Mobile Payments 101: Integrating Mobile Into a Retail Environment
Have you considered how retail customers will be paying for purchases in the next few years? The massive increase in the number of consumers adopting mobile devices means that mobile payments will be a big player in a variety of traditional and non-traditional retail environments.
A Nielson Company report projects that in 2014, 90 percent of mobile devices in use in the United States will be smart phones. And today?
In 2011, 62 percent of American adults aged 25-34 report owning a smart phone. And market penetration of phones with advanced operating systems in other age groups is not far behind. So it might be nice to know a little more about the mobile payment landscape. Here’s a little more information about some of the mobile payment options available for retailers and customers.
Retail Mobile Payment Options
Mobile payments in a retail environment are generally divided into proximity and remote payments, depending on whether the buyer is physically inside the store or not. Within those two categories, a variety of payment methods and technologies can be found on both the retailer and the customer side.
Mobile payments – proximity
Think of proximity payments as those being made by customers within a physical retail environment. But that doesn’t mean the store has to be attended. The location could be a remote kiosk or vending machine or one using a traditional point-of-sale system attended by a cashier or a salesperson. Types of payments include contactless or near field communications, bar code payments, and numeric payments.
Near field communications (NFC)
If you’re familiar with near field communications, you probably know that NFC-enabled smart phones contain chips that can send encrypted data a short distance. These phones are tapped or waved near a point-of-sale reader, transferring payment data. Although these types of mobile payments are used more commonly in Europe, where chip-embedded bankcards have been the norm for years, there’s been a recent push in the United States to implement the technology.
Retailers such as Best Buy, McDonalds, The Home Depot, BP, and Walgreens currently have the capability of accepting contactless credit card and mobile payments. Other companies may not be too far behind. Just this year, Google Wallet launched nationwide after trial runs in New York and San Francisco. The wallet concept takes mobile payments even further, substituting a smart phone application, which collects and arranges each payment source, for a wallet full of credit cards.
But of all types of mobile proximity payments, NFC may be the furthest from adoption because of the high hardware costs for retailers and the banks supplying contactless cards, not to mention the slower evolution of NFC-enabled smart phones. For those reasons, companies in the United States have turned to less expensive (and less efficient) mobile proximity payment solutions.
Bar code payments
In the United States today, bar code payments make up the largest segment of all mobile proximity payments, mostly because the method requires little investment in hardware for retailers (to be be able to scan bar codes fromo a smartphone, a retailer would need to have an imaging scanner, but most retailers consider this a worthwhile investment). Bar code payments are made using either a smart phone or POS-displayed bar code.
As with other methods, the customer needs an account and a funding source. Once at the cash register, the POS system sends a billing transaction request which triggers a 2D bar code from the server to the customer’s phone. The retailer also scans a 2D bar code and when the system sees a match, the transaction is completed.
For POS-displayed bar codes, the point-of-sale system first generates the 2D bar code. Next, the code is scanned by the customer’s camera (with the help of an optical reader app) and the mobile device prompts the customer to transmit the billing information back to the central server where again the transactions are matched and the sale completed.
Using bar code payments requires that customers download different apps for different retail POS systems. Since mobile phones and applications are subject to potential connectivity issues, and these type of proximity payments are limited to smart phone owners, some retailers are sticking with payment technology that just requires text-enabled mobile devices.
Numeric payments from a smart phone start with a code delivered via text message, (SMS or short message service in industry parlance) authorized by the customer and carried out by a third-party service. First, consumers must create an account in the retailer’s program, providing access to personal data and payment information. The registration process generates a Common Short Code (CSC) specific to the consumer’s account.
To initiate a purchase, the customer sends a blank text message to the CSC number, receiving in reply a message containing a purchase authorization code. At the point-of-sale (POS), the cashier validates the authorization code and the third-party service completes an ACH financial transaction from the customer to the retail location.
Numeric mobile payments don’t require overhauls of POS hardware and software, but existing systems must be modified to accept the mobile authorization codes. They do, however require that retailers educate and enroll customers in the store-branded program, and contract with a third-party provider who processes the payments for a monthly fee.
Now that you know a little about mobile proximity payments, let’s take a look at mobile remote payments.
Mobile payments – remote
Payments made outside a physical location, remote mobile payments are often more non-traditional than proximity mobile payments. For example:
(1) Person-to-person payments. Sending money or making a transfer to someone without a bank account.
(2) Digital transactions. Buying mobile apps, ringtones, or downloading music, adding phone minutes, or even donating to a charity.
(3) Non-traditional retail scenarios. Paying a vendor at a seasonal show.
The advantage of mobile remote payments is that both parties usually require little more than their phone. The phone would most likely require some type of app, but no additional hardware. The person receiving the payment signs up for a payment processing service, either a monthly package or a per transaction fee, and the person making the payment offers an account to draw from (a bank or service similar to PayPal). Once these components are in place, both parties have a few more options.
Message-based remote mobile payments
Similar to numeric payments, the transaction is completed with a series of text messages. The customer initiates the transaction by SMS, sending a CSC to the third-party merchant connected with the retailer. The return text contains billing information. When the customer sends a third text confirming the charges, the transaction is complete. As virtually all mobile phones (smart phones or not) have text messaging capabilities, this remote payment strategy is often the most accessible.
Browser-based remote mobile payments
Just as you’d make a payment from your personal computer at home, you can use the web browser on your smart phone to pay remotely. Information for these types of transactions is sent to payment processors using Secure Socket Layer (SSL) protocols and the whole process gives consumers a higher degree of familiarity as it looks much like a regular online transaction. Depending on the age of the mobile device and the speed of the cellular network, this type of mobile payment is much more effective on recently manufactured smart phones on fast networks.
Application-based remote mobile payments
An application-based payment is simply one that uses the retailer’s proprietary app. Easily downloaded to a smart phone, these mobile apps employ the same level of security as a payment made through a secure website. Again these payments are best when consumers have the latest mobile phone technology.
Now that you know quite a bit more about the state of mobile payment technology in retail, don’t stop. If you’d like to find out how mobile payments will affect retailers this year and in the near future, take a look at this white paper from MobilePaymentsToday.com showcasing the pros and cons of the options described above. You’ll also find some tips for your own business on navigating this changing field.
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