Exploring the Evolution and Future of Card Payments

As technology has been rapidly advancing over the past two decades, so have the functionalities and capabilities of card payments.

The days of swiping plastic at the register are mostly behind us, and the rise of newer methods like contactless payments, digital wallets and embedded payments have quickly become standard practice. What does your credit union need to understand and monitor for the future? In this article, we’ll share a helpful overview of the evolution and future of card payments.

Emerging Card Technologies

Contactless & NFC Payments

We’ve seen the mechanics of card payments evolve over the years, with the rise of contactless payments, which began in the late 1990s, and near field communication (NFC) payments, the tap payments that are used with smartwatches or rings, which started in the mid-2000s. These types of payments really took off during the height of the Covid-19 pandemic, as contactless forms of payment were more commonly requested in businesses.

The current adoption rate of contactless and NFC payments in the U.S. is about 70 percent, where most stores are using this method. However, there are still some that haven’t incorporated these payment methods. As the use of these types of payments continues to increase, further protections are still needed, and this is an area to keep an eye on in the coming years.

Digital Wallets & Tokenization

In addition to the payment methods above, another popular form of payment is through digital wallets. With digital wallets, consumers can input their card information into the digital wallet on their cell phone, even if their physical card doesn’t don’t offer the tap to pay feature. Examples of digital wallets are Apple Pay, Google Pay or Samsung Pay, and they allow purchasers to make payments directly through their mobile device.

Through the tokenization system that links through the digital wallet, the user’s sensitive card data is replaced by a random token, which makes fraud much more difficult and thereby improves security.

Biometric Authentication

Through this security process, personal identity verification is needed (i.e. recognizing facial features, fingerprints and so on) to make online payments. The benefits of this method include enhanced security, ease of use and fraud mitigation.

Biometric payment cards are also coming down the payments pipeline, as an alternative way to make payments at the point of sale with a fingerprint instead of signature.

With these types of cards, a user’s fingerprint is connected to their card, where they can place their finger on the card to initiate a payment in a store. So, instead of the POS system connecting to a chip, it’s recognizing the fingerprint as the form of authentication for the payment. While these cards haven’t hit the market yet, the plan is to have them integrated within the next several years. It’s worth mentioning that this type of card will work with current POS terminals, so updates won’t be needed, as it’s just the card that will change.

Alternative Payment Methods

Buy Now, Pay Later (BNPL)

With this payment option, consumers can make purchases immediately and pay off the amount later over time in installments. An example of companies who offer this type of short-term, low-interest or interest free payments are Affirm, Afterpay or Klarna.

Within the past couple of years, card issuers like AMEX, Visa and MasterCard have also started offering BNPL, therefore acting as a financing option through the card network’s infrastructure. As this is a newer option, future regulations to protect consumers could be coming.

Embedded Payments

With this method, which originated from FinTechs, purchasers can use a payment processing feature that is built into an app or website, such as CashApp or Venmo.

Embedded payments create a seamless experience with payment information already stored through the app, where consumers don’t need to manually enter card data at the time of purchase. Embedded payments are a trend to watch, as more businesses have begun to utilize this option.

Wearable Payment Devices

These accessories allow the user to make contactless payments, and the most common device used is a smartwatch like Apple Watch. Like other forms of contactless payments, these accessories give purchases security, speed and convenience, as it’s much easier for a user to present a watch than having to access their phone.

Benefits of Advancements

As card payments technology has advanced, so have the opportunities to enhance security and fraud protection. There are three main solutions available:

• AI Fraud Detection – With this protection method, machine learning analyzes spending patterns to detect anomalies like unusual spending patterns, in real time. If your institution does not employ this solution already, it’s a great time to begin practicing! Over time, personalized fraud alerts will evolve, to reduce false declines and improve user experience.
• Dynamic CVVs – With this approach, the three-digit security code from the back of the card is changed periodically and therefore makes stolen card numbers useless for online fraud. This is a newer method we’re seeing to help with online security, and it also takes away the need to replace the physical card after a breach.
• Multi-Factor Authentication – As a layered security measure, this method has become popular within the past few years, and is required for high-risk transactions. Rather than typing in an additional password, this method requires biometric information in addition to a pin (or similar) from a separate device, to create multiple layers of security.

As card payments have progressed, we’re seeing several benefits for businesses, such as with AI in fraud detection, institutions can access better data analytics in real-time, which reduces workload and saves time. Additionally, with embedded payments, consumers can make a secure, quick payment, and they’re more likely to do so when they don’t have to go searching for their card, and in turn, this helps merchants and businesses. Finally, personalized card-based rewards programs help entice consumers. For example, if a user has made previous purchases regularly, the company could offer a discount on their next purchase based on the previous orders.

For consumers, these methods have allowed for faster, easier payments with methods like digital wallet integration, with an added layer of security. In addition, subscription management is easier to access, where subscriptions are more centrally located if consumers have used embedded apps to pay. Finally, the omnichannel payment experience creates a lot of options for consumers to pay through multiple channels, such as having multiples apps to choose from to make the payment. With all of these in mind, it’s clear that ease of use is the main benefit for consumers, so that’s where institutions should focus for the future.

In addition to those mentioned above, we’re seeing expanded financial inclusion with offerings like virtual cards, where a unique card number (generally connected to a real card number) is used for an online transaction. There are single-use card options that are a great option for one-time transactions, and multi-use virtual cards for purchases like subscriptions. For businesses, this is a benefit in cases where an employee can use a single-use card to make a one-time purchase, instead of being issued a company card.

Additional methods that are available include card-based lending, which allows users to borrow funds as they spend and language and accessibility improvements. These options  provide more inclusivity through voice assistance, audio guidance and screen readers and in addition, for users needing support, multiple languages are available.

Future Trends

Invisible Payments and Auto-Checkout

One main payment method that will become more mainstream within the next decade is invisible payments and auto-checkout. With this option, biometric information is used to make payments. A reader gathers the user’s biometric data and registers what they have put in their cart to process a payment, without the user having to pull out their phone or wait in a checkout line. Amazon Go and Whole Foods are examples of companies offering this payment type, currently only in larger cities.

In-Vehicle Payments are another potential offering in the future that would allow consumers to pay with their car. For example, the user could be going through the drive-thru and a reader or scanner could identify the vehicle. In this option, the payment would be assessed from the purchaser’s vehicle, rather than a card.

Another key payment type that will continue to evolve is Voice-Enabled Payments through smart assistants that allow consumers to make authorize payments with voice-activated biometric information. This voice-activated payment method requires initial setup to link payments to a user’s voice.

Regulatory Changes

In terms of what to look out for on the regulatory front, we’ll see a stronger emphasis on multi-factor authentication, more detailed risk assessments for businesses to address security gaps and there will be more specific guidelines on monitoring. Additionally, we’ll see increased scrutiny and regulations on credit card companies on how personal data is managed with emerging payment methods.

Sustainability

Using more eco-friendly materials for cards is another element we’ll see in the future. More sustainable offerings that we could see are digital cards to reduce plastic waste and programs like tree planting or donating to green initiatives for offsetting carbon use for card productions.

With all this in mind, it’s important to recognize how much card payments have evolved over the years to identify the important areas to focus on for the future. As we’ve seen, card payments are continuously changing, so staying up to date on tech advancements and focusing on security is the best approach as we look ahead to the future of card payments.

PaymentsFirst is a trusted resource for navigating the fast-paced world of electronic payments. The rapidly changing landscape within the payment industry has brought numerous opportunities and challenges. PaymentsFirst is committed to helping member organizations thrive in this environment by providing up-to-date information, trends, and tools. The primary goal is to empower organizations to make informed decisions to ensure their success.