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Near Field Communication (NFC) payments: how do they work?

Last updated on May 20, 2024

When it comes to ways to pay, consumers are spoilt for choice. Although online purchases continue to be popular, in-person shoppers are increasingly choosing to pay contactlessly. In doing so, they are utilising something that is known as near-field communication (NFC) technology. 

NFC technology exchanges information every time a credit or debit card is tapped against a reader or a digital wallet like Apple Pay, Alipay or Google Pay is used. 

Nearly all of today’s credit cards, debit cards, smartphones and wearable devices are equipped with NFC technology. And whilst your phone’s NFC scanner is probably active right now, the NFC chip in your phone is a passive scanner that does nothing until it is held closely to another NFC device or tag. 

What is NFC technology?  

NFC stands for Near Field Communication. NFC is the short-range wireless technology that allows devices such as key fobs, cards, phones, and smartwatches to exchange bite-size pieces of data with other devices fitted with NFC technology.  

Thomas Edison pioneered NFC technology in a radio frequency experiment which he conducted in the late 1800s. It wasn’t until 2004 that Sony, Philips, and Nokia created a forum to combine NFC with production. This led to the first mobile phone with NFC being launched by Nokia in 2006. 

NFC technology has three modes of operation:
1. Card emulation – This has been designed to enable monetary transactions
2. Reader/writer – This enables the user to interact with tags
3. Peer-to-peer - This allows two NFC devices to exchange data

The science behind NFC is very similar to radio-frequency identification (RFID). RFID is used in security cards and keychain fobs to access hotel rooms, offices, gyms, airports, supermarkets, and farms to help identify luggage, groceries, and cattle.

NFC is based on RFID technology, but has a much lower transmission range. You could think of NFC as RFID 2.0 because NFC offers a superior set of features and better security, all of which we will discuss later. 

By using a specific RFID frequency of 13.56 MHz, NFC can avoid interference from other wireless devices. For this reason, two NFC devices can only exchange information if placed within a few inches of one another. Data can be delivered at speeds of 106, 212 or 424 kilobits per second, which is very quick for transferring a variety of data types such as contact information, payment information, photographs, and music.  

What are the uses of NFC technology?

NFC technology can be used for a wide variety of things, including:

  • Contactless payments
  • Transferring small files between mobile devices
  • Configuring wireless services
  • Wireless device charging
  • Redeeming tickets
  • Venue and location check-in
  • Unlocking car doors
  • Providing access to high-security areas

The global NFC market was estimated to be worth USD 23.1 billion in 2022. The trend of smartphones becoming all-in-one devices and the demand for wearable technology are the two factors behind the rising demand for NFC technology.  

The convenience of paying for products with wearable devices has presented the wearable industry with a problem. Wearable devices run on batteries that require frequent charging. The concept of charging one’s device without using a charger or going home is a game-changer for the wearable industry. For this reason, built-in connectivity technologies such as Wi-Fi and Bluetooth are now integrated with NFC and wireless charging technology.   

What are NFC payments?  

NFC is the technology behind contactless payments, such as tap to pay, where a customer can tap their debit or credit card, smartphone, or wearable device within approximately two inches of a payment terminal to make a payment. The sheer convenience of tapping to pay has made NFC payments extremely popular among a global consumer base that would previously have used cash, chip & PIN, or signature authentication. 

This convenience is made even better by the fact that consumers don’t need to be carrying physical cards. They can make an NFC-enabled payment by using their credit and debit card data from digital wallets, even if they do not have their physical card on them.  

1. For NFC technology to work, both payment devices must be NFC-enabled. You can tell if the payment device has been designed to incorporate NFC technology by looking for a contactless logo of four curved lines that portray an NFC radio signal. Any credit or debit card or payment terminal displaying this logo can support contactless payments.

2. NFC payments work when an NFC-enabled card, smartphone, or wearable device makes contact with or is placed close to an NFC payment terminal. 

3. When this happens, the customer’s NFC-enabled payment device releases a single-use token to the payment terminal. The single-use concept is important because every token is unique to that specific purchase. The token contains transaction details such as the customer’s card number and expiration date. 

4. The payment terminal takes the data contained within the token. It sends this via encryption to the merchant’s and customer’s banks to verify the details, at which point the transaction is either confirmed or rejected. 

5. Once the transaction is approved, the payment terminal completes the transaction and sends the customer’s card or device a signal to confirm that the payment has gone ahead. 

How do NFC card readers work?  

NFC payments work when an NFC-enabled card, smartphone, or wearable device contacts or is placed close to an NFC payment terminal. NFC-ready devices contain a physical chip that operates at a specific RFID radio frequency of 13.56 MHz. When two chips are close together, they create a contactless connection. This will only happen if the two devices are touching or no more than a few inches apart. During this connection, the devices transfer a single-use token that contains the data needed to complete a transaction.

The single-use concept is vital because every token is created as a unique token for that specific purchase. The token contains transaction details such as the customer’s card number and expiration date. The payment terminal takes the data contained within the token. It sends this via encryption to the merchant’s and customer’s banks to verify the details, at which point the transaction is either confirmed or rejected. Once the transaction is approved, the payment terminal completes the transaction and sends the customer’s card or device a signal to confirm that the payment has gone ahead.

One of the critical aspects of NFC technology is that it uses a specific RFID frequency of 13.56 MHz. This is important because it means that communication between the payment terminal and contactless payment device must take place over a small distance; it’s not possible to use NFC technology while seated at a restaurant table and waving your card, mobile phone, or wearable device in the direction of the terminal to settle your bill. 

This restriction has its upsides since the need to hold the payment device so close reduces the likelihood of accidental taps, for example, whilst another shopper is passing by the payment terminal. It also provides a convenient layer of payment security. 

Top 6 benefits of NFC payments?  

NFC payment technology carries lots of benefits for both businesses and consumers. These include:  

1. Excellent payment security – Spoiler alert! We will cover this in full shortly, but the RFID frequency, Tokenization, encryption and two-factor authentication are all reasons why NFC offers an excellent level of payment security.  

2. Speedy payment experience – Whether leaving a restaurant, at the till, or using a self-checkout, paying via NFC is simple and easy! Data is passed from the customer’s payment device to the payment terminal in a fraction of a second. This creates a frictionless payment service and a speedy experience. And that, will make your customers smile.

3. Encourages low-value purchases and single purchases – Many small retailers have removed minimum purchase values from cards, meaning that customers can pop in to buy a chocolate bar or a drink and pay using NFC in less time than it takes to identify and grab the product in the first place. This is helped by the popularity of self-checkouts, which have improved to create a speedy service. NFC's convenience means shoppers are more likely to return to a store for forgotten items rather than face the hassle of coming back later.

4. Engenders customer satisfaction and loyalty – Consumers love contactless technology for the same reason as businesses. NFC payments provide an efficient, safe, and quick payment experience, creating happy shoppers who are likely to return.  

5. Hygienic payment devices - NFC technology's hands–free nature means that the customer taps their card or payment device on the payment terminal, not their hands or fingers. Customers and staff appreciate the touch-free nature of contactless.  

6. No additional cost – Most payment processors charge the same for NFC-enabled cards as they do for the older methods of accepting debit and credit cards. 

Are NFC payments safe?

Yes. NFC technology is a safe payment method.  NFC payments offer great security benefits:

1. Tokenization - When an NFC payment is made, an algorithm generates a unique, randomly generated number (token) that has nothing to do with the cardholder's account number. Thus, no personal details are shared.  

2. Encryption - Fraudsters are much more interested in obtaining data such as credit card numbers than in capturing a one-time randomly generated token.  

3. Two-factor authentication – For consumers using their e-wallet, and payment channels such as Apple Pay and Google Pay, two-factor authentication (2FA) provides a fantastic security layer. 2FA verifies each transaction with a Face ID, PIN, or fingerprint so that even if the customer’s phone is lost or stolen, it cannot be used for payment. 

FAQs

How do I know if my payment terminal can take contactless payments?

NFC-enabled payment terminals carry the contactless logo with four curved lines designed to portray an NFC radio signal.  

What are some examples of NFC mobile payments?

There are a wide range of NFC mobile payments that NFC-enabled payment terminals can take including, Apple Pay, Google Pay, Android Pay and Samsung Pay.

How do customers pay with NFC?

Customers can pay using NFC technology by tapping an NFC-enabled smartphone, wearable device, or a credit or debit card onto an NFC-enabled payment device.

How can businesses accept NFC payments?

Businesses can accept NFC payments by acquiring an NFC-enabled payment reader, or by using their smartphone or tablet providing that they have added a mobile payment app that utilises NFC technology; if it can take contactless, then it probably does.

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