Mobile phones call up a cashless future

Apple has embraced mobile payments with the iPhone 6. [Karlis Dambrans/Flickr].jpg

This article is part of our special report The demise of cash?.

SPECIAL REPORT: A boom in payment-enabled smartphone manufacture and the entry of key phone and finance players into the mobile wallets market has made 2014 a watershed year, as the tide turns against the future use of cash.

Consumers in the US are primed for mobile wallet adoption according to a paper written last month by Javelin Strategy & Research, an America analyst specialising in technology and financial services.

Over half of mobile US purchasers bought physical goods using their smartphones in 2014, up to 51% from only 14% in 2009, Javelin said. Such payments will rise from roughly $3 billion (€2.4 billion) in 2013 up to $53 billion by 2019, the research claimed.

Global shipments of cellphones equipped with Near Field Communication (NFC) technology will surge by more than a factor of four from 2013 to 2018, reaching 1.2 billion units, according to research published in March this year by IHS Technology, A Colorado, US-headquartered research analyst company.

NFC is used to perform safe, contactless transactions involving payment, public transportation or transfer of data.

“The majority of smartphone makers are adopting the NFC wireless communications and payment technology in their products as a de facto standard,” according to Don Tait, senior financial and ID market analyst at IHS. 

“Europeans can already use contactless cards or NFC-enabled mobile payments in 36 countries across Europe and their enthusiasm for this safe and simple way to pay is evident,”  according to Javier Perez, President of MasterCard Europe.

Entry of Apple pivotal

The arrival of Apple into the mobile wallet market this September has contributed to the tide. The ApplePay wallet model is built upon the existing financial ecosystem. The company has negotiated agreements with networks Visa, MasterCard, and American Express and large banks such as Bank of America, Chase and Wells Fargo.

Apple claims 220,000 US merchants accept its pay system already. From a global perspective, there are 2.5 million merchant locations that accept contactless payments – so as Apple Pay rolls out to other regions, it is likely to gain ground in European markets.

A study conducted by PRIME Research between November 1st 2013 and April 30th 2014 showed European consumers are eager to adopt contactless payments and integrate them in their daily routines, especially in the UK, Poland, Russia, Italy, Hungary and France.

The growing prevalence of mobile payments will continue to feed into the thorny debate surrounding the finalisation of an EU proposal to cap interchange fees, interbank payments made for each transaction carried out with a consumer card. The issue is set for trilogue negotiations between the EU Council and Parliament at the moment.

Changing consumer patterns

Security concerns are also exercising the EU executive, and remain a key inhibitor of mobile payment adoption, with 4 in 10 non-mobile purchasers avoiding the behaviour due to concerns about the safety of mobile payments.

“Using your mobile device to pay and interact with a merchant in the physical world is a logical next step, but changing consumer behaviour takes time,” according to Jeff Miles, the vice-president of mobile transactions with NXP, a large US-based electronic solutions company.

If security concerns remain an issue, security is also at the heart of the arguments favouring the uptake of mobile payments. Apple has deployed biometric security within its payments model, giving users individual security.

Meanwhile this spring witnessed the trial of innovative Swedish hand scanning in Lund as an alternative payment method. More than 1,000 Swedish shoppers have signed up to make payments with a simple swipe of their hand, using new technology that “read” the patterns of their veins.

The vein-scanning terminals have been installed in shops and restaurants after an engineering student at the local university came up with the technology two years ago while waiting in line to pay. Such developments demonstrate that biometric technology is making headway with fool-proof security solutions.

Another factor spurring growth in the market for on-line, contactless payments, is their ability to interact with the wider internet and social media.

A key differentiator of the Apple Pay model versus other offerings that have been in the market is inclusion of in-app payments. Apps on smart devices are enabling more streamlined customer services and retailers are looking to turn these merchant apps into something that will generate both loyalty and secure transactions.

Moreover this year has seen another shift, with financial institutions joining the ranks of mobile payments providers.

Having traditionally sat on the sidelines, leaving the running to internet companies such as Apple, Google, and PayPal, big banks are beginning to dip their toes in the water.

US player Citi this year became the first global bank to introduce its own branded digital wallet in the US.

Meanwhile in Europe, Deutsche Telekom in May 2014 launched MyWallet, a mobile payment app for smartphones in Germany.

These moves ae likely to be replicated by other large financial houses, as the use of cash begins its inexorable demise.

A digital wallet refers to an electronic device that allows an individual to make electronic commerce transactions.

This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store. Such wallets are also increasingly used to authenticate holders’ credentials, to verify age for example.

Such digital wallets comprise systems (the electronic infrastructure) the application (the software that operates on top) and devices (the physical platform, such as a smartphone).

An individual’s bank account can also be linked to the digital wallet. The credentials can be passed through a retailer’s terminal wirelessly using near field communication (NFC).

Many are speculating that these smartphone “digital wallets” will eventually replace physical wallets. The system has already gained popularity in Japan, where digital wallets are known as Osaifu-Keitai are more widely used than elsewhere.

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