Myra Leung gives an introduction of mobile payment by looking at its current landscape, technology involved, benefits and risks, regulations and future possibilities.
Mobile payment usage landscape
“Contactless” is a familiar term in the UK. From transportation to grocery shopping, the wide usage of mobile payment indicates the UK's transformation to a cashless society. Currently, there are about 8.5 million people (19% of the smartphone users) in the UK registered for mobile payment. The UK mobile payment users are predicted to reach at least 25.5% in 2023.
This change in payment method is increasingly popular around the world because of its convenience.
The global mobile payment market size is estimated to be $3,081 Billion by 2024, which is approximately a compound annual growth of 23.2% since 2019. The overall major market leaders are from Asia, with China having 36% usage of mobile wallets, while the UK and Germany lead the change in Europe with around 5%.
What are mobile payments and mobile wallets?
A mobile payment is any payment made through a mobile device. Mobile money transfers and mobile wallets are two of the most typical examples of it. Compared to mobile money transfer, mobile wallets are a relatively new concept. A mobile wallet is a digital wallet that stores payment information in a user’s mobile device. It is usually in the form of an app like Apple pay, Google pay, Samsung pay etc. After users input their credit or debit card information, users can activate it to pay for products by tapping their phone on a reader (“point of sale terminal”). Then users can authorise the payment through a password, a fingerprint ID or face ID.
How does a mobile wallet work?
The ease with which a payment can be made, a mere tap of a phone, is due to a technology named NFC, near field communication”.
It allows two devices equipped with NFC chips to transfer data wirelessly when they are close together (around two inches or less).
NFC is a part of RFID (“radio-frequency identification”), which is a technology that can identify and transfer data through radio waves. Two NFC devices can exchange encrypted information (credit card details) within a few seconds and, after authentication, the payment is made. Since data is transferred through radio waves, the transaction process is much faster than credit cards, which use magnetic stripe and chip cards.
Moreover, NFC is more secure than a magnetic-stripe card because of the encryption and its dynamic nature. A credit card’s magnetic stripe is static, as it is unchangeable at the back of the card. Whereas, when using credit cards in the mobile wallet, both encryption and tokenisation take place.
Tokenisation is a security practice that uses time-limited token numbers to process transactions using the encrypted card information in the mobile wallet. After inputting the credit card information, the information is sent to the card’s issuing bank or network. If it is valid, the card information inputted in the mobile is replaced by a series of random numbers (tokenisation). As a result, even if the payment details on the mobile device were copied, they wouldn’t be valuable to fraudsters because they are not the actual card information.
Benefits and its growth factors
1. Convenience and ease of use
Mobile wallets are fast and convenient. Mobile phones are a huge part of our lives and they are always in our hands. Therefore, enabling payment through mobile phones saves the hassle of searching for a wallet in a purse to pay with a credit card or cash. This is a lot more convenient, especially when you have a cup of coffee or a few shopping bags in hand. Also, it is very easy to use, hence attractive for businesses and customers.
2. Security
Mobile wallets are also more secure. A simple comparison between the major payment methods can show that:
In the context of the current pandemic, the mobile wallet also provides more safety. Both cash and non-contactless credit cards require physical interaction, which can increase the risk of catching the virus. In fact, COVID-19 has also been a growth factor for the mobile wallet market because of the rising awareness of hygiene.
Is it really safe to use and is there any regulations to protect consumers?
It may be a concern about security as mobile payment is a new technology dealing with consumers' financial data. Therefore, when mentioning mobile payment and its innovative mobile wallet, it is worth mentioning PSD2 (Second Payment Services Directive). PSD2 is a regulation in Europe for electronic payment services. It makes payment more secure, encourages innovation and help banking serves to adapt to technologies like mobile payment.
PSD2 brings two major changes:
Security: Stronger security requirements for online transaction through multi-factor authentication are required
Transaction data: Banks and other financial institutions needs to give third-party payment services providers access to consumer bank account if account holder give their consent.
These changes are updated according to the new services provided in online payment. It makes payment safer by requiring SCA (Strong consumer authentication) and other measures to increase their protection.
Moreover, it also foster innovation and competition through regulating and enabling more services legally. For example, PSD2 allows “merchants”, such as Amazon to retrieve your account data from the consumer’s bank if they give consent. This allows sconsumers to make a payment directly, without needing to be redirected to another page to use other service like Visa or PayPal. This enhances businesses to improve customers experience and make consumers’ lives more convenient.
In the future, mobile payment usage will surely increase and soon become a universal part of life. Both customers and merchants should start to adapt to the changes like mobile wallet. However, with the constantly revolutionising payment method, more new technologies in the finance industry may appear: expansion of mobile commerce, instant real time payment, or even voice-activated transaction through the power of AI and ML (Machine Learning) is under development and may be applied, if a strict regulation to ensure consumer’s security is established.
Further reading
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