Apps Vs. NFC For Mobile Payments - Here's Why The Debate Matters And Who Will Win

The big question in mobile payments is not whether they will catch on with consumers.

Already, Starbucks processes 10% of its U.S. transactions thanks to customers who hold up their phones for cashiers to scan, instead of using plastic or cash.

The real question is what kind of technology will power mobile payments. Will the solution be hardware-dependent or software-centric? Will phones require an NFC-chip (Near-field communications, which allows phones to communicate wirelessly), and an NFC-compatible payment terminal? Or will modular, software-based solutions complemented by attachable card readers win out?

In our most recent report on mobile payments, BI Intelligence takes apart the NFC vs. software-based card reader battle.

This debate is a huge question in mobile because some of the biggest companies in tech have a lot riding on the issue. Apple has so far remained mostly on the sidelines, its Passbook virtual wallet app doesn't do payments (although it carries Starbucks and Square, two Passbook-compatible apps that can be used to power transactions). Google Wallet has bet on NFC. So has Isis, the brainchild of the main U.S. carriers, and a similar venture by Samsung and Visa.

PayPal and Square, instead, have bet on software and app-centric solutions that rely on hardware only in the sense that cheap attachable card readers and other solutions can help merchants hook into the system. No chip is needed.

In our second quarter 2013 update on mobile payments, we explain the main types of mobile payments, analyze the state of the mobile payments race, examine the matchup between card readers and Near-field communications (NFC), look at how traditional banks, credit card companies, and card processors are responding to the mobile payments threat, and detail who is furthest along in developing the all-in-one solution for merchants and consumers.

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Here's a brief overview of the current state of the mobile payments race:

• Overall, we're still in the early stages of mobile payments adoption: As of year-end 2012, only 7.9 million U.S. consumers (less than 90 percent of the total) had adopted a consumer-facing NFC-compatible system like "Google Wallet," or apps that use QR codes or other methods to generate a payment.
• But, in-store mobile payments nearly quadrupled last year: eMarketer has estimated in-store mobile payments as adding up to $640 million in transaction volume in the U.S., up from $170 million in 2011. However, this figure does not include swipes on mobile credit card readers like Square and PayPal Here, only consumer-side mobile payments.
• Card readers are building up real scale: Square's mobile payments volume rose to $10 billion in 2012, up from $2 billion in 2011. Starbucks is switching its credit and debit card processing to Square, and as of January 2013 accepts the "Square Wallet" app at 7,000 locations. The Starbucks alliance with Square is evidence of how the card reader-based approach has already worked its way deep into the U.S. consumer economy.
• Mobile payments as part of mobile commerce are also exploding: PayPal processed some $14 billion in mobile payments last year, evidence of mobile catching on as a transactional platform. PayPal hopes to build a merchant-powered network based on the ubiquity of PayPal as a payment and money transfer platform. PayPal users are already able to pay at thousands of traditional stores by keying in their mobile number and a PayPal PIN selected online (or in their PayPal app). PayPal is expanding the program this year, in part through an alliance with Discover.

In full, the special report:

• Explains the main types of mobile payments
• Analyzes the state of the mobile payments race,
• Examines the matchup between card readers and near-field communications (NFC),
• Looks at how traditional banks, credit card companies, and card processors are responding to the mobile payments threat
• Details who is furthest along in developing the all-in-one solution for merchants and consumers

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