What will drive Mobile Payments Adoption?
All over the world, existing and new players are working to make point-of-sale mobile payments a reality. The two key challenges in realizing this are building partner ecosystem, and changing consumer behavior to adopt mobile device as a payment instrument. To change consumer behavior, providing a compelling yet secure consumer experience is a critical factor. This paper contends that having the right balance between consumer experience and security is a must to drive adoption.
The bulk of the payment industry* revenues come from processing payment transactions and associated services. Advancements in technology and mobile penetration have made it easier for new players** to enter this space. New Players are challenging the status quo, coming up with new and innovative services to gain market share. Existing players are under pressure to innovative to stay competitive, and to increase their market share and revenues.
In 2011, worldwide 491 million smartphones were shipped compared to 304 million in 2010, representing a growth of 61%. The smartphone penetration in US was around 48% at the end of 2011. With the explosive growth of smartphones and rise of digital media, the demand for data services has increased tremendously. Mobile service providers are making huge investments to upgrade the wireless networks to provide high-speed, high-bandwidth data services to meet the growing demand. They have also realized that to increase return on investment, they have to provide innovative services rather than just being a pure connectivity provider.
Key shifts in payment and mobile industry necessitating service providers to innovate and offer new services:
Payment Industry Shifts
- Adoption and availability of newer chip based payment technologies like EMV are driving new services
- Focus on reducing operational and fraud cost by leveraging better solutions enabled by newer technologies
- Push towards gaining consumer insights by analyzing the vast amount of data to provide personalized and innovative services
- Entry of new players driving up the competition necessitating development of new services with differentiated experiences
Mobile Industry Shifts
- Commoditization of basic telecommunication and data services driving service providers towards value added services to increase revenues, market share and reduce churn
- Inclusion of near-field communications (NFC) and secure storage technology in the mobile devices to provide new services
- Mobile devices are the new standard for consuming wide range of services driving up the demand for data services
Challenges in Adopting Mobile Payments
Service providers are innovating to combine the strengths of payment and mobile industry to provide next generation mobile payment services. They are collaborating to provide a service called “Mobile Wallet”, which includes three key components:
- Wallet application – An interface to use payment instruments like credit, debit or pre-paid cards at point-of-sale
- Secure storage – A dedicated storage inside the mobile device for sensitive data to prevent unauthorized access and use
- Contactless technology (NFC) – A near-field communications technology that allows payment credentials to be transmitted by waving the mobile device near the contactless reader.
In addition to mobile payments, Mobile Wallet can also be used to provide commerce services like coupons, loyalty, transit, ticketing, content discovery etc.
The two key challenges in the adoption of mobile payments are:
- Establishment of Partner Ecosystem – To roll out mobile payment services, multiple stakeholders like mobile service providers, merchants, payment networks, acquirers, banks, issuers, and point-of-sale vendors have to collaborate in the highly complex payments industry. A widespread adoption by merchants by deploying contactless readers to accept mobile payments is a must to drive adoption.
- Changing Consumer Behavior – Consumers are used to carrying the plastic cards and swiping them at point-of-sale. A move towards mobile payments requires a change in consumer behavior and habits. The consumer behavior can be altered by addressing some of the pain points with plastic cards as well as by providing newer and innovative experiences. The success of the mobile payments depends upon providing a compelling consumer experience and consistent or better security than a plastic card.
Providing a Compelling Consumer Experience
The consumer experience in the context of mobile payments is the way consumer interacts with the Mobile Wallet and makes a payment at point-of-sale. Since, consumer is making a financial transaction; the security of the mobile payment is an important factor in the overall consumer experience.
Mobile payments consumer experience differs from a plastic card. The first and foremost is the act of waving (bringing the mobile handset in close proximity to the contactless reader) as opposed to swiping the card at the point-of-sale reader. The other is the act of opening up the Mobile Wallet and choosing the payment card which is analogous to reaching out for physical wallet and looking for a payment card.
Mobile Wallet provides number of inherent benefits and compelling consumer experiences that can help change consumer behavior.
- Auto selection of payment card based on preferences, location and store information. As an example, store credit card can be given preference over a regular credit card
- Consumers can check the card balance in real-time before deciding which card to use
- Receive store receipts instantaneously in the Mobile Wallet
- Seamless redemption of relevant coupons and loyalty
- Receive offers and coupons based on personal information, preferences and location
- All of the cards are stored in the Mobile Wallet and are always available for use
- No need to worry about forgetting the physical wallet or cards at home
Mobile Wallet can potentially implement four key additional security mechanisms than a plastic card.
- Dynamic Data Authentication (DDA) – A unique one-time use code is used for payment transaction authorization along with payment credentials. The code is only valid for a short duration.
- Wallet PIN – Consumer have to provide a PIN before using the Mobile Wallet or making a payment. This prevents unauthorized access in case mobile device gets lost or stolen.
- NFC Technology – The near-field communications is a very short range wireless technology that operates within less than 4 centimeters. This makes it extremely difficult to skim information. Also, the data can be encrypted to further reduce the risk.
- Secure Storage – The payment credentials are stored in the secure area of the mobile device specifically engineered for storing sensitive information. The data is encrypted and totally safe from unauthorized access. The data can only be managed by Trusted Services Manager (TSM) operated and maintained by the service provider. Service providers can also choose to store different payment credentials than those shown on the plastic card in the secure area. The stored credentials are never shown to the consumer and provide additional security.
- Default Payment Card – Service provides can choose to enable setting up of default payment credentials. Consumer can make a payment without providing a PIN or explicitly acknowledging via Mobile Wallet. This scenario provides ease-of-use but introduces potential security risk. In case mobile device gets lost or stolen, fraudulent transactions can easily take place.
From the security mechanism listed above, it is safe to say mobile payments are more secure and provide additional control to the consumers.
Mobile payments can provide new and innovative consumer experiences and offer additional security mechanisms to reduce fraud and unauthorized use. However, service providers should not focus only on consumer experience and enable scenarios which can potentially impact security. During early stage, a single fraudulent transaction can have a much bigger impact on consumer perception and adoption. Hence, it is critical for the service providers to provide the right balance between experience and security.
- IDC – Smartphone shipments – http://www.idc.com/getdoc.jsp?containerId=prUS23299912
- Nielsen – Smartphone penetration – http://www.mediapost.com/publications/article/168085/nielsen-smartphone-penetration-reaches-48.html
*Payment Industry – Includes Payment networks, Acquirers and Issuers
**As an example, PayPal, with revenues of $4.4bn in 2011, processed $118bn in payment transactions is a key player in online and mobile payments. Square is another fast growing company providing highly innovative services delivered via mobile devices to small businesses and consumers