What you need to know before choosing a mobile payment system

By Terri Wallo-Strauss

Originally published in the October 2015 MJSA Journal.

You’re picking up your usual venti caramel frappuccino on the way to work, but oops, you discover you left your wallet at home. The bad news is, Starbucks doesn’t take IOUs. The good news is, if you have a smartphone, paying for coffee is as easy as loading an app onto your phone that allows you to fund a virtual Starbucks card. One quick scan by the cashier and you’re on your way with your hand-crafted beverage. By offering this type of customer convenience, Starbucks is the major retailer leading the way in mobile payment systems, nabbing 90 percent of the $1.6 billion of mobile payments made in 2013. Starbucks is part of a fast-growing world of mobile payment systems that is all about convenience. According to a 2014 Forrester Report, mobile payment systems will continue to grow: Payments through some type of mobile payment system are expected to increase from $52 billion in 2014 to $142 billion by 2019.

Like it or not, cash currency is edging toward a museum, as more and more consumers want to use debit/credit cards or a smartphone to pay for products. Whether you are selling online or at a trade show, trunk show, or brick-and-mortar store, you need to consider your options for how your customers can pay for your jewelry.

Why Now?

If you’ve been thinking of changing or adding a mobile payment system to your small business, now may be a great time, as significant changes are coming to the credit card industry. New credit card rules going into effect this month are shifting liability from card users to merchants. EMV, which stands for Europay, MasterCard, and Visa, now has a new standard for credit cards that use encrypted chips rather than magnetic strips. Going forward, businesses that don’t accept EMV-chip credit cards will be responsible for paying for fraud that occurs at the point of sale. For example, if a customer swipes a credit card with an EMV chip on your non-EMV compliant terminal and it was a fraudulent sale, the bank will now ask you to credit that sale back to the credit card holder.

While experts disagree that EMV will be an automatic fix for credit card fraud, it brings the U.S. closer to the standards in Europe and beyond, where this kind of technology has already been implemented. Regardless of its effectiveness, the rollout of the new chip cards means you’ll need to upgrade, as that old credit card terminal you’ve been using is likely not EMV compliant.

Choosing a mobile payment system can be complex. There are various types of systems out there, including contactless payments (i.e., Apple Pay, Google Wallet), in-person payments (i.e., Square), online payments (i.e., PayPal), peer payments (i.e., PayPal, Google Wallet), and others, such as online bill payments (per your bank, credit cards, or utilities) that more and more Americans are making from their computers, tablets, and mobile phones. Before considering which will work best for your business, you need to understand a little about these systems, how they work, and the technology that is rapidly changing.

A Tale of Two Technologies

When it comes to the technology involved in mobile payment processing, there are two primary types of systems.

Near Field Communication (NFC)
NFC technology uses radio frequencies to enable smartphones and other devices to communicate with each other, either by touching them together or bringing them into close proximity. A consumer with an NFC-chip equipped smartphone or specialized band or watch touches the device to a merchant’s NFC-equipped terminal or card reader, and the transaction is completed.

Currently, there are several companies that have incorporated this technology into their products, including Apple, which offers its NFC-based Apple Pay system on the iPhone 6, iPhone 6 Plus, and the Apple Watch. Google has also launched its own payment system, Google Wallet, which is available for use on all NFC-enabled Android phones and iPhones. Samsung has launched a payment system for its phones that will allow users to use either the NFC technology on new terminals or be swiped on older credit card machines. In addition, more companies, including Microsoft, currently have plans for payment systems in the works.

NFC technology originally required a terminal, which can be expensive. However, in this fast-growing field, it is now becoming less expensive and more accessible, with many new NFC-based card readers emerging.

Non-NFC
By now chances are that many consumers have used a non-NFC mobile payment system, which requires a credit card to be swiped or entered manually. One of the first, Square, was launched in 2009 and has become popular with small businesses such as hair stylists and food trucks because of its ease of use. Square provides a free plastic reader that business owners plug into their smartphone or tablet. They can then swipe a customer’s credit or debit card. Consumers sign the device’s screen using their finger or a stylus and away they go with their purchase.

Other Options
In addition to NFC and non-NFC technologies, there’s also a new system, CurrentC, that was recently launched on a limited basis. Developed by a group of major retailers in an effort to both compete with Apple Pay as well as sidestep the traditional fees credit card providers charge merchants, CurrentC uses QR codes that are displayed on a merchant’s screen and then scanned by the customer’s phone to initiate and verify the transaction. Although it involves more steps than NFC payments, retailers are hoping it catches on, as it would mean lower fees they would have to pay based on how the transactions are processed.

According to a Forrester March 2015 report, large banks, such as Chase, Citibank, and U.S. Bank, as well as a group of credit unions are also developing their own systems, as they look to fix thinning margins with an additional revenue stream.

While understanding the technology is important, this fast-growing field means that things will continue to change quickly. NFC technology is likely the wave of the future, and larger retailers are beginning to embrace this technology. Experts say 5 percent of those with NFC-enabled devices will use this contactless payment option at least once a month. Though 5 percent does not sound like a lot, it’s a significant growth over last year and will continue to grow as more people obtain NFC-enabled phones and wearable tech devices.

Review Your Options

Deciding on one of these mobile payment systems can be a tough decision. “You need to decide what’s best for you as the merchant and what’s best for your customer,” says Jan Dawson, chief analyst of Jackdaw Research in Provo, Utah. “There’s no point in choosing a payment process that customers love but is nightmarish for the merchant or vice versa. You need to look for balance.”

Before investing in a system, Dawson recommends that you research online, make sure you understand the options, and talk to the companies themselves. In addition, speak with other small business owners about their experiences using the technology.

Here are a few things to consider when shopping for a mobile payment system.

Fees and Transactions
Wading through the fees and pricing of many of these mobile payment systems can be complicated. The interchange fees that merchants pay to banks and payment networks are a major concern for most small businesses. Unfortunately, mobile payment systems are not designed to eliminate this concern.

Just as with the old-fashioned way of swiping and processing credit cards, today’s mobile systems charge an intercharge fee for the credit card company, which can run from 1 to 4 percent depending on the credit card. On top of that, the companies charge a fee for themselves, which can be a percentage of the sale or a fixed fee of around $0.25 to $0.35 per transaction. Fees may differ depending on whether or not a credit card is swiped or keyed in. Also, some even charge an additional 1 to 2 percent in an array of markups that they may call “contact,” “IRS,” or “statement”  fees.

Some companies offer monthly subscriptions, which can lower the transaction fees. But these subscription plans often have a limit on the number of transactions you can process within a certain time frame. Before selecting this option, you must know how many transactions you expect to process every month to ensure it won’t cost you more than a plan without a monthly fee. Because exceeding a transaction limit can result in higher fees or your funds being held for up to 30 days, discuss your business and the sales you anticipate with the mobile system company to decide on a realistic processing limit.

Also, pay attention to how fast funds will be transferred into your account. Although there are some systems, such as PayPal, which transfer the funds immediately, others may take one or more business days.

Finally, many of these mobile payment systems come with attractive add-ons. Some are complimentary, such as offering you the ability to send electronic receipts to your customers, but others often come with a fee; these could include add-ons that allow you to create and issue coupons that are attached to a receipt, issue gift cards or special vouchers, add customers to a loyalty program, or manage inventory.

Setup
No small business owner has the time to learn a complicated system, so look for a mobile payment system that is plug-and-play. Some mobile payment processing systems charge a nominal one-time fee or rental fee for the actual reader, while others do not. There are some companies that don’t require equipment, such as Flint Mobile, which allows merchants to use their mobile device to take a photo of a consumer’s card to process the transaction.

Compatibility
Make sure a mobile payment system is compatible with the business software you use. All companies should spell out the programs with which their payment systems can interface. “Before choosing one, look to see how easily the financial records will transfer to Quickbooks or whatever accounting software you use,” advises Matthew Perosi, an internet analyst and consultant who examines existing and emerging technologies in regard to business marketing. “A difficult transfer process might cause extra work, and who really wants extra work? Small businesses owners work far too many hours in every day.”

Security
“Fraudulent credit card use is a problem that has been plaguing the U.S. payment card industry for years,” says Perosi. “Professional hackers always seem to find a way to break in, but they usually don’t target small businesses unless the business allows itself to be an easy target.”

Perosi points out that the mobile payment system company is ultimately responsible for the security of the app on the smartphone and the functionality of the hardware. NFC payment systems are considered particularly secure because the transmissions are extremely short range, requiring a hacker to be uncomfortably close by while the payment is being processed. In addition, the information is encrypted before it is transmitted.

Non-NFC systems operate in a similar manner to the new EMV technology, which sends a code for each transaction in lieu of the customer’s credit card information. While there’s still the opportunity for fraud, merchants should be fairly well protected provided they go through the usual forms of consumer verification, such as requiring either a PIN or a signature on every transaction.

Customer Service
If your payment app crashes while you’re at a trade show or your funds are on hold, chances are you’d like a company that provides good customer service. Be sure to read reviews and comments by users regarding customer service to ensure you can get the support you need when you need it. And don’t forget to ask your fellow small business owners about their own experiences and what they recommend.

Doing It All
Finally, experts say to think about finding a system that encompasses different technologies. “You want to avoid having to implement several different systems if you can—try to find a system that can support multiple payment technologies,” says Dawson. For example, some companies offer point-of-sale terminals, mobile payment systems, and virtual terminals all under one umbrella.

Small business owners are now able to offer both NFC and non-NFC options to their customers. Square recently announced a partnership with Apple Pay and is now offering an NFC card reader that can take a contactless payment. Merchants can use that for customers who want that technology or they can use their now EMV-compliant reader and swipe like they did before. Other mobile payment systems are expected to follow this NFC/non-NFC partnership trend.

“More and more people will be wanting to pay with their phones and other gadgets, so purchasing a payment solution today that supports those would be a great way to avoid an upgrade in a year or two,” says Dawson.

The Future Is Now

Thinking how good using cash looks about now? There are advantages to these systems. “The biggest pros are letting people make purchases when they don’t have enough cash,” says Dawson. “Also, many credit card companies insure against breakage and theft on purchases, and you don’t get those benefits when you’re paying with cash.”

Experts agree convenience for both the merchant and the consumer will continue to drive this form of payment. What does the future hold? Companies are currently exploring additional wearable payment systems, such as fitness trackers and other smart jewelry. The race is on as consumers embrace easier and faster ways to spend their money—so make sure you’re set up to take it.