New payment technologies offer the ability to leave your cards at home.
If you've ever paid a merchant by holding your smartphone or smartwatch close to the payment terminal, you're not alone – one out of every four adults has used mobile payment systems like Apple Pay, Google Pay, or Samsung Pay. But are these new payment options really a better way to pay?
How it Works
Using your smartphone, you add credit, debit, or prepaid card information to a digital wallet. Your credit or debit card issuer may ask for additional identity verification, like entering a code sent to you via an authorized phone number or email address. After that, your device is authorized to pay using that card. Most banks and credit unions support at least one digital payment option.
When it's time to pay for a purchase, your device uses near-field communication (NFC) that passes payment information between your device and the merchant. Unlike swiping a credit, debit, or prepaid card, NFC payments never reveal your card information to the merchant, and that information is not stored on your device. Instead, 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 or facial recognition. Depending on the merchant, you may be asked to sign or enter a PIN for debit card purchases.
Popular Mobile Payment Systems
While Apple Pay is the most prominent NFC payment option in the United States, there are several other popular mobile payment systems:
Each system has unique features, but they all provide the core functionality of secure, contactless payments.
There are typically no fees for using popular payment programs. However, regular fees from your financial institution may apply (for example, if you surpass a limited number of debit card transactions in a specific timeframe).
Security Advantages and Device-Specific Risks
Smartphone payments offer significant security advantages over traditional credit and debit cards. However, they can also introduce potential risks if your device is compromised.
Security Advantages
When you pay with a mobile device, the transaction offers security enhancements over a typical card transaction. First, your card number isn't transmitted when you make a payment. Instead, a unique, one-time code (token) is used. Even if this token is intercepted, it can't be used for further transactions.
Most smartphones require fingerprint or facial recognition to authorize payments, adding a layer of security that traditional cards don't have. Further, payment information is tied to your specific device and can't be used without it.
Device-Specific Risks
While these features make smartphone payments more secure in many ways, if your phone's security is compromised, meaning a thief can unlock it, they could make payments since they could reset security measures such as Face ID. Knowing how to use your device's remote lock or wiping features quickly is crucial. If you have an Apple device, be sure to enable Stolen Device Protection to minimize the risk of your Apple ID password being changed by a thief.
While smartphone payments introduce the risk of concentrating multiple payment methods on one device, the overall security enhancements often outweigh this risk for most users. The key is to treat your smartphone as securely as you would your physical wallet, if not more so.
Rewards and Loyalty Programs?
A digital payment method like Apple Pay or Google Pay should not affect how your rewards card accumulates points, even when purchase rewards depend on merchant categories (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. In the same way that some credit cards give you the option of applying loyalty rewards when making a purchase, some mobile payment systems also offer these capabilities.
The Takeaway
Smartphone payments offer a combination of security, convenience, and speed, making them an attractive option for many consumers. However, they're not without limitations and potential risks.
As with any financial tool, it's important to understand how these systems work and use them responsibly. While they may not completely replace traditional payment methods in the near term, mobile payments will likely play an increasingly prevalent role in everyday transactions.
Dort Financial Credit Union is a not-for-profit financial cooperative whose mission is enriching people’s lives… members, employees, community. Unlike other financial institutions, credit union ‘profits’ are returned to the membership in the form of lower loan rates, higher dividend rates, and affordable services.
