The Failure of Mobile Payments

US consumers alone purchased $38.8 billion worth of goods using their mobile devices in 2013, a number which is only expected to rise. While consumers are eager to make payments with their mobile devices few of these purchases were processed through traditional payment terminals due to the lack of compatible infrastructure.

This lack of support is not because companies are uninterested. With profits growing every year everyone wants to get in on the huge potential of this market. With Google Wallet, Isis, backed by the big three US carriers, Square and Paypal Here mobile payment terminals there are a plethora of big companies all vying for your business. There are also small players trying to squeeze in on the market with new and innovative ideas on how people can access payments through existing infrastructure. Unfortunately, none of these solutions have found any real traction in the market because they all have a fatal flaw.

The Google Wallet and Isis solutions, both of which use a phones NFC capabilities to communicate to the terminal, are hampered by limited device compatibility. There are only a select handful of devices which have NFC and are certified to make mobile payments, meaning that only people with those devices, on specific phone companies, are able to use the system.

The alternative to moving towards a card-less solution is to try and interface with the existing infrastructure. Square, Paypal HereCoin, and Loop all make use of the mag-strip on credit cards.

Coin works by allowing the user to swipe their card’s mag-strips through a reader and onto the phone. This data is then loaded onto the Coin card from which the user can select which card they would like to pay from. Loop works in a similar way by having the user swipe their cards in the the Loop reader/dongle. The user then chooses which card they want to use at the time of purchase through the paired app on their phone. Loop, unlike the Coin card which is swiped, uses a magnetic field placed near the mag-strip reader to spoof the terminal into thinking that a card has been swiped. Square and Paypal Here both use a dongle that vendors swipe credit cards with in order to accept mobile payments. Unfortunately, these systems ability to operate with existing infrastructure is also the reason they will become useless in the next few years.

All of these solutions rely on using the mag-strip on credit cards because it is by and far the simplest way of interacting with the card. The process is as simple as copying the data off the mag-strip and reading it back to the payment terminal when prompted. Unfortunately, the ease at which these new payment systems can interact with mag-strips means that theives can use card info just as easily. In Canada and Europe, most banks have moved over to issuing cards which, while having a mag strip as a fall-back, rely mainly on Chip-and-PIN transactions. These are much safer than traditional cards as the chip is individually programmed for each card, making spoofing it extremely costly. With just the chips on a card payments are more secure than when using a mag-strip, but the addition of a separate PIN makes the theft just that much harder. The only reason mobile payment solutions like Square, Paypal Here, Loop, and Coin can be used at all is because the people making them are in the US, one of the few remaining developed countries still using mag-strip cards. Things are about to change though because both MasterCard and Visa are finally transitioning US customers over to Chip-and-PIN cards. This means that while these current solutions are already useless in most of the developed world, they will be just as useless in the US in a matter of years.

With no clear leader in the race for mobile payment domination the market is still wide open. With so many phone manufacturers, banks,  and technical systems to coordinate, and so many different companies trying to shut out the competition, it’s going to take a global initiative from the likes of Visa or MasterCard to get any meaningful results. Until then, we are stuck with hundreds of half-baked solutions all competing for a prize which is passing them by.

Hayward Peirce Written by:

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