What is... | August 9, 2016

What is a contactless payment?

We’re not supposed to enjoy parting with our hard-earned cash, but convenience and speed means more of us now happily wave and pay, giving transactions as little thought as possible.

Andy Haldane, Bank of England’s chief economist, has suggested that the UK gets rid of cash altogether and brings in a government-backed digital equivalent to manage inflation and prevent another downturn. While this idea may seem a bit far-fetched for now, it may be a real possibility in the future. The surprising proliferation of contactless payments, a quick and fast way to pay without entering your debit or credit card details, signals clear interest in a cashless society. After all, three billion “wave and pay” payments were completed by Europe's Visa cardholders alone between 1 May 2015 and 30 April 2016. 

Tapping or waving to pay for everyday goods makes money more abstract – chiefly because of how it detaches us from the actual physical payment. Simply, it takes away the physical “pain of paying” felt when we hand over cash.

The future is here
The technology behind contactless is a wireless chip containing your payment card details. On the chip is an antenna, so when the card is touched against a terminal it transmits purchase information. But this technology doesn’t stop at cards. Contactless jewellery and fingernails are all now possible; you can stick a near-field communication (NFC) chip onto almost anything. And if you’re feeling even more adventurous, other technologies in development mean you may eventually pay just with a selfie or through the rhythm of your heart. 

Emptying pockets
Research shows what and how much you buy is surprisingly dependent on how you pay for it and each new means of cashless payment, from debit and credit cards to mobile wallets, gives us less and less time to pause for thought. With contactless payments, that friction is almost entirely absent. Tapping or waving to pay for everyday goods makes money more abstract – chiefly because of how it detaches us from the actual physical payment. Simply, it takes away the physical “pain of paying” felt when we hand over cash. Behavioural economist Dan Ariely says this very conscious moment in the physical payment process can help keep our spending levels in check.

Neuroeconomics, which looks at the mental processes in economic decision making, tells us that cash is the most painful to part with. Carnegie Mellon professor George Loewenstein writes that credit cards further anaesthetise the pain of paying so it doesn't feel like you're giving anything up to make the purchase: we swipe a card and the card is returned to us, unlike paying cash where you have to hand over bills.

Paying via contactless is potentially even quicker: the payment is over and done before you know it. Research confirms that this convenience encourages us to make more frequent transactions. 

In the UK, after the upper limit on contactless card transactions was increased from £20 to £30 in September 2015, their use surged. There were 218 million contactless payments in the year ending May 2016, up 247% from the year before. And Transport for London’s adoption of contactless ticketing, which is now being replicated in major cities round the world has been an influential contributor to the uptake.

The ING International Survey - Mobile Banking 2016 found that people across Europe now use physical cash much less, with many keen on contactless in particular. The Czechs are particularly positive: 69% say they trust contactless payments, with Poland (59%) and Romania (58%) next. 

Unexpected consequences
All these findings partly explain why so many people rack up large credit card debts. We can get into debt through borrowing small sums over time – and when you don’t physically see the cash leaving your wallet, you don’t really feel the pain. Imagining your future self, making spending concrete and using pre-commitment devices can help, as this eZonomics article explains.

However, the real question remains. Do we really want payments to become so convenient that we end up trading our long term finances for short term comfort?

SpendingDan arielyCardsOpportunity cost