The Basics of Mobile Payments - What It Is & How It Works
The Basics of Mobile Payments - What It Is & How It Works
- What are mobile payments?
- How do mobile payments work?
- Types of mobile payments
- 5 benefits of mobile payments
- How to set up mobile payments
We live in a world where most things can be done via the mobile phone. Watching movies, listening to music, sending emails–life can be lived through your cell phone. And making payments is one of the most popular things people do on their mobile devices. With in-person payments becoming less and less popular–a Spanish study found that 67% of mobile phone users now use their phones more frequently to make payments–more people are turning towards the convenience and speed of making payments via their mobile phones. Mobile payments on a global scale are predicted to reach $6 trillion in coming years.
Even if mobile payments are a part of so many businesses' daily existence, there is still much to know about the way they work. What exactly are mobile payments and how do they work? Are there different types of mobile payments? And if so, what’s the difference between them? What are the benefits of mobile payments? And finally, if a business wants to set up mobile payments, how does one go about doing so?
To answer these questions, we’ve put together a quick, helpful guide.
What are mobile payments?
A mobile payment is an umbrella term for any regulated transaction that occurs from a mobile device. Where other, more traditional payment methods–check, cash, credit or debit cards–typically need to be used in-person, mobile payments allow for people to pay digitally. NFC mobile payments, in-app mobile payments, mobile wallets, mobile credit card payments–the term “mobile payments” encompasses them all.
Mobile payments are contactless methods of payment and can be used to pay back friends for dinner or drinks or to purchase goods or services from small businesses. These are called peer-to-peer payments and are processed by mobile payment companies like Venmo or Square Cash. They can always be used as a way to make contactless payments at brick-and-mortar businesses (these are commonly referred to as pay-to-business). Most businesses at this point accept mobile payments through a variety of mobile payment apps (Apple Pay being one of the more popular methods) that allow customers to pay without using cash, check or otherwise. Businesses that accept mobile payments have to purchase specific point-of-sales systems that provide this option.
Mobile payments can also be referred to as mobile transfers, mobile money or mobile wallet.
How mobile payments work
Here’s what happens when you make a mobile payment at a brick-and-mortar:
- First, to accept mobile payments at a brick-and-mortar a business needs to have a near field communication (NFC)-enable point-of-sale device.
- NFC (which will be discussed later in the article) refers to the technology that allows the phone (or the NFC-enabled credit card) and the NFC-enabled point-of-sale device to communicate.
- Customers looking to make a mobile payment, will need to stand within a certain distance from the device with a mobile payments app open.
- The customer will tap or swipe their mobile device over the NFC-enabled POS
- This will allow the two devices to communicate, with the mobile payments app sending encrypted payment information to the POS and the POS sending encrypted information back in return.
- Payment will be deducted from the customers mobile wallet or what bank account they have linked to their mobile payments app.
After a few seconds, the payment will be processed and the money will be deducted from the customer’s bank account and deposited in the merchant’s account.
The other aspect of mobile payments is “tokenization”. This is a method used by mobile payment companies that allows for customers to make mobile payments without fear of their security being compromised. When individuals enter their credit card information into their mobile wallet, the mobile payment company they’ve decided upon will send all of this information to the customer's bank or other financial institution. All of the customer’s specific bank details are then replaced with a randomly generated series of numbers (i.e. the token). This number is then returned to the mobile payments company and coded into the mobile wallet. This makes the customer’s specific mobile payment method unique to their phone and makes it extremely difficult for there to be security breaches.
Types of mobile payments
There are three main types of mobile payments: NFC mobile payments, in-app mobile payments and mobile credit card payments.
NFC Mobile Payments
NFC (or near field communication) mobile payments are an increasingly popular form of mobile payment. They work by radio-frequency identification technology (RFID) to pass encrypted data back-and-forth between two devices that are close to each other. NFC mobile payments allow for customers to make contactless mobile payments using a mobile device and/or a credit card with an NFC chip installed in it.
An NFC mobile payment needs to be done in close proximity as the RIFD is limited to a short distance (four inches). There are three methods of making NFC mobile payments:
- Peer-to-peer: Two NFC-enabled devices connect, communicate and share encrypted data.
- Read/write: A device, like a phone, captures information from another device that is unable to read information
- Card emulation: A device like a contactless credit card is used to share information. This is the most commonly used NFC method, as it allows any business with a NFC-enabled POS to accept mobile payments
NFC mobile payments are easy, convenient and fast ways for merchants to get paid.
In-App Mobile Payments
An in-app mobile payment is a payment made within the ecosystem of a specific app (Amazon Prime, Instacart, etc.). A customer will register their information within the app and when they purchase something within the app, it will draw on this financial information to charge the customer for this payment. These are simple mobile payments that keep a customer active within a businesses website and allows them to make purchases simply and conveniently.
Mobile Credit Card Payments
Making mobile credit card payments is done through what’s referred to as a mobile wallet. Apple Pay is a popular mobile payments app that allows customers to upload their credit card information (which then goes through the process of tokenization to ensure security) and then to tap or swipe their phone during in-person payment transactions. By swiping or tapping your phone on an NFC-enabled device, a customer authorizes the POS to reach out to the credit card processor and begin the process of charging them for their purchase.
Most mobile wallets allow you to upload a collection of credit cards, so you can reap the benefits of paying using a credit card in every situation. This is a popular method of payment with 70% of millennials using mobile credit card payments because of the benefits they are afforded by doing so.
5 Benefits of Mobile Payments
Simple mobile payments are an incredible way to pay vendors and merchants for many reasons. Here are a few of the many benefits for customers who use mobile payments and for businesses that accept mobile payments.
1. Less costly
By using digital payments a business saves money on supplies commonly used when accepting cash, check or non-mobile credit cards. There’s no POS system needed, no receipt paper, no pens or other writing related materials needed to accept mobile payments or to process them. Because mobile payments can be accepted using a mobile payments app on a smartphone, a business only needs to purchase a reader to start accepting them.
2. A healthier cash flow
Accepting mobile payments is a fast way to get paid. When a business accepts mobile payments the funds are transferred into their merchant account instantaneously or at most, within a few business days. This allows a business to have a greater amount of cash on hand more frequently. And more cash on hand means a healthier cash flow which allows a business to operate more efficiently and have better visibility and control over their working capital.
Mobile payments make it so customers can pay just about anywhere using their preferred mobile payments app. When businesses accept mobile payments, they’re providing a flexibility of payment methods that allows customers another way to pay. When customers have more options they are less likely to not have a way to make a purchase in the moment and are more likely to make the actual purchase.
Because of tokenization, mobile payments are an extremely safe way to make and accept payments. It’s very difficult for anyone to gain access or hack a mobile payment because of the unique series of numbers each individual mobile payments app assigns to their customers. Even if a crook finds a way to access a business, the encrypted data is almost impossible to translate. Added levels of security–passcodes, fingerprints, QR codes–can be added to further increase the safety of making mobile payments.
Mobile payments are some of the fastest ways to make purchases these days. The time it takes for a mobile payment to process is nearly instantaneous, with funds arriving in the merchant’s account almost as quickly. The speed of payment allows for a better customer experience, but more importantly it helps to provide a consistent, healthy cash flow for businesses.
How do I set up mobile payments?
There are a variety of different options when choosing a mobile payments company and setting up mobile payments is a little bit different for each. That said, we’ll walk you through the 6 steps of how to choose a mobile payments company and how to set up your phone to start making mobile payments.
1. Figure out what your needs and your customers needs are
Before you can even start the process of setting up mobile payments, you’ll need to choose a mobile payments company. And before doing this you’ll need to identify just what your needs and your customers needs are. Do you need a system that processes simple mobile payments or is only used to accept mobile credit card payments? Or are you running a more complicated business that needs inventory management, stock counts and so on? Furthermore, do you want to set up loyalty programs with your customers? All of these things needed to be thought about before you choose your mobile payments company.
2. Research the fine details of each mobile payments company.
Every mobile payments company is slightly different and before choosing the one that’s perfect for a business research into a few key things is crucial:
- What are the fees associated with this mobile payments company?
- How secure are they?
- Are they PCI compliant?
- What forms of payments does this company accept?
- How difficult is it to set-up the system?
- If you have problems, do they have robust customer service?
Knowing the answers to these questions is going to greatly help figure out which company is best for you.
3. Choose a company.
There are so many options for companies that help businesses make mobile payments. Here’s a list of some of the companies currently operating in this field. This is by no means a complete list and if these companies don’t fit specific business needs, there is most likely one on the internet that does.
4. Download the app for your mobile payments company
Whichever mobile payments company you choose, you’re going to have to purchase and/or download the app for your phone. This will be done through your phone’s app store. That said, if you’re using Apple Pay or Google Wallet and the respective tools of that company, they come with the apps pre-installed.
5. Get set-up
Whichever company chosen will, typically, send along a free reader for all of the incoming mobile payments. You’ll also have to set-up the app which will involve customizing the fields you want to display and any other specific details the business needs to track. Remember that not every mobile payments company offers the same features, and researching the company prior to selecting it is in every business’s best interest.
6. Let customers know they can now pay using mobile payments
Mobile payments are beneficial for so many reasons, but all of this set-up work is for naught, if a business doesn’t let its customers know that they now accept mobile payments. Most card readers that accept NFC mobile payments will indicate that they do, but a little nudge is a fast way for a business to start reaping the rewards of mobile payments.
In conclusion, studies show that nearly ⅓ of people in the world make payments using their mobile devices. Understanding and implementing the ability to make and accept mobile payments is crucial to keeping a business afloat and thriving in today’s modern business world. Plastiq allows you to do both, keeping your payments as mobile as you and your business are.