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why retailers should think outside of the wallet

19 November 2011

A vast array of new mobile payment technologies have recently made a splash in the marketplace and are starting to challenge more traditional payment methods by offering a more streamlined customer experience.

The increasing attraction of having a single, pocket-sized device to perform multiple functions is clear. From the consumer’s perspective a single device can now function as a phone, sat nav device, music player, web-browser and even as a replacement for the traditional purse or wallet.

So what is the attraction from the merchant’s perspective?

Apart from the obvious public relations benefit of being perceived as an innovative and progressive organisation, research also suggests that convenient ‘frictionless’ payment methods can help merchants to increase transaction completion rates by making the payment process more streamlined. A number of new technologies enable customers to pay for goods and services without a personal identification number (PIN), login or signature once the system has been set up, making it easier for consumers to spend their money – an obvious advantage for retailers!

What are the main mobile payment technologies?

  • Mobile payment acceptance: as the name suggests, in contrast with the other technologies set out below, this is a method of accepting, rather than making payment. The technology provides businesses with a convenient method of accepting credit or debit card payments using a card reader attached to the merchant’s mobile phone or tablet. The technology is a growing area and has been adopted most notably by Starbucks in its collaboration with Square, the manufacturer of small cube-shaped card readers that plug into mobile devic-es.
  • Near Field Communication (NFC): this is an evolution of the ‘contactless’ technology which is becoming commonplace for low value card transactions. Customers can swipe an NFC enabled smartphone over an in-store reader to make payment rather than using a credit or debit card. NFC technology is often used in conjunction with a mobile wallet (see below), or retailer-specific account.
  • Mobile wallets: are another high-profile growth area which enable users to register their debit and credit card details in a secure online environment which link to an app on their mobile device. The customer can then use the app to make payment at supporting retailers without having to produce a payment card at the checkout. Mobile wallets are often used in conjunction with other technologies in order to carry out the transaction. For example, Google Wallet takes advantage of NFC technology to make contactless payments via a smartphone. Alternatively, Square Wallet relies on global positioning system (GPS) technology to enable users to locate and sign-in to supporting retailers nearby. The cashier gets a photo of the customer’s face and name, and the ability to charge the card, the customer then confirms their name at the checkout and walks away with the purchase.
  • QR Codes: Quick Response Codes are the square matrix bar codes which can be read by taking a photo of the code on a smartphone. One new use for the codes is for consumers to download an app, connect it to their credit or debit card, and use a personalised QR Code to make payment to merchants who support the payment method.
  • SMS (text message) payment: this well-established payment method has been used widely in the market for digital content such as videos, music, wallpapers and ringtones. The method is typically restricted to this sector because no trusted delivery address is provided to the merchant.
  • Direct mobile billing: this method has been used by mobile phone operators to charge their customers for additional services such as apps or games, by taking advantage of the existing billing relationship and adding the cost of these services to the customer’s phone bill. Direct billing is quicker and often more reliable than SMS payment.

What are the legal risks and considerations?

In many respects the legal issues facing businesses engaged in mobile commerce, or m-commerce, are the same as those relating to other forms of e-commerce. Any sale of goods or services made to an individual using a mobile device will give rise to the same consumer law and distance selling considerations as if the sale was made from a conventional website.

An additional compliance issue concerns payment methods relying on premium-rate calls or text messages. These are subject to regulation by PhonepayPlus which operates an Ofcom approved code of practice Ofcom approved code of practice.

Where mobile payment acceptance technologies, such as the Square system, are used the system must be peripheral component interconnect (PCI) compliant and the PCI Security Standards Council published a useful set of guidelines on mobile payment acceptance in September 2012:

click here to download

Issues also arise where technologies are employed which use location tracking technology – particularly to target the customer with location specific offers. In order to carry out these activities, businesses will need to comply with Data Protection legislation and the Privacy and Electronic Communications Regulations 2003.

Last but not least is the issue of security. Researchers from the security group at Leibniz University of Hanover and the computer science department at the Philipps University of Marburg tested 13,500 of the most popular apps in Google’s Play store and found that 8% fail to protect bank account details and social media logins of users, which highlights perhaps the biggest reputational and legal risk associated with mobile payment technologies.

Mobile devices are more susceptible to loss, theft, and fraudulent attacks and so whichever technology is adopted will have to incorporate adequate security features to limit this risk. After all, losing a phone or a wallet is distressing enough, but losing both of these packaged together as a single device poses obvious difficulties when it comes to calling the credit card company to suspend the account!

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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