Podcast: Play in new window | Download
Gen Z, Millennials, and Gen X prefer frictionless experiences in all areas of their lives and have embraced contactless payments. Baby Boomers also prefer this payment method in many circumstances, but are often bamboozled by a lack of standardization in contactless payment technology.
Unlike credit card terminals, contactless payment experiences are not as standardized, which creates friction and confusion. And as merchants continue to elevate the consumer experience, and meet their customers where and how they want, they’ll need to prioritize accepting payment methods such as Apple Pay and Google Pay—ensuring their use in-store is as frictionless as possible.
During a recent PaymentsJournal podcast, Suresh Dakshina, Co-Founder of Chargeback Gurus, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, discussed how the pandemic pushed more consumers to try contactless payments, as well as the security benefits they present for consumers and merchants.
How Contactless Payments Work
Contactless payments are a popular way to make purchases without physically touching a card or exchanging cash. There are several ways to make a contactless payment, among them tapping a card, scanning a QR code, and using a mobile device to access digital wallets, such as Apple Pay or Google Pay.
Although contactless payments have been around for a while, the pandemic accelerated adoption as many consumers avoided touching payment terminals. “Contactless payments became even more prevalent during the pandemic and transactions really skyrocketed,” Dakshina said. “Now, it’s become a way of life.”
Keyes agreed that the pandemic sped up the inevitable.
“Just before the pandemic, contactless payments were starting to gain a little bit of steam in the U.S., but they were not as popular as overseas,” Keyes said. “People didn’t want to change how they were paying because they were very set in their ways. I remember thinking and writing at the time that something significant would need to happen to drive adoption. The pandemic did that because it forced people to consider this option that’s convenient.”
Security and Comfort Drive Adoption
As with any payment method, security is of the most importance. With contactless payments—unlike swiping a card or entering a card number at a payment terminal—merchants don’t see a credit card number, and the transaction details are encrypted. This reduces fraud significantly in retail stores, especially from practices like card skimming.
“Contactless payments are truly secure because the data on the credit card is transmitted through encryption,” Dakshina said. “And that is the maximum protection you can have. It’s very challenging to hack a contactless payment.”
Although merchants are aware of how secure contactless payments are, there may still be some uncertainty among consumers. “People feel like someone could hack into your phone if you’re using a mobile wallet,” Keyes said. “But it’s still extremely safe. There’s room for education there.”
Among younger consumers, mobile wallet adoption is reaching a point where a significant percentage are using digital wallets exclusively and refuse to carry credit cards.
“I saw a person who walked into a smoothie shop asking the store owner if they accept Apple Pay. The owner said no, and the customer said, ‘I don’t have a credit card. If you don’t accept Apple Pay, then I cannot do business with you.’ There’s a large volume of consumers who do not want to carry credit cards and want to use a digital wallet to pay for their transactions. Businesses, especially retail stores, can capitalize on this younger generation who embrace cardless payments,” Dakshina said.
What’s more, merchants have an additional financial incentive to accept contactless payments.
“Contactless payments are considered a card-present transaction and provide security to the merchant as the liability falls on the issuer in the case of fraud disputes,” Dakshina said.
Keyes noted older consumers may be intimidated by the inconsistency of contactless payment experiences across various physical stores.
“If you swipe your credit card, it’s pretty much the same experience every time, even if you use a chip,” Keyes said. “But when you’re tapping [to pay], there are a lot of different terminals, which have different readers, and you’re not sure what you’re tapping especially if it’s a phone vs. a card.”
But, as older consumers consistently pay this way, any intimidation they may have initially felt with contactless payments will decrease.
Trends In Contactless Payments Among Young People
Younger consumers flock to frictionless experiences, where they have fewer steps to get what they want, Dakshina noted. And they want seamless experiences in all facets of their life.
“I have seen apartment complexes that target younger consumers. Their apartments are accessible exclusively by keypads instead of traditional keys,” Dakshina said. “The younger generation doesn’t want keys because they might lose the key and it [creates] friction. The world is starting to adapt to the needs of the younger crowd, which oftentimes goes untapped.”
Traditionally, merchants don’t target younger consumers—at least not right away. But this group has a great deal of spending power, and those in it expect merchants to meet them where they are and accept the payment methods they prefer.
“Merchants [need] to adapt to these technologies, because this is the crowd they want to attract, the ones going into the workforce,” Dakshina said. “They’re the ones who are very open to spending money on things they like.”
According to Keyes, merchants should prioritize mobile wallet acceptance. “Accepting Apple Pay and Google Pay is a good baseline,” he said. “The next step is making it clear that you accept those payment types and making it easy to use them in-store.”
Contactless Payments Catching on Throughout the World
The adoption of contactless payments is increasing worldwide, though use cases vary depending on where you look. For example, China and Europe have advanced in simplifying the checkout process by using mobile wallets that allow users to add items to their cart and pay through their phones before leaving the store.
India is also moving toward a cashless society, with more people using mobile payment apps instead of credit cards or cash.
“In India, more people are sending payments through peer-to-peer apps,” Dakshina said. “In our office, the younger crowd does not carry credit cards since they use mobile wallets for their transactions. They don’t carry cash anymore. Even a street vendor accepts contactless payments.”
The United States, by contrast, has been slower to adapt—though that’s changing.
Keyes noted that more sophisticated point-of-sale technology will ease the transition.
“Eventually every merchant in the U.S. will accept contactless payments soon,” he said. “For small businesses that don’t want to invest in any large terminal product, this will keep costs low.”
“Contactless is only going to get more popular. It may become the default and even the exclusive option at certain merchants, just like how some places used to only accept cash and not credit cards.”
Dakshina agreed and said contactless payments will see continued growth in the U.S.
“Payments are the lifeline for any merchant, and you have to make it seamless for your customers to do business with you,” he said. “Less friction in your customer experience always leads to more revenue.”