How Do Mobile Payments Work?

Mobile payments are an up-and-coming technology that allows people to pay for things by using their mobile phone. Mobile payment transactions rely on a phone that is set up with a mobile app that stores payment information and a point of sale device that can communicate with the phone.

How Do Mobile Payments Work?

Mobile payments capitalize on something called near field communication (NFC), which is a short-range wireless communication technology standard. NFC is a way for electronic devices to communicate with each other. An NFC reader uses a short-range radio frequency to read data from devices close to it. This type of technology is very similar to RIFD, which you have probably seen in things like credit cards or in library books. A cell phone with NFC capabilities has a coil of wire inside of it that can pick up the electric current generated by an NFC reader; this is called “inductive coupling.”

Mobile phones and the NFC readers can both send and receive communications, which allows for a more secure transaction. For example, the NFC reader can ping the mobile device for account information or ask for a password before continuing and then maintain an open connection for the duration of the transaction.

On the user end, the mobile phone needs to have an app like Google Wallet or PayPal to store account information. Users create an account with the service provider that has credit card information or, in the case of Paypal, links to an account with money in it. These apps take a few minutes to set up because they go through a few safety measures, but they are indispensable for users who want to take advantage of mobile payment technologies.

Starucks uses mobile payments

What Are the Security Issues?

Whenever a new technology surfaces, especially a wireless one, there are going to be concerns about security. One common concern is that since the devices used to do mobile payments aren’t physically linked in any way, they can be easily hacked. However, since devices must be very close (practically touching) to establish a connection, data cannot be stolen by people nearby piggybacking on a connection.

Mobile payments also use a number of security measures, such as identity verification and encryption. Identity verification is a way for a user’s identity to be secure and is typically used on larger purchases (of $25 or more) to make sure that large transactions are not being authorized without the cardholder’s explicit permission. Encryption is used to encode data so that it cannot be decoded by just anyone. How secure a network is has a lot to do with the encryption used.

As mobile payments become more widespread and the industry enters a period of rapid growth, it will attract more fraud. A big part of this comes from malware or phone app sites (links that look legitimate but download malicious programs, etc.).  People with malicious intent might also fish for password information from users by using links or emails that seem to be from official sources, but are not. A big part of making networks secure from these sources is to educate users about what a legitimate site (including its URL) looks like. Additionally, users should know to NEVER give out user name and password details in email or text messages. A company will never send emails asking for that information.

Are Mobile Payments Here to Stay?

According to a recent report from ReadWrite, mobile payments are really going to take off in 2013. They pulled together a few statistics about the attitudes of people in the mobile and banking industries and determined that we are on the cusp of mobile payment success. Among the data:

  • In a survey of mobile industry players (executives, developers, et. al.), mobile payments were voted the top service for 2013.
  • Visa Europe states that there will be 40 issuers offering wireless payment services to consumers in 2013, and that number will likely grow to 80 by the end of the year.
  • A report called the “State of Retailing” stated that mobile payments will be essential for staying competitive in the retail sector.
  • China is jumping in on mobile payments and it is predicted that mobile payments will rise to over 50% annually this year.

So, effectively, great strides are being made in this technology, and it has proved useful to both retailers and consumers. Great pains have been taken to make mobile payments a secure process, and so it looks like, for now, they are here to stay.

Angie Picardo is a staff writer for NerdWallet. Her mission is to help consumers stay financially savvy, and save some money with the best 5 year CD rates.


 

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Gary Shouldis is the founder of 3Bug Media, a web marketing company that helps businesses create 360 Marketing Strategies to dominate their market. His blog is read by over 20 thousand small business owners a month and has been featured in the N.Y. Times Small Business, Business Insider and Yahoo Small Business.