Mobile devices like smartphones, tablets and smart watches – devices carried by billions of people worldwide – are making their way into all factors of life. Whether making purchases, getting directions, or controlling your thermostat, these mobile devices are proving to be the jack of all trades – and perhaps even master of them all.
One such trade that we’ll be looking at today is a big one: mobile payment.
Right now, the mobile payment scene is experiencing a boom. Over 2.8 billion mobile wallets were in use by the end of 2020. That’s already a considerable amount, but it gets better: By the end of 2025, that number is projected to increase by almost 74% to reach 4.8 billion. [1]
There are many factors at play which can explain this:
The point is that more and more people have started using their mobile devices to not just make purchases but pay for them too.
With such a turn in the tide, many have been left to ask: Are mobile payments the best way to pay?
Contents |
Mobile payment refers to any sort of payment transaction that occurs through a mobile internet-connected device like a smartphone, tablet or smart watch. Depending on who you ask, this can take place both online and in-store. All that is required is the necessary facilities for the payment to be made, whether that be a QR code or an NFC POS terminal.
Mobile payment has been around for several years now. Uptake was initially slow as stores often refused or were slow in adopting and integrating the necessary hardware and workflows necessary to accept mobile payments.
But once the ecosystem of mobile payment providers started to take shape, things really started to take off. That’s because the modern mobile payment scene sees payments are often facilitated via applications built onto the device though, as you’ll see, this is not always the case.
Mobile wallets are central to the mobile payment experience. Known as digital wallets, e-wallets and more, these are essentially applications where you can store your encrypted card details. More importantly, these wallets can then be used to make purchases using said cards or balances.
|
|
|
|
Did you know? While mobile wallet and digital wallet are often used interchangeably, there are some small differences. The biggest of which is in the name: Mobile wallets are stored on mobile devices while digital wallets can be stored on any digital device. In that way, mobile wallets are more of a subset of digital wallets. |
|
This is important for security as the user does not need to input their details each time or, in the case of in-store purchases, interact with other devices to input their pin. Payments are authenticated using the mobile device, whether through fingerprint scanner, a secure passcode or, in the case of Apple Pay, Face ID.
Another bonus for security is that you do not need to carry the physical cards, which can be lost, damaged or stolen. There are many other benefits of paying with digital cards like virtual cards that we have delved into before.
Another benefit of mobile wallets and apps is that they allow you to carry multiple cards on one device. Just like a physical wallet, you can keep different debit, credit and corporate cards – and in some cases IDs and reward cards – and select which to use as needed. This makes for a better user experience while also being much more convenient.
Not all wallets are made equal. There are two broad varieties of mobile wallets: Open loop and closed loop.
As the name suggests, this type of wallet is more open, acting like a centralized or general use wallet that you can use to pay at many different locations. These are linked directly to a payment account and so do not require a prepaid balance.
Open loop wallets are very convenient thanks to their wide acceptance, though the market does suffer from fragmentation.
A closed loop wallet, in contrast, is more specialized or locked down – often to a specific retailer or location. They make use of a prepaid balance rather than being connected to any sort of payment account. Think of them like gift cards where the mobile application allows you to manage and fund the card.
These are great for the merchant offering the wallet in terms of collecting data but are much less convenient due to their proprietary nature.
There is actually a third type which straddles between the two:
These wallets can be used with a wider range of merchants than a closed wallet (any who enter an agreement or contract with the wallet) but are not quite as widely accepted as its open counterpart.
The type of mobile wallets available to you depend on the device you are using, the hardware it includes (e.g. whether it has NFC) and the software it is running. That’s not to say that all mobile payments happen through apps – we’ll see later how even existing technologies like SMS help enable mobile money.
First, let’s take a look at the advantages of mobile payment that have helped increase its adoption over time.
With so many payments being made via mobile every day, there must be some major benefits it offers. And it indeed does – here’s just a few:
A digital platform works best with a digital payment method. The likes of Apple Pay make it incredibly easy and efficient to make payments on your mobile device or in store. Why? Because it’s well-integrated at both a hardware and software level.
When paying in-store, it’s possible to set up your device in a way that allows you to quickly access your payment card through a physical button.
When paying online, many of the popular mobile payment wallets are now available as an option. It’s often as simple as scanning your finger to confirm the purchase.
Having an all-in-one device that you can use for communication, entertainment and payments is incredibly convenient. You don’t have to bring your wallet or cash along with you when making a trip to the local store.
Mobile payment is also incredibly convenient in situations where speed is of the essence. Thanks to the integration, minimum input is needed to make payments – especially for smaller amounts.
For example, many public transport systems are compatible with the popular mobile wallets for paying for tickets and entering the turnstiles.
If you lose a bank card, you are out of luck. You’ll need to call up your bank immediately to freeze or cancel the card outright to protect your details. With your smartphone, that is not the case.
Modern smart devices are very secure, at least compared to carrying cash or a physical card. That’s thanks to the implementation of authentication methods like fingerprint or facial scanning, which help ensure only you as the owner can unlock the device and access the payment app – which itself is often authenticated separately.
Every purchase comes with insightful and even actionable data. This can then be utilized to offer personalized discounts, loyalty programs and more. That can translate into more savings and relevant deals.
The mobile payment providers receiving this data, on the other hand, will also learn a lot about customer behavior and other trends in spending. This can then be used to improve the service or offering for the better.
So those were just a few of the benefits to expect from mobile payments. Next up: how do they actually work?
Paying via mobile doesn't work too differently from a typical card-based payment. While the details do change a bit depending on the format of the payment (i.e. QR, SMS, or NFC), the fundamentals remain the same:
Initiation – You initiate a payment through your mobile device
Authentication: – You authenticate the transaction via PIN, password, fingerprint, or facial recognition.
Transmission: – The payment information is encrypted and transmitted securely to the payment gateway or processor.
Processing – The payment processor receives the transaction data, decrypts it, and verifies its authenticity.
Authorization – The payment processor sends an authorization signal back to your mobile device, confirming the transaction has been approved.
Settlement – The transaction is settled via your bank or card network, and the funds are transferred from your account to the merchant's account.
Confirmation: You and the merchant receive confirmation of the completed transaction, usually in the form of a digital receipt sent to your mobile device or email.
The actual payment experience is also quite simple. Here’s a look at the process itself for a typical NFC-based open loop wallet like Apple Pay:
This is the typical payment process for the popular NFC-based mobile payment. However, there are a number of different technologies in use that facilitate the mobile payments.
NFC or ‘near field communication’ is a type of contactless communication – a wireless technology – that allows smartphones, tablets and other devices equipped with the necessary hardware to communicate with NFC-enabled card machines using close-proximity radio frequency identification.
It’s most popular in parts of Europe and Asia but is quickly spreading throughout the United States. It’s also incredibly simple: you only need to wave your smartphone next to the NFC-compatible device – no touching necessary.
When it comes time to pay, the POS machine then emits a signal searching for another NFC payment device (your smartphone). Once the POS machine detects a response, the payment information is then sent, and the transaction commenced.
It’s at this point where the funds are transferred to the merchant account and from there to the merchant’s business account. [2]
The cool thing about NFC is that it combines the strengths of contactless payment and mobile. You can store multiple cards in a single device that you often carry with you anyway, and you don’t need to deal with texting or swiping through menus while at the checkout. Of course, it’s also an incredibly secure way to pay.
Ultimately, through standardization and compatibility across brands and borders, NFC has been evolving to one of the leading payment methods.
QR or ‘quick response’ codes are 2D barcodes that can be read by smartphones and other camera-equipped devices. Having been developed first by the Japanese automotive industry in 1994, QR codes are now widely used as a means of payment.
When you scan one, the software in your phone or other devices decode the horizontal and vertical patterns into a string of characters. These characters tell your device what to do next, whether that be open a link, confirm payment information or more.
China is quite famously a leading user of QR-based payments – we’ll look into that in just a bit. But India, through Paytm, has also seen a large adoption of QR payments to the tune of $62 billion by the end of 2022. By 2026, that number is expected to increase to $125 billion. [3] Meanwhile, in some African countries, restaurants are now including QR codes on receipts.
A lot of the appeal comes from the fact that they’re a great way to facilitate payments due to their reliance on widely used smartphones rather than a dedicated card payment terminal or other expensive setups.
Unlike the old-fashioned barcodes that we’re used to seeing on our groceries, QR codes have a few tricks up its sleeves:
All in all, it’s not hard to see why QR codes have taken off as one of, if not the, most popular medium for mobile payments. And with one study suggesting that the global spend using QR code payments will reach over $3 trillion by 2025; rising from $2.4 trillion in 2022, it’s still got room to grow. [4]
SMS or ‘short messaging service’ as a means of payment works by sending an SMS to pay merchants securely, quickly and safely. With just a text, you can buy goods, services and make deposits – both in person and online.
One of the main draws is the accessibility to banking and payment services it brings, hence why it’s use in markets with large underbanked populations: Africa, India and Latin America. [5]
Elsewhere, SMS payments are most used by charities to receive donations. But how does it work?
As mentioned, SMS payment involves sending a text message to pay for an item or service. The text is sent to and processed by the mobile payment provider, who then clears the transaction between the purchaser and the vendor.
For customers, it’s a quick and easy way to pay, and it doesn’t require you to input your bank details – or even have a bank account. You also don’t need any usernames or passwords.
|
|
|
|
Did you know? All the way back in 1997, Coca Cola released vending machines in Helsinki that allowed customers to pay for their drink by sending a text to the vending machine, making it amongst the first examples of mobile payment. [6] |
|
They’re able to accept payments from the billions of mobile phones capable of texting around the globe, including those without access to a bank or card. There’s also the ability to build up customer loyalty via marketing content, coupons and more through SMS messages.
Can receive payments from the millions of customers who don’t have a bank account or credit card and thus were prevented from buying their goods or services before. This usually presents a whole new set of customers. Best of all, the billing is handled by the phone operator.
For all these reasons above, SMS payments have been one of the fastest-growing payment methods in the world.
There are several more ways in which mobile payments can be made outside of these three. Near sound data transfer (NSDT), for example, is another mobile payment methods in use where an audio signal is sent between devices as a sort of one-time password to enable secure transactions. However, this technology is not as widespread as those mentioned above.
Now that we know how mobile payments work, we can take a closer look at why they have become so popular.
This is the big question. What is driving this growth? There’s no single factor at play, but many small successes that have made mobile payments so popular today. We’ve identified just a handful.
It makes sense that digital payment methods work best for digital platforms. There is a level of integration that makes the payment almost seamless – in the case of Amazon’s one-click ordering, it’s almost invisible.
But then there is another level of integration for mobile payments, and that is thanks to mobile commerce. Mobile commerce or ‘m-commerce’ refers to purchases made on digital platforms through a mobile device. That’s an important distinction as data is showing that more people are making purchases directly from their mobile devices.
One forecast predicts that by 2024, about 70% of all retail e-commerce sales will be made up by global m-commerce sales. [7] That’s a clear sign that mobile is becoming the popular platform for shopping online.
It’s also worth looking at the mobile app ecosystem. Almost every store has its own corresponding mobile app or at the very least a website that can be accessed via a smart device.
Look no further than the growing realm of social commerce for proof.
The likes of Instagram have introduced ads and posts that allow brands to not only show off but sell their products through the social platform. Instagram Shopping posts see somewhere around 130 million taps every month. [8]
That translates to a lot of mobile payments. Then there are the many apps offering in-app purchases and subscriptions to consider.
In short, the mobility, flexibility, convenience, speed, simplicity, integration and general influence mobile devices have on individuals all play a role in making mobile commerce – and thus mobile payments – popular.
Here’s a bit of a ‘chicken and the egg’ problem: For mobile payments to take place (especially in-store), the technology that accepts these payments needs to be there. However, the merchant may not want to invest in the necessary hardware and payment integration process until the demand is there.
At least, that’s how it seemed before. Now, thanks to external pressures, the demand is very much there for mobile-compatible POS – and for an omnichannel approach. After all, consumers are looking more and more to pay using a multitude of different options via mobile: from instant payments to contactless cards, digital wallets, and cryptocurrencies.
With the customer being king and conversion calling, merchants need to be ready to accept electronic payments. An increasing number of merchants accepting electronic payments shows that we are on a good track. A 30% rise is estimated between now and 2026 across 28 European markets, even in traditionally cash-loving countries like Germany.
The vast majority is represented by small and micro-merchants such as street food vendors, personal trainers, and providers of other personal services. [9]
One of the fastest ways for these merchants to start accepting omnichannel electronic payments is to use a solution on their mobile device and with that skipping a costly investment on hardware terminals and a complex payment integration. Instead, having the right software on the merchant’s mobile device will do the trick.
What examples do we currently see in practice?
The “Tap on Mobile” POS solution from the Discover Global Network is one POS solution example for merchants specifically targeting the use of software on mobile devices. It consists of a suite of software tools enabling mobile devices to accept contactless payments in minutes, rather than waiting days or weeks for a card reader to arrive. [10]
Another example of the mobile device focus for accepting electronic payment is Apple’s launch of a new SoftPOS service in the US, with Stripe as acquirer, already counting more than two million business customers. It will enable small businesses to accept contactless payments like Apple Pay directly on their iPhones without the need for any extra hardware.
The pandemic had a massive, lasting impact on how we pay. Cash and even cards fell in popularity as they were seen as unhygienic at a time of heightened health consciousness. A Mastercard study from April 2020 found that 79% cited safety and cleanliness as the reason for using contactless payment. [11]
The name of the game became no-touch or contactless payments, in the form of contactless-enabled cards and mobile devices.
Prior to the pandemic, mobile payments were growing in usage, but were by no means widespread. A lack of infrastructure, understanding and even a general ignorance of the technology meant that there was little reason for people to move from the cash or cards they were so used to using.
But then it struck.
People were looking for a contactless solution to make their necessary payments when shopping in store. That’s when the advantages of mobile payments started to shine.
The lock downs caused by the pandemic meant that people were often unable to leave their houses. Instead, many chose to order food via delivery apps. If we look back at the role of e- and m-commerce in mobile payment adoption, we can see this as a big contributor.
Another point worth noting is that the contactless limit for mobile payments – the amount you can pay without needing to input a pin or otherwise authenticate – was raised in the UK and Europe. This made it even more convenient to pay via mobile and likely convinced more to switch over.
All this together meant that the pandemic had arguably the biggest role to play in the growth of mobile payment.
As we have discussed before, the introduction of PSD 2 and adoption of strong customer authentication (SCA) has had a massive impact on the online payment process. In short, it complicates and adds yet more steps to the payment process.
But beyond this, it’s also been changing the way we pay – especially online. It all comes down to security and authentication, perhaps by design. And as security is a big concern in a world where online spending is increasing, such developments and innovations are welcome.
So we must ask: Are mobile payments going to benefit the most from SCA regulations?
Possibly. Smartphones have proven to be the ideal device for compliance with strong customer authentication.
We’re talking about a powerful yet portable minicomputer that you carry around with you, with plenty of sensors and other important hardware to boot. That is to say that these devices are perfect for authenticating purchases.
We have the means for proving inherence, possession and knowledge in our pockets. It’s compatible with both in-store, online and on-device transactions too. This places it amongst the most frictionless payment experiences available to both consumers and business travelers.
There is some discussion to be had whether this is by design, or that the rise of mobile payments came about naturally (aside from the pandemic) and that your smartphone just so happened to fit the needs.
Either way, it’s possible to proceed through the whole payment process using your mobile alone – that alone could make it worth the title of best payment method.
For a real case study on how widespread use of mobile payment looks, we’ll now turn our attentions to a pioneer of the market.
No article about mobile payment would be complete without a look at the biggest market: China.
Today, the country has one of the most advanced digital ecosystems in the world, becoming a global leader in consumer technologies. So, what is the payment landscape like there?
Put simply, very mobile.
Everything from stores, restaurants and even street vendors accept payment via mobile – and often even prefer it. This is possible thanks to the use of QR codes which, as mentioned, offer a more mobile means of managing transactions without the need for specialized hardware. Many choose to print the QR code on a piece of paper.
Mobile payment market is largely controlled by two key players: AliPay and WeChat Pay. Between them, they represent 54.5% and 39.5% respectively of China’s mobile payment market. [12] Even more impressive is the news that this market is growing further.
2025 is forecast to see a combined user base of nearly 2.5 billion, up from just over 2.2 billion in 2020. [13] This growth is impressive considering the already high penetration rate of these mobile payment tools.
And then there is the amount being spent. By some estimates, China’s cumulative digital payment value will reach 3.5 trillion USD by the end of 2022. [14]
This leaves us asking: why is mobile payment so popular in China?
It’s mainly a case of low credit card adoption, ease and convenience over cash, and the wider impact of the digital evolution in the country. When we looked at the topic of mobile payments in China before, we identified three major reasons behind the wide adoption of mobile payments:
We go into more detail about this and the greater trend of mobile payment in this article. For now, we can take a look at the conclusions we can make.
One of the significant effects of mobile payment adoption in China is the move away from cash to a digital alternative. This in turn provides richer and more widespread data regarding finances and transactions across the population. This allows for not just greater insights, but the development of relevant products as part of a broader integrated digital ecosystem. [15]
While overconsumption – out of convenience amongst other things – is a concern, the greatest benefits for users can be seen in more socially disadvantaged groups. [16] It’s proven very inclusive for the underbanked population, for example.
Owing especially to the adoption of QR code-based transactions and widespread accessibility of smartphones, a wider range of individuals and SMEs were able to transact with others without the need for expensive or difficult to access hardware or cash.
This is not only empowering through increased entrepreneurial opportunity, but also helps improve the prospects of those who otherwise would not have been able to access banking and payment services.
Let’s move on to look at how businesses are reacting to this trend.
Mobile payments by businesses to other businesses – that’s still a fair way out. Especially for internal procurement processes, where dedicated workflows exist, and cash flow management is of the utmost importance.
But there is one scenario where businesses can really benefit from using mobile payments – and many already have started. That, of course, is business travel.
Mobile payment offers some great features for travelers. Thanks to integration between mobile payment wallets and corporate card providers (like, say, our integration with Apple Pay and Google Pay) you can not only pay contactless without needing to carry your card, but also enjoy security without the need to then write up an expense report later.
We have spoken many times before about how reliability is key for business payments. No one wants to deal with issues at the cash register, especially when a big meeting is coming up. Acceptance of mobile payments is growing rapidly, and so that reliability is now a reality.
So, what benefits will mobile payments bring to business travel. Quite a few:
Mobile devices make for the perfect pocket-sized compliance management tool. When a payment is made with a device, it can indicate whether the purchase is compliant directly at the point of sale. This preventative measure makes policy management more effective while also being less intrusive or cumbersome.
In turn, the convenience of automated expense reporting helps drive compliance.
Another big benefit is faster – even real-time – capture of payment data. That translates to faster decision-making by budget managers. They have access to current budget data for a trip to examine how much is being spent and it’s within the budget.
This speed can also be seen in expense reporting. Travelers save time while travel managers get a more accurate view of expenditure. This makes it possible for the policy to be more fine tuned.
Other mobile device technology, like GPS can be incorporated such as a warning pop up when the software detects that the coffee they’re buying is within three miles of their office – something that would not be reimbursed.
There is plenty more that can be gained too: data on who is using the card and when, the ability to reconcile pre-trip booking data and on-trip payment data, as well as capture of level 3 (folio) data.
This is all just the beginning as improving mobile hardware and software will over time open new opportunities and ultimately save on time and resources when it comes to business travel payments.
Actually, let’s take a look at what trends are starting to take shape in the mobile payment scene.
Predicting the future is hard. But predicting the payment market? Almost impossible. What we are able to do is look at the current data and extrapolate that further for a glimpse at what may come.
Here’s a quick overview of the 5 key mobile payment trends to look out for:
The mobile payment will only continue to grow.
As we mentioned in the beginning, over 4.8 billion are expected to be using mobile wallets by 2025. As more people become exposed and the experience becomes even more frictionless, a mass adoption around the world can be expected.
In the corporate travel space, one survey found that 41% believed that mobile payments via wallets would gain traction in 3 to 5 years. [17] That suggests that the majority believe this payment method still has room to grow in the B2B space.
What is clear is that over time, more countries will approach the magnitude we see in China. But markets like the UK and US are topping the charts in other ways.
For 2022, the average mobile POS transaction value per user globally is $1,920. [18]
According to the latest data from Statista, the UK blows that number out of the water with the largest average annual transaction value per user at over $14,220. This is followed by the US at $12,710. In comparison, Germany sees only $3,070. [19]
This reveals a few things:
This suggest that countries like Germany see mobile payments as a more casual, everyday payment method. Larger purchases are then likely to be made using other means such as credit cards. Meanwhile, the UK already seems to be on board with mobile payments for purchases of all sizes.
Back in 2019, a survey of 16,000 smartphone users across 10 countries found that 84% were willing to book their flights with a mobile device. [20] That was already a significant portion.
Today, thanks in no small part to the pandemic and the many other external forces at play, contactless payments – especially by mobile – are the preferred means of payment.
It’s easy to see why – it’s convenient, hygienic and easy. So why not take that trend with us as we travel?
And with 43% of passengers now booking flights after being exposed to offers on social media, it’s now possible to have the whole booking experience, from discovery to payment – on mobile. [21]
Speaking of social media…
Let’s look at Gen Z. This younger generation now consists of over 2.5 billion – that’s two and a half billion digital natives. Based on this write up by Phocuswire [22], here are a couple interesting facts to consider:
This makes one thing clear: we’re soon going to be experiencing a major shift in the way people book and pay for travel.
But according to another study, a quarter of mobile shoppers say a slow checkout process is their biggest deterrent. Mobile is proving to prevail here too.
Behavioral biometrics is making progress. Instead of using an old-fashioned bus pass, we could be recognized by the way we walk – our stride, gait or other identifiable features. That means all transactions could be handled invisibly by our mobile devices. [23]
This innovation would greatly improve the user payment experience. And of course, this all relies on the technology we carry with us in our pockets and on our wrists.
The incredible growth of mobile payments is undeniable.
From its humble beginnings to today, we’ve seen all sorts of innovation revolving around the smartphone and adapting it around the needs of payment. Whether in the form of NFC contactless payments, QR codes or SMS, it offers a convenient and secure way to facilitate payments both on the side of the buyer and the seller.
So why is it experiencing such a growth? There are a few factors, though the pandemic is arguably the biggest factor.
But that’s not to say that regulations like SCA, advancements in POS technology (and its availability) and the move to digital platforms for making purchases haven’t also played an important role. The benefits it offers as a payment medium are in themselves also important.
China is a shining example of the extent mobile payments can penetrate into everyday life. In fact, its success has led other countries in the region to follow the model set out by China. The same can be seen further afield as many retailers in Europe now promote their acceptance of the big Chinese digital wallets.
And then there are businesses who are enjoying greater efficiency and convenience when it comes to business travel thanks to the use of mobile devices for making payments on the road.
We can only predict what the future holds, and all signs are pointing to continued and sustained growth as accessibility continues.
So, there you have it.
Mobile payments are just one of the many innovations taking place in the payment landscape right now. We’ll certainly be covering more important trends like this in our AirPlus Global Newsletter so make sure you subscribe today so you don’t miss out.
[1] Half of the world’s population will use mobile wallets by 2025 | Paymentscardsandmobile.com
[2] What are NFC mobile payments? Are they really safe in 2023? | Pay.com
[3] Mobile Wallets Report 2021 | Pay.com
[4] QR code payments to hit $3 trillion globally by 2025 | Paymentscardsandmobile.com
[5] What are SMS payments? | Mobiletransaction.org
[6] History of Mobile & Contactless Payment Systems | Nearfieldcommunication.org
[7] Mcommerce | Insiderintelligence.com
[8] New to Instagram Shopping: Checkout | Instagram.com
[10] Tap on Mobile: the digital revolution moves from payment to acceptance | Paymentscardsandmobile.com
[11] Chronicles of the New Normal: Contactless Staying Power | Mastercardservices.com
[12] How WeChat Pay and Alipay Can Strategically Grow Your Business | Eastwestbank.com
[14] Payment methods in China: How China became a mobile-first nation | Daxueconsulting.com
[15] Mobile Payment in China: Practice and Its Effects | Direct.mit.edu
[18] Mobile POS Payments - Worldwide | Statista.com
[19] China's mobile payment adoption beats all others | Statista.com
[20] Solutions for your mobile payment journey | Phocuswire.com
[21] The 2022 Travel Payment Trends Report | Trustpayments.com
[22] Social, mobile, cashless - Gen Z travel and payment trends | Phocuswire.com