Mobile Payments 101: Retail

SPECIAL REPORT

By Suzanne Cluckey Mobile Payments 101: Retail Contributing writer, Learn what mobile payment options are currently available, MobilePaymentsToday.com their pros and cons and their probable long-term viability.

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 • Mobile remote payments • Near-field communications (NFC) • Message-based payments • Bar-code payments • Browser-based payments • Numeric-code 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 trans- to their products have paved the way for formed mobile devices from simple phones major growth in mobile payments. into powerful computing tools. Today, owners of these devices can use them for Mobile payments amounted to $170 everything from locating a nearby filling billion worldwide in 2010. By 2014, this station to paying for their gas and snacks. figure will balloon to $630 billion, according to estimates from Juniper Research, a Developments within and beyond the provider of business intelligence based in retail world suggest that mobile devices Europe. Juniper also projects that $100 bil- will take center stage very soon. Concerns lion of the entire mobile payments amount among banks and retailers about fraud and will be in payment for physical goods, as the endless quest among mobile device opposed to payments for digital goods or makers and service providers to add value money transfers.

In the United States, mobile payments will Projected growth of mobile payments total $214 billion by 2015, 77 percent of which will be payments made at a physical $630 billion retail location, according to Boston-based independent research firm Aite Group. $600 billion $500 billion As this future begins to unfold, retailers must calculate seriously the role that $400 billion mobile phones might play in the future of $300 billion their business. $200 billion It is no simple calculation. Choices in the $170 billion mobile payments world are wide-ranging and accompanied by many complicating factors. In addition, trends and alliances 2010 2011 2012 2013 2014 between stakeholders are still taking shape, Source: Juniper Research and it’s very likely that coalitions formed will have a controlling influence in deter- mining which mobile payments systems will be supported and how they will be implemented. Near-field communications (NFC) This technology currently represents the most powerful and promising of mobile Retail options for mobile payments payments methods and, in the United States at least, also the most problematic. Retail mobile payments come in two types: Complications arise not only because of proximity and remote. Each employs a the hardware involved, but also because of variety of payment methods and technolo- the many mobile operating systems with gies. Some of the technologies require which retailers’ NFC-enabled POS systems additional hardware and software on the will need to interact. customer or retailer side, or both. At this early stage of NFC implementation, Mobile proximity payments it is impossible to know how the major Proximity payments occur while the cus- mobile operating system players will set up tomer is on site in a physical retail envi- their side of the process. ronment, which can be either an attended POS station or an unattended location NFC payments are also known as “contact- such as a kiosk or vending machine. Types less payments” because the mobile device of payments include near-field communi- never actually touches the POS system. In cations, bar-code payments and numeric- fact, in most instances, it never leaves the code payments. customer’s hand.

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 iden- tity, 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.

The mobile wallet user also can designate a “default payment card” for transactions, while maintaining the prerogative to ap- prove or change the payment method at All of the hardware and data required to make NFC payments resides on a smartphone, so the mobile the POS. Alternatively, the customer can device never touches the POS system. set the mobile wallet default so that it al- lows the POS system to prompt a payment method (e.g., a store-branded credit card With NFC, all of the hardware and data or gift card). The customer then has the required to make payments resides on the option to accept this prompt or choose customer’s smartphone. The user begins another payment type. payment by entering a PIN into the device, which enables a SIM or MicroSD card containing the customer’s credit and/or bank The good news about NFC payment is account data. The customer chooses a pay- that it can utilize the same POS technol- ment account, then holds the device within ogy deployed to read microchip-embedded a few inches of the retailer’s contactless contactless bankcards. The bad news is POS terminal. The terminal receives pay- that most of this technology is deployed ment information from the smartphone via outside of the United States. short-wave radio transmission. According to American Express, this transaction is To date, relatively few retailers in the Unit- 63 percent faster than cash and 53 percent ed States have adopted contactless systems faster than using a traditional credit card. due to the reluctance of some banks to

For consumers, an especially attractive NFC transactions are 63 percent faster than cash and feature of NFC payment is the “mobile 53 percent faster than using a traditional credit card. wallet.” This is an application used by the Source: American Express

pay for the more expensive chip cards and retailers’ reluctance to pay for the POS Mobile devices defined readers and back-office system upgrades. Smartphone: A mobile phone equipped with an Moreover, currently very few NFC-enabled advanced operating system (OS). The user can mobile devices are available to smartphone download compatible applications — usually from buyers in the United States. The technol- an online source — that carry out sophisticated ogy has been promoted in Europe, where computing tasks. The Nielsen Company projects that chip-embedded bankcards have been the by 2014, 90 percent of mobile devices in use in the norm for years. United States will be smartphones. Banking and retailing sectors in the United Feature phone: A mobile phone with a proprietary States, however, have begun to reconsider operating system. The OS is less sophisticated than implementation of contactless mobile pay- that of a smartphone, and while downloadable ment methods, given the rising incidence applications are available, they tend to be fairly simple. of fraud with magnetic-stripe cards and the fact that contactless cards are the standard Mobile payment device: One of a number of throughout the rest of the world. Addition- network-connected devices such as a mobile phone, ally, merchants are beginning to assess the personal digital assistant, smartphone or tablet. advantages of contactless payments as part of their PCI DSS compliance programs.

This reframing of the contactless payment beginning to embrace the technology, and outlook led Aite Group to project that there are signs that the selection of NFC contactless payment use will constitute devices is poised for rapid and significant the fastest-growing segment of mobile growth. Most major mobile companies payments over the next several years. The have announced plans to introduce NFC- company conservatively estimates that 7 equipped models in 2011. And as the past percent of U.S. retail locations will offer history of the smartphone has demon- mobile contactless payment by 2015, net- strated, once major players come on board, ting a gross dollar volume of $25 billion. smaller competitors quickly follow suit.

Retailers now capable of accepting con- Retailers can benefit from the fact that tactless card and mobile payments include contactless payments do not require the Best Buy, The Home Depot, BP, Wal- use of a smartphone. While smartphones greens, McDonald’s and other national and are gaining in popularity, there are seg- regional chains. ments of the population that do not carry them. Contactless payments, however, re- Of course, it will take years for mobile con- quire only a chip-embedded debit or credit tactless payments to reach critical mass in card, which banks can rapidly deploy. Cus- the United States as retailers upgrade their tomers are likely to use the chip-embedded systems and consumers trade up to NFC- card, helping retailers recoup their invest- enabled devices. However, handset manu- ment in the technology. facturers, carriers and OS developers are

While chip-embedded cards are simple to use, smartphone users gain the advantage Pros and cons of bar-code payments of being able to store soft cards on their NFC-enabled device and leave their plastic Pros at home. Additionally, smartphone users  Don’t require a major investment in hardware would be able to update their mobile wallet for either the retailer or consumer automatically by means of a download from a card issuer any time a change was made to  Free staff to perform other tasks a payment method (for example, an updated expiration date for a bank card). Cons  Customers may have to download different apps As they wait for the picture of NFC use in for use with different POS systems the United States to develop, many retail-  System may be prone to connectivity, hardware or ers are considering more easily and inex- software errors from the customer’s smartphone pensively implemented — if less efficient — mobile proximity payment solutions.

Bar-code payments As with the NFC mobile wallet, the cus- These comprise the largest segment of tomer can specify a default account setting, mobile proximity payments in the United while maintaining the option to change States today. A retailer can set up the sys- payment choice at the POS. The customer tem in one of two ways. accesses payment accounts on the server through a secure mobile device sign-on. Smartphone-displayed bar code. The customer begins by registering for an ac- Once purchases are scanned, the retailer’s count and designating funding sources. This POS system sends a billing transaction information can be kept on the retailer’s request to the server’s payment queue. own server or can be stored on a third-party The server then sends a 2-D transaction server — a sort of cloud-based mobile wallet. 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 de- The bar-code payment system introduces the features vice then prompts the customer for permis- and convenience of mobile payment for both retailer and consumer without requiring either to make a major sion to transmit the scanned billing infor- investment in hardware. mation to the server. There, the transactions are matched and the sale is finalized.

Both methods of bar-code payment require are opting for a simpler approach that can the customer to use mobile software that be employed by any texting-enabled mobile integrates with the retailer’s POS system. device: numeric-code payments.

Retailers who elect to use a smartphone- Numeric-code payments displayed bar code must install an optical This system revolves around a code delivered scanning device. Those who choose the via Short Message Service (SMS, or, in user POS-displayed approach do not need the parlance, a text message) that authorizes a scanner, but they do need equipment to third-party payment initiated by the customer. display the bar code. Ideally, each POS station would have a dedicated displayer. It is To use this payment method, the customer feasible for checkouts to share a large digi- must first enroll in a retailer’s program tal display that shows lane number and bar and grant the retailer access to personal code together. However, this introduces information and payment data. Upon the potential for mix-ups if the customer registering, the customer receives a Com- happens to scan the wrong bar code. mon Short Code (CSC) specific to the customer’s account. The advantage to the bar-code payment system is that it introduces the features When the customer decides to make a and convenience of mobile payment for purchase at the store, he sends a blank text both retailer and consumer without re- message to the CSC number, which returns quiring either to make a major investment a message containing a purchase authori- in hardware. zation code. Once purchases are scanned into the POS system, the customer gives The disadvantage is that mobile/POS the authorization code to the cashier, who 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.

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 rea- Text messaging forms the basis of the numeric-code payment system. While son, some retailers who are anxious to begin it does not require new hardware or software, numeric-code payment does entail modifications to existing systems and requires the retailer to invest in the transition to mobile payments methods store-branded marketing programs.

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 Message-based remote payment can be transacted on virtually any mobile entail modifications to existing systems phone, opening it to a wide audience. to enable mobile authorization. It also requires the retailer to invest in store- branded marketing programs that acquaint customers with the payment process and count. With these elements in place, parties urge them to enroll. can transact payments in one of three ways.

Mobile remote payments Message-based remote payment This method entails a series of interac- Mobile remote payments are payments to a tions by SMS or MMS (i.e., a text with an retailer that take place while the customer accompanying image file). The customer is not present in a physical store environ- initiates the purchase with a message to a ment. This option can be well suited to CSC to which the retailer subscribes. The nontraditional retail scenarios, including merchant sends a return text with billing person-to-person payments, transactions information. The customer texts back to with unbanked customers and payments to accept this amount and the transaction is seasonal vendors. complete. This payment type also has been widely used for digital transactions, such as ring- Charges incurred by message-based re- tone and music downloads, phone minute mote payment can be added either to the top-offs and donations (for instance, the customer’s mobile bill or deducted from a Red Cross campaign to raise funds for mobile wallet. earthquake victims in Haiti). The chief advantage of this payment meth- Typically, mobile remote payments require od is that it can be transacted with relative no hardware other than the mobile device ease by any text-enabled device, which is itself. The payee must set up payment pro- virtually any mobile phone. cessing through a third party, and the payor must establish an accessible payment ac-

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

As with browser-based payments, the Retailers must be prepared to offer something of advantage of application-based payments value to their customers in exchange for their effort in setting up the [payment loyalty] program.

Preparing customers for the eventual introduction of NFC technology by imple- menting 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 Starbucks is using a closed-loop payment loyalty program the program. to prepare customers for the eventual introduction of NFC technology. Challenging the assumption that customers wouldn’t be interested in a mobile app for specific types of retail. In the world Adding ordering and mobile payments of mobile payments, old rules give way to functions to the current mobile website new ones. This means thinking creatively or smartphone app. Allow customers to about ways to involve loyal customers in a access the inventory database and make re- mobile payments program. It also involves mote purchases that they then can pick up letting go of demographically based as- in the store as a will-call. Again, implemen- sumptions about mobile payments. Millen- tation of such a program will be most suc- nials may be early adopters of new tech- cessful if it is tied into a loyalty program. nologies and processes, but baby boomers are especially tuned into innovations that Thoroughly training all employees who add convenience and value. Mobile pay- will play any part in the mobile payments ments programs offer benefits to appeal to system. Detailed, solutions-based train- both groups, as well as to the generation in ing is critical to ensuring the success of a between, Gen X. program. Employees need to understand

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