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Payments Briefing: Can tap to mobile technology democratize payments?

  • This week, we explore how tap to mobile payments could help SMBs compete with larger businesses.
  • We also look at how PayPal’s failed customer acquisition strategy led to the birth of 4.5 million fraudulent accounts on its platform.
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Payments Briefing: Can tap to mobile technology democratize payments?

Contactless payments have been growing throughout the pandemic. The use of contactless payments has increased by 150% in the US since March 2019, and the UK recorded £66.5 billion in contactless transactions in the first six months of 2021 alone.

Amidst this shift, it’s becoming more challenging for small businesses and micro-merchants to remain competitive and retain market share against established players and tech giants like Amazon. Many SMBs are cash-only and are unable to afford feature-rich payment terminals that accept contactless payments. Processing payments on the go, in settings such as outdoor events, street vending and deliveries, can also be a challenge.

Tap to mobile technology (also known as ‘tap to phone’ and ‘tap to pay’) – which turns smartphones into payment acceptance devices – could simplify payment processing for SMBs, since it’s easy to set up and requires no additional hardware.

In order to use tap to mobile, SMB owners can simply download an app on a smartphone and create a merchant account. Once connected to the payment processor, the phone automatically receives its provisioning credentials. This allows small business owners and micro-merchants to accept payments from contactless-enabled cards or devices like phones, tablets and wearables within minutes.

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Payments firm NMI recently surveyed 300 small business owners and 1000 consumers in the US and UK to ask about their contactless payments capabilities, and whether tap to mobile payments could help them meet current challenges in their payment systems and provide a better shopping experience for consumers.

NMI’s report found strong support for the use of tap to mobile technology from SMB owners as well as consumers. 95% of SMB owners said they would consider using tap to mobile, including 92% of current cash-only businesses. Additionally, 83% of consumers said they would use tap to mobile if it was offered by a business, and 85% said they were more likely to shop at a business that offers tap to mobile as a payment option.

The top three factors that would influence SMB owners’ decision to offer tap to mobile payments were the cost of the technology and its maintenance (66%), customer demand (55%), and the security of business and customer transaction data (54%).

Tap to mobile payments could potentially address all three of these concerns. First, the technology doesn’t require a big financial investment, since there’s no need to purchase additional equipment.

Second, consumers show a clear desire to use tap to mobile. Consumers said they’re more likely to shop at a business that offers tap to mobile in a variety of settings including restaurants, deliveries and events, due to its convenience (76%) and speed (73%).

Finally, with regard to security, tap to mobile must adhere to the data security standard outlined by the PCI Security Standards Council, a global forum of payments industry stakeholders that mandates the adoption of security standards for safe payments.

Although tap to mobile is still in the early adoption stages, it’s growing fast. Vijay Sondhi, CEO of NMI, believes that tap to mobile is democratizing payments by lowering the barriers to entry for SMBs and micro-merchants who are looking for cheap and user-friendly solutions to process payments and grow their business.

I spoke with Sondhi to get his thoughts on NMI’s report and the wider implications of its findings for the payments industry.

What, in your view, are the most important takeaways from NMI’s report on tap to mobile?

A few points stuck out to me as important takeaways from our report. First, 95% of SMB owners said they would consider using tap to mobile payment technology, and 83% of consumers said they would pay this way if it were offered. We knew there was interest in this technology, but the data shows it’s overwhelming. Both businesses and customers demonstrate the great demand for tap to mobile.

Another key learning for me was how much SMBs currently struggle when setting up and onboarding new payments systems. The biggest pain points for SMBs when implementing new payments systems were all linked to onboarding, including paying for the system and setup (47%), setting up the equipment and hardware (46%), and training employees on how to use the system (39%).

Tap to mobile can help alleviate all three of these obstacles because it requires no additional hardware. Merchants simply download an app on a pre-existing mobile device and can start processing payments almost immediately.

My final takeaway was around the negative consequences for businesses that don’t have their customers’ preferred payment methods. 59% of consumers said they’re less likely to return to a business that doesn’t have their preferred payment option, and 72% said the availability of their preferred payment methods is important when they leave an online review. It’s clear that customers are looking for a seamless payment experience, and the ability to offer these check-out options influences where they decide to shop. Businesses that can deliver on these offerings through innovative options like tap to mobile are the ones that will drive customer loyalty and trust.

Can you explain how leveraging tap to mobile can help SMBs compete with larger businesses?

Tap to mobile payments provide a quicker and cleaner transaction experience for consumers, and because SMBs don’t have to purchase additional hardware, it’s also a cheaper option for them. In many countries around the world, contactless payments are becoming the default way of paying, so SMBs must provide this option to deliver on consumer demand.

There is a large segment of merchants who are smaller than the SMBs – like field service workers – who don’t need a full-fledged point of sale system because these traditional POS systems aren’t designed to be carried by the merchant. Tap to mobile enables merchants to carry their POS system with them wherever they are located, and is an easy way for traditionally cash-only businesses to make the move to digital while bypassing the expensive, hard-to-use traditional POS hardware.

As a result, this technology allows SMBs to quickly respond to changing consumer behaviors, accelerate their digital payment adoption, and compete with large businesses. Leveraging tap to mobile could allow SMBs to democratize payments and level the playing field with tech giants like Amazon since it’s a readily available, affordable and flexible payment option.

Behind PayPal’s 4.5 million fraudulent accounts

PayPal recently identified and removed 4.5 million fraudulent accounts on its platform, as reported by CEO Dan Schulman during the firm’s Q4 2021 earnings call. After publishing its earnings report, the payment processor also saw its stock value slump by 25%, the largest single-day drop on record.

PayPal has 426 million accounts registered on its platform, with 120 million of those acquired within the last two years. With the emergence of new payment methods and processors, the firm has been going through a phase of slowing growth. Growth in its total payments volume fell short of analyst expectations, rising 23% in Q4 2021 — the smallest increase in two years.

Lately, the firm has been experimenting with its customer acquisition strategy by offering its first-ever sign-up incentive program. These incentivized accounts, however, are what eventually fell prey to fraudsters.

PayPal’s risk management team discovered that many of the new incentivized accounts were being created by bot farms. Bot farms are computer systems that run on automated software, performing manual tasks like filling out sign-up forms, which are often deployed in fraud schemes. 

Since then, PayPal has pulled the plug on its incentivized account opening program. With that, the firm lowered its forecast for new customers and abandoned its ambition to achieve 750 million active accounts by 2025 — a goal for which it had already spent a lot on marketing campaigns. Revising its customer acquisition strategy, the firm now wants to move away from incentive programs, focusing instead on sustainable growth by increasing the engagement of current customers. 

What we’re seeing at PayPal is a systemic issue, related directly to identity theft and synthetic fraud, according to Mary Ann Miller, VP of client experience at Prove, which uses mobile devices to ID people.

“The use of weaponizing personal information for bots to attack account creation flow is not a single organizational issue,” she told Tearsheet. “Cybersecurity and fraud teams are regularly waking up to attacks that require immediate attention and remediation.”

Neobanks like Chime and payments apps like CashApp, with their fast approval and low-to-no-fee accounts, have also suffered from cases of fraud throughout the pandemic.

As fraud continues to dog the ecosystem, experts believe the root of the problem lies in digital identity-proofing. In Miller’s opinion, the core issue is that digital identity today is broken. Nearly anyone with stolen personal information — such as name, social security number, and date of birth — can easily open accounts in another person’s name. Service providers can’t be sure whether the person at the other end of a device is the same person whose information is being presented.

Highlights from our recent coverage

Behind the new card partnership: Five questions with GM and Marcus by Goldman Sachs

Marcus by Goldman Sachs announced earlier this year that it’s teaming up with General Motors to launch a new co-branded credit card and rewards program. For Goldman Sachs, this marks Marcus’ second big retail partnership after issuing the Apple Card in 2019. At their first Appreciation Experience with NASCAR driver Austin Dillon, Tearsheet sat with GM and GS executives to get an update on the state of the collaboration.

As community banks strive to modernize, Jack Henry zeroes in on payment-focused pain points

In November 2021, Jack Henry announced that its clients made up 67% of financial institutions on the Clearing House’s RTP network. While community banks look for faster ways to tech up their services, companies like Jack Henry are finding ways to secure their spots as solid solutions.

Data Snack: As finance apps’ ad spend soars, their conversion rates are declining

The average ad spend on an app store by a finance app rose by 51% between 2020 and 2021, crossing the half-a-million dollars mark. At the same time, conversion rates for finance apps fell across the App Store from 6.8% to 5.8%, and Google Play Store from 60% to 55%.

 What we’re reading

  • Swell joins forces with i2c on integrated financial platform (Finextra)
  • Airwallex debuts multicurrency virtual business cards in the US (PYMNTS)
  • Square brought credit cards to small merchants and survived Amazon (Forbes)
  • PNC Treasury Management launches on-demand pay tool (Finextra)
  • US bank taps Payactiv to help companies offer employees earned wage access (Finovate)
  • Going global: A conversation with Revolut’s CFO Mikko Salovaara (McKinsey)
  • Klarna Card waitlist opens to US customers (Finextra)
  • GoDaddy app to offer mobile QR code payments (PYMNTS)

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