As a small business owner, you naturally strive to meet customers where they are, whether that’s stocking the right merchandise or offering convenient payment options. Mobile payments processing is fairly simple for a merchant, but it requires a bit of upfront effort. That includes investing in a point-of-sale system that can handle contactless payments and digital wallet transactions.
What is a mobile payment?
A mobile payment is a contactless way of paying that involves a mobile device such as a mobile phone, a smartwatch, or a tablet.
These devices might run mobile wallet apps or peer-to-peer mobile payment apps. Or, they might enable transactions via SMS.
Popular mobile wallet apps include Apple Pay and Google Pay. Popular peer-to-peer mobile payment apps include Venmo, PayPal, CashApp, and Zelle.
How does mobile payment work in brick-and-mortar stores?
In brick-and-mortar retail stores, customers often use mobile wallets to make a mobile payment. This involves tapping a smartphone, smartwatch, or tablet on a payment terminal. The payment terminal might be a merchant’s mobile device, or it might be a dedicated, separate piece of hardware. In either case, the terminal must contain near-field communication (NFC) radio technology, which enables it to receive payment information from the device.
From there, the terminals function in a similar way to when they handle inserted chip cards. They send and receive a series of encrypted messages to a financial institution, clearing the funds for a payment to proceed.
Only payment terminals with NFC radios can accept tap-to-pay transactions. (These terminals have a wireless payment icon that looks like a series of semicircles.) The terminals are all-in-one devices that also function as card readers for credit cards, debit cards, and gift cards.
Some merchants may accept other types of mobile payments for in-person transactions. For example, a seller might accept payment from a peer-to-peer payment app like PayPal or Venmo.
5 types of mobile payments
Mobile payments take five main forms. While each has its unique features, all achieve a near-instantaneous transfer of money from one account to another.
1. Mobile wallet
Mobile wallet services include apps like Google Pay, Apple Pay, and Samsung Pay. These services run on computers, smartphones, tablets, and smartwatches, and link to a customer’s credit card, debit card, or bank account. Once a person sets up their mobile wallet account, they can use these devices much like they’d use a credit card. In a brick-and-mortar store, they can tap their device on a payment terminal equipped with an NFC radio. Online, they can use their mobile wallet account on many merchants’ checkout pages by selecting a mobile wallet icon (such as Apple Pay) from among the checkout options.
2. Mobile peer-to-peer
This type of transaction, which runs on platforms like Zelle, PayPal, Venmo, and CashApp, allows individuals to transfer money to other individuals via a mobile app or a web page. Some of these services—most notably PayPal—enjoy wide acceptance from small business retailers. This means you can pay a business owner using PayPal instead of using a credit card.
3. SMS payments
SMS payments let people make payments by sending an SMS to a specific phone number. Americans, who largely own smartphones, rarely make SMS payments. In parts of the developing world, however, SMS payments are prevalent and widely trusted.
4. Mobile ecommerce
This category, also known as m-commerce, describes any type of transaction one makes on a mobile device. If a shopper makes a purchase on their mobile device’s browser or on a merchant’s proprietary app, that qualifies as a mobile ecommerce payment.
5. Mobile point of sale
In a mobile point-of-sale (mPOS) arrangement, a retailer uses their mobile device as a payment terminal. Square offers a popular mPOS service. The company sells a wireless Square reader that vendors use for contactless and chip card transactions. Customers can insert a credit card into the chip reader, or they can tap their card or mobile device to the reader for a NFC transaction. At this point, your point-of-sale software takes over, transmitting payment data to financial institutions and transferring money to your account.
Advantages of mobile payments
As a small business owner, you stand to gain many benefits when you accept mobile payments. They include:
- Convenience. Mobile payments eliminate a barrier to finalizing a customer’s purchases. Customers can pay conveniently by tapping a phone or credit card at a point of sale, or they can make online transactions using their payment apps.
- Speed. Financial institutions process mobile payments in the blink of an eye. This makes mobile checkout as fast as a credit card transaction—if not faster.
- Popularity. More customers are spending more money using mobile payments. In 2021, global consumers spent $1.786 billion via mobile payments. Financial analysts expect this figure to more than triple within the next five years.
- Security. Mobile payments are among the most secure forms of commerce. That’s because they’re performed on mobile devices that tend to require some form of authentication, typically in the form of a fingerprint, facial recognition, or a passcode. The devices also encrypt their transmissions, giving thieves a very minimal chance of intercepting customer data.
Disadvantages of mobile payments
While mobile payments offer many benefits to merchants and consumers, they come with a few drawbacks.
- Transaction limits on peer-to-peer transactions. Many mobile wallet providers place a limit on their users’ person-to-person transactions, which means merchants who want to receive payments from an app like Venmo may not be able to make sales above a certain dollar amount. This boundary helps protect all parties from theft and fraud. However, mobile wallets do not add purchase limits to retail purchases made at tap-to-pay terminals. Retail shoppers who link a credit card to their mobile wallet app will not experience any app-imposed purchase limits when shopping in a store.
- Specialized payment terminal needed for mobile wallet transactions. Merchants need a modern payment terminal to accept tap-to-pay transactions in a brick-and-mortar store—an expense that not all small businesses can afford.
As more and more shopping shifts to mobile platforms, payment systems will make a similar shift. Customers, always in search of convenience and flexibility, are increasingly embracing mobile payments—particularly given the level of security they provide.
Merchants will benefit, too. Some mobile payment apps like Venmo and Square charge fees to merchants that are very similar to credit card fees. Other apps, like Apple Pay, don’t charge merchants at all. This lets business owners benefit from the convenience and security of mobile payments without taking a larger than usual financial hit. Small business owners that enable their company to accept mobile payments will likely reap the benefits that come along with them.