Epayments: a guide to the pros and cons of alternatives to cash
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From a swipe of a connected watch to a touch of a smartphone, technology has brought a wide choice of digital options for shoppers wishing to replace the traditional wallet.
But, despite high-profile launches of payment platforms, cash and cards are still the preferred means of payment globally. A study released in October by Aimia, an analytics company, found that fewer than one in 10 UK consumers were “very likely” to use a digital wallet — a number that has barely changed over the past three years.
Consumers remain highly sceptical about the technology. Aimia says that about three quarters of UK shoppers feel the arrival of companies such as Apple to the payments market has not changed the probability of them using a digital wallet.
About 40 per cent simply prefer cash and debit cards, but a similar number have concerns about data security and lost or stolen phones.
The launch of Apple Pay was seen by many analysts as the moment that the sector would go mainstream, given the trust that many of its users have in the US technology group, but research suggests that only a small percentage even of Apple customers use the platform regularly.
Marc Allsop, senior vice-president at Aimia, says: “Payment providers must ensure they address concerns about data security and prove to customers that their details are secure. Only then will digital payments truly become part of everyday shopping behaviour.”
Consumer behaviour also simply takes time to change, according to analysts, and there needs to be a clear benefit or incentive to use a digital wallet instead of a payment card or cash.
Paul Lee, a researcher at Deloitte, a consultancy, says use of digital payment platforms will grow as improvements are made to loyalty schemes and biometric information, as well as location, can be instantly used to authenticate user and in-app payments.
Part of the problem is also the fragmentation of the market. Apple has left plenty of room for rival options. JPMorgan Chase has recently revamped its Chase Pay platform, for example, and improvements have also been made to MasterCard’s MasterPass and Visa Checkout.
Even so, analysts suggest it will take a combination of many different products to change the behaviour of consumers and turn mobile money into a viable alternative to traditional forms of payments.
How to pay?
The FT’s guide to the benefits and shortcomings of high-tech alternatives to cash, which has not been bettered as a choice of payment for more than two millennia.
• Debit/credit/prepaid cards: chip & pin
How it works Chip-enabled debit or credit cards are now commonplace in many countries. The card’s chip and the point-of-sale terminal generate a cryptogram and attach it to the consumer’s personal account number. The cryptogram is sent to the issuing bank for processing.
Pros Fast, easy to use, secure and safe in comparison to cash and basic cards. There can be added benefits such as consumer protection and cashback services.
Cons You need to remember a pin for each card.
• Debit/credit/prepaid cards: contactless
How it works The chip in your credit or debit card can be tapped on a reader and, using radio-frequency identification or near-field communication (NFC) technology, this communicates with the consumer’s bank in much the same way as the chip-and-pin method.
Pros Same protection as chip-and-pin cards and there is no need to remember a code number. Easy and quick to use.
Cons There is normally a limit, in the UK it is £30 for example. Less secure than using a pin if stolen. Risk of accidental payments.
• Prepaid contactless wearables
How it works Some wearables, such as key fobs, allow you to load money that can be used where contactless payments are available.
Pros Easy and fast to use.
Cons Need to load on money every time you want to use it and there is normally a limit.
• Digital wallet payments using contactless near-field communication technology (Apple Pay, Samsung Pay and others)
How it works A smartphone application that allows people to pay by swiping their phone across a payment point, either linked to a bank account or to a prepaid store of cash.
During a physical NFC transaction, each of these “digital wallets” will use the cryptogram on the consumer’s card as well as a secure “token”. The bank card networks — services used by banks such as Visa and MasterCard that provide the infrastructure, or network, behind the payments system — generate the tokens (each one is a 16-digit number, exactly like a card number, linked to the consumer’s card number). The digital wallets store these tokens (either on the device or in the cloud) so the consumer can make a payment.
During a transaction, the token and cryptographic information is sent to the merchant. The card network decrypts the token and sends it to the issuer for processing.
Digital wallets, such as Apple Pay, act more as a channel for transactions as the network providers handle the creation of the tokens.
Pros Convenient way of paying and relatively secure given that the number is stored as a token rather than the consumer’s actual card data. Smartphones are now in widespread use.
Cons Needs a mobile device that is compatible with the app and customers’ banks will need to have signed up to the service. Requires the right sort of contactless retail equipment to work.
• Digital wallets payment in-app
How it works Similar to the digital wallets using NFC payment technology but requires an app on the users’ phone that pays a retailer online.
Pros Convenient as there is no need to enter card details, which makes payment safe and secure.
Cons Need to download the app. As with NFC payments, you will need the right sort of mobile phone and an issuer signed up to using the digital wallet service of your choice.
• Digital wallets for in-app, online and in-store purchases (for example MasterPass)
How it works An electronic wallet allows consumers to securely store credit or debit card details together with personal information, normally managed by the consumer’s bank.
Pros Convenient as there is no need to enter card details, safe and secure with, for example, pay-at-table options to cover a restaurant bill without requiring the services of a waiter.
Cons Need to download the app.
• Stored value wallets (such as PayPal/Skrill/Neteller)
How it works Also sometimes called e-wallets, there are online prepaid account where a user can add money to be used whenever required
Pros Covenient and safe as there is no need to enter card details.
Cons You can only pay where you see the stored value wallet symbol, may not be widely accepted. Needs topping up, and sign-up with one of a number of competing options.
• Faster payments network (such as Pingit/Paym)
How it works Services such as Pingit and Paym allow you to pay your friends and family using their mobile number.
Pros No need to remember your friends’ and family members’ current account numbers and sort codes.
Cons Need friends and family to sign up to the service, as well as your issuer. This is a UK-only service.
• Automated Clearing House or bank transfer-based mobile payment schemes in-app (such as Zapp or CurrentC)
How it works People can make payments from their bank accounts by electronic credit or debit transfers using mobile devices.
Pros The consumer never has to provide any of their personal or payment information to the merchant.
Cons You need to sign into your banking app in order to pay. Retailers and banks need to sign up to the system.