Exploring the inevitability of contactless payments

Published December 22, 2020

When you buy your bodega coffee with just a tap, that contactless payment not only offers instant gratification—it also offers an opportunity to use what has become, in a world where COVID-19 germs could lie on any surface, potentially life-saving technology.

As contactless alternatives to payments and deliveries swept the economy at the start of 2020, pundits and publications quickly turned their eyes to how our new reality changed the way today’s consumers prefer to pay. Pre-COVID, contactless technology was on the rise for more than two decades. Now, in a fast-growing market, touch-free payment solutions are the star of the COVID-19 show as the contactless case study nobody asked for.

Contactless payments existed long before COVID—and there’s plenty of growth left

 The pandemic didn’t create the pivot to contactless options—it accelerated it.

Contactless payment technology was created in the 1990s—but no other use cases have been quite as effective as a global pandemic to speed up the adoption and availability of the no-touch technology. But the payments industry has been sharpening contactless payment options for decades.

Brief history: contactless payment technology

Contactless payment—also known as tap-to-pay—made its 1995 debut in Seoul, South Korea, when it was the world’s first contactless payment system to be used for transit. And in 1997, Mobil gas stations introduced contactless payment at the pump via a cash-loaded fob called “Speedpass.”

Even the first iterations of contactless used the same technology that’s used today: Near-Field Communication, or NFC, to communicate with a payment terminal. NFC, which came onto the scene in 2002, is a version of radio-frequency identification (RFID). RFID technology was invented in the early 1980s and has been used for decades to scan groceries, manage stock in retail stores and even used to electronically pay roadway tolls.

Types of contactless payments

For a transaction to be made using NFC technology, both the payment form and the point of sale (POS) have to be NFC-enabled. In the years since its conception, NFC-enabled contactless payments have taken shape in two main forms: contactless payment cards and mobile wallets.

Contactless payment cards are credit or debit cards that are equipped with RFID/NFC technology. Rather than swiping or inserting a card for payment, the card is held near a tap-to-pay POS. According to Credit Karma, “Every time you make a purchase, a one-time security code is sent between the card in your hand and the payment terminal,” making the transaction speedy and safe. Considering magnetic stripes were invented in the 1970s, today’s tap-to-pay technology is the newer, safer addition in card technology.

A mobile wallet is a smartphone-enabled contactless technology that stores payment information. The concept is the same as contactless payment cards—simply hold or wave your phone over a tap-to-pay POS to make a secure transaction. Apple Pay, Google Pay (formerly Android Pay) and Samsung Pay are all NFC-enabled.

The pandemic set the stage for contactless payments to soar

Payment industry innovators have been working toward digital-first payment alternatives for more than two decades now, and COVID-19 merely created a perfect storm for contactless solutions to thrive.

COVID-19 created the conditions for a larger audience to see the value in the options that were already at hand for many—like contactless cards and mobile wallets. A study by The Strawhecker Group and the Electronic Transactions Association showed that 27 percent of small business survey respondents have seen an increase in mobile wallet and contactless card payments since the start of the pandemic.

COVID-19 also created the conditions for exponential growth in the contactless market. “The global contactless payment market size is expected to grow from USD 10.3 billion in 2020 to USD 18 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 11.7 percent during the forecast period,” according to recent research. Plus, over a million smartphone users worldwide used mobile payments in 2020 compared to just 830,000 in 2018. That number is forecasted to increase to 1.31 million by 2023.

Contactless is adopted across the world. In an interview with Hewlett Packard Enterprise (HPE), Omer Cheema, director of strategy at Samsung, said, "More than 50 percent of the transactions in Europe are being done contactlessly." And in Germany, more than half of purchases are taking place contactlessly, compared to 35 percent pre-COVID. No other country can compete with China, though—81 percent of smartphone users use mobile payments, according to eMarketer.

Previous to the pandemic, once a consumer passed a certain spend limit on a contactless payment, they’d have to tap in their pin number. But because of the amount of germs that are transferred via touch, according to Hewlett Packard Enterprise, “48 countries have increased spending limits on contactless payments.  For example, the U.K.'s spending limit went from £30 (US$36.60) to £45 (US$54.90), while Canada's leapt from CAD$100 (US$71.50) to CAD$250 (US$179.20).”

In 3-5 years, “contactless?” will be the new “cash or card?”

Contactless payment solutions are set to surpass cash and card purchases within 3–5 years thanks to smarter (and safer) technology, expanded solutions across sectors and increased contactless spending limits across the world.

Contactless options enable a better customer experience across a range of industries and use cases. For example, contactless banking allows for a better customer experience. According to Business Insider, “on average, contactless ATMs can decrease transaction times from 45 seconds to 10 seconds, allowing banks, especially those with busy branches, to serve more customers.”

Mobile POS is another example of readily available merchant-side technology that allows retailers to accept card payments using any device—including mobile wallets. According to Juniper Research via Reuters, “Juniper Research has forecast global mobile point-of-sale revenues to rise to nearly $50 billion in 2021, from over $6.6 billion this year, with such devices expected to account for 1 in 3 point-of-sale terminals by then.”

Contactless is a long-term solution

Consumer experiences aren’t just contactless as a result of the pandemic. Contactless is a long-term solution to an ever-evolving market. 

Contactless = consumer comfort, especially in the hospitality industry. Plus, contactless payments offer heightened security and less risk of fraud. Because mobile proximity readers only read at less than 10 centimeters away, you can’t accidentally share your payment information with the next kiosk over.

With all of this in mind, businesses should be careful not to rule other payment options out. According to the HPE article, “As only seven out of 10 Americans have a credit card and 6.5 percent (8.4 million) of U.S. households have no bank account at all, contactless payment is great only for those who can afford it.” Merchants that combine the latest digital technologies with customer-first experiences will see the biggest benefit in today’s growing contactless world.

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