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Meet the New Ways to Pay

The way we’ve paid for things for decades is changing, and much of this change is happening because of mobile phones. Apps and new technology allow us to perform transactions at the cash register and to send money to friends and family. And we are taking advantage: The Federal Reserve in 2014 surveyed consumers and found that 22% of mobile phone owners reported having made a mobile payment in the previous year, an increase from 15% in 2012.

Add the overhaul underway to our credit cards, and it really is becoming a new world for payments. Here’s what you need to know.

Phones to pay the cashier…

Mobile wallets, or virtual wallets, aim to replace the leather one that holds your cash and cards. They can handle two types of transactions: paying merchants with a wave at the cash register, and settling up with friends or family with the tap of a button.

For in-store purchase, the big players are Apple Pay, Google Wallet, Android Pay and Samsung Pay. They have their differences, but generally speaking, each one stores your credit card information and conveys it when you hold the phone over the card reader.
How does it work exactly? These mobile payment systems typically operate using near field communication, or NFC, a short-range wireless network. Look for a symbol similar to that for Wi-Fi to tell whether a store’s card reader is NFC-enabled.

...or your friends and family

The other big use of mobile wallets is for peer-to-peer payments, that is, sending money to individuals. All you need is their email address or a phone number. You register once and never exchange bank account numbers or personal information.

Google Wallet is a popular option. Once again, link your credit card with the wallet, and then use it to settle up after a big dinner or send money to your kid at college.

But are mobile payments safe?

Yes, especially when you consider that traditional credit and debit cards aren’t always secure.

Whereas cards with the black magnetic stripe on the back transmit your actual card number every time you swipe, the best mobile payment options never reveal it. Instead, each card in your virtual wallet is assigned a token (a string of code) that represents your card number. When you use the app to pay at the register, your token is used to process the payment.

It means that if a store is later hacked and its data compromised, your credit card number is not there.

What about credit cards with a chip inside?

You may have noticed that financial institutions like Dominion Energy Credit Union are issuing customers new credit cards boasting a microchip and greater security. These EMV cards work a bit differently—they too encrypt the actual card number and instead transmit a one-off code to complete transactions.  The most noticeable difference is that you insert the card in the reader and leave it there for the duration of the transaction. No more swiping.

Bottom line: Mobile wallets are usually easy to set up and fee free. Between them and EMV cards, we may well continue to see these nontraditional payments become the norm.

Peter Lewis, NerdWallet. Copyright 2015 NerdWallet, Inc. All Rights Reserved.