Mobile Payment Methods
Until just the past few years, lack of access to the banking system has been an expensive burden on the poor. Just recently, a surge in new financial products makes it a lot less expensive to be unbanked.
With the rise of e-commerce, fintech, and the shared economy, a handful of regional entrepreneurs are setting out to change the status quo.
Unbanked
Although the barrier to using the banking system is usually described in terms of poverty, merely having little or no money doesn’t need to block access. It’s really a cluster of related problems that add up to make using conventional banking services so difficult and expensive that people end up choosing to do without:
No cash to keep a minimum balance
No regular paycheque to have direct deposited to qualify for a no-fee account
Not living in a neighbourhood with a local bank
Not speaking (or reading) English well enough to use banking services
Not having the skills to maintain a check register
Having a history of bounced checks or unpaid debts
Working during banking hours
Any two or three of those issues can put the regular banking system out of reach (although someone with a little financial savvy can almost always find a cheap way into the banking system).
Mobile Phone
US — In the U.S., there are 68 million Americans without access to a bank account or debit card — roughly 22 percent. But when it comes to mobile phones, there is no shortage in the U.S., with nearly 90 percent of American adults in possession of a mobile device. Worldwide, there are 2.5 billion unbanked individuals. However, nearly 85 percent of the global population, about 6.8 billion people, has access to a mobile phone.
Asia-Pacific — The Asia-Pacific currently clocks about half of worldwide smartphone users. The total number of smartphone subscriptions in Southeast Asia and Oceana will hit close to 800 million by 2020.
This presents a tremendous opportunity for mobile payment technology to bring the financially excluded into the economic mainstream. Mobile payment technology eliminates the need for direct access to a bank or credit union, and for the billions of unbanked people worldwide, using mobile payments is often more convenient and costs less than other methods of money transfer. Not to mention, mobile payments are available on the majority of the devices many people already own, including the most basic types of SMS-only feature phones.
Millennials
It's not just the unbanked, who are rethinking using Credit Cards its Millenials too! According to The Street, younger consumers are avoiding debt by eschewing credit cards in favour of prepaid cards. Stress over the financial climate has caused them to rethink conventional credit card use.
“The young American generation graduated from high school and college in the midst of one of the worst financial crises in our nation’s history,” financial adviser Jake Rivas told The Street. “Instead of viewing debt as a tool to be used for financial success, they are fleeing from it.”
Rivas pointed to rising student loans as the primary source of millennial aversion to debt. Combining those loans with fears of another financial crisis has led the young generation to avoid anything that could put more stress on their bank accounts. Still, he said, older consumers continue to use credit cards.
As a result:- more than a fifth of all millennials have never even written a physical check to pay a bill. 63% of adult millennials don’t even have a credit card. By comparison, only 35% of consumers over 30 don’t have credit cards.
Mobile Payments
Here is a look at the top new kinds of mobile payments and how they work.
1. Mobile wallets
Online companies like PayPal, Amazon Payments, and Google Wallet also have mobile options.
First payment:
User registers, inputs their phone number, and the provider sends them an SMS with a PIN
User enters the received PIN, authenticating the number
User inputs their credit card info or another payment method if necessary (not necessary if the account has already been added) and validates payment
Subsequent payments:
The user re-enters their PIN to authenticate and validates payment
Requesting a PIN is known to lower the success rate (conversion) for payments. These systems can be integrated with directly or can be combined with operator and credit card payments through a unified mobile web payment platform.
2. Carrier billing
The consumer uses the mobile billing option during checkout at an e-commerce site — such as an online gaming site — to make a payment. After two-factor authentication involving a PIN and One-Time-Password (often abbreviated as OTP), the consumer’s mobile account is charged for the purchase. It is a true alternative payment method that does not require the use of credit/debit cards or pre-registration at an online payment solution such as PayPal, thus bypassing banks and credit card companies altogether. This type of mobile payment method, which is extremely prevalent and popular in Asia, provides the following benefits:
Security — Two-factor authentication and a risk management engine prevents fraud.
Convenience — No pre-registration and no new mobile software is required.
Easy — It’s just another option during the checkout process.
Fast — Most transactions are completed in less than 10 seconds.
Proven — 70% of all digital content purchased online in some parts of Asia uses the Direct Mobile Billing method
3. SMS/USSD-based transactional payments
Premium SMS / Premium MMS
In the predominant model for SMS payments, the consumer sends a payment request via an SMS text message or a USSD to a short code and a premium charge is applied to their phone bill or their online wallet. The merchant involved is informed of the payment success and can then release the paid for goods.
Since a trusted physical delivery address has typically not been given, these goods are most frequently digital with the merchant replying using a Multimedia Messaging Service to deliver the purchased music, ringtones, wallpapers etc.
A Multimedia Messaging Service can also deliver barcodes which can then be scanned for confirmation of payment by a merchant. This is used as an electronic ticket for access to cinemas and events or to collect hard goods.
Transactional payments by SMS have been popular in Asia and Europe and are now accompanied by other mobile payment methods,[citation needed] such as mobile web payments (WAP), mobile payment client (Java ME, Android…) and Direct Mobile Billing.
Inhibiting factors of Premium SMS include:[citation needed]
Poor reliability — transactional premium SMS payments can easily fail as messages get lost.
Slow speed — sending messages can be slow and it can take hours for a merchant to get a receipt of payment. Consumers do not want to be kept waiting more than a few seconds.
Security — The SMS/USSD encryption ends in the radio interface, then the message is a plaintext.
High cost — There are many high costs associated with this method of payment. The cost of setting up shortcodes and paying for the delivery of media via a Multimedia Messaging Service and the resulting customer support costs to account for the number of messages that get lost or are delayed.
Low payout rates — operators also see high costs in running and supporting transactional payments which result in payout rates to the merchant being as low as 30%. Usually around 50%
Low follow-on sales — once the payment message has been sent and the goods received there is little else the consumer can do. It is difficult for them to remember where something was purchased or how to buy it again. This also makes it difficult to tell a friend.
Some mobile payment services accept “premium SMS payments.” Here is the typical end-user payment process:
User sends SMS with keyword and unique number to a premium short code.
User receives a PIN (User billed via the shortcode on receipt of the PIN)
User uses PIN to access content or services.
Remote Payment by SMS and Credit Card Tokenization
Even as the volume of Premium SMS transactions have flattened, many cloud-based payment systems continue to use SMS for presentment, authorization, and authentication, while the payment itself is processed through existing payment networks such as credit and debit card networks. These solutions combine the ubiquity of the SMS channel, with the security and reliability of existing payment infrastructure. Since SMS lacks end-to-end encryption, such solutions employ a higher-level security strategies known as ‘tokenization’ and ‘target removal’ whereby payment occurs without transmitting any sensitive account details, username, password, or PIN.
To date, point-of-sales mobile payment solutions have not relied on SMS-based authentication as a payment mechanism, but remote payments such as bill payments, seat upgrades on flights, and membership or subscription renewals are commonplace.
In comparison to premium short code programs which often exist in isolation, relationship marketing and payment systems are often integrated with CRM, ERP, marketing automation platforms, and reservation systems. Many of the problems inherent with premium SMS have been addressed by solution providers. Remembering keywords is not required since sessions are initiated by the enterprise to establish a transaction-specific context. Reply messages are linked to the proper session and authenticated either synchronously through a very short expiry period (every reply is assumed to be to the last message sent) or by tracking session according to varying reply addresses and/or reply options.
4. Mobile web payments (WAP)
The consumer uses web pages displayed or additional applications downloaded and installed on the mobile phone to make a payment. It uses WAP (Wireless Application Protocol) as underlying technology and thus inherits all the advantages and disadvantages of WAP. Benefits include:
Follow-on sales where the mobile web payment can lead back to a store or to other goods the consumer may like. These pages have a URL and can be bookmarked making it easy to re-visit or share.
High customer satisfaction from quick and predictable payments
Ease of use from a familiar set of online payment pages
However, unless the mobile account is directly charged through a mobile network operator, the use of a credit/debit card or pre-registration at online payment solution such as PayPal is still required just as in a desktop environment.
Mobile web payment methods are now being mandated by a number of mobile network operators.
5. Direct operator billing
Direct operator billing, also known as mobile content billing, WAP billing, and carrier billing, requires integration with the mobile network operator. It provides certain benefits:
Mobile network operators already have a billing relationship with consumers, the payment will be added to their bill.
Provides instantaneous payment
Protects payment details and consumer identity
Better conversion rates
Reduced customer support costs for merchants
Alternative monetization option in countries where credit card usage is low
One of the drawbacks is that the payout rate will often be much lower than with other mobile payments options. Examples from a popular provider:
92% with PayPal
85 to 86% with Credit Card
45 to 91.7% with operator billing in the US, UK and some smaller European countries, but usually around 60%
More recently, Direct operator billing is being deployed in an in-app environment, where mobile application developers are taking advantage of the one-click payment option that Direct operator billing provides for monetising mobile applications. This is a logical alternative to credit card and Premium SMS billing.
In 2012, Ericsson and Western Union partnered to expand the direct operator billing market, making it possible for mobile operators to include Western Union Mobile Money Transfers as part of their mobile financial service offerings. Given the international reach of both companies, the partnership is meant to accelerate the interconnection between the m-commerce market and the existing financial world.
Mobile payment service provider model
There are four potential mobile payment models:
Operator-Centric Model: The mobile operator acts independently to deploy mobile payment service. The operator could provide an independent mobile wallet from the user mobile account(airtime). A large deployment of the Operator-Centric Model is severely challenged by the lack of connection to existing payment networks. Mobile network operator should handle the interfacing with the banking network to provide advanced mobile payment service in the banked and underbanked environment. Pilots using this model have been launched in emerging countries but they did not cover most of the mobile payment service use cases. Payments were limited to remittance and airtime top up.
Bank-Centric Model: A bank deploys mobile payment applications or devices to customers and ensures merchants have the required point-of-sale (POS) acceptance capability. The mobile network operator is used as a simple carrier, they bring their experience to provide Quality of service (QOS) assurance.
Collaboration Model: This model involves collaboration among banks, mobile operators and a trusted third party.
Peer-to-Peer Model: The mobile payment service provider acts independently from financial institutions and mobile network operators to provide mobile payment. For example, the MHITS SMS payment service uses a peer-to-peer model.
The Key Players
1. Apple Pay: The leader in luxury and convenience
Two years after launch, Apple Pay has announced 12 million users across the U.S., Canada, Australia, Singapore, Hong Kong, the U.K., Switzerland and France. Based on volume processed on our platform we see it is the fastest growing native wallet, with 400% growth in the past year.
As a trailblazer, Apple Pay has fought hard to drive adoption. In London and Tokyo it partnered with transport networks to enable Apple Pay as an alternative to travel cards. Now with Apple Pay for the web, it is attracting web-based shoppers as well. And it seems to have worked; Apple Pay volume on our platform doubled in the past two months. In a store, Apple Pay payments are possible via any NFC enabled terminal, with no additional integration required.
For businesses, Apple Pay has two core benefits: The first is its user demographics; iOS users are typically affluent early adopters, an ideal target for luxury brands.
The second is Apple’s signature sleek user experience, which drives conversions by making payments totally frictionless. One luxury clothing brand uses Apple Pay to eliminate the need to build a shopping basket; shoppers simply tap on the Apple icon below an item and confirm payment with Touch ID.
Apple Pay also helps businesses that rely on high-frequency orders, such a food delivery companies and coffee outlets. JustEat, for example, makes repeat orders even easier by enabling them via the Apple Watch.
The airline industry has also benefited from supporting Apple Pay. The ability to store boarding passes, and make payments, via the Apple Wallet makes it the ideal travel companion. Vueling, for example, is seeing significant gains since supporting Apple Pay.
2. Android Pay: The potential floodgates
Android Pay launched in the U.S. in September 2015, and now has users across the U.S. the U.K., Poland, Australia, Hong Kong, and Singapore.
It is worth noting that Android users outrank iOS users in key markets, and has over 80% of smartphone market share worldwide, according to Statista. So while Apple users might lead the charge, Android could be the one to open the floodgates.
Android Pay is available in-app, in-store via NFC, and most recently, via mobile web.
3. Samsung Pay: The broadest reach for in-store payments
After launching in South Korea in August 2015, Samsung Pay entered the U.S. as an in-store payment method. Since then it has extended its coverage to China, Singapore, Australia, Brazil, Puerto Rico, Russia, and Spain. It currently has 5 million registered users.
In addition to credit cards, Samsung Pay supports membership cards, gift cards and coupons, thereby opening the wallet to a broader segment of users. And it sets itself apart by being able to imitate a magnetic strip through MST technology. This makes it possible to pay when no NFC terminal is available — a bonus in the U.S., where EMV adoption is still ramping up. On Adyen terminals contactless EMV is fully supported, in which case Samsung Pay transactions will be handled as NFC payments.
Meanwhile in China…
In terms of mobile wallets adoption, China is light-years ahead and, at 560 million, it is the largest smartphone user base in the world. There are two main players in this market:
4. Alipay
Alipay accounts for 50% of all online payments market in China. And, with 400 million users, it is a driving force behind mobile payments in the country.
Alipay is popular with digital businesses like Evernote, making it easy to onboard freemium users in China. For luxury retailers, it is a great method for connecting with a critical mass of Chinese shoppers, both home and abroad. The Cambridge Satchel Company saw an uplift of 15% after rolling out Alipay, and Daniel Wellington reported that it was able to reach Chinese shoppers quickly and easily by supporting Alipay.
5. WeChat Pay
The current hot topic is WeChat Pay, which has 300 million users and growing. It is an exciting method because it marks the birth of Conversational Commerce, which is the ability for shoppers to make a payment directly inside a chat thread. WeChat has built an entire ecosystem in which Chinese can chat, network, and interact with brands. By introducing payments WeChat is closing the loop, making everything possible in one application.
WeChat Pay is only available for shoppers with a Chinese bank account. But, like Alipay, it is critical for reaching Chinese shoppers, and we are currently integrating it for luxury brands, airlines and travel booking sites.