What's Next For Mobile Payments

Mobile payments are the next frontier of retail technology. New products and services that let consumers pay for products using a smartphone instead of a bank card or cash are emerging. For instance, Starbucks says that last year more than 26 million in-store transactions were paid on mobile phones via the Starbucks Card Mobile App. Customers can use their phones to make purchases at more than 9,000 locations.

Clothing retailer American Eagle Outfitters now accepts mobile payments at select stores via Google Wallet, a mobile app from Google that links to a credit card. Toys R Us, Foot Locker, and Macy's also support Google Wallet.

More mobile payment options are on the way. Isis, a joint venture from AT&T Mobility, T-Mobile USA, and Verizon Wireless will launch mobile payment trials this summer. Meanwhile, The Wall Street Journal recently reported that Target, Wal-Mart, and other retailers are working on a competing mobile payment system.

Startups also are getting into mobile payments. Square, launched by Twitter co-founder Jack Dorsey, recently came out with Card Case, an application that lets customers use their mobile phones to pay retailers.

While there's significant activity around mobile payments, there's also a lot of uncertainty, which is bad news for retailers that must decide where and how to invest. Two questions underpin this uncertainty: Which mobile payment infrastructure will prevail, and will customers adopt the technology in great enough numbers to make it worth a retailer's investment?

Dialing For Dollars

Two models are emerging for the use of mobile devices in place of swiping a card or paying cash. The first requires near field communication, a radio system that lets two or more devices send and receive data at very close range, such as a few centimeters. With this system, a user taps an NFC-equipped smartphone against an NFC-equipped point-of-sale terminal to pay for a transaction. The smartphone also needs a digital wallet app that's preloaded with money from a credit or bank card.

Google Wallet is a good example. It runs on NFC-enabled Android phones, including the Nexus S 4G and Galaxy Nexus devices. At the 2012 Mobile World Congress, Google announced that 10 Sprint smartphone models will support Google Wallet this year. Apple and Research In Motion also are expected to add NFC support to forthcoming devices.

Google Wallet works with MasterCard PayPass, a point-of-sale terminal that supports NFC.

At present, Citi MasterCard is the only credit card that works with Google Wallet, which means purchases made with Google Wallet are charged to a Citi MasterCard account. Alternatively, users can buy a Google Prepaid Card, a virtual card for Google Wallet that's funded using any credit card.

American Eagle Outfitters is experimenting with Google Wallet in some of its stores. "Although it's still early, we consider mobile applications like Google Wallet to be the next frontier for how customers shop and interact with brands," says a spokeswoman for the clothing retailer. "Customers are rarely seen without a mobile phone in their hands." The retailer declined to discuss the project's costs or its impact on the stores' payment infrastructure.

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NFC-based mobile payment options will expand with the launch of Isis, the AT&T Mobility, T-Mobile USA, and Verizon Wireless joint venture. Like Google Wallet, the Isis Mobile Wallet will let consumers use NFC-enabled smartphones to pay for goods in stores.

Isis has major backers; in September, the group announced that HTC, LG, Motorola, RIM, and other manufacturers would release mobile devices that use Isis's NFC standards. At Mobile World Congress 2012, Isis said that Chase, Capital One, and Barclaycard would let customers link credit, debit, and prepaid cards with the Isis Mobile Wallet. Isis says it will roll out pilots of its mobile payment system in Austin, Texas, and Salt Lake City this summer.

The main drawback of NFC systems for retailers is that they must invest both time and money to deploy the terminal--a significant expense for companies that would need them in hundreds or thousands of locations. Retailers also must demonstrate that their payment processes meet PCI requirements for protecting credit and bank card information.

No NFC Required

There are other options besides NFC that merchants can adopt to let customers use mobile phones to make payments. Square has released a mobile phone app called Card Case that lets customers pay with their mobile phones. Rather than tap the phone on the point-of-sale terminal, the customer sets up a Card Case tab with the merchant. At checkout, the customer types the merchant's name into his or her Card Case account on a mobile device, along with the amount of the purchase. That amount is then transferred to the merchant. Card Case users fund their accounts using a standard credit card.

Similarly, a company called Tabbedout has an app by the same name that lets smartphone users pay restaurant and bar bills by linking the app to a credit card or a PayPal account.

Some large retailers are also experimenting with proprietary mobile payment options that don't rely on NFC. Starbucks lets users link rechargeable Starbucks Cards to their mobile devices via an app. The app, available for Android and Apple phones, displays a bar code that the barista scans at checkout. It also tracks loyalty points and lets users check card balances and add money to their accounts.

The Square and Starbucks approaches don't require upgrades to payment terminals, which may be appealing for a company with thousands of locations.

PayPal is another alternative, announcing in February that account holders will be able to make in-store purchases at Home Depot by typing their mobile phone numbers and PINs into a keypad at the register. This method isn't a mobile payment system, but it does demonstrate the increasing number of alternatives that merchants have for in-store payments.

Many Questions, Few Answers

The big question for retailers is, which of the many payment approaches are worth supporting?

There are no clear answers. NFC-enabled systems have promise, but the field is small. Recent announcements from Google and Isis show that smartphone manufacturers are committed to rolling out devices that support this technology, but at present non-NFC phones far outnumber NFC ones. According to IMS Research, 35 million NFC-enabled smartphones were shipped globally last year. The consulting firm predicts that number will grow to nearly 80 million by the end of this year, but that's still just a fraction of all mobile devices.

Starbucks and Home Depot also point to the viability of different models: Starbucks leverages its in-house card system and loyal customers to drive a proprietary mobile payment system, while Home Depot is banking on PayPal's popularity to provide an alternative to cards and cash at the register. Other retailers can choose to follow these models, but if NFC grows in popularity, stores will likely find themselves supporting a variety of payment systems.

Another question retailers must answer is whether consumers will take to mobile payments in sufficient numbers. According to KPMG's annual Global Consumer and Convergence survey of 9,600 people in 31 countries, 66% of respondents said they would be willing to use their mobile phones as wallets.

However, Starbucks' experience shows that mobile payments still represent a small fraction of transactions. Customers loaded $2.4 billion onto Starbucks Cards last year, but just $110.5 million was loaded via the mobile app, Starbucks says. While $110 million isn't anything to scoff at, the difference illustrates the gap between mobile payments and traditional cards.

MOBILE COMMERCE

$670B Total value of global mobile payments by 2015, according to Juniper Research 26M Starbucks' mobile payment transactions in 2011 140K+ U.S. terminals that support Google Wallet

Security questions also loom in consumers' minds. Ninety percent of respondents to the KPMG survey cite data security and privacy as their No. 1 concern with mobile payment applications and systems. And they're right to be concerned.

In February, researchers at security company Zvelo identified a vulnerability in Google Wallet that let them reveal the PIN code that a user must enter to access the app. The exploit required the phone to be rooted (in other words, the user has to have full administrator access). However, other researchers found a much easier method that lets anyone with physical access to the phone reset the PIN and get full access to the app to make purchases. This prompted Google to suspend the provisioning of its prepaid virtual cards for several days while it addressed the issues.

More Ways To Pay

Even with security concerns, it's clear that consumers are experimenting with mobile payments. And retailers have a vested interest in making it as easy as possible for customers to give them money in whatever manner they choose. The American Eagle Outfitters spokeswoman says the retailer is relatively early to mobile payments but also notes that "smartphones are a way of life for AEO customers."

Now may be the time for retailers to experiment as well. Smart merchants will look beyond the payment mechanics to a bigger prize: how to leverage mobile payments to keep customers coming back. Mobile apps provide an opportunity to create and strengthen customer reward and loyalty programs, offer coupons and in-store discounts, and strengthen brand loyalty.

Now imagine tying those benefits to an in-store mobile payment system. The possibilities are endless. For instance, why wait to have customers come to the register to make payments? With NFC-equipped touchpads placed throughout a store, customers could pay for items right in the aisle, giving new meaning to impulse buying.

It's clear that mobile payments are a new frontier. Retailers that set foot into this new land shouldn't be surprised to find customers already there.

Michael A. Davis is CEO at Savid Technology. To read more by him, go to informationweek.com/michaeldavis. Write to us at [email protected].

InformationWeek: Oct. 11, 2010 Issue

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