How does the mobile payment system work

Mobile payment: everything you should know

Mobile payment is revolutionizing the way people pay. Instead of cash and conventional credit cards, there are payment apps on smartphones, wearables and contactless money cards. We explain here how this works and what advantages and challenges mobile payment brings with it.

The residents of Beijing can do without cash if they want - but hardly without a smartphone: in the supermarket or in restaurants they pay using an app, and electricity, telephone or gas bills can also be settled in this way. You call a taxi using the AliPay payment app and use it to bill the journey at your destination.

When shopping online, too, purchases are made using the smartphone program. AliPay, with over 900 million users, is by no means the only payment app in China. The messenger service WeChat has also integrated a payment service - used by around 600 million people. Already in 2016, almost three trillion dollars were moved via both apps, according to a study by the United Nations. That is slightly less than the gross domestic product of Germany in 2016, as a corresponding study by the International Monetary Fund shows.

What is mobile payment?

Mobile payment means cashless payment, mostly using mobile devices such as smartphones or tablets, but also using fitness trackers, smartwatches or smartrings. In conjunction with the mobile Internet, they enable a new type of payment: It is convenient, flexible and also saves time. Mobile payment is therefore equally interesting for financial service providers, retailers and consumers.

Mobile payment is trendy all over the world. China is one of the countries that is helping to fuel the boom. There, smartphones are already used for mobile payments in everyday life, of course. According to the “China Mobile Payment Report 2017”, the transaction rate has grown by 381 percent - within one year.

Germany lags behind in an international comparison. Consumers in this country are more suspicious. For example, they fear hacker attacks and are concerned about data protection. 47 percent prefer to stick with cash and 25 percent with giro and credit cards - at least for now. This is the result of GfK market research on behalf of the banking association. Mobile payment is not generally free. Just as there are fees for credit cards, mobile payment services require a fee for their service. These include, for example, fees for the account, to top up a credit, for transactions or for payments abroad.

How does mobile payment work?

There are two options for mobile payment: If someone buys from an online shop using a smartphone, he uses what is known as “remote online payment”. To do this, he needs a credit card or a PayPal account, for example. PayPal is a service that allows you to send money virtually to others. The account is charged beforehand or the amount is withdrawn from the bank account. Depending on the situation, the user enters the credit card data into the smartphone app during the payment process via "Remote Online Payment" or logs on to PayPal with the user data, i.e. with an email address and password.

If someone is standing at a ticket machine or at the cash register in a shop, they can pay using "contactless payment". That means something like contactless payment via wireless data transmission. This is made possible primarily via the NFC short-range radio technology, but also QR codes and, in the future, Bluetooth. Depending on the provider and the country, the user must also enter or sign the card PIN if it exceeds a certain amount. Thanks to methods such as CDCVM (Consumer Device Cardholder Verification Method, a procedure for cardholder verification), regular card PINs and the signature can be replaced by a simpler authentication via fingerprint, face recognition or the PIN of the mobile device.

NFC payment system: This is how the technology works

NFC payment system: This is how the technology works

NFC is the abbreviation for "Near Field Communication" - in German: near field communication. As with WLAN and Bluetooth, two chips each communicate wirelessly with each other - but at a lower data transfer rate. The distance between the chips must not be more than four centimeters. So only small amounts of data can be transferred. NFC is used in more and more areas - for data exchange, mobile payment or ticketing. Users of car sharing services also usually unlock the rented car with an NFC card or an NFC-enabled smartphone. Advantage: It's faster and more convenient than laborious entry with a PIN or a signature. At the same time, it is difficult to intercept the transmitted data. In contrast to paying by credit card, all data is transmitted in encrypted form.

This is how mobile payment works with smartphones, wearables and cards

For contactless payment to work, shops must be equipped with appropriate card terminals and offer contactless payment. The contactless function is indicated by a wave symbol on the card, which consists of four white semi-arcs.

On the other hand is the buyer or customer. If you want to make contactless payments, you need an NFC-enabled device. These can be credit cards or smart cards with radio chips as well as smartphones and wearables such as fitness trackers or rings. In addition to the hardware, smartphones and the like also need the right payment app. Vodafone customers can use the provider's wallet app, for example, and there are other services (see box). To complete a purchase, the user opens the payment app and holds the device or card no more than four centimeters away from the terminal. Depending on the provider and country, the user must also unlock the device used via fingerprint, PIN or face recognition. First a tone confirms the payment process, then an "OK" appears on the display. This completes the process very quickly.

In countries such as the USA, China, Japan and Great Britain, smartphone users have been able to pay using the payment system of their device manufacturer for years. The services are connected to the credit card companies and can basically be used anywhere where contactless payment is possible. Germany is only gradually following: Google started in June 2018 with the payment service Google Pay. Apple Pay followed at the end of 2018 - just under four years after its market launch in the USA.

Mobile payment with prepaid apps and Bitcoin

There are other options for making mobile payments - even without an NFC-enabled smartphone or NFC-enabled payment card. The customer apps from Rewe and Edeka, for example, allow the amount to be paid by scanning a QR code. The provider Cashcloud supplies an NFC chip on a sticker that users stick on their cell phone. With Cringle and PayPal, money is sent to companies or other users via email or SMS.

The providers Boon and Pey fall a little out of the scope of the various payment systems. Boon is a prepaid service for Android devices. Before the user pays, they have to top up their Boon account by bank transfer or credit card.

Instead of euros, customers can also pay with the purely digital monetary unit Bitcoin - at least where it is accepted. The startup Pey has developed a wallet app that can be used to make purchases in stores. So far this has only been possible in Hanover. However, some online shops do allow payment with Bitcoins. The decentralized, anonymous payment system works without a connection to banks and is considered secure. This is due to the blockchain technology: A blockchain is a digital cash book that Bitcoin users manage together.

Mobile payment systems at a glance

Mobile payment systems at a glance

A general distinction is made between closed and open payment systems. In closed systems, customers are more restricted. Because here, individual retail chains each offer their own payment app that can only be used in their stores. Open payment systems enable mobile payment in shops with appropriate payment terminals. Dealers bring third-party providers on board to operate the service: so-called mobile wallet platforms.
There are various payment systems around the world:

  1. Closed systems:
    • Aldi, Edeka, Lidl, McDonald’s, Media Markt, Netto, Rewe, Shell, Starbucks, Uber, Vapiano, VW
  2. Open systems:
    • AliPay, Apple Pay, Bitcoin Wallet, Boon, cashcloud, Coin, Cringle, Deutsche Bank DB Mobile Banking App, Fidor SmartCard, Girogo, GO4Q, Google Pay, Intuit GoPayment, MasterCard MasterPass, Microsoft Wallet, Payback Pay, Paydiant, PayPal Mobile, Pey, Samsung Pay, Square Order, Visa Checkout, Vodafone Wallet, WeChat
    • Acceptance points: supermarket checkouts, ticket machines, petrol stations, parking meters, football stadiums

Security and Challenges

How secure is mobile payment and what are the challenges?

Security always plays a major role for German consumers - it is no different when it comes to mobile payment. For 79 percent, it has priority when it comes to mobile payments, according to a survey by the consulting firm PwC. But where are the risks?

Consumers fear that their data could be intercepted and misused before, during or after a payment process. In addition, several pieces of information are linked with one another: payment and purchase data with location data. This would make it easy for data thieves to create a user profile. However, technology companies are developing increasingly secure and innovative chips for NFC-enabled devices. Sensitive payment data is saved in a secure environment.

There are two main reasons why NFC technology is considered secure: The signal only lasts a few centimeters and data is transmitted securely. If you are looking for additional protection from hackers, you can get special, shielded covers for smartphones, for example. However, “stealing” money using NFC technology is a bad idea, because a payment can only be debited using registered readers and is therefore traceable to the bank.

But what happens if the user loses their smartphone, wearable or payment card, or if they are stolen? Of course, he should report the loss as soon as possible. The damage should be limited, however, since the thief would have to authenticate himself at the latest from a certain amount on the device or via card PIN or signature.

An additional option is helpful for payment cards: the customer then receives a message by email or SMS every time a transaction has taken place. In this way, fraud is discovered early and can be stopped by the providers.

Global security standards

Global security standards

There are also global security standards for mobile payments - they are the same as for card payments. The largest international credit card companies have set them up. These include MasterCard, Visa, JCB, American Express, Discover, and Union Pay. For ticket solutions, Infineon also relies on CIPURSE, the only open and flexible security standard in the industry.

This is how we will pay

Experts are certain: Mobile payment will be the dominant payment method of the future. Because more and more solutions for mobile payment are establishing themselves worldwide - with different models. Instead of paying, the Swedes “swish”: According to the operator, 43 percent of citizens were already using the Swish app for transactions in 2016. In South Africa, customers in the supermarket verify their purchase with a biometric Mastercard with fingerprint, in China soon with facial recognition. In 2007, a Vodafone subsidiary introduced the simple, mobile payment service M-Pesa in Kenya. More than 30 million people now use it to pay small amounts of money using credit on their SIM card.

According to the PwC study, the majority of Germans are also open to mobile payment. Not only do you want a secure payment app, it should also be practical. This assumes that there are uniform standards - and that you can pay anywhere with one system.



Advantages and disadvantages of mobile payment

Advantages and disadvantages of mobile payment

  1. advantages
    • You no longer need change for parking tickets or other small amounts.
    • Payments at cash registers or turnstiles on buses and trains are processed faster.
    • Wallets with cash, credit and bonus point cards are no longer necessary. This is not only practical, but also counteracts robbery, theft, money laundering and undeclared work.
    • Paying abroad is easier because there are no language barriers and everything works the same everywhere
    • Visually impaired people pay barrier-free.
    • With open payment services, you no longer have to remember the PINs of various payment service providers.
  2. disadvantage
    • Users produce transaction data that needs to be protected.
    • There is another point of attack for cyber criminals.
    • By registering purchases, even more targeted advertising is possible through personalized offers.
    • Users are dependent on the technology and the applicable security standards.
    • Mobile payment is still too complicated for consumers in Germany.

The most important questions and answers at a glance

Mobile payment initially means cashless payment - mostly using mobile devices such as smartphones or tablets. But fitness trackers, smartwatches or smartrings are also being used more and more. In principle, mobile payments can be made almost everywhere, i.e. in restaurants, supermarkets, taxis, online shopping or the electricity bill. The time-saving, convenient and flexible process makes mobile payment an interesting alternative to cash or credit cards for financial service providers as well as for retailers and consumers.

A basic distinction is made between two forms of mobile payment. With so-called remote online payment, purchases are made in an online shop using a smartphone. For the payment process, the user needs a credit card or a way to send money virtually - for example via a PayPal account. Contactless payment works differently: cashless payments are made directly at the cash register or at the machine. For example, the local radio technology NFC can be used for this, in which two chips communicate wirelessly with each other - but only at low data transmission rates and at short distances. That makes the technology particularly safe.

Businesses need a corresponding card terminal for contactless payment, customers need an NFC-enabled device. Appropriate payment apps must also be installed. A distinction is made between closed systems of certain retail chains and open systems of third-party providers that can be used in different shops.

Convenient, flexible and time-saving at the same time: The advantages of mobile payment attract more and more customers worldwide. For example, you no longer need change when parking, paying abroad is much easier and even waiting at the supermarket checkout is no longer necessary, as payment processes are processed faster and faster. Wallets with credit cards and cash could also become superfluous in the future. This is not only practical, but also counteracts robberies, money laundering and undeclared work. Paying will also be easier for people with visual impairments in the future. The users of open payment apps also have the advantage of only having to remember a PIN.

Some consumers fear that their data could be intercepted and misused when making mobile payments. By combining payment and shopping data with location information, user profiles could also be created and advertising could be personalized even further. This is why for most consumers: data protection has the highest priority when making mobile payments. That is why ever more innovative chips in the devices ensure that the payment data is stored in a secure environment and thus protected from access. In addition, NFC can only be used to debit registered readers - which are then traceable to the bank. Depending on the country and provider, other security mechanisms are used: The user must unlock the device used, for example via PIN, face recognition or fingerprint, or enter or sign the card PIN.

Mobile payment is considered to be the payment method of the future. New technologies are developing around the world, new providers and new users are emerging. In China alone, the transaction rate via mobile payment methods grew by 381 percent in 2017. It is now important for the future to set up a comprehensive infrastructure of NFC-enabled payment terminals in other countries as well. In addition, the payment process itself should be as uniform as possible.

Last updated: October 2017