides what they want to do. Their actions and behavior will drive the rest of the market to a particular way of paying.”