If you’re a consumer with an iPhone 6 or an Android NFC equipped phone when Google’s Android M OS ships, you may be ready. If you’re a giant retailer like Wal-Mart or Target, a small shop, a restaurant, provider of retail point of sale solutions, or someone else in the chain, you have some things to consider to get on the train.
Some ask, do we need to make payments on our mobile phones? In the United States, need might be too strong of a word. Most citizens are armed with a credit or debit card and so many places already have a simple terminal that takes a single swipe of the card to pay. However, in places like Kenya, the M-Pesa payment system enables people to pay for groceries, utilities, airline tickets and more through mobile phones – without even needing a bank account. Countries like Kenya, despite lacking a well developed financial system, leapfrog to new technology enabling new capabilities at a much lower cost and with less friction. And that is really what mobile payments is about.
Moving to mobile payments is another part of digital convergence. Our computers (including tablets, smartphones and other devices) can do so many things. They’ve helped us become comfortable with moving money between our own accounts, paying bills online, paying people through PayPal or services like Venmo, and more. For the consumer, payments integration on the phone (or wearables like Apple Watch and Android Wear) is a matter of convenience and the opportunity for a better purchasing experience. A great example of integration would be receiving an instant electronic receipt that gets automatically filed away, automatic analysis of transactions for loyalty credits and spend tracking, and getting reminders for available similar deals and return policies. The ability to pay a restaurant tab with your phone automatically is another. The seamless way that you pay for an Uber or Lyft ride creates a better experience for both the passenger and driver by making the transaction safer, quicker, and easily trackable. For major platform vendors like Google and Apple, the reason payments are being built deeply integrated is that it is an important part of creating consumer lock-in to their ecosystems. Making it part of the platform also unleashes developers to create new and better customer experiences.
Apple Pay vs Android Pay
At Apple’s WWDC this past Monday, one of those payment experiences was shown off. Apple’s Passbook app was renamed Wallet. It also brings with it more capabilities to make everyday transactions faster and more seamless.
Apple’s Wallet will now be able to handle loyalty cards and with some retailers, like Panera, be able to automatically bring up the right loyalty card to get scanned by simply presenting the phone. It’s a small thing, but doing a few small things right can make for a great customer experience. Apple also announced a partnership with Square, which is a popular iPad based POS system for small businesses. Their new device will be very accessible for the smaller businesses that use Square and also will support Apple Pay.
Google has stepped into the mobile payment fray with Android Pay, announced at their I/O developer conference two weeks ago. Apple has a head start, but you can be sure Android will add locations, geographies, and features quickly. Google pioneered mobile payments with Google Wallet predating Apple, but it was a bit ahead of its time, clunky, and ultimately unsuccessful.
Android Pay will also launch with the integration of loyalty cards. One example they cited was using Android Pay for a Coke at an NFC equipped vending machine, and buying a Coke with Android Pay then getting a free one with Coke Reward points. Unlike Apple, which will charge a very small transaction fee, Google said it will not be charging fees for Android Pay.
While the convenience of paying with your phone may prove compelling in some circumstances, it is still something that will take some time for mass adoption. In addition, consumers still have security concerns over this new technology. Both Apple and Android Pay have tokenization of the credit card numbers used, which means that the actual credit card number is never transmitted at the POS and the token is generated for that transaction. Both also have authentication; Apple with the fingerprint reader on phones and Google with a finger signature, although Google will also support phones with fingerprint recognition. News of hacks like the recent IRS story and of Starbucks system might make some cautious, although a significant amount of fraud happens, for example, when a consumer hands a credit card over to pay a bill in a restaurant. The technology will improve to the point of making fraud potentially a minor issue, in the same way it did for enabling online purchases in the first few years of the Internet.
Developments in the Payment Card Industry
In the United States, one important development in the processing of credit card transactions is the move to EMV (Europay, Mastercard, Visa) or chip-and PIN or chip-and-signature technology taking place later this year. More widely used outside the United States, the technology involved authenticating credit cards via a chip embedded in it is more secure than a magnetic stripe. The fundamental stick the issuers are using to drive the first round of adoption by October 2015 is that if retailers do not support it in the POS after this period (with some exceptions) then the liability for fraud shifts to them and not the issuer. Credit card fraud losses in the U.S., the largest fraud market, is estimated to be around $10 billion a year. By some estimates, it might take about $8.6 billion to upgrade the U.S. POS systems to meet the new requirements. This kind of upgrade cycle should also have retailers, large and small, looking at incorporating mobile payments support as part of their overall strategy. Earlier this year, American Express pledged $10 million for a two month program to help small businesses get ready for the October 15 deadline for EMV adoption by offering $100 reimbursements for new equipment.
Aside from EMV, retailers today use a variety of POS solutions including mobile. If you’ve done business lately at an Apple Store or Nordstrom, you may have noticed salespeople with iPhone based terminals. They come to you and can process your sale on the spot. Secure contactless payments need to extend to these platforms, and systems from tablet POS makers like Revel and Kounta are doing just that. Traditional restaurant and hospitality retail systems like NCR’s Aloha are being replaced by less costly iPad and tablet based systems. NCR has their own called Silver and announced support for Apple Pay. Square, of course has made a dent in small businesses, particularly restaurants, with their almost free (transaction fees apply of course) iPhone and iPad based systems. There are many POS systems now based on iPads and with cloud based back-end software. Because POS systems are being modernized with lower cost, standard hardware and software based on devices like the iPad bodes well for the ability to integrate them with the new mobile payment solutions.
Perhaps we’re not all reaching for our smartphones just yet to pay for everything. Like any new technology, just replacing what your trusty credit or debit card can do with the new device isn’t enough. Building an easier, faster, better user experience by integrating the contactless payment into the mix is what will ultimately drive mass adoption.
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