2013: The Year Payments Finally Emerge From the Dark Ages?

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What technologies from the 1960s do you still use today? What about from the 1990s?

Most of us don’t use rotary phones, beepers, dial-up Internet or fax machines anymore. Yet we still use magnetic stripe credit cards and outdated point-of-sale systems. Payments technologies continue to lag far behind the technological adoption curve, and adopting new technologies as they become available has been a slow process, with hurdles that include legacy infrastructure and costs.

That said, 2012 saw some major leaps forward for the payments industry. Between Squarebucks, PayPal, Google Wallet, Isis, LevelUp and MCX, the mobile payment wars have just started to get exciting.

But despite the progress, the prediction that 2012 would be the “Year of Mobile Payments” didn’t come true. Now some people are arguing that, “someday we may look back and say [2012] was ‘The Year Before the Year of Mobile Payments. ‘”

Maybe so. Maybe 2013 will be the year we finally stop using insecure payment technologies from the 1980s and 90s. The year where paying with your phone will finally become mainstream. Here’s how 2013 could change everything:

Merchants Will Decide Who Wins the Payment Wars
People often wonder what it takes to win the so-called payment wars. Getting the most users? Forming an alliance with a big brand or a major credit card? Deploying salespeople everywhere? The answer is: none of the above. Merchants, often the so-called “Main Street” businesses, will be the ones who decide which apps will emerge victorious from the mobile payments battles (and there won’t be just one victor).

Here’s why: The mobile payment revolution isn’t just about giving customers a trendy new way to pay. It’s more about finding solutions that will deliver new value for the consumer (discounts or rewards for loyalty, for instance). In turn, mobile payment apps can drive new and repeat business for the merchant.

When it comes to emerging victorious, other factors — especially security — are important. But benefits to the consumer and the merchant are the number one determining factor. When both parties get something great out of mobile payments that they never had before, then the revolution will prevail; it will be win-win for everyone.

The Hyperlocal Sales Model Will Fail
Is it easier to knock on five million doors, or to play nicely with payment systems that already exist?

Well, that’s kind of a loaded question, but it underscores the biggest problem that mobile payments have faced so far: Scaling. In 2013, two things could replace the inefficient hyperlocal sales model and encourage wide-scale adoption of mobile payments.

First, merchant payment processing systems need to adapt — and quickly — to accept a wide variety of payment options (preferably, all of them.) Additionally, the checkout process with mobile payment apps needs to move just as quickly as (or, better yet, faster than) a credit or cash transaction.

Second, payment apps need to play nicely with existing systems. Incentivizing merchants to try your new app is nice, but not an effective way to scale. Instead, the name of the game is cooperation.

Paradigm Shift: The Mobile Wallet Is Your Smartphone
It’s much easier — and better — to create a mobile payment app than a mobile wallet. Eventually, the phone will become the mobile wallet, and consumers will have a variety of payment and loyalty apps to choose from, depending on which places they visit most. No single system will rule them all.

Don’t believe me? Think about your own physical wallet right now. You might have a Macy’s card, a Capital One Visa, an American Express Gold, a loyalty card from your grocery store, and a dozen others. None of those could replace or encompass all the others. Your wallet does the encompassing. And, eventually, the phone will be no different — a storage space for all your payment and loyalty apps.

Security Is Important (Really Important) — So Expect to Hear More About It
Security is one of the biggest hurdles that will have to be surmounted to enable the widespread adoption of mobile payments. That’s because plenty of consumers are (rightly) concerned about the security of new payment options.

The good news is that mobile payments are actually significantly more secure than legacy payment options like mag stripe cards. The average mobile payment app has far more data points at its disposal than a magnetic card. It can verify your identity and intent much quicker and more accurately than this type of card. Plus, since we’re glued to our personal tech for much of the day, people will notice and report a stolen or lost phone much quicker than a credit card used just once or twice a day.

Another important security feature is tied to the power of over-the-air updates to apps. These can both refresh apps with the latest security features and turn the app off in seconds in the event of a breach.

Once merchants and app developers can convince consumers that mobile payments are secure, they will quickly become the dominant solution.

Mag Stripes Will Go the Way of the Dial-Up Modem (Adios!)
As I alluded to earlier, the technology in the magnetic stripe credit cards that most Americans use on a daily basis is more than 40 years old. It’s also highly vulnerable to fraud. And despite various protections against fraud, the U.S. loses about $8.6 billion dollars every year on credit card fraud, according to the Aite Group. Yikes.

EMV (short for Europay-Mastercard-Visa, its founders) is the way of the future. EMV uses a smart chip embedded in the card to store sensitive account data securely. In fact, it’s so much more secure than magnetic stripe credit cards that every major global region has already adopted the technology en masse … except the U.S.

Why is the most tech-savvy country on the planet lagging behind here? The reasons are complex, ranging from expense to legacy infrastructure to powerful lobbies. But while we’ve been able to procrastinate on upgrading our systems for decades, the economics of putting EMV into the field are now starting to make real sense.

The emphasis on EMV at a recent payments conference could be a bellwether, and the year 2013 should see some major strides in the EMV direction.

Mobile Will Level the Playing Field for Brick & Mortar in This E-commerce World
Brick and mortar businesses have some real competition in e-commerce, and (admit it) we’re all guilty of indulging in a little showrooming here and there.

Mobile has the power to level the playing field for brick and mortar again, and 2013 is the year we’ll start to see this happen for real. For example, advances in mobile payment technology will soon make it possible for people to find the exact product they’re looking for, when and where they need it.

Let’s say it’s February 12. You’ve procrastinated on buying a Valentine’s Day gift for your sweetie. You know what you want to buy, and you could order it online, but you’re worried it won’t show up on time (and don’t want to pay an extra $20 for overnight shipping.) With new mobile technologies, merchants can track inventory down to the individual product and connect shoppers directly with that data. This will give consumers a strong incentive to buy from a local merchant rather than take their chances with e-commerce. Plus, they’ll get the benefit of checking the item out with their own hands and eyes before they buy.

This, along with new customer loyalty and promotional opportunities, will make it possible for brick and mortar stores to get really competitive vis-a-vis e-commerce this year. Watch out, Amazon!

So, are you planning on making any big changes to the way you pay (or accept payment) in 2013?

Henry Helgeson is the CEO and co-founder of Merchant Warehouse, a recognized leader in payment and commerce technologies.


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