News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Race between Technologies Clouds Future of Mobile Payment

Race between Technologies Clouds Future of Mobile Payment

By Patrick Peterson,

Race between Technologies Clouds Future of Mobile Payment The competition has narrowed between quick-response (QR) codes and near field communication (NFC) chips. Many retailers expect a winner to emerge and claim a majority of the market enabling consumers to use their smartphones to make purchases. But the winner might not arise quickly and might not arise at all, because neither technology seems to have a clear advantage in the contest.

“There is so much disruption and uncertainty that (merchants) don’t want to spend a dime developing into one of these because it could be a completely wasted effort,” said Marc Castrechini, director of software development for Merchant Warehouse, a Boston company that provides payment systems for online and brick-and-mortar retailers.

Picking a winner comes down to customer acceptance and both technologies might have problems winning consumers in the U.S. A recent study published by Mobile Entertainment revealed that two-thirds of Americans said they would never use a mobile wallet, which is the opposite of results from the U.K. where nearly two-thirds said they would. Apparently, Americans aren’t eager to embrace mobile payment technology. That means proponents of QR codes and NFC still must convince consumers that their technology can be secure and easier to use than credit cards, which are used for two-thirds of in-store transactions.

What’s the difference?

Developed by the auto industry to keep track of inventory and parts, QR Codes can be read by any smartphone after downloading widely available free apps. The square optical codes can transfer information or connect to an Internet site. Another simple app allows the retailer to generate QR Codes. No extra hardware is necessary. On the other hand, NFC requires the smartphone to have an internal chip to read another tiny chip, which costs about 30 cents. One survey estimated that only about 20 percent of smartphones will include NFC capability by 2014.

Both technologies can help the retailer offer promotions, advertisements and loyalty programs. While neither merchants nor the public seem to be picking a favorite, the popularity of Apple’s iPhone, which has no NFC chip, might tilt the contest toward the QR Code (despite a recent patent application that allows for either technology).

“It’s really easy to implement,” Castrechini told “I guess it’s a lower barrier of entry for the consumer.”

While Apple seems to favor the QR Code (or at least gives off mixed signals), big box stores, including CVS and Walmart, have adapted to use NFC readers, which have a slight advantage in security because the chips communicate only between each other and reduce the exposure to hackers on the Internet.

“This allows the mobile device and payment device to do a ‘handshake’ and confirm the mobile device is valid and true,” Castrechini said. “For instance, a (stolen) credit card could be copied and reprinted a number of times. There is limited technology today at the payment device level to authenticate whether a physical card is valid or fraudulent. You might actually see better NFC acceptance on the merchant’s side.”

Aware that this battle is brewing, retailers have indicated they expect to adopt one of the technologies. More than a quarter expect to adopt NFC within three years, while a third expect to upgrade their systems to use QR Codes within three years, according to Merchant Warehouse findings. Additionally, some 30 percent of retailers report that customers have asked them to make phone purchases possible. And a vast majority of retailers say they are familiar with mobile payments and see them as a way to increase sales.

“At the end of the day, we don’t care who’s going to end up winning, we just want make sure we can support the technologies,” Castrechini said. “We try to stay agnostic,” Castrechini said. “It’s what appeals to the consumer demographic. The biggest hindrance to QR or NFC is certainly consumer adoption.”

Consumer Reluctance

The underlying problem might be the unwillingness of the American public to begin using their smartphones for financial transactions big and small. Some 180 million Americans carry credit cards and use them for two-thirds of in-store purchases. The present mobile payment systems don’t make the process easier. They still require a customer to pull out a smartphone, just like pulling out a credit card, and perform the transaction. With smartphones vulnerable to breakage, theft, hacking and being lost, customers don’t seem to trust the devices with all their financial information.

While a lost or stolen smartphone is a consumer’s nightmare, the device and its payment capabilities actually might be replaced more easily than a credit card, which must be canceled and reissued through the mail.

“A user can walk to their nearest mobile provider retail outlet, obtain a replacement phone, install their wallet application and are once again able to make payments,” Castrechini said. “Let’s hope they changed their PIN while they are at it.”

But mobile phones, despite consumers’ fears, can be secure and difficult for a thief to use.

“First off, as seen by companies like LevelUp and Google Wallet, payment applications may be protected by a pin,” Castrechini said. “This immediately prevents anyone (from) using the device as a payment medium if it is lost or stolen. Additionally, these wallet applications typically provide a consumer portal, giving the user the opportunity to disable or remove the payment tenders that are configured for the wallet application.”

The trend is to store sensitive personal financial information in the cloud, not in the phone, he added.

“This keeps the sensitive data away from the device, and as long as access to the application itself is protected, thieves are unable to access payment data from the device,” Castrechini said.

Picking Both Winners

Castrechini advises retailers to establish cash register systems that accept multiple forms of payment. Merchant Warehouse offers products that accept either QR Codes or NFC service. Each system allows retailers to advertise digitally, create loyalty programs and offer coupons.

“Merchant acceptance is also important,” Castrechini said.  “The (point of sale) needs to be able to accept an electronic coupon and redeem on it.”

Castrechini said he believes the mobile wallet market will grow rapidly during the next few years and merchants should be ready to accept QR Codes, NFC and a variety of payments systems that are not yet on the market.

“It’s more about continually allowing them to accept what we as the consumer decide to use.  It’s the only way to go,” Castrechini said. “Whenever the winner comes out, they’re not going to be the winner for very long,” he added. “With such high interest from the innovation and mobile community, we believe that instead of a clear winner, there will be a number of heavily used competitors. Because of this, from a ‘payment presentation’ perspective, it is quite possible that not only will both QR Codes and NFC still be in use, but there will also be additional options.”

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Daniel Leibovitch