When Apple Pay was introduced in 2014, many people scoffed at the idea that a smartphone could replace cash and credit card transactions at the point of purchase. But today, mobile payments are on the rise. By 2020, mobile payments are expected to increase to $503 billion, according to a report by Business Insider.
Several factors are converging to drive this growth: the proliferation of smartphones (about 95 percent of Americans use them), enabling technology, lifestyle changes, demand for improved customer experiences, and the need for fast, easy and secure transactions. Millennials are currently the largest audience for mobile payments – nearly half the people in this age range report using a mobile payment.
Over the last few years, top technology innovators such as Apple, Google and Samsung have advanced the mobile payment industry by introducing next-generation mobile payment apps, making mobile payments more accessible to more consumers. Plus, credit card companies are finally getting behind mobile payments. Increased merchant support for the technologies across point-of-sale (POS) terminals is expected to fuel mobile payment growth in retail, according to a study by Allied Market Research.
For small businesses, accepting mobile payments can improve customer experiences, streamline processes and reduce transaction costs, to name just a few potential benefits.
Some industry experts say that adopting mobile payment technologies is one way to future-proof your business. But does it make sense for small businesses to get on board now? To help you weigh the pros and cons, here's an overview of mobile payments, potential benefits and the technology needed to support them.
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What are mobile payments?
The terms "mobile payments" and "digital wallets" are often used interchangeably. But they're not the same thing.
"Digital wallet" is a blanket descriptor for a wide range of technologies that digitize items typically carried in a wallet and allow many wallet-related tasks to be performed with a smartphone. With various digital wallet apps, a smartphone can be used to make payments, record and redeem loyalty rewards, replace paper boarding passes, convey personal identification, and transmit credentials that grant access to secured doors and rooms.
Mobile payments are a type of digital wallet. Mobile payment apps allow customers to pay for goods and services with their smartphones rather than handing over cash or a credit card. Mobile payments use near-field communication (NFC) wireless technology or Bluetooth (BLE) to make payments using a tap-and-go method, similar to that used when presenting a digital boarding pass stored in a digital wallet. For example, you might use a mobile payment app to pay for groceries at a supermarket by tapping your phone to a compatible checkout register.
Mobile payments are also used as the POS when a merchant uses a mobile device and an app like Square to process a payment either in the field or at a brick-and-mortar location. Another type of mobile payment allows payments to merchants or between friends to be made online, such as with PayPal.
When you purchase an app or game via smartphone, that's also considered a mobile payment. The transaction is charged to your cell phone bill. No credit or debit card is needed to make the purchase, and you can buy the app or game without ever setting foot in a retail outlet.
Lastly, there are closed-loop payments that are proprietary mobile payment systems that a company builds for use by its customers, such as the Target mobile app.
What are the pros and cons for small businesses?
Accepting mobile payments can enhance the relationship with your customers. It's super fast and can reduce the number of steps typically involved in the checkout process. Customers don't have to remember their debit, credit or loyalty rewards cards, or answer the questions often posed on checkout terminals. All they need to do is tap their phone and the system completes the transaction. Fields are automatically filled. Frequent customers can be rewarded with discounts on the spot.
With digital wallets and mobile payments, businesses have access to a wealth of real-time customer information, such as shopping preferences and history. So, accepting mobile payments can quickly and affordably inform marketing and loyalty decisions. You can easily segment customers for marketing purposes and incorporate product suggestions at the time of purchase (or after purchase) that more closely match each customer's likes and dislikes.
Although there's been a lot of concern about security, mobile payments are actually more secure than other forms of payment. Customers don't have to worry about leaving a credit card behind at the terminal, and since the data for mobile payment is encrypted, risk of data theft is reduced. This can build stronger trust between merchant and customer. If the phone is lost or stolen, it can be locked. Plus, many systems offer fingerprint identification to verify a purchase.
Mobile payments and digital wallets should be integrated with traditional payment forms. You'll want to continue offering all the forms of payment you currently accept in addition to digital wallets.
What's needed to accept mobile payments?
Setting up mobile payments is generally fast and affordable. To accept mobile payments through digital wallets, you need a digital wallet provider. There are dozens of digital wallet companies from which to choose. Talk to your existing payment providers to see if they already work with mobile payments and digital wallets. Check out this great list of more than 100 providers.
For online businesses, you'll likely need to add a module to your current shopping cart software to accept mobile payments. For brick-and-mortar companies, you'll need a reliable internet connection and a POS terminal that accommodates mobile payments in addition to the other forms of payment your business accepts. The scanner or terminal cost should run no more than $500 or, depending on the mobile payment provider, can even be free.