Different Approaches to Mobile Payments

Isn’t it interesting how mobile payment solution providers are addressing the demand for mobility? The concept of mobile payments isn’t new. In fact, there are mobile payment experiences dating back over 10 years. A mobile payment in its purest form is use of the customer’s mobile phone to transact the payment as part of the network.

Customer Phone for Pre-Authorization
In the late 90’s there were several attempts to facilitate mobile payments. Most of these implemented a stand-alone network, independent of and not integrated to the merchant POS. These networks were most typically prepaid solutions.

The customer would initiate a purchase transaction using SMS to text a short message of the amount to a private network phone number or short-dial. The network would validate the customer has sufficient prepaid funds for the amount presented in a form of pre-authorization by returning a short alpha-numeric code. The customer presents the code to the cashier and the cashier performs the authorization by keying the amount and pre-authorization code into a POS terminal (e.g. ZON Jr. terminal). The network responds with the authorization approval and the cashier tenders payment into their independent point of sale.

In this technology, the mobile phone is not transacting the payment. We could have initiated this same payment transaction with a non-mobile phone. The phone is really just used a manual communication tool.

Customer Phone as a Chip Wallet (NFC)
“Mobile payments” implementing NFC technology have been in discussions and pilots for over a decade. This is using RFID technology with the chip in the phone. In installed base of RFID readers in retail locations today, read the secure customer chip information and transmit the payment authorization over the merchant’s POS and network. If you consider your physical billfold or purse carrying cards with a chip is them, this form or mobile payment is really no different. The chip in a phone functions identically to a chip in a card in a billfold.

More convenient? How so? The mobile chip might replace a chip card in my billfold, but I still have my driver’s license, voter registration, and employee ID cards. I still need to carry my billfold, so where’s the added convenience. I can scan my billfold just as I would scan my wallet.

NFC payments requires reader technology at the POS. Today, only 1% of merchants have hardware capable of reading NFC. Perhaps, worst yet, there are very few phones having NFC capable chips within.

Merchant Phone as an alternative to a POS Terminal
A myriad of offerings similar to Square and supported by audio jack readers from Roam Data, do not add consumer convenience of mobile phone use. These solutions are simply lower cost alternatives for small merchants. Use a mobile phone with a small magnetic stripe reader (MSR) to aggregate credit card acceptance across several merchants.

In the transaction flow, this is no more convenience for the customer than the method used for decades. The customer still hands their card to the cashier just as they did years ago with the old “knuckle-busters”. The risk of stolen credit card information is still present. From the customer’s perspective, this could just be a simple skimming application designed to steal the cardholder information using a smartphone.

Some implement encryption at the swipe of the reader, but Square doesn’t. The encrypted reader is too expensive. How does the customer know which readers are secure and which are not? We don’t.

So, in the purest form and from the consumer perspective, this is not a mobile payment.

Customer Phone as a Pure Mobile Payment
This is the innovative approach we believe makes the most sense and eventually will win out. Why? Leverages the customer’s mobile phone to initiate the payment. Requires no payment hardware for the merchant; a significant savings. Virtual wallet security allows the cardholder information to never be part of the transmission in the customer’s phone or merchant’s POS. A dynanic token that may be changed repeated and on demand of the network. This dramatically reduces the risk of fraud in payments.

Innovators in this space are leveraging nearly every smartphone functionality: camera, motion, GPS, and keyboard.

This approach creates even more convenience opportunities for the customer; more important to a good shopping experience that just a mobile payment. But, that’s a story for another day.