Have you ever wondered about the technology behind contactless payments? Or are you simply curious about what the future may hold for this payment method? If so, this is the guide for you! We will cover everything you need to know about security, where contactless can be used, its impact on businesses and how to get set up with contactless payments. This guide offers valuable information for merchants and cardholders alike, so read on to find out more.
What are contactless payments?
Contactless payments are, as the name suggests, touchless payments that can be made without the card, or chosen device, actually coming into contact with the card reader. It is not just credit and debit cards that can be used to place contactless payments, but mobile phones, wearables such as smart watches and smart cards are also popular options for today’s consumer. The technology used is close-proximity radio-frequency identification (RFID) which reads the chip embedded in the card when it is held a short distance away from the terminal.
The COVID-19 pandemic has had innumerable impacts on the economy, the way we work, as well as our personal, daily routines. Naturally, as people started to avoid making physical contact with publicly handled objects like Chip and PIN terminals, contactless has seen a massive surge in popularity. Contactless – touch-free – payments accounted for 88.6% of total card payments in 2020 with 83% of the population now using contactless.
With the increased use of contactless payments has come several regulatory responses. In the early stages of the pandemic, the contactless spending limit was raised from £30 to £45 in the United Kingdom. According to the Treasury, the government body that’s responsible for developing and executing the government’s public finance policy, this measure was put in place to protect workers and consumers from potentially spreading the virus by using cash during the outbreak. Fuelling their decision was the fact that people’s shopping habits were shaped by their needs in the context of a national lockdown, which forced everyone to leave their house as little as possible. Increasing the contactless spending limit meant that people could purchase more of the items they needed for a weekly shop and could use touch-free payments, for example.
On the 3rd of March, the Financial Conduct Authority (FCA) announced a further development. A single transaction contactless payment now has an even higher limit of £100, meaning that higher value transactions such as fuel, weekly groceries and other product categories can be more safe, secure and touch-free than ever.
How do contactless payments work?
RFID technology reads the radio signals emitted by the contactless device and enables a payment to be placed. The cardholder simply needs to hover or tap the card near the contactless card reader which will recognise the signal. If the payment is unsuccessful the cardholder will be alerted and either asked to try again or insert their card.
Contactless payment technology - a brief history
2007 was the first time that contactless cards were issued in the UK. Since then, contactless payments have been going from strength to strength, driven by a seemingly unrelenting consumer demand. Research by the UK Card Association showed that between 2013 and 2014 spending grew by 255% with 10 contactless transactions being made every second.
2014 was also the year that Transport for London (TfL) allowed consumers to use contactless across their network, encouraging the millions of travellers who ride the bus, train and underground to make the switch to this form of payment. By April 2018, 17 million journeys each week were paid for on a contactless device. (Mobile Transaction) In 2015, the daily card limit was raised from £20 to £30 in the UK to encourage more people to make the transition.
Before this, countries like the USA and South Korea had already been experimenting with contactless payments in the 90s. With the former introducing Speedpass, a preloaded key fob that allowed consumers to quickly pay for the fuel at gas stations. Seoul, on the other hand, implemented UPass for travellers using their rail and bus services. Despite the earlier adoption of contactless payment methods by these countries, it still took time for it to be incorporated into more areas of every-day life.
Another illuminating statistic from UK Finance revealed that 88% of debit cards and 81% of credit cards had contactless functionality by the end of 2020. They also analysed the different demographics using contactless and uncovered that the payment method is now widely used across different demographics, with no significant differences between age groups.
How to accept contactless payments
Merchants need to have the correct payment terminal to be able to accept contactless payments. This can be identified by the contactless symbol which will appear on the terminal if the method is present. However, if it is not equipped with this functionality, you should contact your POS provider and ask for an updated terminal which accepts contactless.
Is there a daily limit for contactless payments?
The limit you can spend through contactless in a single transaction varies depending on the territory. In the UK, there is no daily limit, but your bank may flag multiple contactless transactions in a short space of time as suspicious and you may be asked to enter your pin. Additionally, there is a £45 restriction per transaction, however, as of the FCA announcement on 3rd March 2021, this has increased to £100 as a further response to the COVID-19 outbreak.
The UK currently has one of the highest per transaction limits in Europe but compared to the rest of the world it is considered fairly low. Research by Merchant Machine shows that Japan has the highest limit at ¥20,000 (approximately five times that of the UK). At the other end of the spectrum, their research showed that Poland had the lowest at £9.52 at the start of 2019. However, since then the Polish government has doubled the limit to £19.04 in response to consumer and trader regulations.
Where can contactless payments be used?
Contactless payments can be made anywhere there is a payment terminal with a contactless card reader. In the UK, there is an extensive list of supermarkets, restaurants and retailers that allow their customers to pay with contactless. In 2020, the supermarket was the most popular place to make contactless payments, accounting for 41% of contactless payments. Shortly, sellers of The Big Issue will be able to accept contactless payments, eliminating the need for customers to have to carry change to buy it. In a few years, it will be even less likely to not be able to pay with contactless options in the UK, especially considering that the vast majority of modern card terminals have the functionality built-in.
Which devices can be used for contactless payments?
Credit and debit cards are the traditional means of conducting contactless payments, but fitness trackers, watches, wristbands and key fobs are all devices that can be used to pay touch-free. The wide range of devices available means that contactless is becoming an increasingly convenient way to pay for goods.
Settlement and clearing cycles
Depending on your payment setup, and if there are two different payment service providers involved, there need to be mechanisms in place for settlement and clearing. Typically, a batch settlement cycle will take place once a day, but this can vary from one provider to another. For merchants, contactless transaction settlement times will be similar to any other type of transaction. However, it will depend on the time scale agreed with your acquirer.
The majority of companies combine the process of settlement and clearing as one, as they happen simultaneously. Your payment service provider will send all card transaction data to the card scheme (e.g. Visa or Mastercard) who then split the file up and send the separate file over the card providers (i.e. high street banks). The banks then remove the money from the consumer accounts and the funds flow back through the chain to the merchant. The time frame for this to happen is agreed upon by the payment service provider and the merchant at the point of contract negotiation.
How long do contactless payments take to process and clear?
The time in which a contactless transaction is settled/cleared depends on the agreement put in place between the acquirer and the merchant. There is a move in the UK for same-day processing, but this is normally charged per settlement or a fixed amount per month. At the moment the industry average is T+3.
How long does it take for contactless payments to show on the customer bank statement?
The time it takes for a contactless payment to show up on a customer’s bank statement varies from bank to bank, but usually takes up to two to four working days. However, they may show up as a pending transaction before-hand. Contactless payments are usually signalled on bank statements with the contactless symbol.
Contactless payments security
UK Finance’s 2021 Fraud Review concludes that contactless payment fraud, across all cards and devices, has risen dramatically, with £1.26 billion in losses during 2020 compared to £19.5 million in 2018. UK Finance points to the pandemic as the cause of these alarming numbers, but also notes that banks refund around 98% of all unauthorised fraud according to the FCA’s PSD2 directive.
And since acts of fraud committed on contactless cards and mobile devices represent a mere 2.9% of total card fraud loss in the UK, it’s safe to say that contactless payments are generally secure and trustworthy.
As with all cards, there is a risk of fraud and it is best practice to remain vigilant, regularly check your bank account for any irregularities and report your card as missing or stolen as soon as the incident happens. However, several years ago post-cancellation fraud was happening on contactless cards. Victims saw transactions appearing on their bank statements several months after their card was cancelled. Fortunately, this issue has been largely rectified with most banks opting to process payments online to lessen the risk of fraudulent transactions slipping under the radar. (If you want to know how to safeguard your revenue and business from payment card fraud, watch our relevant video here).
Pros and cons of contactless payment
Advantages of contactless payments
The biggest draw for many customers is the ease and simplicity of only having to tap a card reader to place a transaction. In turn, this reduces queues and improves the overall customer experience. Additionally, as discussed above contactless payments are secure and have comparatively low fraud rates. From a merchant standpoint, accepting contactless payments allows them to diversify their audience and attract those who are looking for a frictionless payment experience.
Disadvantages of contactless payments
Although these fears are largely unfounded, some consumers (mainly the older generation) are still concerned about fraud and security. Worries about new and unfamiliar technology still lurk in the minds of many and merchants may need to reassure their customers about the low-security risk. Others may find the per transaction limit frustrating if they are consistently placing payments over £30.
What should you do when contactless isn’t working?
The first time a consumer makes a payment on a new contactless card, they will be prompted to enter the PIN as a security measure. If the contactless functionality is not working for any transaction after this, they should get in touch with the card issuer as soon as possible.
A ‘card clash’ can take place when two contactless cards are in close proximity to each other and the terminal is unsure which signal it should be reading. It is advisable to keep any contactless cards separate from each other to avoid this happening.
The future of contactless payments
The growth of contactless payments currently shows no sign of slowing down. UK Finance predicts that by 2028 37% of UK payments will be contactless. It is likely that there will be a move towards providing even more secure payment methods and creating innovative new ways of incorporating contactless into devices and even the human body.
In March 2019, NatWest and RBS launched the first biometric card with fingerprint recognition during a three-month trial. Essentially, the cardholder could authorise any payment using just their fingerprint, waving good-bye to PIN and the £30 limit for contactless transactions in the UK. Both major card schemes (Visa and Mastercard) have rolled out pilot biometric cards across various territories, including the UK and France. Merchants who have updated POS card readers will be able to accept biometric-enabled cards, just like any other contactless card.
Biometric technology is not fraudproof, though. Biometric software can be tricked by fingerprint moulds made from plastic, glue or gummy bears. And, unlike passwords and PINs, you cannot change your fingerprint if it is replicated by fraudsters. Another challenge for the biometric card would be its cost, which is significantly higher compared to the conventional EMV card. Considerations aside, businesses need to keep up with consumer demand and market trends if they don’t want to miss out on sales and everchanging spending habits.
Amazon is currently trialling technology that aims to let consumers pay by simply waving their hand at a scanner. A scan is taken of their hands which is then linked to their card and in theory, would be able to check out by passing their hand over the scanner.
The latest payments directive in the EU, PSD2, is also likely to signal some changes for contactless payments, with additional security checks meaning that customers could have to enter their PIN after making five transactions or if they reach a set cumulative total of €150 (roughly £135).
No one can truly predict the future of contactless as the world of payments moves so quickly and constant innovations drive industry change. However, it seems likely that contactless is sticking around for a while longer as consumers become increasingly reliant on the convenience it offers. Payment technologies are forecast to continually develop, further optimising the customer experience.
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