December 1, 2010
Back in the Dark Ages (about 25 years ago) if you wanted to pay for something you have a very few ways to do it. There were 3 fundamental payment methods: cash, check, or if you were very progressive and had great credit – a credit card. Online banking didn’t exist. Debit cards had yet to gain any popularity at all, and the idea that you might pay for groceries using your mobile phone (which had the appearance back then of a modified brick) was unheard of.
Fast forward to our modern era and the debit card is ubiquitous. There are more self-serve checkout options being offered each year at a variety of retail stores. The key to the growth of these electronic transactions is the security and widespread availability to process the transactions with high speed data connections and hardware which specifically recognizes the magnetic stripe data and associated PIN code. However, the delivery of the secure information behind electronic transactions can now be facilitated wirelessly and securely.
In fact, worldwide mobile payments for digital and physical goods will reach almost $630 billion by 2014 according to Juniper Research. Additionally, the top three global regions for mobile payments – Far East and China, Western Europe and North America – will represent nearly 70 percent of the global mobile payment gross transaction value by 2014.
The new technology behind financial transactions via wireless devices is called Near Field Communication or just NFC for short. NFC permits data to be securely exchanged between two different devices from a short distance away (around 4 inches or 10 centimeters). These two devices could be your mobile phone and a version of the standard credit card terminal. This allows the terminal to communicate with your phone and approve payment via another remote computer which verifies your account information and ability to pay.
Sounds easy right? Walk up to Starbucks, order your coffee, move your phone close to the credit card terminal and have the charge automatically put on your phone bill – which you pay off at the end of the month. No cash, no credit or debit card and the process could be very fast. However, as convenient and relatively simple the process sounds, there is one major reason why this type of payment system hasn’t caught on in the United States: money. More specifically, the credit card terminals currently in use would each need to be replaced and updated with terminals which can transact wirelessly.
The Federal Reserve Bank of Boston has published a white paper entitled, Mobile Payments in the United States at Retail Point of Sale: Current Market and Future Prospects which makes the following observation, ”Perhaps a higher hurdle is that merchants would have to install contactless readers capable of processing mobile payments at each terminal/cash register. The additional cost of this technology has been estimated at $200 per reader. Additional readers would not be required for merchants who have already installed readers to handle contactless cards, since NFC-enabled mobile phones can transact over the same readers. However, penetration of contactless readers has been low. While a few large merchants have adopted them, many appear hesitant to invest $200 per reader until their existing readers need to be upgraded for other reasons. Besides the cost, the uncertainty about which standard will emerge as dominant appears to be deterring merchants from investing in this technology. For many merchants, the benefits are questionable. They can already accept payment cards using the magnetic stripe. The potential benefits of increased marketing opportunities, such as being able to store coupons or rewards programs on their customers’ cards or mobile phones, are uncertain and require additional investment.”
You can view the complete Federal Reserve Bank of Boston report here.
Additionally, security issues will arise with any new payment technology. SSL secure certificate experts at Trustwave have been monitoring and exploring security issues via wireless for the past few years. In fact, the company has even reported on the Top 5 Wireless Vulnerabilities – which would seem a precursor to transacting securely via wireless.
Another expert on secure credit card transactions is Lou Honick. As CEO of a firm which specializes in credit card processing – Host Merchant Services – Mr. Honick commented on the possibility of new payment methods entering the mix, ”Payment processing is an evolving business. Things aren’t going to change overnight, but we are clearly moving to a mobile, socially connected environment for doing business. Of course, this raises a whole new set of challenges around privacy and security, but it also creates great opportunities for entrepreneurs to solve these problems and build profitable new businesses in the process. When cost, convenience, and security converge, I think you will see new payment methods and platforms gain real traction. However I also believe that small businesses will have plenty of time to adapt and there isn’t necessarily an urgent need to be an early adopter.”
With regard specifically to issues surrounding security, Mr. Honick added, ”Fraud is a problem, but it remains a problem with traditional card swiped and keyed transactions as well. If anything, mobile devices give us a better opportunity to integrate security into payment processing. Everything from built-in photo ID, fingerprint readers, and PIN entry can be accomplished efficiently on most smart phones and advanced mobile devices to facilitate better security. There will always be people who try to circumvent the system and perpetrate fraud. M-commerce is a key part of our strategy at Host Merchant Services and we
recognize that it is one of the fastest growing segments in payment processing. Wireless terminals and smartphone applications are particularly popular with contractors, transportation companies, and service professionals for providing additional security and cost savings. Mobile commerce makes it possible to get a card swipe and signature in situations where it was previously very difficult. This helps merchants reduce transaction costs and reduce the likelihood of chargebacks and fraud. While mobile commerce is still a relatively small part of our business, it is rapidly growing and of great interest to our customers.”
While there may be a chicken and egg standoff on implementing mobile commerce technology featuring Near Field Communication, at least one proponent is apparently moving forward to promote the technology – Google. Google CEO Eric Schmidt used the recent Web 2.0 Summit to demonstrate an ”unannounced product” that experts have identified as the forthcoming Nexus S with an NFC chip inside. The system operates on Google’s Android operating system and was demonstrated for location services. But a ”tap and pay” feature was also mentioned by the Google CEO. It was described as ”personal and secure”. If the demo is any indication, then Google will be pushing mobile commerce via Android shortly. You can view the entirety of Mr. Schmidt’s comments here.
Another driving factor in adoption of mobile based payment systems is the familiarity with mobile apps and payment features built into smartphones like the iPhone from Apple. Consumers are already comfortable making purchases with a phone to buy music from iTunes, for instance. One expert in ecommerce has already seen customers taking an interest in mobile payments. Mr. Daniel Foster, technical director for dedicated server firm 34SP.com is fielding queries from a variety of clients on how to add mobile capabilities including mobile payment capabilities for hosted accounts. Mr. Foster is certain that mobile payments will become another standard in the near future, ”Everyone has a phone. The phone is almost always with the person. When they want to purchase at retail or conduct ecommerce transactions a phone is actually easier to locate that a credit card. If a tap and pay type system is developed and supported by top vendors, then adoption will happen extremely quickly.”
Based on developing trends and expert commentary, it seems that mobile payments via a cell phone or other mobile device are imminent. While mobile phones may not replace credit cards in the near term, they will certainly be another payment medium that offers quick, convenient and secure payment processing in a wide range of situations.
Derek Vaughan is a web hosting industry veteran and expert. Mr. Vaughan has architected the marketing growth of several prominent web hosting success stories leading to acquisition including Affinity Internet, Inc., Aplus.Net and HostMySite.com. Prior to his entry into the web hosting industry, Mr. Vaughan was responsible for online marketing at The Walt Disney Company where he marketed ecommerce for the ESPN.com and NASCAR.com brands. Mr. Vaughan received his M.B.A. from Vanderbilt University and is currently serves on the HostingCon Advisory Board.