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How Mobile Payment Systems Are Redefining Commerce

Wed, 12/12/2012 - 8:30am

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Thanks to recent tech advances, investments by companies like Apple and Google, and the backing of traditional payment processors (as well as new startups), the mobile payments space is white hot.

Consumers, particularly those in parts of Europe and Asia, have been making purchases using their cellphones for the better part of a decade. Traditional ecommerce solutions aside, however, mobile payments have yet to really go mainstream.

Even if the disruption isn't happening overnight, mobile payment systems are still poised to help redefine the way business is done all over the world.

Mobile Payment Systems: A Primer

The phrase "mobile payment system" can apply to a number of different technologies and implementations for initiating and accepting transactions using a mobile device.

Forrester Research separates systems into two broad categories:

  • Payment systems that utilize a mobile network to initiate or authorize a transaction.

  • Contactless systems that use a mobile phone in lieu of a traditional credit card.

In other words, mobile payment systems apply to both how consumers pay for goods, as well as how merchants can process transactions.

Systems that Process Payments

On the processing side, startups like Square want to cut down the barriers associated with accepting credit card transactions.

Last October, Mashable's Jennifer Van Grove discussed three services that allow merchants to accept credit card payments on mobile devices.

Square works by combining a small, square-shaped card reader with a free app for iPhone and Android. Simply plug the reader into the microphone jack of your smartphone and open the app. Now transactions can be processed either by swiping the card or hand-keying the digits.

The promise of something like Square -- which charges a 2.75% transaction fee but has no other associated costs -- is that it eliminates the need for smaller businesses to set up expensive point-of-sale systems. It's also portable and can be used with any Android or iOS device.

Square isn't the only mobile payment processor in town. Intuit GoPayment and VeriFone's PAYware Mobile are also actively investing in the space.

Systems that Let Consumers Pay by Mobile Phone

When it comes to actually paying for items using your phone instead of with cash or a credit card, the future is all about NFC. Near field communication, or NFC, has been in the works for nearly ten years.

Analysts predict, however, that 2011 is the year that a sizable number of NFC-enabled devices will finally ship to consumers. The premise behind NFC is simple: Rather than swiping a card, just wave your phone at a payment terminal and be on your way.

We're already seeing pilot NFC implementations from credit card companies and banks, including Visa, Bank of America, American Express and MasterCard.

Last fall, Visa worked with the transit and port authorities in New York to install Visa payWave terminals at select New York City subway stations. The advantages of NFC and contactless payments in areas like the subway are two-fold. First, it's fast. Second, it helps cut down on the need for paper tickets.

A number of public transit systems are already in the process of transitioning to RFID-enabled transit cards. Using a mobile phone would accomplish the same feat, but with the benefit of also being refillable on the spot.

Going Green and Going Hands-Free

Aside from being able to accept and make payments in more locations, one of the advantages of modern mobile payment systems is environmental. Sure, the ecological impact of a paper credit card receipt is likely small -- relatively speaking -- but cutting down on excess waste is still good for the environment.

It can also be good for businesses' bottom lines. Apple, one of the first major retail chains to accept payments using mobile devices (first Windows Mobile powered terminals and later the iPhone), has long emailed customers their receipt by default, only printing it on request.

It's not clear how much money that decision has saved Apple over the years, but given the high number of transactions that each Apple retail store processes each day, it is likely significant. Moreover, every receipt that is emailed is one less wasted piece of printed paper.

The great thing about mobile devices is that with specialized apps or software, a singular device can represent an array of different types of cards. The same device can act as a credit or debit card, a subway pass and perhaps, even an event ticket. Relying on a mobile device for such transactions eliminates the need for extra cards and saves money and resources.

But How Secure is This Anyway?

Understandably, one of the primary concerns with mobile payments, be it via processing services or via NFC, is security. More than 60 years after the first general purpose credit card hit the market, credit card theft and security continue to be problems for merchants, card issuers and consumers.

Not all mobile payment systems are created equally. Many security experts have questioned whether NFC technology will help or hinder overall financial transaction security. The limited communications range of NFC (the "near field" aspect) makes traditional security obstruction efforts more difficult. However, as a 2006 paper [PDF] by Ernst Haselsteiner and Klemens Breitfuss demonstrated, there are still potential security holes in the system that need to be accounted for.

When it comes to payment processing systems and point of sale systems, data encryption is of utmost importance.

In January, Rick Orr from TabbedOut contributed a guest post for Mashable discussing the security of smartphone payments.

Orr outlined three considerations for users and merchants to consider when making payments via a smartphone. Orr says it is essential to ensure that credit card information is:

  • Only sent to the venue's POS system, rather than passing through third-party services.

  • Only stored on your phone, where it's safest, and not in the cloud.

  • Always encrypted when it is sent to the POS system, where the transaction is taking place.

Last month, VeriFone CEO Douglas Bergeron attacked its competitor, Square, on the basis that the Square card reader and authentication system was insecure. Although VeriFone's approach and proof of concept were criticized, it highlighted some of the potential pratfalls in this new era of payment processing systems and vendors.

It's important to remember, however, that current credit card POS terminals and systems are often insecure, yet millions of users use them everyday anyway. At this stage, nothing indicates that there is anything about mobile payments that is anymore inherently insecure than any other system.

Mobile Payments Today and in the Future

Forrester Research opines that the 2012 Olympics in London will be the first major event where mobile payment systems using NFC will be on display in a big, big way. It could be years until more businesses and venues start to adopt mobile payment systems.

In the meantime, we're seeing mobile payments crop up more and more frequently. Starbucks started accepting mobile payments at stores nationwide in January. Last month, the company announced that more than 3 million people had chosen to pay for their coffee using the company's app.

As NFC devices start shipping in bulk, we expect to see more vendors test the technology and for rollouts to continue in large cities. Traditional financial services companies, like American Express, are betting on mobile payments to be a big part of the future.

American Express recently announced its new payment system, Serve, that will have a payment to payment and mobile payment component. Visa, Mastercard and Discover are also investing heavily in various mobile payment options and are hoping to outfit more merchants with support for various mobile payment systems.

Who knows, in five years time, paying for a candy bar or sandwich at the deli with a smartphone may be second nature.

What are you thoughts on mobile payment systems and their impact on commerce? Let us know in the comments.

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December 12, 2012

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