Mobile Payments: FAQs for Retailers

by

Analyst, Software Advice

In July 2011, Gartner released a study on worldwide mobile payment trends. In it, Gartner reported a striking 38 percent jump in mobile payment users from 2010 to 2011, to 141 million. Even so, the report notes that the market has been slow to develop, and mass market adoption may be more than four years away.

"The biggest hurdle is the need to change user behavior by convincing consumers to pay with mobile phones instead of cash and cards," says Gartner Research Director Sandy Shen in the press release on the report.

Calvin Grimes, mobile product manager at Fiserv, sees mobile payments addressing a problem consumers don’t realize they even have. Grimes notes it’s similar to how consumers used to think about mobile banking. “They didn’t realize they wanted it until they had it,” says Grimes. “Leading financial institutions pioneered the service–now it’s expected.”

Retailers can–and should–play a role in driving consumer adoption of mobile payments, and Eytan Wiener, COO of Quantum Networks LLC, thinks retailers should act now rather than later: “It’s worth it for companies to get in on this technology early. Those that do will benefit long-term, and attract enthusiasts eager to try this out in stores.”

Retailers need to understand the technology and implications of mobile payments to avoid being caught flat-footed. Here are some answers to questions retailers frequently ask to get you started.

The Basics

What are mobile payments?
Mobile payments are monetary transactions facilitated through smartphones or other mobile devices, such as tablets. These payments are initiated by a virtual wallet communicating with merchant payment terminals at the point of sale.

What is the consumer-facing technology behind mobile payments?
Consumers first register their credit card account with a virtual wallet application, such as Google Wallet or the soon-to-be-released ISIS application. Capable mobile devices contain radio-frequency identification (RFID) chips that communicate with merchant terminals using a technology called near field communication (NFC). The devices communicate when in close proximity, establishing a “contactless payment” connection.

What do retailers need to accept mobile payments?
Beyond the basic requirements to complete any credit card transaction (a merchant account, payment gateway, point of sale software, etc.), retailers must have either a standalone NFC-payment terminal or an integrated credit card machine that is ISO 14443-compatible. Standalone receivers can be purchased for a few hundred dollars; fully-integrated credit card machines are more expensive.

How do mobile payments benefit consumers versus using credit cards?
The simplicity of paying by phone–which consumers carry anyway–is one of its main selling points. Theft prevention is also a benefit, as virtual wallets can be remotely wiped in the event a phone is lost or stolen. Finally, value-added services built into virtual wallets–such as integrated loyalty programs and couponing–are some of the proposed future benefits of mobile payments.

The Ecosystem

Who are the major players that retailers should be aware of?
In the U.S., two players are spearheading mobile payment adoption: ISIS, a joint venture between Verizon, AT&T and T-Mobile USA, and Google, which is partnering with Sprint, Citi and MasterCard on its Google Wallet initiative. A third party to keep an eye on is PayPal, the e-commerce payment processor. PayPal is testing multiple new payment models across the world to increase its penetration into physical stores; the NFC technology its CEO once ridiculed is currently being tested in Sweden.

How much will a mobile payment transaction “cost?”
Today, mobile payments via smartphones cost the same as using current NFC payment technologies such as PayPass and payWave. Interchange rates are slightly higher for contactless payments than for traditional credit card payments although card companies could lower rates for NFC transactions like it did in Italy back in 2010.

How is mobile payment security being addressed?
Mobile device manufacturers and application developers will have to ensure devices are secure from hackers. NFC signals transmit at a range of only a few centimeters (and a maximum of a few meters, in some instances), and virtual wallets require authentication to complete payments. Applications with PIN passwords will inherently be safer than cards that are stolen and used elsewhere instantly. Security technology experts are also researching new ways to increase mobile payment security–such as creating single-use credit card numbers to destroy the value of skimmed virtual wallets.

The Merchant Opportunity

How will mobile payments be integrated with couponing and loyalty?
Value-added services will undoubtedly drive consumer adoption of mobile payment platforms. The smartphone will eventually link mobile payments with retail mobile shopping applications such as ShopKick (which allows shoppers to earn points for mobile check-ins at participating stores), PunchTab (which rewards shoppers for purchases and for encouraging their social networks to shop at specific stores) and RedLaser (to scan QR and barcodes at stores for more product information), among others.

For example, shoppers could check-in to specific store areas to receive targeted offers and immediately complete the sale; they could track their rewards points directly within their virtual wallet at the point of sale; or consumers could receive a coupon on their phone immediately after scanning a QR code or making a purchase. The idea is that a mobile payment is the final step to completing a soup-to-nuts mobile shopping experience.

Does point of sale technology selection have to change?
Most retailers will only have to update credit card terminals during their next upgrade cycle to offer mobile payment processing. Other than that, most of the innovation will be within smartphone applications, not point-of-sale hardware or software.

What should a retailer do to prepare for the mobile payments movement?
Have a vision in place. Merchants, retailers, financial institutions and consumers are all playing a game of chicken right now–waiting for one of the parties to take the biggest step forward. For starters, retailers can stay on-top of payments in the news, as well as testing the waters with technologies such as Google Places. Additionally, stay alert if your community is adopting NFC elsewhere, such as Boston’s NFC inniaitive within taxi cabs.

These answers should answer most retailers’ questions, but others will undoubtedly arise as mobile payments become more prevalent. Feel free to leave a note below if you have a question not answered in our FAQ, or contact me directly.

An additional thanks to Mutual Mobile's Rachel Youens for her insight.

Thumbnail image created by Tom Purves.

 
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