Mobile Payments 101: Retail

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1 SPECIAL REPORT Mobile Payments 101: Retail Learn what mobile payment options are currently available, their pros and cons and their probable long-term viability. By Suzanne Cluckey Contributing writer, MobilePaymentsToday.com Executive summary Though mobile devices have played only a small role in retail payments to date, developments within and beyond the retail world suggest that they will take center stage very soon. Juniper Research estimates that between 2010 and 2014 mobile payments will grow dramatically, from $170 billion to $630 billion worldwide. Retailers must begin to determine what role mobile payments will play in their business. The calculation is not a simple one, however, given the wide range of mobile payment methods. This special report will help retailers begin to sort out these payment methods with a complete overview and benefits analysis of each, including: Mobile proximity payments Near-field communications (NFC) Bar-code payments Numeric-code payments Mobile remote payments Message-based payments Browser-based payments Application-based payments Lastly, this special report will offer recommendations to help retailers take their first steps into the dynamic field of mobile payments. Advances over the last decade have transformed mobile devices from simple phones into powerful computing tools. Today, owners of these devices can use them for everything from locating a nearby filling station to paying for their gas and snacks. Developments within and beyond the retail world suggest that mobile devices will take center stage very soon. Concerns among banks and retailers about fraud and the endless quest among mobile device makers and service providers to add value to their products have paved the way for major growth in mobile payments. Mobile payments amounted to $170 billion worldwide in By 2014, this figure will balloon to $630 billion, according to estimates from Juniper Research, a provider of business intelligence based in Europe. Juniper also projects that $100 billion of the entire mobile payments amount will be in payment for physical goods, as opposed to payments for digital goods or money transfers. 1

2 In the United States, mobile payments will total $214 billion by 2015, 77 percent of which will be payments made at a physical retail location, according to Boston-based independent research firm Aite Group. As this future begins to unfold, retailers must calculate seriously the role that mobile phones might play in the future of their business. It is no simple calculation. Choices in the mobile payments world are wide-ranging and accompanied by many complicating factors. In addition, trends and alliances between stakeholders are still taking shape, and it s very likely that coalitions formed will have a controlling influence in determining which mobile payments systems will be supported and how they will be implemented. Retail options for mobile payments Retail mobile payments come in two types: proximity and remote. Each employs a variety of payment methods and technologies. Some of the technologies require additional hardware and software on the customer or retailer side, or both. Mobile proximity payments Proximity payments occur while the customer is on site in a physical retail environment, which can be either an attended POS station or an unattended location such as a kiosk or vending machine. Types of payments include near-field communications, bar-code payments and numericcode payments. $630 billion $600 billion $500 billion $400 billion $300 billion $200 billion $170 billion Projected growth of mobile payments Near-field communications (NFC) This technology currently represents the most powerful and promising of mobile payments methods and, in the United States at least, also the most problematic. Complications arise not only because of the hardware involved, but also because of the many mobile operating systems with which retailers NFC-enabled POS systems will need to interact. At this early stage of NFC implementation, it is impossible to know how the major mobile operating system players will set up their side of the process. NFC payments are also known as contactless payments because the mobile device never actually touches the POS system. In fact, in most instances, it never leaves the customer s hand. Source: Juniper Research 2

3 smartphone owner to collect and arrange payment information. The app may either come preinstalled on the device or be securely downloaded by the user from a trusted source. Individual accounts in the mobile wallet are known as soft cards. To add them, the user requests a download from the card issuer. After verifying the customer s identity, the issuer transmits a secure soft card download to the mobile wallet. Within the wallet app, the user can organize accounts and select personal security features to suit her preferences. All of the hardware and data required to make NFC payments resides on a smartphone, so the mobile device never touches the POS system. With NFC, all of the hardware and data required to make payments resides on the customer s smartphone. The user begins payment by entering a PIN into the device, which enables a SIM or MicroSD card containing the customer s credit and/or bank account data. The customer chooses a payment account, then holds the device within a few inches of the retailer s contactless POS terminal. The terminal receives payment information from the smartphone via short-wave radio transmission. According to American Express, this transaction is 63 percent faster than cash and 53 percent faster than using a traditional credit card. For consumers, an especially attractive feature of NFC payment is the mobile wallet. This is an application used by the The mobile wallet user also can designate a default payment card for transactions, while maintaining the prerogative to approve or change the payment method at the POS. Alternatively, the customer can set the mobile wallet default so that it allows the POS system to prompt a payment method (e.g., a store-branded credit card or gift card). The customer then has the option to accept this prompt or choose another payment type. The good news about NFC payment is that it can utilize the same POS technology deployed to read microchip-embedded contactless bankcards. The bad news is that most of this technology is deployed outside of the United States. To date, relatively few retailers in the United States have adopted contactless systems due to the reluctance of some banks to NFC transactions are 63 percent faster than cash and 53 percent faster than using a traditional credit card. Source: American Express 3

4 pay for the more expensive chip cards and retailers reluctance to pay for the POS readers and back-office system upgrades. Moreover, currently very few NFC-enabled mobile devices are available to smartphone buyers in the United States. The technology has been promoted in Europe, where chip-embedded bankcards have been the norm for years. Banking and retailing sectors in the United States, however, have begun to reconsider implementation of contactless mobile payment methods, given the rising incidence of fraud with magnetic-stripe cards and the fact that contactless cards are the standard throughout the rest of the world. Additionally, merchants are beginning to assess the advantages of contactless payments as part of their PCI DSS compliance programs. This reframing of the contactless payment outlook led Aite Group to project that contactless payment use will constitute the fastest-growing segment of mobile payments over the next several years. The company conservatively estimates that 7 percent of U.S. retail locations will offer mobile contactless payment by 2015, netting a gross dollar volume of $25 billion. Retailers now capable of accepting contactless card and mobile payments include Best Buy, The Home Depot, BP, Walgreens, McDonald s and other national and regional chains. Of course, it will take years for mobile contactless payments to reach critical mass in the United States as retailers upgrade their systems and consumers trade up to NFCenabled devices. However, handset manufacturers, carriers and OS developers are Mobile devices defined Smartphone: A mobile phone equipped with an advanced operating system (OS). The user can download compatible applications usually from an online source that carry out sophisticated computing tasks. The Nielsen Company projects that by 2014, 90 percent of mobile devices in use in the United States will be smartphones. Feature phone: A mobile phone with a proprietary operating system. The OS is less sophisticated than that of a smartphone, and while downloadable applications are available, they tend to be fairly simple. Mobile payment device: One of a number of network-connected devices such as a mobile phone, personal digital assistant, smartphone or tablet. beginning to embrace the technology, and there are signs that the selection of NFC devices is poised for rapid and significant growth. Most major mobile companies have announced plans to introduce NFCequipped models in And as the past history of the smartphone has demonstrated, once major players come on board, smaller competitors quickly follow suit. Retailers can benefit from the fact that contactless payments do not require the use of a smartphone. While smartphones are gaining in popularity, there are segments of the population that do not carry them. Contactless payments, however, require only a chip-embedded debit or credit card, which banks can rapidly deploy. Customers are likely to use the chip-embedded card, helping retailers recoup their investment in the technology. 4

5 While chip-embedded cards are simple to use, smartphone users gain the advantage of being able to store soft cards on their NFC-enabled device and leave their plastic at home. Additionally, smartphone users would be able to update their mobile wallet automatically by means of a download from a card issuer any time a change was made to a payment method (for example, an updated expiration date for a bank card). As they wait for the picture of NFC use in the United States to develop, many retailers are considering more easily and inexpensively implemented if less efficient mobile proximity payment solutions. Bar-code payments These comprise the largest segment of mobile proximity payments in the United States today. A retailer can set up the system in one of two ways. Smartphone-displayed bar code. The customer begins by registering for an account and designating funding sources. This information can be kept on the retailer s own server or can be stored on a third-party server a sort of cloud-based mobile wallet. The bar-code payment system introduces the features and convenience of mobile payment for both retailer and consumer without requiring either to make a major investment in hardware. Pros and cons of bar-code payments Pros Don t require a major investment in hardware for either the retailer or consumer Free staff to perform other tasks Cons Customers may have to download different apps for use with different POS systems System may be prone to connectivity, hardware or software errors from the customer s smartphone As with the NFC mobile wallet, the customer can specify a default account setting, while maintaining the option to change payment choice at the POS. The customer accesses payment accounts on the server through a secure mobile device sign-on. Once purchases are scanned, the retailer s POS system sends a billing transaction request to the server s payment queue. The server then sends a 2-D transaction bar code to the customer and awaits a matching transaction from the retailer. The retailer scans the 2-D bar code, the transactions are matched on the server and the payment is processed. POS-displayed bar code. In this case, all elements remain the same, except that the retailer s POS system generates the payment request bar code. The smartphone camera enabled by a downloaded optical reader app scans the bar code. The mobile device then prompts the customer for permission to transmit the scanned billing information to the server. There, the transactions are matched and the sale is finalized. 5

6 Both methods of bar-code payment require the customer to use mobile software that integrates with the retailer s POS system. Retailers who elect to use a smartphonedisplayed bar code must install an optical scanning device. Those who choose the POS-displayed approach do not need the scanner, but they do need equipment to display the bar code. Ideally, each POS station would have a dedicated displayer. It is feasible for checkouts to share a large digital display that shows lane number and bar code together. However, this introduces the potential for mix-ups if the customer happens to scan the wrong bar code. The advantage to the bar-code payment system is that it introduces the features and convenience of mobile payment for both retailer and consumer without requiring either to make a major investment in hardware. The disadvantage is that mobile/pos software integration requirements can result in the customer having to download different apps for use with different POS systems, thus inhibiting the adoption of bar-code payment. are opting for a simpler approach that can be employed by any texting-enabled mobile device: numeric-code payments. Numeric-code payments This system revolves around a code delivered via Short Message Service (SMS, or, in user parlance, a text message) that authorizes a third-party payment initiated by the customer. To use this payment method, the customer must first enroll in a retailer s program and grant the retailer access to personal information and payment data. Upon registering, the customer receives a Common Short Code (CSC) specific to the customer s account. When the customer decides to make a purchase at the store, he sends a blank text message to the CSC number, which returns a message containing a purchase authorization code. Once purchases are scanned into the POS system, the customer gives the authorization code to the cashier, who Additionally, this payment method can slow down transactions, especially while customers are becoming familiar with the process. Even with an educated user, the system is subject to any connectivity, software and hardware problems that might arise with a customer s mobile device. Finally, the customer must have a smartphone to download the required software for either bar-code approach. For this reason, some retailers who are anxious to begin the transition to mobile payments methods Text messaging forms the basis of the numeric-code payment system. While it does not require new hardware or software, numeric-code payment does entail modifications to existing systems and requires the retailer to invest in store-branded marketing programs. 6

7 enters it into the POS system as a mobile purchase request. The POS system validates the authorization code, and the third-party payer transmits payment to the retail location s ACH account. Closed-loop transactions (such as coupons or loyalty points) are reconciled without involving the ACH account. Each month, the retailer receives a payment report from the third-party provider and an invoice for processing costs. Though this payment method requires no new hardware or software systems, it does entail modifications to existing systems to enable mobile authorization. It also requires the retailer to invest in storebranded marketing programs that acquaint customers with the payment process and urge them to enroll. Mobile remote payments Mobile remote payments are payments to a retailer that take place while the customer is not present in a physical store environment. This option can be well suited to nontraditional retail scenarios, including person-to-person payments, transactions with unbanked customers and payments to seasonal vendors. This payment type also has been widely used for digital transactions, such as ringtone and music downloads, phone minute top-offs and donations (for instance, the Red Cross campaign to raise funds for earthquake victims in Haiti). Message-based remote payment can be transacted on virtually any mobile phone, opening it to a wide audience. Typically, mobile remote payments require no hardware other than the mobile device itself. The payee must set up payment processing through a third party, and the payor must establish an accessible payment account. With these elements in place, parties can transact payments in one of three ways. Message-based remote payment This method entails a series of interactions by SMS or MMS (i.e., a text with an accompanying image file). The customer initiates the purchase with a message to a CSC to which the retailer subscribes. The merchant sends a return text with billing information. The customer texts back to accept this amount and the transaction is complete. Charges incurred by message-based remote payment can be added either to the customer s mobile bill or deducted from a mobile wallet. The chief advantage of this payment method is that it can be transacted with relative ease by any text-enabled device, which is virtually any mobile phone. 7

8 Message-based remote payment also has disadvantages, though, including the time required to complete a transaction and the possibility of failed payments due to lost messages. Browser-based remote payment With browser-based remote payment, buyers make an online payment just as they would from a home computer. The customer selects the payment method from a proffered range and enters payment information. This information is then sent securely to the payment processor via Secure Socket Layer (SSL) protocols. As a last step, a confirmation page appears to let the customer know the transaction has been successfully completed. Advantages to this payment method include customer familiarity with the process and trust in the SSL protocol. Disadvantages include the comparative slowness and unreliability of Web browsers on feature phones and older smartphones. For best results, both the device and the cellular network should be enabled for at least 3G data downloads. Application-based remote payment Application-based remote payment allows the customer to make a payment via a retailer s proprietary smartphone app, which the customer has opted to download. The optimized site can offer the same level of security as the retailer s full website; in many cases, in fact, the payment method has already been registered with the retailer, so card-number entry is not even required. As with browser-based payments, the advantage of application-based payments is the customer s familiarity with and trust in the payment system and the retailer. On the downside, this payment method requires a smartphone with the retailer s app downloaded to it. Also, like browser-based payments, data download speeds should be 3G or faster. Recommendations Each of the payment methods described in this paper plays a necessary and important role in the current mobile payments scheme. However, with time, some methods will become less relevant. The inevitable ascendancy of NFC-enabled smartphones and contactless POS installations will marginalize (but not completely eliminate) some SMS and bar-code payment options. In light of the pending arrival of contactless payment, retailers should consider the following actions: Adding NFC-enabled equipment with the next POS system update. This can be, but need not be, a storewide implementation. An alternative is to start with a few contactless payment lanes, adding more upgraded checkouts as the technology catches on. Retailers must be sure to alert their customers to the presence of these POS systems and explain how they operate. This may even extend to educating customers about smart cards and mobile devices themselves. Many of their customers may have a contactless card but be completely unaware of it. Retailers must be prepared to offer something of value to their customers in exchange for their effort in setting up the [payment loyalty] program. 8

9 Preparing customers for the eventual introduction of NFC technology by implementing a closed-loop payment loyalty program. Most notably, Starbucks is using such a program with a 2-D bar-code payment method. This voluntary program invites customers to download a Starbucks mobile app to their smartphone and set up the app with their current Starbucks card number. The user funds this soft card with a credit card transaction directly on the mobile site. Upon purchase, the smartphone displays a bar code connected to the loyalty account. The barista scans this at the POS, payment is deducted and loyalty points are added. With a certain number of visits, the customer gains access to program benefits. Key to the success of this program is the user reward. Retailers must be prepared to offer something of value to their customer in exchange for their effort in setting up the program. Challenging the assumption that customers wouldn t be interested in a mobile app for specific types of retail. In the world of mobile payments, old rules give way to new ones. This means thinking creatively about ways to involve loyal customers in a mobile payments program. It also involves letting go of demographically based assumptions about mobile payments. Millennials may be early adopters of new technologies and processes, but baby boomers are especially tuned into innovations that add convenience and value. Mobile payments programs offer benefits to appeal to both groups, as well as to the generation in between, Gen X. Starbucks is using a closed-loop payment loyalty program to prepare customers for the eventual introduction of NFC technology. Adding ordering and mobile payments functions to the current mobile website or smartphone app. Allow customers to access the inventory database and make remote purchases that they then can pick up in the store as a will-call. Again, implementation of such a program will be most successful if it is tied into a loyalty program. Thoroughly training all employees who will play any part in the mobile payments system. Detailed, solutions-based training is critical to ensuring the success of a program. Employees need to understand 9

10 how the system is supposed to work and what they re supposed to do if they encounter a problem with it. Nothing will sour customers on a mobile payments program faster than making them wait in line while an associate tries to figure out why another customer s device isn t communicating with the system. Training the customer. Produce simple but complete marketing materials to introduce the mobile payments program and explain its unique benefits. Provide a step-by-step visual overview of the program to familiarize enrollees with every aspect of the program and make them comfortable with the procedures. Provide FAQs and customer service resources to address any issues in a friendly, one-on-one manner. Optimizing the mobile payments smartphone app for different smartphone operating platforms. Be prepared to invest in programming for at least the most popular platforms, or risk annoying customers who would like to opt in, but cannot because their smartphone is not supported. A prime example of failing to optimize an app for all smartphone operating platforms is the Starbucks loyalty card mentioned above. The coffeehouse s mobile application was optimized only for iphone and Blackberry operating systems. But in 2010, Google s Android operating system became the most widely used smartphone platform in the United States, meaning that the majority of smartphone users today cannot take advantage of the Starbucks mobile loyalty card. 10