What is Mobile Payment?
Mobile payment refers to the use of a portable electronic device to send and receive money. Also known as Mobile Money Transfer or m-payments, mobile payments have gained widespread adoption due to the increasing use of smartphones, high-speed mobile networks, and the growth of e-commerce. The global mobile payment market was valued at $1.18 trillion in 2019 and is projected to reach $8.94 trillion by 2027, according to Fortune Business Insights[^1^]. The COVID-19 pandemic has further accelerated the demand for contactless payments, as people work from home and prefer to avoid public shopping areas.
How Does Mobile Payment Work?
The workings of mobile payments depend on the underlying technology of the mobile payment system. There are various types of mobile payments, each with its unique operational approach[^2^]. Let’s explore different types of mobile payments and understand how they function with real-life examples.
Types of Mobile Payments
In-Store and Remote Payments
In-store payments refer to contactless payments made by consumers when physically present in a store. On the other hand, remote payments involve the use of a mobile device to send funds to a merchant or individual in a different location. Let’s take a look at some examples in each category.
Mobile wallets, also known as digital wallets, store payment information on a mobile device. This information is securely stored within a mobile application or SIM application toolkit. The payment process involves various technologies, such as sending and receiving SMS, Near Field Communication (NFC), and QR codes[^3^].
For instance, Safaricom’s M-Pesa, operating on a SIM application toolkit, allows users in Kenya to transfer funds securely using encrypted SMS[^4^]. Apple Pay, another popular mobile wallet, enables users to make contactless in-store payments by authenticating with their fingerprint at a card terminal[^5^]. Google Pay and Samsung Pay are other examples of widely-used mobile wallets[^6^].
Mobile wallets provide a high level of security through encryption and tokenization.
Quick Response (QR) Code Payments
QR codes are two-dimensional matrix barcodes that contain machine-readable optical data. A mobile app scanner can scan and read the information within a QR code[^7^]. In the case of in-store payments, the customer scans a QR code at checkout through a mobile application, and the purchase amount is debited from their mobile wallet[^8^]. QR codes offer a convenient alternative to manually entering credit card details and prevent credit data theft by unscrupulous retailers.
Here are some examples of remote mobile payments:
Most people make payments through web browsers or mobile apps, whether for online purchases, gaming apps, or social media platforms. Payments are made by entering credit card details on a payment page or by charging a preapproved card linked to a mobile app. Online money remittance services like Paypal are also commonly used, along with digital invoices[^9^].
Similar to web payments, payment links are sent to individuals via email or text message. Upon clicking the link, the user is directed to a checkout page where they enter their credit card details. The transaction amount can be preconfigured by the merchant or left blank for the customer to input[^10^].
SMS payments, also known as premium SMS, allow users to pay for products like ringtones and digital goods. When a user subscribes to a premium SMS service, the payment is either added to their phone bill or deducted from their prepaid credit[^11^].
Direct Operator Billing
Direct operator billing involves entering a phone number on a checkout page, and the payment is added to the user’s phone bill or deducted from their prepaid credit. This payment method is commonly used for digital content subscriptions, charity donations, and TV voting[^12^].
Mobile banking has become the primary method for bank transfers and bill payments in many countries. Users log into their bank accounts through mobile apps to perform transactions and communicate with their banks. To enhance security, many banks use two-step login verification and one-time passwords (OTP)[^13^].
Point-of-sale mobile payments are contactless payments made at merchant locations. Here are some popular examples:
Near-Field Communication (NFC) Payments
NFC allows two devices within a close proximity to communicate using radio frequency identification technology. An NFC-enabled mobile phone interacts with an NFC-enabled card machine, exchanging encrypted payment data. This technology enables electronic mobile payments without the need for cash or physical credit cards. NFC is widely used not only for purchasing goods at merchant stores but also in public transportation systems in various countries[^14^].
Sound Waves-Based Payments
This cutting-edge mobile payment solution eliminates the need for an internet connection. A payment terminal sends payment data to a mobile device through sound waves. The device converts the sound into analog format and completes the transaction, requiring only a simple software installation without the need for additional hardware. Sound waves-based payments provide a viable solution in low-income areas where smartphone costs hinder adoption[^15^].
Magnetic Secure Transmission (MST) Payments
MST payments occur when a mobile device emits a signal that replicates the magnetic stripe of a credit card. The card terminal recognizes the signal and processes the payment as if a physical card were swiped. Samsung utilizes both NFC and MST technologies, securing payments with advanced tokenization[^16^].
Benefits of Mobile Payments
Mobile payments have been a disruptive technology, transforming the way businesses operate and making an impactful social contribution, especially in low and middle-income countries. The rapid adoption of mobile payments can be attributed to their perceived usefulness and ease-of-use, as explained by the Technology Acceptance Model (TAM)[^17^]. Let’s explore some key benefits of mobile payments:
Mobile payments offer unparalleled accessibility for both senders and receivers. With a mobile device in hand, users have immediate access to their funds. This convenience is especially beneficial for small and micro-businesses, saving them time and effort in depositing and withdrawing cash from banks. Improved efficiency in financial transactions contributes to faster economic growth, especially for economies that have been lagging behind[^18^].
Convenience and Security
Mobile payments provide a convenient way to make and receive payments with minimal physical effort. With just a mobile phone, individuals can conduct business operations from their homes. Mobile payments also offer enhanced security compared to traditional payment methods. Encryption, tokenization, and multi-factor authentication ensure that sensitive payment information is protected. Enhanced security measures lead to increased economic activity and overall growth in a country’s gross domestic product (GDP)[^19^].
Banking the Unbanked
Mobile payments have played a vital role in bringing financial inclusion to the unbanked population worldwide. Previously excluded from mainstream financial systems, those with low incomes or limited access to formal banking services now have access to basic financial services through mobile payments. The World Bank reports that nearly 4 billion people globally now have a bank account or an account with a mobile money service provider[^20^]. Access to financial services is crucial for poverty reduction and reducing inequality, aligning with the United Nations Sustainable Development Goals[^21^].
By understanding the different types of mobile payments and their benefits, individuals and businesses can leverage this technology to enhance convenience, security, and financial inclusion.[^1^]: Fortune Business Insights – Mobile Payment Market
[^2^]: Source: Original Article
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[^4^]: Safaricom M-Pesa
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[^20^]: World Bank – Global Findex Database
[^21^]: Source: Original Article
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