Contactless And Card Payments Are Redefining The Future Of Digital Transactions

The global pandemic in 2020 has not only transformed how we travel, work, eat and socialize, it has also changed how we pay for things. Before the pandemic, contactless payment systems in the United States were an intriguing innovation for early adopters. Now it is considered the preferred way to pay — the technology has gone more mainstream, and the Centers for Disease Control and Prevention (CDC) recommends using touchless payments whenever possible.

Given the current situation, I expect fintech companies will only continue to invest resources in developing new contactless solutions that protect consumers and ensure business continuity.

Here are some predictions for the future of contactless payments.

1. Contactless payments will supersede cash and traditional credit cards.

We’ve all heard the studies about how dirty money is, how it is teeming with bacteria and drug contamination. But before the pandemic, it was likely only germaphobes who worried about this. Now we are all concerned about who touched that $20 bill last.

A good indicator of how popular touchless payment technology has become is that 48 countries have increased the spending limits on contactless transactions. Spending limits require consumers to enter a pin if they spend more than the limit, which is usually less than $50. The average contactless limit increased after Covid-19 was 131%. Similar increases are expected in the U.S., which currently has a limit of $100. Even countries that preferred cash payments, such as Germany, have become enthusiastic adopters. Before the pandemic, Germany had hit a plateau of 35% of transactions being contactless. Now more than half of overall purchases are touchless.

These changes in attitude will likely cause contactless payments to overtake cash and traditional credit cards within the next five to ten years.

2. Point-of-sale payments and financing will lead the charge.

Point-of-sale (POS) terminals are devices where customers process payments at retail stores. In many cases, they are not entirely contactless because you have to insert or swipe your card and tap the screen a couple of times to process a payment. This will likely change as POS hardware adapts to changes in demand.

A recent study reports that 27% of small business survey respondents have seen an increase in customers using their mobile phones or contactless cards to pay. It is not cheap for retailers to make these investments, but contactless systems can help retailers reduce transaction time, increase revenue and shorten counter queues. To illustrate this, the Metropolitan Transit Authority (MTA) in New York has already installed contactless payment systems in every station in the Bronx. The plan is to have them fitted in every MTA station and bus by the end of the year.

The global contactless payments market size is expected to go from $10.3 billion in 2020 to $18 billion in the next five years, which corresponds to an 11.7% compound annual growth rate (CAGR), according to a March 2020 report.

Financing platforms are also bound to change. Digital point-of-sale financing platforms allow retailers to get pre-approved offers from multiple lenders without requiring paperwork or even signing on a touchscreen. These platforms, which help increase sales, will likely become the industry’s standard.

3. Mobile wallets will replace physical wallets.

The adoption of proximity mobile payments has been sluggish in the United States compared to mobile-first regions like China. In 2019, 81.1% of smartphone users in China used mobile payments, while in the U.S., it was only 29%. This is expected to change rapidly. A study conducted in March 2020 by RTi Research reported that 30% of consumers used touchless payment methods for the first time during the pandemic.

A recent report by Juniper Research predicts that the global original equipment manufacturer (OEM) market — we are talking about products like Apple Pay, Samsung Pay and Huawei Pay — will triple in value in the next four years from $333 billion in 2020 to $1 trillion in 2024.

These predictions are based on pre-pandemic data and don’t include issuer pay models. Issuer pay models are installed on devices instead of being native to them. Typically, issuer pay platforms cannot access the NFC technology in phones and watches and instead rely on alternative methods. For example, Alipay, the most popular mobile payment platform in China, has a 54.5% market share of China’s mobile payment market and uses QR code technology to process payments.

4. Penetration Of NFC

The increased penetration of Near Field Communication (NFC) is driving the growth in contactless payments. Though the technology has been around since 2000, it has been unexplored and undergoing a gradual evolution phase over the years. According to industry reports, there are 3.4 Bn active smartphones in the world that are an all-time high. Out of which, over 2 Mn devices are NFC enabled.

With the outbreak of the pandemic, the recent demand for contactless payment is growing in the wake of taking preventive measures for health. It is predicted that the market size of NFC is expected to grow at a CAGR of 17% and is projected to touch $30 Bn by 2023. Furthermore, the widespread use of the technology puts a question of security on the personal data collected and gathered on NFC enabled devices. But the advancements in technology make the payment method more secure than other traditional methods. Additionally, with payment security solutions, the risk of theft on the physical card is reduced.

NFC payments are protected with different layers of security. Contactless payments are processed within a short distance limit and any fraudster trying to steal the information would stand uncomfortably close to an NFC enabled device. Thus, the proximity factor enables the first level of protection. The other level of security is user initiation in which the user has to verify the transaction through two-way authentication – scanning and passcode entering that enable strict security protocols for the user as well as the merchant.

Since contactless payment is set to acquire a huge customer base, financial experts recommend users and merchants to use their privacy and protection methods. Users transacting through NFC should password-protect their device. Even in the case of mobile theft, chances of initiating payments will strictly be prevented. On the other hand, merchants accepting contactless, digital or card payments should adopt secure infrastructure by complying with the latest PCI – Payment Card Industry standards. The guidelines of PCI strengthen payment security and protect it from potential data thefts or misuse.

Challenges still exist for fintech companies.

It is easy to get excited about the benefits, efficiency and convenience of contactless payments and forget about the challenges it poses. First, not everyone has access to this technology. About 25% of Americans don’t have a credit or debit card, and approximately 8.4 million households don’t have a bank account.

There is also the concern of privacy and cost. Touchless payment technology is fast and convenient, but it is also traceable and comes with merchant fees that are passed on to customers. While these are problems that still exist, fintech companies have already started working toward solving them.

Companies like Square and PayPal offer checking-account capabilities without requiring a bank account. Square’s Cash App, for example, allowed users to get their stimulus payments sent to their account by providing their Cash App routing and account number to the IRS without the need for a bank account.

The success of mobile wallets may also pave the way for the broader adoption of cryptocurrency as a main street payment method. When everybody has a mobile wallet to access banking and investment accounts, using a cryptocurrency wallet could also be on the horizon. Widespread use of cryptocurrency could, in turn, potentially address the privacy concerns some users have with contactless payment platforms.

In light of the global pandemic, contactless payments have increased and are likely to remain on the rise long after the pandemic subsides. The widespread adoption of contactless payments is paving the way for enhanced digital financial infrastructure. With privacy and security concerns being addressed and tackled carefully, the trend is likely to stay for long even after the pandemic subdue