Summary and implications
Many technology companies are considering how to enter the mobile payment market. Credit cards will, in a few years, be a thing of the past as mobile phones become the primary way to pay for goods and services. This article considers the key competing technologies and the legal risks, and how the adoption of these technologies may shape the payments market of tomorrow.
Exponential growth of mobile payments (m-payments)
The need to consider mobile payments becomes clear as payments using mobile smartphones have increased exponentially year on year. Some reports claim that such payments now account for almost 20 per cent of all consumer transactions processed worldwide (Adyen, Mobile Payment Index, 30 January 2014). Whilst the exact number of mobile payments remains uncertain, Capgemini and The Royal Bank of Scotland estimate that mobile payments – or "m-payments" as they are known in the industry – will grow 58.5 per cent annually, reaching 28.9bn transactions in 2014 (World Payments Report, 2013). These figures clearly demonstrate that consumer appetite is high. What is yet to be determined is which technology will lead the way and therefore which provider(s) will benefit.
M-payment technology: the options
There are several primary choices emerging in m-payment technologies.
Near-field communications
"Near-field communications" have been widely adopted in the last year to deliver payments wirelessly via the Visa contactless platform. The success of this is shown by over 300,000 shops in the UK adopting contactless readers for small payments (including Starbucks, Pret A Manger, and more recently, Marks & Spencer). Following such success, last week, the UK's three largest mobile network operators, EE, O2 and Vodafone, launched a new mobile advertising and payments platform. The platform, known as Weve, allows their customers – accounting for some 80 per cent of all mobile phone users – to store credit and debit cards along with loyalty cards and coupons. This information is linked to the SIM card in a smartphone, allowing payments to be made at tills with contactless readers already being used for some debit and credit cards, such as the Visa Contactless system.
Bluetooth
According to Adyen – a provider of international mobile payment technology – Apple devices remain the most popular platform for mobile payments. Its iPad and iPhone devices accounted for 72.6 per cent of all mobile payments made between September and December 2013. With such popular hardware, and with access to more than half a billion users' credit card details through its iTunes platform, Apple is a credible contender. Whilst there has been much speculation on how Apple might commercialise its position, it seems that it favours Bluetooth (low energy beacons which send data in a similar way to wi-fi). This technology is present in the iPhone 5.
PayPal has also launched a Bluetooth platform called Beacon, which enables the sending of a photo of the consumer to the merchant's point-of-sale system, allowing the consumer to be greeted by name. The consumer can then order or pay for goods, requiring only a verbal confirmation to complete the purchase.
Apps
The examples so far have all required third party hardware infrastructure. There are, however, mobile payment systems which do not. One example is Zapp, which has partnered with HSBC, First Direct, Nationwide, Metro Bank, Santander and Worldpay in the UK to provide mobile payments through an app alone. The app can be used with NFC technology. More excitingly, however, it can also make payments by sending a code to a mobile phone to verify transactions. In addition, QR codes can be scanned with a mobile phone's camera to make payments. These options allow interoperability among existing infrastructure, removing some of the barriers which have hindered the success of other platforms.
The legal risks and challenges ahead for m-payments
There are some key legal risks for business to consider in progressing their m-payment strategies.
Interoperability
Although consumer demand for mobile payments is high, there does not, as yet, appear to be a front-runner for the emerging technology. As with all new technologies, the main challenges are interoperability and infrastructure. Most of the options are being backed by large companies using some form of proprietary technology. This may limit accessibility and increase costs for any business who invests in one technology only to see it quickly made redundant by a subsequent dominant product.
Security
Following recent data breaches (such as Target's loss of 40m credit card details from its point-of-sale terminals in the US at the end of 2013), security remains another major concern. NFC technology, for example, processes payments upon presentation of a device (or card) and currently requires no further authentication. Here, Apple may lead the way with its fingerprint enabled iPhone 5S which adds an additional layer of biometric protection. Merchants and consumers alike may also turn to the cloud to store their data rather than it being stored physically, on a device. Businesses should consider, in assessing options, the sensitivity of their customer base before selecting a technology which has less security protection.
Use of data
There are also concerns over the ownership and exploitation of data. As the market develops and certain businesses take the lead, there will be an increasing amount of demographic data available in relation to buying habits. This data has a higher commercial value than the processing of the transactions alone. How this data is used or, perhaps, misused is likely to be a key battleground in the future. It is likely that the law will have to evolve as these new technologies develop to protect consumer data and regulate the market. Present legal regimes do not clearly establish how businesses are to negotiate challenging issues such as consent of individuals to use of their data.
Outlook and conclusion
Provided the challenges can be overcome, the outlook for the m-payments market is very promising and presents opportunities to those already in the market as well as new entrants. Although there is, as yet, little innovation from banks, who historically owned the infrastructure which allowed electronic payments to take place, there will be a need for these institutions to work together in the future to initiate changes to address the competition from new entrants, such as Apple. A word of caution: any business considering m-payments should be careful in selecting the technologies and considering the risks. Much of the commercial benefit in the data attached to the transactions needs to be considered also. This is increasingly likely to be the focus of financial institutions as well as the new technology players.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
