New payment technologies offer the ability to leave your cards at home.
If you’ve ever paid a merchant by holding your smart phone or smart watch close to the payment terminal, you’re not alone – one out of every four adults have used Apple Pay or Samsung Pay. So are these new payment options really a better way to pay?
How it Works
Using your smart phone, you add credit, debit, or prepaid card information to a digital wallet. Your credit or debit card issuer may ask for additional verification of your identity, like by entering a code sent to you via an authorized phone number or email address. After that, you’re device is authorized to pay using that card. Most major banks and credit unions support at least one digital payment option.
When it’s time to pay of a purchase, your device use a technology called near-field communication (NFC) that passes payment information between your device and the merchant. Unlike swiping a credit, debt card, or prepaid card, NFC payments never reveal your card information to the merchant and that information is not stored on your device. Rather, your device passes a one-time, single-use “token” that authorizes payment from your account for that specific transaction. In addition, payment also requires authorization that only you can provide – typically a fingerprint. Depending on the merchant, you may also be asked to sign or enter for PIN for debit card purchases.
There are no fees for using popular NFC payment programs like Apple Pay or Samsung Pay, but regular fees from your financial institution may apply (for example, if you surpass a limited number of debit card transactions).
Security Versus Credit Cards
Security can be a significant advantage for digital payments when compared with credit and debit cards. Unlike a credit card, the device itself is not the payment method – it always requires authorization from you. So if you lost your payment-enabled phone or watch, it would be useless to a thief, even if your device was not locked with a password.
Since your credit card information is never revealed to the merchant, it’s never stored on their servers. This means that your card information can’t be revealed because of lax data management on the part of the merchant. Hacks of merchant payment systems are uncommon, but when they do happen, the results can be devastating. For example, security breeches at Target and Home Depot alone revealed credit card data from nearly 100 million customers.
The move to chip-based cards works to make credit cards more secure since those cards are much more difficult to duplicate compared with non-chip cards. But you may have noticed something when using a chip card – it often takes longer to process than the old swipe method. Smart phone payments tend to have a major speed advantage, especially compared with chip cards. Some merchants also waive require signature or PIN requirements, making the transaction even faster.
So digital payments offer more security and convenience than traditional credit or debit cards, but what about the risks? Hacks are unpredictable by nature, but in many cases, digital payments actually make it more difficult for someone with access to your credit card number to set up NFC payments.
Digital payments can’t completely protect you from people who have full access to both your credit card information and digital payment provider accounts (for example, your iTunes password and email address). So if your Apple account has been hacked and the thief has access to your full credit card information and your bank or credit union doesn’t require confirmation of an email address or phone number, a fraudulent account could be set up on a device you don’t own.
Another potential downside of using digital payments is that they aren’t accepted as widely as credit or debit cards. That said, most major retailers and approximately 35% of merchants overall accept Apple Pay. So your smart device may not be able to completely replace your credit cards (or cash – some merchants don’t accept credit cards after all), but it can come close for a larger percentage of Americans.
Apple Pay is, by far, the largest NFC payment option in the United States. Over 35% of all retailer locations accept it and approximately 75% of all NFC transitions are Apple Pay. That said, this type of payment technology is growing rapidly and there are other options to consider.
What About Reward Cards?
Using a digital payment method like Apple Pay or Samsung Pay should not affect how your reward card accumulates points, even when purchase rewards depend on merchant category (like restaurants or gas stations).
In fact, more merchants are linking store loyalty and credit cards to digital payments, making it easier to earn even more rewards.