What are Mobile Payments and How Do They Work for Your Business

February 12, 2021

Mobile payments are no longer a novelty. They’re slowly becoming the norm, especially in today’s landscape. Customers are using them more and more often. What this means for merchants is that offering them becomes a must for their online services and stores (check this webinar for more details). In this article, we’re looking at how mobile payments work, and what are the benefits.

What are mobile payments?

In short, mobile payments – as the name suggests – are payments happening digitally using a mobile device, usually a smartphone. They can happen within a mobile app, replacing other payment types when buying online, or in a physical location as an alternative to contactless credit and debit cards.

The global adoption of mobile payments has been growing, with a considerable contribution of the COVID-19 pandemic, which made consumers look for alternatives to traditional payment methods.

The fastest growth has been happening in the Asia-Pacific region, as shown by stats. In 2019, the penetration of proximity mobile payments in the US amounted to 29 per cent, as opposed to 81 per cent in China.

It’s estimated that in 2023, there will be 1.31 billion proximity mobile payment transaction users worldwide, up from 950 million in 2019.

The fastest adopters are typically millennials. Although in today’s reality, more and more people are taking to mobile payments to make their lives easier, no matter their age. And the growth is often the biggest in older demographic groups.

How do mobile payments work?

You can use mobile payments both when you’re paying online and in physical locations like stores or public transport. The whole idea is to use your phone – either as contactless payment instead of a credit or debit card or a means of authorising your online payment, which can be done in several ways.

Essentially, there are several types of mobile payments, so let’s take a look at the few most popular ones.

Types of mobile payments

Mobile wallets and NFC mobile payments

Mobile wallet (sometimes also called e-wallets) are apps on your smartphone enabling you to store your credit and debit cards in one device, which you can then use for contactless payments as you would use a contactless credit or debit card.

Popular mobile wallets include Apple Pay, Google Pay, and Samsung Pay.

A mobile wallet lets you store multiple credit cards and select the one you want to use to pay at any given time.

Mobile wallets store card data using tokenisation. During the transaction, the 16-digit credit card number is replaced by a randomly generated alphanumeric ID, which constitutes the token. This means that it’s impossible to copy the card data during the contactless payment, as is the case with traditional payment cards.

In stores, mobile payments are enabled by near field communication technology – widely known as NFC. The user brings his phone close to the point-of-sale device enabled with NFC technology – just like a credit or debit card. The payment is usually authorised with a fingerprint or face identification.

Mobile wallets can also be used to pay for shopping online or in mobile apps. If a store or online service enables any of the popular mobile wallets at the checkout, the customer can authorise the payment using their mobile phone, just as they would do it in-store.

Research shows the use of mobile wallets has surged because of the COVID-19 pandemic, by as much as 68%. Interestingly, this increase hasn’t been precisely driven by the younger generation, with the use among older age groups doubling compared to 2019.

Direct carrier billing

Another type of mobile payments is direct carrier billing. DCB is an online mobile payment method that enables consumers to buy goods, products, services and digital content like streaming service subscriptions.

It works across mobile devices, including smartphones, tablets and Smart TVs, and it’s accessible to any user with a subscription or prepaid account with a mobile operator.

With direct carrier billing, customers can pay for their Netflix subscription or an underground ticket in a dedicated app by adding the amount to their monthly mobile phone bill.

Consumers complete their purchase through a one-step checkout process. All that’s required is a 4-digit PIN code, so there’s no need to input personal details for every transaction or fill out lengthy forms.

For a merchant, offering direct carrier billing as a payment option requires partnering up with a mobile carrier, usually through a payment service provider like DOCOMO Digital. As our research showed, DCB is yet another mobile payment method that’s been gaining traction in the recent year, with 50% of merchants either having launched DCB in 2020 or planning to in 2021.

Direct carrier billing also enables other options like service bundling, which lets them leverage the existing relationships consumers have with their mobile carriers. It is a great way to secure recurring revenue for the merchant and a new, digital revenue stream for the mobile network operator.

To see how direct carrier billing payments compare to traditional card payments, take a look at this video.

QR code payments

QR code (or quick response code) is the trademark of a type of matrix barcode created in 1994 for the Japanese automotive industry. Today, it’s used in many different contexts, one of which is a mobile payment method, particularly popular in China.

QR codes can be used in several ways. The customer can scan the code on their smartphone using a mobile app allowing QR code payments. They confirm the price, if required, before tapping to finalise the payment. Or they can scan it at the point of sale, just like they would swipe a card, using a special QR code scanner.

It used to be necessary to have a dedicated app to scan a QR code, but today, iPhones and Android smartphones can scan QR codes directly from the main camera app. All it takes is to open the camera and point it towards the QR code. The camera will instantly recognise it and display a push notification for you to tap to finish the transaction.

Online stores can accept QR payments as long as the payment gateway or ecommerce solution supports it.

In some parts of the world like the UK, QR codes did not initially have the same rapid adoption rate as contactless cards. And even though QR code payments can be included in mobile wallets, e-wallets allowing to pay by QR code are not really widely used yet. Major mobile wallets like Apple Pay and Google Pay are widely processed through the NFC technology accepted by all modern card terminals.

In China, people have been successfully using QR code payments for a while now. The Chinese payment app Alipay was the world’s most used app in 2018 outside of social networking apps, with fifteen million merchants accepting Alipay’s QR code payments in China. The WeChat app was fourth, only preceded by Facebook, WhatsApp, and Messenger – and it also includes QR payments, apart from its social media and messaging capacity. But even though some parts of the world have been slow to adopt QR codes, social distancing measure have boosted the technology once again, making it one of the safer payment alternatives, especially at places like restaurants, cafes, etc.

The benefits of mobile payments

There are undeniable benefits to mobile payments, which certainly contribute to their increasing adoption worldwide, especially in the current reality.

  • Mobile payments are convenient. All you need to do is have your mobile phone with you. No fumbling with your wallet to reach for your credit card, no need to take a purse to go to the grocery store.
  • Mobile payments are fast. In a physical store, you simply take out your phone, bring it close to the payment terminal, and authenticate the payment with your finger or face ID. With online payments using a mobile wallet, there’s no need to type in the credit card details – you authenticate your payment the same way.

If you’re using DCB, you’ll have to enter a four-digit code to authenticate a transaction, and that’s it

  • Mobile payments are secure. You’re not giving away credit card information or any other types of sensitive data with mobile payments, replacing it with tokens that are useless if they’re intercepted during a transaction. Digital wallets also provide extra layers of biometric authentication like fingerprints or face identification.
  • Mobile payments are high-converting. For consumers, a mobile payment is quicker and easier to make. What this means for merchants is that you’re reaching more customers and allowing more transactions by letting your customers choose more digital payment methods they use every day. And this, of course, leads to higher revenues, along with reducing checkout abandonment rates resulting from complicated processes and bad user experience.

So, how do I accept mobile payments at my store/app?

If you’re a digital merchant looking to provide your customers with mobile payments, you’re best off working with a trusted payment service provider. They will supply you with the tech and often also support you with the strategy to maximise conversions.

If you have a physical location, you’ll also need a POS terminal that accepts NFC mobile payments.

See how you can work with DOCOMO Digital to provide mobile payments at your store, platform, or app.

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