Payment Gateways and Mobile Payments
The way in which consumers pay for goods and services has long been a battleground of technological innovation. Online payment systems in the form of payment gateways paved the way for widespread adoption of online purchases. Authorize.net made early use of Secure Sockets Layer (SSL) technology to get the major banks on board with allowing payments to flow through their system – PayPal and others would later enter the market and ride it to enormous success. While online purchasing continues to grow at a blistering rate (far outstripping the growth of traditional retail purchases), another digital innovation may in fact push purchases back into a bricks and mortar environment, albeit through online platforms.
Mobile payments (sometimes referred to as the mobile wallet) refer to payments performed via a mobile device. The rise of mobile computing, especially in the developing world, has facilitated an intense and rapid amount of competition to become the de facto mobile payments system. Even though the movement is in its nascent form, total payments for the year nearly doubled from 2012 ($163 billion) to 2013 ($235 billion). While only a small percentage of people have used mobile payments to pay for goods, 40% of users report that it has now become their primary mode of payment. Interestingly, consumers have reported that the biggest driver of mobile payments uptake is in reducing the awkwardness that arises when it comes time to split bills with friends.
What’s interesting about these two technologies is that the first (payment gateways) nudged traditional payments online, while the second (mobile payments) brings the technology developed here to facilitate payments in a real-world environment, processed online.
The Digital Wallet
The term “digital wallet” refers to three major parts of payment – the system (the electronic infrastructure), the application (the software that operates on top of this), and the device (the individual portion). Often, an individual’s entire set of ID components will be linked to a digital wallet. This can include bank account details, driver’s licenses, health cards, loyalty cards and other ID documents. Digital wallets come in two forms: client-side, where all information is stored on a user’s device; and server-side, where all information is stored by a service-provider in the cloud. Increasingly, server-side digital wallets are becoming more popular due to the security, efficiency and added utility they offer end-users. It is this added utility specifically that industry watchers tout as the key reason digital wallets will shortly take the place of their physical counterparts. Some speculators are suggesting that digital wallets could even be a threat to big banks, by luring depositors away to non-bank repositories such as PayPal. They believe this may happen due to the much lower entry barriers required to use these services (in many cases, simply downloading an app is all that is required).
While there are various ways of connecting the client device (in nearly all cases, a mobile phone) and the mobile payment terminal, the biggest pickle on the tree is Near Field Communication (NFC) technology, which establishes radio communication between devices within close proximity.
Introducing Apple Pay
As we talked about in a previous blog, Apple made waves late last year with the introduction of their NFC-powered digital wallet. Many believe Apple Pay is attempting to displace traditional credit and debit cards by using Near Field Communication (NFC) from iPhones and Apple Watches to make wireless payments. Essentially Apple is attempting to replace credit cards with phones for a quicker, smoother payment process. The service also allows users to checkout purchases online using their card details which have been stored in their phones. While the service was launched in cooperation with Visa, MasterCard and other major card players, there has been much speculation that once the service is widely adopted as a form of payment Apple will be able to bypass the credit providers and facilitate payments directly. While exact details of Apple’s deals with credit card companies are unknown, the Financial Times reported that Apple receives a 0.15% cut of transactions made using the service. In Australia alone, the introduction of Apple Pay is set to cost the financial services industry more than $1 billion. Another point of concern for big banks is that Apple seems determined to use fingerprint reading technology (in the form of their Touch ID service) to authenticate transactions. At a higher level, this would make Apple the gatekeeper of user’s digital identities – a role banks have traditionally played. By partnering with Apple, banks are explicitly endorsing Touch ID to play this role, which would no doubt reduce customers’ interactions with their bank apps, which in turn would reduce engagement and cross-selling opportunities.
While many technology companies are busy focusing on improving the retail experience with digital wallets, some reports are showing Apple is thinking outside the box with the potential for mobile services. The Information claims that Apple representatives have been in talks with technology providers about using NFC technology for public transit ticketing and building security access – a move which may be a clever way to achieve adoption of the Apple Pay service, by providing a no-cost service to end-users. Transport systems and building security systems that require this form of entry may even take the choice out of adopting Apple Pay out of the end-user’s hands.
The Future of Payments
While it’s almost a given that the mobile wallet will eventually subsume all the components of a digital wallet, it would be short-sighted to think that the innovation will stop at the mobile phone. There are many other futuristic pushes in the payment space. PayPal has been trialling a service recently with cafes and diners that would allow for a completely seamless transaction process. The service allows users to search for restaurants that accept PayPal payments using a mobile app. After their meal, users pay at their table through the phone, and their name and photo is sent through to the cashier, who completes the transaction simply by clicking on the photo of the user to ensure their identity.
In their current form, mobile payment options still haven’t solved the biggest pain involved in the customer purchase journey – the checkout line. Some retailers are already experimenting with Bluetooth enabled beacons, which automatically connect and transact with a user’s mobile payment device as they walk straight out of a store. Taking this even further, a start-up in Sweden has created an infrared reader which allows users to pay for things simply by reading their palms (which can be instantly scanned). There will indeed be countless more innovations around the payment space in the years to come, and the winners will be organisations with a keen sense of timing – adopting neither too early, nor too late.