Jupiter Research has reported that not only did global mobile payments exceed forecasted amounts in a majority of previous years, volume reached $100 billion in 2010, with worldwide projections of mobile payments expected to exceed $630 billion in 2014. Comparatively, the Aite Group released a comprehensive report that projects U.S. mobile payments to exceed $162 billion by 2014; from a volume of $16 billion in 2010. As the Aite Group Report stated, “Over the past 12 to 18 months, the United States has begun to move closer to a tipping point that will lead to the popularization of mobile payments.” Since mobile payments are transacted on a contactless payment platform, data readers and compatible media are essential components. A March 2011 Federal Reserve Bank report estimated there were 70 million contactless devices, including contactless credit and debit cards, and 150,000 contactless readers installed by U.S. merchants.

Accompanying prognostications in infrastructure and revenue growth figures is the fact that mobile payment technology will also expose hospitality businesses to an unparalleled toolbox of m-commerce payment and marketing applications across a broad spectrum of POS touchpoints (in-house, remote and online). One technology projected to lead the way is near-field communication (NFC).

Near-field Communication
NFC is a short-range radio frequency communication technology that enables devices located no more than a few centimeters from each other to exchange data. NFC devices are compatible with existing contactless technologies, including smartphones, cards, pads and tags. NFC is also compatible with many installed contactless payment readers which are already prevalent in numerous retail point-of-sale (POS) terminals. In addition to enabling payment transactions between mobile devices and contactless readers, NFC chips may be embedded on in-store products, promotional displays and billboards using smart tags capable of transmitting pricing, selection, quality and other snippets of information directly to a mobile device. As a result, many analysts perceive mobile payments being closely linked to innovative product marketing technology.

The evolution of mobile payment (m-payment) devices has led to two distinct modes of operation: proximity mobile payments and remote mobile payments. Proximity payments occur at a physical location while remote payments are conducted from off-premises locations (including online). Proximity application software secures the payment format in a way that parallels transacting a purchase using a wallet. It is for this reason that mobile payments are referred to as digital wallet, e-wallet or m-wallet transactions. Remote applications may function similarly or rely on settlement from external financial institutions at compatible points of sale.

In a remote payment scheme, the consumer first establishes an account with a mobile payment service provider (e.g., Visa, MasterCard, PayPal, Google Checkout, Obopay, Paymate) and the account is then associated with a mobile phone number and funded through an authorized bank, credit card, debit card or smart card account. Remote m-payments can be made anytime from anywhere, and the unique nature of this platform allows transactions to originate via text messaging (SMS) or a wireless Web browser. In a typical m-payment structure an NFC chip is installed in the mobile device along with an accessible credit or debit account.

It is important to note that Apple recently announced it will enable iPhones and iPads with NFC functionality by the end of the current calendar year. This development is in addition to Apple testing its NFC-enabled devices as mobile payment acceptance terminals, thereby creating units that are capable of serving as both payment devices and settlement terminals (i.e., managing transaction initiation and reconciliation). This multifunctional equipment is expected to advance the field of mobile payments while providing a competitive advantage for Apple in the marketplace.

NFC Standards
NFC standards are supported by all major payment providers and maintained by the non-profit NFC Forum.  Begun in 2004, the Forum includes leading mobile communications, semiconductor and consumer electronics companies working collaboratively to develop international NFC specifications for interoperability. In 2006, the NFC Forum introduced a comprehensive set of standardized technology architecture, initial specifications and tag formats for NFC-compliant devices. The specifications deal with data exchange formatting, smart poster requirements and accessible Web applications. Since NFC technology operates in the 13.56 MHz frequency range over a typical distance of a few centimeters, it is considered inherently secure. The underlying layers of NFC technology are based on ISO 14443 (contactless smart card protocols), ECMA (European Computer Manufacturer’s Association) and ETSI (European Telecommunications Standards Institute) guidelines. NFC technology is considered an extension of the proximity card standard that combines the interface of a smartcard and a reader into a single device. NFC can be used with a variety of devices, from mobile phones that enable payment to transferring information to digital cameras that transmit digital content to a remote device using contactless connectivity. NFC is designed to simplify complex transactions by providing a uniform connectivity between compatible devices.

NFC is often compared to radio frequency identification (RFID) and Bluetooth protocols. Unlike RFID technology that is basically a one-way (simplex) communication standard, NFC is a two-way (duplex) contactless communication standard that facilitates a more efficient transaction platform. In addition to advancing data exchange, NFC also offers superior data transfer and encryption speeds over RFID. Similarly, NFC is more advanced and user friendly then Bluetooth technology since it offers faster interoperability (device connectivity) with less chance of signal interference (security) and can be used even when the receiving device has a low battery level or is turned off. For nearly a decade, NFC has been recognized as the preferred International Organization for Standardization (IOS) for mobile payments.

M-commerce
In a traditional commercial transaction there is an agreement between the buyer and seller that establishes the purchase price, method of payment and form of delivery simultaneously. For example, a consumer may purchase food after reviewing the menu at a quick-service restaurant. Placement of the order is concluded with payment. The food is then passed to the consumer. This is the case in a majority of hospitality retail scenarios. The degree of risk between buyer and seller is described as evenly distributed since the buyer receives delivery once the seller is paid. When alternative payment media are placed in the purchase equation (m-commerce or e-commerce) the risks and relations among the buyer and seller are altered. The relative degree of perceived risk to consumer and merchant is changed given the increased flexibility related to the purchase agreement, acceptable method of payment and format and timing of delivery. The success of mobile payments in the hospitality industry is tied to establishing a level of comfort between consumer and merchant, for on and off-premises transactions.

Mobile payments provide a faster transaction throughput than fixed transactions coupled with an ability to distribute real-time marketing messages to consumers. Unlike traditional commerce, m-commerce allows hospitality management to instantly reach consumers through multiple touchpoints. For example, an e-coupon promotion delivered to smartphones can be shared via social networking and used immediately or integrated directly into a digital wallet to be used at a later date. The ability to determine the location of a consumer through geo-location technology (a feature built into some smart mobile devices) adds an additional dimension to telemarketing. Research has shown, that when properly implemented, flash sales and e-couponing can significantly improve marketing efficiency as consumers will be contacted where/when they are most likely to be receptive to an offering. M-commerce provides an unparalleled set of opportunities for hospitality merchants to build customer loyalty while lowering transaction costs–a win-win-win situation.

Proximity Transactions
An on-premises transaction is referred to as a proximity transaction since the activity occurs within a close physical range between mobile device and POS reader. Proximity applications tend to be limited to a maximum distance of 7.5 centimeters (about 3 inches) of distance between the payment device and POS terminal. A proximity contactless payment network must adhere to standards and be securely integrated since it may involve diverse handheld devices and POS readers. Proximity transactions require two technological applications: a) device initiation of consumer settlement and b) acceptance of consumer payment by a merchant reader. For example, a hotel guest may choose to use a cellular phone to pay folio charges at the front desk during checkout, or a restaurant patron may opt to settle a guest check at the table, or a guest’s handheld device may be used to interact with a lobby self-service kiosk. In each case, instead of the consumer using a credit or debit card swipe to reconcile a transaction, mobile payments rely on proximity exchange of financial data via a transportable platform involving NFC technology. A major benefit of NFC is its compatibility with existing contactless payment standards since it uses short-range radio signals transmitted between a mobile device and a POS reader to enable payment processing over card processing networks.

Proximity payments are based on a widely supported global financial standard referred to as EMV (Europay, MasterCard and Visa). EMV controls interactions at both the physical and application levels in retail POS transactions and thereby ensures a higher level of security; a security level equivalent to smartcard-enabled payments. A proximity payment platform enables a cellphone to function as an e-wallet, thereby eliminating the need to carry credit cards, debit cards or smart cards. A proximity payment network involves several technologies including:

Contactless Reader – POS mounted device responsible for interacting with mobile commerce-enabled devices (e.g., phones, smartcards and other contactless media). Interoperability is based on NFC technology and a high-frequency, low-range transmission device. Most contactless POS readers are NFC ready and capable of encrypting identification and transactional data at the point of capture.

Payment Gateway – A communication channel is used to connect a contactless payment reader to a transaction processor. The same gateway used for processing credit and debit card transactions can be used to transmit captured account and transaction detail to a payment processor that, in turn, verifies account status and reconciles the purchase transaction.

Portable Device – An NFC-equipped handheld, wireless, portable device (e.g. mobile phone, smart card, payment sticker, etc.) contains the requisite chip set needed for secure data exchange (identification and transaction data) between a portable device and a contactless reader. 

Wireless Network – The ability to download and install content (e.g. account information, services and subscription activation) to mobile devices over a wireless network is critical to mobile payment processing. This process, referred to as over-the-air provisioning (OTAP), can also be used to update advanced application protocols.

E-wallet App – Electronic wallet software allows mobile devices to manage a set of accounts and related transactions. Many mobile devices are being sold with e-wallet or e-purse applications built in. Despite no direct connection to an external PC, these devices appear to perform at a high level of success.

Proximity payments rely on the same protocols and technology used with contactless cards, and therefore successful implementation is dependent on widespread adoption of NFC standards.

Remote Transactions
Knowing a significant volume of hospitality industry purchases will occur off the premises, mobile payments can also be applied to distant transactions, such as remote or online. Unlike proximity payments, remote payments do not require the consumer to be in the hospitality merchant’s lobby, dining room, convention center, recreational area or entertainment hall. Instead, remote payments bring the equivalent convenience of online shopping to a mobile device through telecommunication channeling and/or Internet (TCP/IP) protocol. For example, mobile phones can initiate multiple forms of remote applications, including text messaging, instant messaging and integration with social media, as well as online order entry/shopping.

The sensitivity to protect proprietary financial data in a remote wireless network has led to the development of intensive malware and anti-virus software. For example, consider the data interchange involved with ordering carryout food from a restaurant while traveling home from work. The consumer can simply place an order via text messaging to the eatery from a mobile phone while stopped in traffic. This remote application allows the restaurant to prepare the food so it is ready and waiting for an on-time pickup. Once at the restaurant, the consumer waves, taps or touches the mobile phone to a contactless reader to complete payment. In each phase of this transaction there is a chance of unauthorized intrusion, scamming, smishing (SMS text phishing), interference and other fraudulent activity. Some of the security concerns inherent with mobile transactions are addressed through enforcement of Payment Card Industry Data Security Standards (PCI DSS) requirements. The principles behind these standards apply equally to mobile payments as to traditional payments. The financial payment industry requires businesses that capture, process, transmit or store payment information to adhere to PCI DSS. These standards are prominent in transaction software used to accept deferred, electronic payments. Since the consumer may access the restaurant’s webpage from a smartphone, use the downloadable script to place the order, and also settle the bill, mobile payment security is critical to comprehensive PCI compliance. By 2015, U.S. mobile payment transactions are expected to be segmented as follows: 23 percent remote (offpremises and online) and 77 percent proximity (on-premises).

Consumer Side
The convergence of mobile technology and electronic payments provides unprecedented convenience and control of payment options. From the consumer perspective, in addition to car and house keys, mobile devices have earned what marketers refer to as a share of the pocket. As mobile devices morph into multifunctional, multimedia platforms, mobile payments have begun commanding significant attention. For consumers, the major benefits of mobile payments include: speed, convenience, efficiency, security and networking.

Speed – Eliminates the need for cash, payment cards, checks, coupons, punch cards, discount codes and customer loyalty documentation as all subscribed incentives are stored in the mobile device and automatically applied during a qualified transaction. Researchers at FirstData.com claim an average mobile transaction can be completed two times to three times faster than a cash-based transaction.

Convenience – With a mobile payment there is no need to carry a traditional wallet or source of funds as the mobile device can perform as an e-wallet, plus a consolidated payment card, as well as a wireless telephone. With the number of phones in service, consumers will likely always have access to a mobile phone more readily than a wallet or purse. Additionally, a mobile device can securely store paperless documents, thereby rendering paper receipts obsolete.

Efficiency – The ability of a mobile device to connect with the Web allows the user to interact with a variety of search engines and hospitality websites in an effort to research potential products, accommodation packages, travel options, and price comparisons. As of November 2010, nearly 40 percent of U.S. Internet users had ordered restaurant food online, an increase of 90 percent over the previous year, according to the latest Technomic research study.

Security – Mobile device purchases require a personal security code (PIN code) as an initial measure of transaction security. This feature invokes a protective procedure unique to each user and significantly increases security not available with cash or credit card or offline debit card transactions. Maintaining tighter control over payment options is of utmost importance in ensuring that commerce related messages sent and received are authenticated by a trusted source.

Networking – There is probably nothing more persuasive or influential than word of mouth communication. Mobile transactions happen quickly enough to provide a platform for consumers to share products and service experiences with friends, in real time. The popularity of social media and social networks, dovetails directly with the benefits of mobile payments. Similarly, hospitality merchants can deliver flash sale discounts, e-coupons, purchase incentives, rewards and promotional materials to subscribed users quickly and economically.

On the Merchant Side
On the hospitality merchant side of a mobile transaction, the point-of-sale terminal needs to be equipped with an NFC chip reader to be an effective payment acceptance unit. When a mobile device is placed in close proximity to the POS reader, the reader is able to capture essential identification and account information from the device. This data is similar to that found on the magnetic strip of a credit or debit card. The NFC terminal captures this information through a tap or wave. The process results in data capture much the same way a card swipe is accomplished, but without physical contact. Subsequently, the data is transmitted to a normal transaction processing entity for reconciliation.

Mobile devices are designed to store multiple payment accounts, thereby presenting the consumer with the option of selection for transaction settlement. Selection may be a credit card or debit card account, a hospitality merchant-specific prepaid account or an alternate payment platform, such as PayPal, Google Checkout, Obopay or Paymate. Mobile transactions have implication for the entire mobile commerce value chain, which includes hospitality merchants, point-of-sale equipment manufacturers, financial entities and transaction processors, mobile phone manufacturers and mobile carriers who provide the network. Most of the infrastructure needed to support mobile transactions is currently in place.

The most apparent safety concern associated with remote mobile payments is protecting personal data that either is stored in or flows through the wireless device (e.g. account numbers, PIN and security codes, passwords). Exposure of personal information over a wireless network can leave the consumer feeling vulnerable to theft. In a recent analysis of the largest U.S. restaurant chains, the Cornell Center for Hospitality Research identified fast-casual and quick-service restaurants as the segments most likely to support online customer ordering. According to the group’s research, these eateries accounted for over 70 percent of the total number of foodservice operations offering such a service. Outcomes from this study conclude that the more formal the dining ambience of the foodservice operation, the less likely it is to support online ordering.  These same industry segments (fast casual and quick service) that offer online ordering also lead in the implementation of mobile payments. In fact, Starbucks, Chipotle Grill, Sonic Drive-In, Five Guys Burgers, Pizza Hut and Subway are examples of restaurant chains that actively sponsor mobile applications. An article posted online by eMarketer.com in April 2011, quotes Noah Glass, CEO of mobile applications developer OLO Online Ordering, as claiming his company’s clients experienced a 32 percent increase in average order size with 83 percent of customers preferring to order from a mobile device as opposed to placing a telephone call.

QR Codes
Near-field communication (NFC) payments, using short-range wireless technology, allow a consumer to tap or wave an enabled mobile device to complete an on-premise transaction. Bar codes work by providing machine-readable combinations of black bars, dots or spaces (termed symbologies). Each bar code type has a unique format. The most common format is a one-dimensional (1-D) bar code composed of a series of black bars of varying widths. When a bar code is scanned the reader directs light toward the black bars and spaces and measures the reflection of the light back to the reader (no reflection for black bars but a strong reflection for white spaces). The reader can also sense the width of the bars and spaces. Bar codes can represent specific characters (a number or letter) through a unique combination of bars and spaces. Ordinary bar codes are described as vertically redundant, since the same information is repeated throughout vertical layers of an image. In other words, the height of the bars can be significantly truncated without loss of information. For example, consider a 1-D alphanumeric bar code (figure 1). Regardless of bar height, the linear bar code is composed of five bars and four spaces for a total of nine elements. Each bar or space is either wide or narrow (not tall or short) and three out of the nine elements are always wide, hence the name Code 3 of 9, or Code 39.

Mobile payments do not rely on one-dimensional bar codes. Instead, mobile platforms use a two-dimensional (2-D) format in the form of either a stacked linear bar code or a quick response (QR) code. While 1-D bar codes function as database keys (i.e. link to data stored in a computer), 2-D codes hold more data and fulfill the role of a portable database through keyless data entry. Two-dimensional codes are typically referred to as matrix codes since the data is positioned as black spots within a matrix format. It is the positioning of the dark symbols within the matrix that codes the data. Similar to a 1-D code, a 2-D symbol can be read by moving the symbol across the reader. While there are nearly two dozen 2-D symbologies, mobile payments have focused on the use of stacked linear bar codes and quick response (QR) codes.

A stacked linear bar code is a 2-D symbol that can range from three to 90 rows of bars and spaces and each row is akin to a small linear bar code. Unlike the 1-D bar code, the height of the bars indicates the stacking feature and is important in conveying the contents of the code. The most widely used stacked linear bar code in mobile payment applications is the Portable Data File 417 or PDF417 format (displayed in the Starbucks section of this article).

Stacked Linear Bar Code
A quick response code is a 2-D matrix code that is square in shape and contains a pattern of nested alternating dark and light squares at three corners of the symbol. Maximum symbol size is 177 modules square, capable of encoding 7,366 numeric characters or 4,464 alpha numeric characters. A QR code is designed for rapid reading using a charge coupled device (CCD) scanner and can quickly transport information from transitory media onto a mobile device.

As a payment option, NFC has been stymied by the limited availability of contactless POS terminals. One advantage of using 2-D bar codes in mobile transactions is that the media format avoids the need to replace legacy POS terminals. Given current operations, 2-D bar codes are becoming the mobile payment defacto standard as it is estimated that one in five transactions are settled via this coding. The 2011 Javelin Research report on mobile wallets, for example, indicates 2-D bar codes have increased in popularity despite some security and accessibility concerns.

Given that only a small proportion of mobile devices are currently NFC enabled, QR codes have become more widely accepted by merchants than stacked linear bar codes. Additionally, QR codes are easy and inexpensive to print and display and adhere to a standardized format. QR codes enable consumers to use a mobile device as a bar code scanner in order to initiate a range of interactive marketing actions as well as enable POS terminals to read payment information. A QR code can provide details about a business, product or service as well as provide a hyperlink to a Web address and/or instant e-coupon. Future development and enhancement of QR codes are expected to enrich and advance the consumer interface and reconciliation of mobile commerce.

Isis Formation
In November 2010, AT&T Mobility, T-Mobile USA and Verizon Wireless formed a joint venture entitled Isis, a national mobile commerce network aimed at transforming the payments industry into mobile commerce. Initially, Isis is dedicated to constructing a mobile payment network that uses mobile phones for purchases at compliant POS terminals. Isis intends to focus on smartphone interoperability with NFC technology to alter the payment process by mid-2012. Isis intends to enable contactless mobile payments and commerce services using NFC with an encrypted exchange of information between consumer and merchant devices at a short distance. The Isis network is being built with high-level security and privacy protocols.

“Our mobile commerce network, through relationships with merchants, will provide an enhanced, more convenient, more personalized shopping experience for consumers,” said Michael Abbott, chief executive officer of Isis. “While mobile payments will be at the core of our offering, it is only the start. We plan to create a mobile wallet that ultimately eliminates the need for consumers to carry cash, credit and debit cards, reward cards, coupons, tickets and transit passes.”

AT&T Mobility, T-Mobile USA and Verizon Wireless collectively provide wireless services to more than 200 million consumers who will have access to the Isis service. Isis is working with Discover Financial Services’ payment network, currently accepted at more than seven million merchant locations nationwide, to develop an extensive mobile payment infrastructure for the joint venture. It is important to note that both Visa and MasterCard have partnered with DeviceFidelity to bring contactless payments to mobile devices.

Consumer Interface
One of the concerns slowing the adoption of mobile payment is the fact traditional card readers cannot be retrofitted with NFC capability. Hospitality merchants may need to invest in new equipment to support mobile purchases in the form of contactless readers that range in price from $100 to $350 each. A few providers of this equipment include ViVOtech, MEI and USAT.  Hospitality businesses most likely to be affected by high-volume mobile purchasing should begin transitioning to contactless payments. Currently, it is estimated that 30 percent of the installed POS terminals in quick-service restaurants are NFC-equipped; there are no equivalent statistics for other hospitality businesses. It is important to note that NFC-capable readers also work with radio frequency identification (RFID)-enabled devices and media (e.g. smart tags, QR codes, smart cards and smart stickers/posters). The most attractive characteristics of NFC-based applications do not only focus on the replacement of a plastic card with a handheld device, but rather on the benefits inherent in changing the consumer interface through tapping not swiping, interacting with an intelligent POS reader, and the marketing enhancements available presale, point of sale and post-sale.

Michael Kasavana, PH.D., NCE, CHTP, is a NAMA professor in Hospitality Business for the School of Hospitality Business at the Michigan State University. He can be reached at kasavana@msu.edu.

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