By Ryan Zheng, RiverPay
While cards have been the ideal candidate to completely eclipse and surpass cash as the dominant form of payment in the U.S. for years, a challenger has finally arrived to dethrone it. Mobile payments bypass a lot of the headaches and uncertainties of traditional payments systems — including debit and credit — and they have the distinct advantage of being intuitively easy to use for both consumer and merchant alike, while providing the benefit of pinpoint marketing for the merchant. While payment models like Apple Pay and Samsung Pay might have some pushing for NFC technology as the way forward for mobile payments, the secret weapon that allows mobile payments to make this play for dominance is actually the humble QR code. With QR codes leading the charge, there’s no need to imagine a future where most, if not all, transactions are done completely through one’s smartphone — that future has already arrived.
Mobile Payment As The Way Of The Future
To understand the QR versus NFC discussion, we first have to set the stage for how mobile payments became the dominant force in Asia. China is perhaps the best argument against the unspoken rule that as countries developed, they would invariably adopt a card-based system. According to the research firm eMarketer, 76 percent of Chinese smartphone users made a mobile point of sale purchase in 2017, compared with 25 percent of American users. In total, 61.8 percent of all such transactions globally are Chinese. This translates to more than 570 million people in China who use mobile payments regularly, with the vast majority being via QR codes. While no more than a fad just five years ago, the incredible growth of users and merchants adopting Alipay has been staggering, boosted in part by Alipay and WeChat Pay’s massive user base (both boasting well over 1 billion active users).
China has a few unique factors that led to the rise of mobile payments, such as low credit card penetration, rapid urbanization, widespread adoption of smartphones and a duopoly of payment platforms (Alipay and WeChat Pay together make up more than 90 percent of transaction volume). Even with these factors which smoothed over the transition, the rapid normalization and thorough penetration of QR code payment to all sectors of Chinese society is a marvel to behold. This speaks volume to the immense value added – such as convenience, speed, security and data-based customer insights – that makes QR code the most attractive option for both customers and merchants alike.
Alipay and WeChat Pay succeeded in part because they were backed by massive, integrated and fully developed digital “ecosystems” — always-on hubs for managing daily life. The apps-within-an-app feature of WeChat, for example — where users can schedule doctor appointments, order food and hail rides — makes payment facilitation a necessary component of a full-service lifestyle app. “The model in China is exactly the opposite of what it is in the U.S.,” said Drew Luca, co-head of PwC’s U.S. payments practice. “They started with a social platform and moved to becoming a payments facilitator. In the U.S., it’s been financial services first, with social and loyalty on the other end.”
The goal is to make a secure, convenient and low-cost financial service available to the vast majority of people, and to solve the pain points of traditional finance institutions. In China and many parts of Asia, this goal was realized with QR code mobile payments. With every new development within the payment tech industry, what was unimaginable just five years ago now looks within reach — but it needs the right backing technology.
How QR Codes Make Mobile Payment The Undisputed Choice For Consumers
There’s a few reasons QR code will be key for mobile payments going forward instead of NFC codes, but the primary one is cost of installation. Western consumers are no doubt aware of the never-ending effort to transition from magnetic stripes to EMV chips or NFC communication protocols. While most merchants are doing their best to update their payment hardware to become EMV/NFC compatible, this process has been frustrating and expensive for many. With mobile payment, however, the days of awkwardly asking “Chip or Swipe?” may soon be over. The original reasons for replacing magnetic stripes with EMV was based on security concerns, but mobile payments like QR codes rank as the most secure of all currently available payment options because they require authentication for each transaction.
The distinct advantage that QR code payment has over NFC in the mobile payments space is that it is incredibly efficient and straightforward. The Nation breaks down the benefits of QR payments: “One unique feature which the QR-based payment system provides is its ability to support more than one user at any given time. […] With the use of QR codes, customers can essentially save a great deal of their time by avoiding long queues and experiencing a hassle-free checkout.” And that doesn’t even consider the value of time saved by merchants and customers satisfied by an easy shopping experience.
QR Codes: The Path To Simple Integration
At the core of the issue, and a general challenge for North American merchants looking to adopt mobile payment, is the overall cost needed to accommodate NFC and EMV technologies. Dual interface (contact and contactless) cards and the equipment needed to scan them are expensive — about $800 to upgrade each individual payment terminal. Magnify this to the dozens of readers each store can have, and the issue becomes glaringly apparent.
This creates scenarios where retailers are lagging behind in setting up contactless payments with EMV technology because of the sheer cost of changing reader devices. As merchants face unrelenting calls to upgrade their POS terminals to better accommodate future payments systems (and protect against fraud), retrofitting old payment machines to have the capabilities to handle all of the above is inefficient for most, and an insurmountable cost for some. Just as surely as card overtook cash a couple of decades ago, the rise of QR codes now signals the beginning of the end of a card-based system, by virtue of its overwhelming advantages.
Hidden Data; Crouching Marketing
We’ve already seen how QR code payments are superior when factoring for logistics and security, but one surprising benefit can be found from a marketing perspective. Nothing comes close to the ability for merchants to gain access to value-added insights, or to leverage the vast amount of consumer data to create customized and relevant marketing campaigns. To best illustrate this point, let’s take a look at the most popular payment app in the U.S.: Starbucks.
With more than 16.8 million active members in its U.S. loyalty program and 41 percent of U.S. in-store sales generated through its mobile app, Starbucks is at the forefront of the Western payments industry, surpassing even Apple, Google and Samsung Pay. Vox sums up the reasons for Starbucks’ massive successes neatly: “The app’s popularity could be credited to its early adoption, easy use and a loyal customer base that has been incentivized by a robust rewards program [...]” While these numbers are impressive by themselves, what should be noted about the immense volume of data now available to Starbucks is how it can be used to craft customized precision marketing for each unique patron based on deep consumer insights from everyday transactions.
These insights are also what drive a large percentage of sales for mobile payments giants such as WeChat Pay and Alipay. Because these payment service providers are the literal connection between the merchant and the payment method, they have the data behind consumers’ shopping habits at specific points of sale and are able to utilize that information to create a targeted and individually customized shopping experience, all integrated seamlessly into the digital lifestyle ecosystems.
Plastic Is Out
The future is mobile, and those who transition early will possess first-mover advantage. While the consumer demographic that uses mobile payments regularly is still heavily Chinese, it isn’t hard to imagine widespread adoption among North American and European consumers, especially if the option becomes widely acceptable at POS terminals. As with any changes to the financial industry promising disruption, there has been much spirited discussion, expert analysis and handwringing. But what makes mobile payments – and especially QR codes – unique is its host of intrinsic advantages, including a low barrier of entry for merchants of all sizes, making it the perfect candidate to transform how we use money and become the payments option of the 21st century.