What is contactless payment and how does it work?

11 September, 2024

Synopsis:

• The evolution of payment technologies has revolutionised the way businesses operate, especially with the rise of contactless payments.

• Contactless payment is being increasingly adopted by consumers and businesses for everyday purchases.

• With contactless payments, businesses can enjoy better operational efficiency, improved customer experience, and fraud protection at no additional cost.
  
  

Introduction

Most small to mid-sized businesses can benefit from adopting payment methods that facilitate efficient transactions and deliver customer convenience. In the digital payment ecosystem, contactless payments are an innovative method that enables consumers to conduct transactions without physically handing over their Credit or Debit Card to the merchant. It only requires the simple tap and wave of a card, smartphone, or smartwatch. As a result, the technology improves the checkout experience, enhances customer satisfaction, and improves operational efficiency for the business.

This blog takes you through the contactless payment meaning, how it works, and the advantages and disadvantages of contactless payment for merchants, dukaandars, and business organisations.

What is a contactless payment?

Contactless payment, or tap-to-pay, is a secure, touch-free payment method for everyday transactions. It uses Near-Field Communication (NFC) and Radio-Frequency Identification (RFID) to establish communication between the consumer’s payment device and the merchant’s acquiring bank.

The technology has gained immense popularity as it eliminates the need to provide a Credit or Debit Card to the merchant, enter a Personal Identification Number (PIN), or provide a signature. Moreover, there is no need to count cash or hassle about having change. The payment method does not require physical contact between the device and the terminal, making it a hygienic, convenient, and quick option.

The data exchange between a contactless-enabled card and its reader is possible when the range is around 4 cm. This measure prevents the accidental reading of cards and devices. You can check for the Wi-Fi symbol on devices at the Point-of-Sale (POS) terminals of financial institutions, retail stores, and restaurants to understand whether or not they provide contactless payments.

How does contactless payment work?

After understanding the contactless payment meaning, you must learn how it works to assess if it is right for you. Contactless technology uses NFC, which means two devices can communicate when kept close to each other. The step-by-step process of how the contactless payment system works is as follows.

1. Initialisation: The consumer holds their contactless card, smartphone, or wearable device close to the NFC-enabled Point-of-Sale (POS) terminal.
   
   

2. Communication: The terminal sends out a radio frequency signal detected by the NFC chip in the payment device.
   
   

3. Encryption: The payment information is securely transmitted using encryption to prevent fraud. This often involves tokenisation, where a unique token is generated for each transaction instead of using the card’s details.
   
   

4. Authorisation: The payment processor verifies the transaction details and checks for available funds.
   
   

5. Confirmation: The transaction is completed once authorised, and the terminal displays a confirmation message.
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The process typically takes only a few seconds, making it significantly faster than traditional card payments.

Advantages of contactless payment

The contactless technology has many benefits for consumers and businesses.

The benefits of contactless payment for businesses are as follows:

1. Enhanced customer experience
   The checkout experience of businesses offering contactless card payments is much smoother and more convenient. This leads to a better customer experience and, in turn, earns their loyalty.
   
   

2. Better operational efficiency
   The workforce requirements at a store with tap-to-pay technology are lower. Moreover, the time spent to complete the transaction using contactless payment is less than cash counting or card machine operation. As a result, businesses have shorter lines, increased customer satisfaction, and the ability to serve more customers in less time, especially during peak hours. This translates to better operational efficiency.
   
   

3. No additional cost
   There is no additional processing fee for the contactless service. Merchants and small business owners don’t have to pay anything more than they would pay for a regular Credit Card transaction.
   
   

4. Fraud protection
   Contactless payment systems are protected from hacking attempts with their security and encryption measures. A robust security system ensures businesses get their payments without any hindrance. Also, most banks protect transactions against fraud.
   
   

Also Read: QR Code Payments for Your Small Business

Challenges and concerns

Contactless payment solutions have a fair share of concerns from the perspective of consumers and businesses.

The disadvantages of contactless payment for businesses are as follows:

1. Initial setup expenses
   The upfront cost is one of the primary challenges for businesses adopting contactless payments. You have to upgrade your POS systems to support the technology and buy new terminals that support NFC. These setup expenses can be significant, especially for small businesses with limited budgets.
   
   

2. Consumer reluctance
   Contactless payments have gained immense popularity. However, not all customers are comfortable using them, especially the older generations. They are less familiar with the technology or may distrust it due to security or privacy concerns. This is a challenge for businesses with a diverse customer base. You will have to switch across payment methods - cash, traditional card, and contactless technology - to accommodate the preferences of different customers, which can complicate operations.
   
   

3. Limited transaction amounts
   The Reserve Bank of India (RBI) has set a cap of ₹ 5,000 per transaction for contactless payments. While the limit is set to protect against fraud, it can be inconvenient for customers and businesses. If you handle higher-value transactions frequently, you will need to shift to the traditional payment methods for larger amounts, which can slow down the checkout process.
   
   

Also Read - How To Collect Payment from Customers?

Conclusion

Contactless payment is a simple, quick, and secure way to complete transactions. Customers can use various options, like smartphones, Credit Cards, and smartwatches, to pay for daily purchases. A single tap or wave is enough to complete the transaction, enabling the merchants and dukaandars to save time and effort in delivering the checkout experience.

Despite the challenges and concerns, the technology can give customers a more hygienic, efficient, and secure payment experience. With its growing adoption and crucial role in the global financial ecosystem, innovations and improvements in security measures are likely to overcome the concerns soon.

HDFC Bank offers a POS machine for seamless business payments across different modes. You can choose from different machine types, such as Android, Mini Android, GPRS, MPOS, and Sound Box. It serves as the ideal solution for supermarkets, restaurants, fashion stores, retail stores, etc., as it enables you to process all digital payments quickly and hassle-free.

Disclaimer: *Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.