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Blog / Jan. 28, 2021

Contactless Payments: The Future of Digital Payment Technologies

Although gaining traction has been slow, contactless payments are now poised to take consumer marketplaces in the United States by storm. Mirroring the acceleration of digital transformation, a push for convenience and security have widened the appeal of going contactless.

Financial institutions that wish to get ahead of the competition should seek to provide or facilitate contactless payment tools and technologies like tokenization in digital wallets, contactless EMV and push provisioning for their customers. In all cases, instantaneous payments with minimal friction is the consumer expectation.

What is Tokenization?

Tokenization is the process of replacing sensitive card data with unique identification symbols, or tokens, which retain all the essential information about the data without compromising its security. The vital part of this process is ensuring a consumer’s card credentials are untraceable by replacing the card number with a unique token.

This token acts as an encrypted dynamic transaction number, keeping the valuable account data secret from both the merchant and anyone who manages to steal the tokenized data.

Tokenization is especially useful in battling CNP fraud left vulnerable by EMV protections. Most consumers who pay bills electronically, frequently shop online, or use Apple Pay, Samsung Pay or Android Pay are already familiar with CNP transactions. Here, EMV is less effective, since there is no physical reader to ensure the chip credentials are valid. By using a token, e-retailers provide the same level of protection that EMV provides, with the encrypted token preventing criminals from accessing personal financial data.

Tokenization Starts with EMV

Understanding tokenization begins with EMV. On today’s chip-enabled EMV cards, the chip is a microprocessor that uses dynamic data to securely facilitate the transaction processing of a static card credential.

But, as anyone who has used a chip card knows, there is something still to be desired. The process of “dipping” the card is slow—you sit and wait—and then you wait some more. Eventually, the terminal buzzes so you don’t forget your card, and the process is complete.

That’s not to say that EMV isn’t worth doing. EMV is a critical component in the digitalization of payments because it introduced digital dynamic data during the transaction process, which improves payments processing and better protects consumer data for card-present transactions.

How Tokenization Works in Digital Wallets

Digital wallets take it a step further by adding tokenization to digital payments transaction processing. Tokenization works by replacing the static credential—the number on the front of a debit or credit card—with a token credential that is unknown, even to the cardholder.

For example, one of your bank’s customers is using Samsung Pay to buy a cup of coffee. When the barista asks for payment, the tokenized debit card in your customer’s digital wallet produces a stored token—or dynamic card credential—from the mobile device. That token is then passed onto the merchant in an encrypted way to complete the payment.

Once the merchant processes that transaction and contacts the card association (such as Visa or MasterCard), the card association accesses the “token vault” and uses your customer’s token credential to match it to the card credential and facilitate the payment. In the event of a merchant breach, the credentials that the merchant receives cannot be used to perpetrate fraud going forward.

Tokenization applies not only to card-present transactions—like EMV—but is also used to secure digital wallet payments in the ecommerce space. And, as if this wasn’t impressive enough, tokenization all happens in less than two-tenths of a second.

Take EMV Encryption Contactless

While many customers conduct contactless payments via smartphone, many either do not own a smartphone or still enjoy the habit of withdrawing a physical card. Even for these, dual interface EMV cards that allow contactless use can improve both customer and issuer satisfaction.

When EMV (Europay, Mastercard, Visa) chips were first released to improve the security of magnetic strips, the United States adopted more slowly than other parts of the world. However, they became commonplace rapidly and according to EMVCo, roughly 63% of card-present transactions used EMV chips in 2019.

The new standard in many European countries, Canada and Australia is to deploy EMV cards that require no insertion process. Users with dual interface cards can simply tap or hover their card over the merchant receiver. The process uses the same secure encryption methodology, but the transaction process that previously took a few seconds is now nearly instantaneous.

And as the United States followed suit rapidly with inserted chips, the market is positioned to do so with contactless EMV. According to Visa, 95% of merchants are choosing terminals with contactless capabilities. To put it simply, they are preparing for a massive influx of users.

Why? Firstly, consumers and merchants benefit from speed and convenience. But issuers also benefit, as ease of access lends itself to increased transactions.

To take advantage of the eventuality of contactless EMV, card issuers can offer dual interface cards to customers and promote their availability and use.

The Push for Push Provisioning

Even though merchants and consumers alike benefit from the speed and convenience of contactless EMV cards, many consumers are moving away from physical cards altogether. Over a billion people in the world use a mobile payment app every six months and 29 percent of Americans said they preferred paying with their smartphones. And while almost a third of the population is nothing to scoff at, that percentage, and the demand for convenient digital wallet use, is growing.

Push provisioning is a simple solution that drives digital wallet use by simplifying onboarding. It enables issuers to use integrations to “push” the token into participating digital wallets or merchants. In so doing, push provisioning addresses digital payment and contactless demands.

In practice, push provisioning empowers users to add their authenticated card information to a digital wallet or other platform from the issuer’s app. This makes it far more likely for savvy customers and those newer to the digital space to utilize mobile payments. As a result, push provisioning drives activity and makes it more likely that the card remains top-of-wallet.

With security to rival EMV cards, this method also facilitates NFC (near field communication) payments that can in turn enable consumers to use a device as they would a contactless card.

As such, it appeals to digital wallet issuers for the convenience and security. In turn, “card” holders value the immediate availability without needing a physical card or manual data entry. For tech aficionados, push provisioning also makes paying via wearables like smartwatches or payment rings easier.

At present, push provisioning has limited availability, partly due to the complexity of direct integrations with relevant players. But over time, it promises to meet increasing digital native users’ demand for contactless speed and convenience. As a bonus, it keeps the institution and its own digital banking platform top of mind for its customers in what has emerged as the ‘default’ channel for meeting banking needs.

The Future of Contactless Payments: Read the White Paper

As digitization increases, contactless payments and online pay stand to do the same. Global events notwithstanding, these tools are quick, secure and efficient. As usual, successful institutions should not only follow these and other trends, but also strive to get ahead of them. For a deeper dive into the future of payments, refer to the Digital Payment Trends in Banking white paper.

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