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How Blockchain Technology Can Secure Contactless Payments

From mobile pay apps like Alipay and M-Pesa to online systems such as PayPal, the global payment industry has seen explosive growth in recent years.

This growth has been propelled by disruptive technologies like radio frequency identification (RFID) and near-field communication (NFC). RFID and NFC, technologies that make it possible for payment devices to communicate and exchange information, have largely enabled contactless payments. In their most basic definition, both technologies utilize radio waves and operate at the same frequency level. 

The two technologies involve embedding a chip in a device that will then allow instant payments just by waving it over a reader. The communication between the device and the reader involves radio waves, meaning that, in order for a transaction to occur, the two must be in close proximity. Contactless payment devices include debit and credit cards, key fobs, smart cards, smartphones and more.

The technology has reached such an advanced point that a new method, involving surgically inserting an NFC chip into a hand to enable payments just by a wave, has emerged, taking the contactless payments game up a notch. According to Vlad Zaitsev, a Russian engineer who is among the first to have the contactless payment chip implanted into his hand, this has eliminated the inconvenience of having to carry his payment cards.

While the contactless payments method is easy and fast, it is not without security loopholes. The key challenge with contactless payment methods is that there is no way to verify the merchant outlet and simultaneously determine whether they have been exposed to risks or have had fraudulent transactions occur in the past. Consequently, customers may find themselves falling prey to fraudsters when the wireless signals from their devices are intercepted and their financial information is stolen.

Enter Blockchain Technology

Solutions, such as Tone Tag, are trying to counter these issues by ensuring that all payments are processed through a three-layer encryption protocol powered by blockchain technology. Distributed ledgers not only provide data safety but also enable users to verify that the merchants are reputable and will, therefore, have systems in place so as to avoid falling into traps set by scammers.

When paying through the Tone Tag contactless payment system, customers can identify whether the merchant outlet they are dealing with is prone to risk or if it has been involved in any fraudulent issues in the past. In other words, the blockchain-powered contactless payment system records instances of fraud and shares this data with other customers to warn them. The data is encrypted and stored in a distributed ledger, and the merchants in question cannot alter it.

Similarly, through the blockchain-powered contactless payment system, merchants can identify fraudulent customers and take the necessary precautions. The technology enables them to verify genuine customers and determine if a transaction is unusual or if they have been involved in any fraudulent transactions in the past. With the blockchain-powered contactless payments, no party has the upper hand over the other since all data is presented to all users without compromising their personal security.

Deloitte, in partnership with SETL, a London-based company that focuses on blockchain payments and settlements, is also implementing a blockchain-based contactless payment system with the same goals as Tone Tag. According to a report by Deloitte, apart from ensuring security, the application of blockchains in contactless payments also makes settlement and payment processes more efficient. The report also noted that the combination of the two technologies reduces costs-per-trade for institutions, saving up to $80 billion in associated costs. 

As the blockchain-powered contactless payment technology continues to advance, it is highly likely that more advantages will become known. The contactless payment industry is growing fast, which means that this could be the best time for innovators and entrepreneurs to get in the game.

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