Contactless Payments in Israel – The Future of Finance
The global COVID-19 pandemics, lockdowns, and forced social distancing drove several unexpected technological innovations and social changes. Companies like ZOOM grew exponentially during the lockdowns as video conferencing became the new norm.
Working from home became a daily routine for millions. Businesses that remained open, introduced strict measures to reduce contact between people, as well as skin contact with surfaces like door handles and elevator buttons. The most concerned even wore gloves, and others used hand sanitizing gels several times a day.
As we sought to reduce hand contact between individuals, and reduce the risk of COVID-19 contagion, we saw a big rise in the use of contactless payment methods - 150% in the US alone. People who worried about illness were suddenly reluctant to hand over cash and accept change. They also didn't want to swipe cards or touch buttons to complete transactions with PIN numbers.
We’ve already been shifting away from a cash economy for well over a generation, and credit and debit cards are part of life. Businesses that offered safe, contactless payment methods were at an advantage at the height of the COVID pandemic. Ubiquitous smartphones and QR code technology is making contactless payment increasingly convenient for customers, profitable for businesses - and secure for both parties.
Almost all employers in Israel and the West automatically pay employee salaries directly into their bank accounts, and even traditionally cash-based businesses like bars and taxis have transitioned to cards and apps for payments. The big banks in Israel have dramatically reduced the number of local branches in recent years.
Their justification for closing neighborhood branches is that there is reduced client demand for face-to-face banking services. Online banking is here whether we like it or not. With the reduction of local bank branches, we’ve also seen a reduction in the number of ATMs. It’s suddenly a lot less convenient to withdraw cash money for day-to-day use.
What is a Contactless Payment?
Contactless payment is any financial transaction that doesn’t involve physical contact between either party, any device that requires swiping a card, entering a PIN, or signing an authorization. It definitely excludes the exchange of coins or banknotes. A contactless payment could be an app like Bank Hapoalim’s BIT that instantly transfers money between accounts via smartphones, a smartcard, an e-wallet connected to a bank account or loaded with prepaid credits, or even an RFID enabled device.
Anybody who uses public transport in Israel will be familiar with RAV KAV cards. If you want to travel by bus in Israel, it’s impossible to pay cash for your journey. The old system of queueing to pay the driver as you board has been entirely phased out. Every traveler needs a RAV KAV card with a smart chip. When you get on the bus, you present the card to one of the sensors and the cost of the journey is automatically deducted from your account.
RAV KAV has freed up drivers to focus entirely on driving, shortening journey times and reducing stress levels for drivers and passengers. Cash losses from employee theft have been reduced, and the bus companies have a wealth of electronic data about passenger numbers and line usage that they can use to improve services. On the minus side, if you don’t have your RAV KAV card or it malfunctions, you definitely face some inconvenience.
How do Contactless Payments work?
Contactless payment methods typically use RFID or NFC technology to exchange data.
- RFID - Radio-frequency identification.
- NFC - Near field communication
- POS - Point of sale
RFID technology is in general use across many industries. It’s used to track packages and manage warehouse inventories etc. An RFID system uses electromagnetic fields and allows memory chips containing tags or data and device readers to communicate with each other. The devices don’t have to be physically touched, they just need to be close enough to exchange data.
NFC or near field technology builds on RFID technology. It is designed to provide greater privacy and security and the chips and their readers have to be much closer together to exchange data - typically a maximum of a few centimeters. This is to protect consumers during financial transactions in busy locations like supermarkets.
NFC is the technology that makes systems like Apple Pay and Google Pay possible. The actual technology can be integrated into a smartwatch, phone, or similar device. It’s also used in RAV KAV and similar systems. The advantages are that it’s fast, generally reliable, and reasonably secure.
A POS or point of sale is simply any terminal where customers or travelers can use NFC or RFID-enabled devices. It could be a self-service checkout in a convenience store or an automated turnstile in a railway station. Over the next 5 years, we’re likely to see a big rise in NFC technology at ATMs and in credit and debit cards. NFC-enabled cards will bypass the need to physically type a PIN number, and there may be a trend towards digitally transferring funds from ATMs onto cards for the contactless equivalent of ‘walk-around money.
Contactless Payments as the Future
The UK and Europe have been quick to embrace the transition towards a cashless - or low cash - society. The US has been much slower to adapt (at least pre-COVID). Japan is still very much a cash-based economy and there is little enthusiasm for change. Law-abiding societies with low crime rates are generally still more comfortable with cash and with cash transactions.
Banks and major retailers like to dictate the pace of change and are driven by a desire to simultaneously cut costs and increase profits. The elimination of cash allows them to reduce the number of employees and - in theory - reduces losses due to theft and robbery. Retailers may also be calculating that people will spend more money when they make a contactless payment. It may be easier psychologically to transfer digital funds than to physically hand over banknotes and coins.
One reason why banks and financial institutions were so keen to roll out credit cards is that they can charge fees and commissions on their use. It will be interesting to see if contactless payment systems can create a more competitive and pro-consumer financial landscape where independent financial service providers can deliver services.
The advances in RFID and NFC technology coincided with the proliferation of decentralized and unregulated digital currencies like Bitcoin, Litecoin and Ethereum, etc. In Israel, we are seeing a gradual move towards introducing greater competition and much-needed reforms to the banking sector. In 2019, the First Digital Bank was launched.
First Digital Bank was the first new bank to be established in Israel since the 1980s. Bank Hapoalim and Leumi still have de facto monopolies in Israel and can dictate service standards and terms to clients. That may be about to change as more fintech platforms take off and consumer expectations change. Contactless payments may do more than simply transform how we pay for groceries and meals in restaurants. They could be the first visible sign of major changes to the financial system.
Advantages of Contactless Payments
There’s no doubt that contactless payments are convenient. A quick electromagnetic connection between a smart chip and a device reader takes a fraction of the time that a physical transfer of money takes. Queuing can be reduced in stores and on public transport networks. Retailers are hoping that the potential for error, confusion, and customer service issues is vastly reduced. In a new health-conscious post-pandemic era, the possibility that diseases can be transmitted via contaminated coins and banknotes is eliminated.
The big supermarket chains are keen to introduce more self-service checkouts. They know that they can slash their in-store workforce and reduce operating costs. In areas where crime isn’t a major issue, we may also see a rise of Japanese-style vending machines, operated by contactless systems, for many popular products.
For many consumers, the key advantage of contactless payments is that there’s no need to walk around with cash or visit ATMs. If your payment methods are built into your smartwatch, smartphone, or car key fob, you’re unlikely to ever be without immediate access to funds. Unless muggers and sneak thieves discover how to exploit stolen contactless payment systems, the days of street robberies for the contents of your wallet are probably over.
Existing contactless payment systems rely mainly on encryption to prevent financial fraud and identity theft. Given that the technology is still fairly new, they are incredibly seamless, fast, and maintenance-free. They also integrate with online banking and money management to give users full insight into their spending patterns and allow instant account management and transaction tracking.
Disadvantages of Contactless Payments
There are three main disadvantages to contactless payments. Arguably the biggest issue is individual privacy and the potential for social control.
Possible disadvantages of contactless payments
- Personal privacy and social control
- Fraud, theft, and cyberattacks
- The danger of widespread system failures
- Accessibility and haphazard availability at POS
Traditional cash transactions are essentially anonymous. Put simply, the government has no idea what individuals choose to do with their money, and only a limited ability to calculate exactly how much money individual citizens have. The explosion of the global drug trade in the 1970s and 1980s led to government clampdowns on cash transactions.
The fight against money laundering led to all kinds of new laws, mandated reporting of cash transactions, and communication between government agencies and financial institutions. The global War on Terror added to government demands for oversight and control.
Governments basically dislike having cash in circulation. A cash-based economy makes tax evasion easier at all levels and makes all kinds of low-level criminal activity possible. A digital, cashless economy where every individual transaction is recorded, and stored data can be searched by algorithms and AI technology, potentially gives governments huge control over citizens.
Corporations and financial institutions will also have the potential to put our lives under the microscope and analyze every aspect of our existence via our daily spending. Devices like smartphones, smart vehicle devices, and RAV KAV cards already connect us to the internet of things (IoT) 24/7/365.
Unless you’re a 21st hermit in the wilderness, your whereabouts, movements, and social interactions can - and often are - being tracked. Add your financial activity to that mix - and there is huge potential for government and corporate abuse. If contactless payments are ubiquitous - and are not anonymized - it could eventually be possible to exclude selected people from all economic activity. The relationship between citizens and states could be redefined in a seriously negative way.
Accessibility of Contactless Payments
Adapting a business to accept contactless payments requires an understanding of the technology and its potential, a budget, the will to implement change at the corporate level, and at least some degree of consumer acceptance. The rolling out of contactless payments has been most successful where monopolies exist - e.g. with the Israeli transport system and RAV KAV. Transport users were presented with de facto change.
Where businesses have competitors (and employees and customers) it’s a little more complicated. It’s a lot harder to impose arbitrary changes to well-established practices that people are content to continue. Contactless payment systems are currently a convenient option that is great to use in some places. It can be great to pay your bar bill with a QR code, or your cab home with an app. The next business you go to might not have the technology at their POS.
You may also run into difficulties if you want to make an expensive purchase. Contactless purchases don’t offer the relative protection of PIN numbers and signatures. Some banks and financial service providers will place limits on transaction sizes. That’s not an issue if you’re buying a few items at the pharmacy, It could be a problem if you urgently need a new laptop or washing machine. If you’re planning to travel abroad, you definitely don’t want to be dependent on contactless payment methods. Contactless accessibility at POS already varies considerably even in developed economies. Wherever you go, cash is king in an emergency.
Contactless payments are already part of the financial landscape. How they will evolve remains to be seen. The rule of thumb is to be open to the technology and to keep up to date with new payment methods - but to think carefully about how much personal data and info you are willing to share. It’s also important to never depend on a single system.
TCS follows the development of new payment technologies closely - particularly where they interact with smartphones and the internet. We’re always looking for ways to improve our own services and stay at the forefront of technical innovation in Israel. We’ll keep you updated with the latest tech news, new telecommunications products, and top tips on how to get the most out of the digital age - and benefit safely from the coming tech revolution.