The Ultimate Guide to Contactless Credit Cards
By the end of this year, the credit card industry expects that as many as 50 million credit and debit cards will be embedded with RFID chips, allowing consumers to spend more conveniently than ever before. Contactless payment technology is catching on, and when it does, it will be here to stay. Its deployment is progressing cautiously: JupiterResearch expects that less than three percent of all retail transactions will be contactless in 2009. Still, with the increased security and transaction speed over ordinary credit cards, many experts predict that the RFID chip should replace the magnetic stripe on the majority of cards in the next decade.
What is a contactless credit card?
Modern credit cards were first used in the 1950s. It wasn't until the 1970s however that their use became widespread, thanks to magnetic stripe technology that allowed the cards to be swiped electronically with ease. The magnetic stripe is present on the reverse side of the vast majority of credit cards today and its purpose is two-fold: 1) it stores all of the credit card's data; 2) it is able to transmit this data when swiped by a credit card reader.
But swiping does have its downsides. Firstly, in many situations, the card must be handed over to the store clerk or restaurant waiter. Secondly, any swipe requires taking the card out of the holder's wallet and making physical contact between the magnetic stripe and the card reader.
Enter the contactless credit card. The data on these cards is stored not only on the magnetic stripe but also on a tiny microchip embedded in the plastic of the card. The data from the microchip is transmitted via radio frequency identification (RFID) technology. So instead of having to physically swipe the card's magnetic stripe in the card reader, these contactless cards need only be waved in front of a specially equipped RFID card reading device. In fact, the card doesn't necessarily have to leave the wallet. As soon as the card comes within four inches of the reader, the antenna attached to the microchip transmits the data to the point-of-sale (POS) terminal, and the transaction is complete.
This technology is not new. You may already be familiar with RFID if you have ever used an EZ Pass or other such device on the toll roads. ExxonMobil's Speedpass also uses RFID technology to transact a sale.
Contactless Card Issuers
Contactless card issuers in the United States include Advanta, American Express, Bank of America, Chase, Citibank, Citizens Financial, HSBC Bank, GE Consumer Finance, KeyBank, Peoples Bank of Paris Texas, and Wells Fargo. American Express brands its contactless cards as ExpressPay, which is featured on all new Blue, Blue Cash, Blue Sky, and Clear cards. MasterCard's contactless payment system, branded as PayPass, is available for use with contactless credit cards issued by Bank of America (formerly MBNA), Chase, and Citibank. Visa contactless cards currently are available only from Chase.
Locations Accepting Contactless Cards
Transactions that have traditionally been thought of as cash-intensive are the ones that are being targeted for contactless POS implementation. These include convenience stores, fast food restaurants, gas stations, movie theaters, parking garages, and vending machines.
The reason for implementing contactless payment systems in all of these places is the same — increased convenience. In all of these situations, the customer desires to be in and out quickly. Having contactless POS machines in place would dramatically reduce transaction times and shorten lines, a positive for both the consumer and the merchant. According to Visa, contactless transactions are roughly 25 percent faster than cash transactions.
As of today, approximately 30,000 merchants in the United States accept contactless payments, which only accounts for 0.6% of all merchants in the country. Still, chances are if you live in a major metropolitan area, you have at least seen a contactless POS machine, or perhaps even used one. Merchants accepting contactless payments include 7-Eleven, AMC Theaters, Arby's, CVS Pharmacy, KFC, McDonald's, Regal Entertainment, and Walgreens, just to name a few. Furthermore, all contactless cards come with the standard magnetic stripe on the reverse side, so you can still swipe it anywhere traditional credit cards are accepted.
Security Concerns
RFID technology used in contactless payments does present some security issues. A survey conducted by Market Platform Dynamics earlier this year showed that more than 60 percent of respondents said that they would not use contactless payment cards due to security concerns. Some privacy rights advocates have demonstrated opposition to these cards, too. They contend that the technology is unproven and may be vulnerable to security breaches.
The main cause for concern among these individuals is the theory that the data on your credit card could be maliciously transmitted into the wrong hands. Some have hypothesized that a criminal with an RFID reader equipped with a strong antenna could simply walk up behind you and steal your credit card data from your wallet without ever making contact with you. Another fear is that you could accidentally pay for someone else's purchase if you get too close to the reader.
Such concern is unfounded however. Firstly, the actual credit card number is never transmitted via radio wave. With each purchase, a unique transaction number is transmitted from card to reader, not the credit card number. Every contactless payment card comes equipped with triple DES with 128-bit encryption. Therefore, any data that could be stolen from a contactless credit card would be of little or no use to the criminal. Secondly, unless the criminal had a rather large and conspicuous antenna, he would need to get within inches of your wallet with his RFID reader. It simply isn't practical. As for the case of accidentally paying for someone else's purchase, this too is an impractical fear, as the card needs to be waved within four inches of the POS reader in order to transmit any data.
Advantages and Disadvantages
There are two distinct advantages to using contactless credit cards. Firstly, contactless payment transactions are faster. According the Visa, the average cash transaction takes 34 seconds, and the average magnetic stripe credit card transaction takes 24 seconds. Contactless payment transactions meanwhile average just 15 seconds, since there is no need to hand the card over to the cashier and there is no signature required for purchases under $25. Secondly, contactless credit cards, contrary to popular opinion, are more secure than traditional credit cards. This is because the magnetic stripe actually transmits your credit card number during each swipe. The contactless card however transmits only an encrypted transaction code that is unique to each purchase. Also, just like ordinary credit cards, the holder is never liable for any fraudulent charges.
The negative side effect to the convenience of contactless credit cards is the increase in the holder's propensity to spend. Psychologically, when transactions become easier and faster, people tend to spend more. A 2004 Smart Card Alliance study showed that the average spend increased 15 percent, from $5.00 to $5.75 after contactless cards were introduced. So if you do get a contactless credit card, be advised that while it may be faster, easier, and even more fun to purchase, the new cards do not necessarily give you more spending power.
The Future of Contactless Payments
For now, your only chance to pay with a contactless credit card is at a few select merchants and ballparks around the country. As time passes and consumers grow more confident, the technology will no doubt become more prevalent, someday ubiquitous perhaps. Before then, many experts predict that contactless payment and mobile phone technologies will converge. Imagine not having a wallet anymore, but just a cell phone to make not only all of your calls, but also all of your purchases.
Contactless payments are already beginning to catch on in mass transit locations around the world due to the fast transaction speeds. While some transit agencies have adopted the technology to use at turnstiles, they are all pre-loaded cards available for use only within that particular agency's system. It would be more convenient for transit agencies to be able to simply accept Visa, MasterCard, or American Express contactless credit cards at the turnstiles. And eventually this may occur, as discussed in the Smart Card Alliance's white paper Transit and Contactless Payments: New Opportunities for Collaboration and Convergence.
Another vision of the future of contactless payments shows grocery store shoppers never again having to wait in line as each individual item's barcode is scanned. You will simply be able to stroll out of the store with a shopping cart full of items. At the exit, RFID readers will scan everything in your cart simultaneously, ring up the total cost, and charge that amount to your contactless card, all in the blink of an eye.
For now, cards and key fobs are the only way to transact contactlessly. And while the technology is only slowly catching on, by 2009 approximately $11.6 billion should be transacted via contactless payment systems.