A mobile payment is "any payment" for goods and services that is initiated from a smartphone or similar device. Mobile payments can be broken down into two main types: remote payments or proximity payments.
As the names imply, a remote payment occurs when the consumer makes a payment to a recipient that is not in their location, while proximity payments occur when the consumer and retailer are in the same location.
Boiling things down, remote payments are simply transactions whereby the phone is accessing the traditional Internet payment gateways, such as message-based, browser-based, application-based, and mobile banking.
"It is proximity payments that, in our opinion, will drive the shift in personal consumption expenditures (PCE) away from cash and are, therefore, of more interest to investors," said Dan Perlin, an analyst at RBC Capital Markets.
The numeric code payment process requires the consumer first to enrol in the program by providing personal details (name, payment method, etc., much of this information could be saved in a mobile wallet).
After registration, the consumer can download an application or store a short code for SMS transactions (text messages). To initiate a transaction, the consumer elects to pay for something using the previously registered account.
The payment decision reserves funds in the selected funding account, and the consumer is provided with an authorization code. The cashier enters the authorization code provided by the consumer and the POS terminal validates the code (similar to validating a credit card), and the transaction is competed.
Given the graphics capabilities of Smartphones and other mobile devices, it is relatively easy to generate a bar code on the screen.
The bar codes simply incorporate information into a series of black and white parallel lines (called one-dimensional) or into other geometric patterns (called two-dimensional). These are the ubiquitous symbols seen on packaged foods, airline boarding passes, packages sent for delivery, etc.
The technology dates back to the 1960s and was especially adopted by food retailers in the 1970s (in the US). The technology is only one-way -- from the bar code to the reader; though many Smartphones now have the ability to read bar codes using software and an integrated camera.
One major advantage is that no special equipment should be needed only that the particular codes generated are integrated with the existing system. Two major US retailers use a bar-code based system already, Starbucks and Target.
Both programs rely on a previously loaded prefunded gift card and are tied in with loyalty programs. The system is relatively simple: download an app, use it to get the card information on the phone and then use the app to display the bar code when ready to pay.
Near-Field Communications Chips
Most of the recent "Mobile Payment" announcements have simply been accessing an existing payment network via a new technology such as a near-field communication chip embedded inside a Smartphone or a memory card inserted into the Smartphone, included in a mobile SIM card, a key fob, or even a sticker about the size of a quarter.
In Perlin's opinion, near-field-communication (NFC) will be the technology of choice as it is based on already existing established technology – radio-frequency identification (RFID) first patented in the 1980s, already has an established protocol so there is general interoperability between different manufacturers, and only communicates for very short distances (essentially the devices must touch) which removes the threat of the information being accessed by a party outside of the transaction.
Perlin sees three main ways of enabling NFC technology on a Smartphone (essentially a way of putting a computer chip on the phone): externally, via an internal dedicated chip, and incorporating the chip and its information into the phone’s SIM card (subscriber identity/identification module).
External NFC Chips
Since an NFC chip is remarkably small (Hitachi currently claims the record with a chip that measures 0.05mm by 0.05mm), the chip, its power source, and an antennae can be incorporate in a wide variety of forms.
For example, First Data has experimented with putting the electronics in an adhesive sticker that can be attached to just about anything, while both MasterCard and Visa have experimented with placing the chips in small key fobs or credit cards themselves.
In addition to this "low tech" method, the technology has also been incorporated onto microSD and other mobile phone external attachments such as Device Fidelity’s microSD card and iPhone wallet.
Internal Dedicated Chip
According to Near Field Communications World, there are currently at least 11 mobile devices that have a NFC-chip incorporated inside the device. For example the Google Nexus S manufactured by Samsung is available at retail locations (running off the Google Inc.'s Android platform).
In early May, Research In Motion (RIM) announced that two new versions of the BlackBerry Bold will have built-in NFC capability and should be available in the fall.
Finally, various technology sources (press reports, commentary, etc.) have both Apple Inc. and Microsoft Corp. working on incorporating NFC technology in their respective operating systems.
One of the questions to be decided, however, is where the information sent by the chip is stored -- in the chip, on the Internet or in the Smartphones built-in memory.
A mobile device’s SIM card (subscriber identity/identification module) stores the network-specific information used to identify and authenticate the user.
There are currently SIM cards that incorporate a built-in NFC chip (for example, in late March Gemalto announced a SIM-card design with NFC that it certified for use on the MasterCard PayPass mobile payments system).
Perlin believes that one possible friction point to the rollout of NFC-based mobile payment will be the question as to who controls the consumer/payment authentication information.
If that information is directly incorporated on the SIM card then the mobile network would generally control it while enabling the SIM card, with its information, to be swapped between devices.
If it is on an external or internal dedicated chip then theoretically any of the various parties (handset manufacturer, operating system developer, wallet software provider, etc.) could control the information.
It is this information that Perlin sees as key to providing the mobile advertising and other value-added features of mobile payments.
Bluetooth technology is another form of near-field communication that acts in a very similar way to an NFC chip.
Theoretically, two Bluetooth-enabled devices would be able to send information between each other. Bluetooth theoretically transmits faster than NFC chips and has a longer range than NFC (according to industry standards).
The longer range, however, increases the possibility that the information is intercepted in some way. A company called Rollplay is already working on Bluetooth mobile payment solutions.