Mobile Payment: The Linchpin of the Mobile Commerce Economy

Mobile payments will likely emerge as the way to pay, ultimately eliminating your dependence on credit and debit cards, check—and even cash. Mobile devices are on the forefront of revolutionizing how consumers monitor finances, make purchasing decisions and pay for transactions. Planning for this change will help position all of us for success in mobile commerce.

Commerce is making payment and receiving payment. If there is no payment, there is no commerce.

This statement is every bit as true for mobile commerce as it is for traditional commercial activity. But how does payment actually work in a mobile commerce economy? Let’s take a look, and pretend you are a commuter taking the Bay Area Rapid Transit (BART) to work everyday.

On a typical day you race out of the house and head to your transit station, wave your phone at the turnstile’s electronic reader, dash down to the platform and just make your train. Perhaps you read the morning paper as you pass under San Francisco Bay. The train pulls into your stop, and as you step off, you notice a panel advertisement for a Jack-in-the-Box® mango smoothie. The ad has a logo signifying it’s a smart ad—an advertisement that transfers information to your phone when you tap it on the logo.

You tap the smart ad and your phone displays the nearest Jack-in-the-Box location: there’s one on San Francisco’s Mission Street, right by your station. You leave the station, step around the corner and order that smoothie. You pay for it by tapping your phone at the checkout stand. You remember that, because of your enrollment in a loyalty program, you also downloaded a 10 percent discount coupon when you tapped the smart ad. That amount was automatically deducted from the price of the smoothie.

What does this simple transaction mean to you as a merchant or financial entity? What will it cost you? How does it affect the shopping experience and your ability to build customer relationships? And what does it mean to traditional credit and debit card payments?

To answer these questions and understand how central mobile payment is to the entire mobile commerce ecosystem, let’s take a closer look at what’s behind a simple mobile purchase. Later in this paper, I’ll talk more about the technology that made this transaction happen, but for now, take a look at the transaction itself, because this is at the heart of commerce—exchanging value for value and receiving payment from the customer. In this case, the merchant produces the mango smoothie, and you enter a code into your phone, wave the phone near a reader, receive a 10 percent discount, see a display of the transaction details and then are on your way.

What was special about this transaction?

First, it was fast. The merchant did not need to ask if you had a coupon or a discount card or some other customer-loyalty incentive. Nor did you need to dig around for a coupon or punch card. If you had signed up for these incentives, they would already be in the mobile device and automatically calculated during the transaction. Also, the merchant did not need to receive cash or make change, nor did the merchant need to handle a debit or credit card. Just as significantly, you as the customer did not have to deal with cash or cards. It was a faster and simpler transaction for both the merchant and you.

Pilot programs in Europe have shown that mobile purchases cut the average transaction time in half. A study recently conducted by First Data demonstrates this as well. The study, carried out in several corporate cafeterias around the country, measured factors related to the use of prepaid contactless stickers. A contactless sticker is like a miniature adhesive gift card with a Near Field Communication (NFC) chip inside. The study showed that contactless payments are typically two to three times faster than cash or no-signature card payments and about five times faster than card payments requiring a signature.

The second big difference between this mobile transaction and a more traditional payment is that there was no leather wallet full of cash and credit cards involved. You left your traditional wallet at home.

Third, just before swiping your phone near the reader, you entered a short personal security code that enabled the transaction. The phone’s purchasing capability automatically locked as soon as the transaction was complete. This means that if you lost your phone, nobody would be able to use that mobile device to make unauthorized purchases. This provides a higher level of security compared to credit cards or other payment methods that typically reside in the leather wallet.

On the merchant side of the transaction, the point of sale is equipped with an NFC chip reader. As I will explain later, your phone is equipped with an NFC chip. When the phone passes close to the reader, the reader is able to pull essential personal identification and account information from the phone, similar to the data contained on the magnetic strip of a credit or debit card. The NFC terminal reads this information in much the same way a credit card swipe is read (although no physical contact is needed to read the NFC chip) and the account information is transmitted to the transaction processing entity (First Data, for instance). The payment transaction is then processed in the conventional way.

One other critical action took place during this transaction. Before you passed your phone over the reader, you made an important choice. Because mobile devices will be provisioned with several payment accounts, you can choose which account to debit the cost of the smoothie against. You may select a credit or debit card account, or (and this is of great significance to the merchant) a merchant-specific prepaid stored value account—something like a refillable gift card. Commerce-enabled mobile devices today can manage multiple accounts.

This capability puts merchant-sponsored prepayment incentive programs on exactly the same footing as major credit and debit cards—or cash—from the customer’s usability perspective. And that opens a whole new world of opportunity for merchants to build customer loyalty and possibly even lower their transaction costs.

This transaction has implications for the entire mobile commerce value chain, which includes merchants, point-of-sale equipment manufacturers, financial entities and transaction processors, mobile phone manufacturers and mobile carriers who provide the network. Many people do not realize that most of the infrastructure needed to support this mango smoothie transaction is in place today—all around the world. In fact, the mobile payment scenario discussed above actually took place in San Francisco in early 2008 as part of a First Data pilot program.