Mobile Payments

The term "mobile payments" describes the process of using a mobile device, like a smartphone or a tablet, to make a payment or a purchase. Mobile payments are used both in emerging markets and in developed countries for different reasons. American consumers have not yet widely accepted mobile payments, but Forrester predicts that mobile payments in the U.S. will reach $90 billion by 2017.

According to the Federal Reserve, consumers can utilize mobile payments in three different ways. First, consumers can make person-to-person (P2P) payments, including non-commercial transfers of money or payments to a small merchant. Second, consumers may purchase goods or services on the Web utilizing their mobile devices (mCommerce). Third, mobile payments may be made at a point-of-service (POS).

Mobile payments are funded by several different methods. Payments may be funded directly from a bank account and processed through the automated clearinghouse. Consumers can also fund payments by utilizing a credit card, debit card or other prepaid payment card. Finally, purchases can be funded by going through a carrier that will either add the purchase to the monthly phone bill or create a prepaid account for the customer's mobile purchases. Consumers also have the ability to consolidate these services into one application called a mobile wallet.

How Mobile Payments are Transmitted

Four different technologies facilitate the processing of mobile payments. One method, called Near Field Communication (NFC), is a standards-based high-frequency wireless communication technology that works over a short range of between two to four inches. To make mobile payments, users simply tap their mobile phones against a POS terminal that is also NFC-equipped. Users can also exchange money between two phones by tapping NFC-enabled phones together.

Another method, radio frequency identification (RFID) , utilizes radio waves from an electronic tag to transfer data between two devices. RFID has a longer range than NFC; some RFID tags can broadcast over several meters. However, the longer range may make RFID less secure than NFC.

Mobile devices can also transmit payments by displaying a two-dimensional (2D) barcode. A mobile device displays a 2D barcode connected to a customer's prepaid account. Cashiers at a POS scan the barcode when the customer holds up his or her mobile device. Additionally, payments can be made via Wireless Application Protocol (WAP). A WAP browser on a mobile device enables person-to-person and consumer-to-business payments. Many mobile payment applications from retailers use WAP to transfer money over a wireless connection.

Potential Benefits and Obstacles

Convenience is a major reason that people choose a preferred payment method. For instance, 88 percent of respondents to a Federal Reserve survey about debit cards indicated that they chose debit cards because they proved more convenient than any other payment method. Likewise, mobile payments deliver convenience for consumers in terms of both portability and flexibility. Carrying a single mobile phone instead of multiple cards increases portability while having multiple payment options stored within a single phone gives consumers flexibility in how they choose to pay.

The perceived inconvenience of setting up and learning to use mobile payments on a device may cause some consumers to avoid the technology. However, younger consumers who are already familiar with mobile technology will be less likely to consider setup an obstacle. Additional conveniences for consumers include the automatic integration of rewards, loyalty programs and coupon discounts associated with either the payment method or the service provider being paid.

Consumers tend to choose payment methods based on the lowest cost alternative. Mobile payments, because multiple payment alternatives will be stored on a single device, could give consumers the chance to choose the payment option with the lowest associated fees for any given transaction. However, consumers will pay for mobile commerce through their data plans, and some may have to upgrade to NFC-equipped smartphones to take advantage of the technology. Similarly, merchants will have to either purchase NFC-equipped payment terminals or invest in other methods to collect mobile payment information.

Mobile payments tend to be adopted when consumers feel confident about security. Consumers need to feel certain that their financial institutions safeguard their information and that they will not experience heavy losses associated with mobile payment fraud or a stolen device. Most mobile devices enable password protection and also offer the option to remotely wipe the device of data if the device is lost or stolen. Also, dynamic authentication used by chips embedded in mobile devices, instead of using a static credit card number to authorize a transaction, uses characteristics unique to specific transactions, thus making sensitive information harder to steal.

According to MasterCard's Mobile Payments Readiness Index, Singapore, Canada, the U.S. and Kenya are the four countries most ready to adopt mobile payment practices. In emerging markets, limited access to bank accounts means that mobile payments deliver a system for transferring payments in lieu of banking. In developed countries, mobile payment adoption has largely been enabled by its suitability for purchasing mass transit fares.