Mobile payment technology allows users to make transactions digitally through mobile devices (e.g., smartphones, tablets) using methods such as near-field communication (NFC), quick response (QR) codes, and mobile payment apps. This enables customers to pay for goods and services without physical cards or cash.

The growth of the global mobile payment market – valued at $2.98 trillion in 2023 and projected to reach $27.81 trillion by 2032 – is transforming how customers interact with businesses and manage their finances. The widespread adoption of smartphones, improved security features such as encryption and biometric authentication, and changes in customer behaviour, especially those accelerated by the COVID-19 pandemic, are driving this shift. This technology has also helped expand access to financial services for underbanked or unbanked populations, enabling greater financial inclusion.

Below, we’ll explain how mobile payment technology works, why businesses are adopting it, and its challenges and risks.

What’s in this article?

• Types of mobile payment technologies
  
• How mobile payment technology works
  
• Why businesses are adopting mobile payment technology
  
• Challenges and risks of mobile payment technology
  

Types of mobile payment technologies

Here are the common technologies that power mobile payments:

• NFC: NFC allows two devices to communicate with each other when they are in close proximity (typically defined as a few centimetres apart). Mobile payment services such as Apple Pay, Google Pay, and Samsung Pay use this technology to enable users to make payments by tapping their smartphones at point-of-sale (POS) terminals.

• QR code payments: With QR codes, a mobile device’s camera scans the code at checkout to initiate payment. Apps such as WeChat Pay and Alipay, which are popular in China, use this method widely.

• Bluetooth and beacon technology: Some mobile payment systems use Bluetooth or beacon technology to facilitate hands-free payments in-store, but this is less common.

These technologies can power payments through the following mobile payment methods:

• Digital wallets: Digital wallets store payment information such as credit card and debit card information digitally. Examples include Apple Wallet and Google Wallet. Users can make payments directly from their digital wallets either in-store or online through NFC, QR codes, or Bluetooth or beacon technology.

• Direct carrier billing: Through direct carrier billing, users can charge purchases directly to their mobile phone bills. They often use it to purchase digital goods such as apps, games, and subscriptions. This method adds the transaction amount to the user’s phone bill or deducts it from their prepaid balance.

• Banking apps: Many banks have mobile apps that let users transfer money, pay bills, and make purchases directly from their bank accounts. These apps often integrate with other mobile payment services. For example, a bank account might be an included payment method on a digital wallet.

How mobile payment technology works

Mobile payment technology enables the transfer of funds from a user’s account to a business or service provider via a mobile device such as a smartphone or tablet. Here’s a step-by-step look at this process.

Digital wallet setup

Users download a digital wallet app (e.g., Apple Pay, Google Pay, Samsung Pay) and link their payment methods (e.g., credit cards, debit cards, bank accounts). The digital wallet securely stores this information. Often, it uses tokenisation to keep that information secure, meaning it saves the payment information as a unique token (i.e., string of numbers), rather than as the identifying financial details. Even if a fraudulent actor intercepts the token during the transaction, they cannot use it to make unauthorised purchases.

Payment initiation

When a user wants to make a payment, they open the digital wallet app and select their preferred payment method. The user authenticates the transaction, which can involve entering a PIN or using fingerprint recognition, facial recognition, or other biometric methods.

Payment transmission

If the user pays using NFC technology (which is common in physical stores), the user holds their mobile device near the business’s NFC-enabled POS terminal. The devices communicate wirelessly over a short distance.

If they pay using a QR code, the user either scans a QR code provided by the business or displays their own QR code for the business to scan. The code contains the necessary payment information or a link to it.

In some cases, the business uses Bluetooth or beacon technology to detect the user’s device as they approach the checkout area. The technology then initiates payment automatically or with minimal user input.

Transaction processing

For NFC and other tokenised transactions, the digital wallet sends the tokenised payment information to the business’s POS system. Encryption helps prevent interception of the payment data or access by unauthorised parties during transmission. Some mobile payment systems also generate a unique, one-time security code for each transaction, further reducing fraud risk.

The business’s POS system sends the payment data to the payment processor or acquiring bank, and the payment processor contacts the card issuer or bank to authorise the transaction. The card issuer or bank verifies the token against the original card details, checks for sufficient funds or credit, and approves or declines the transaction.

Transaction completion

Once the transaction is approved, the payment processor sends an authorisation code back to the business’s POS system confirming that the payment was successful. The business’s system provides a receipt or confirmation to the user. In some cases, the system might update or replace the token used for the transaction with a new token for future use.

The user typically receives a notification on their mobile device confirming the transaction is complete, along with details such as the amount, business name, and time. Many mobile payment systems integrate with loyalty programmes and automatically apply discounts or earn rewards points during the transaction. They record the transaction in the user’s digital wallet app, the business’s records, and the records of the user’s bank or card issuer.

Why businesses are adopting mobile payment technology

Here’s why mobile payment technology is so popular with businesses:

• Customer expectations: Mobile payments allow businesses to meet customers’ expectations for fast, convenient payment processes. They can provide a key competitive edge and drive customer loyalty. They can enhance brand perception among tech-conscious customers by positioning businesses as forward-thinking and innovative.

• Lower costs: While mobile payments do come with processing fees, they can also decrease cash handling, lower fraud rates, and simplify payment processing, which can reduce transaction costs in the long term.

• Easier reconciliation: Automated, real-time mobile payment systems simplify the reconciliation process and reduce the amount of time and resources needed to manage financial transactions. This efficiency allows businesses to focus more on growth-oriented activities rather than administrative tasks.

• Deep analytics and customer insight: Mobile payment platforms provide businesses with detailed analytics on transaction patterns, consumer preferences, and spending behaviours. This data helps them refine business strategies, fine-tune inventory, and customise marketing efforts to specific customer segments.

• Security: Mobile payment technology uses sophisticated security protocols such as tokenisation and dynamic encryption to reduce the risk of data breaches and fraud. These protocols protect businesses and customers.

• Omnichannel experience: Mobile payments create a cohesive, omnichannel experience with consistent payment options across physical, online, and mobile platforms. This integration improves the customer experience and allows businesses to capture and analyse cross-channel data for more personalised and effective marketing tactics.

• Global expansion: By supporting multiple currencies and languages, mobile payments help businesses more easily expand into new markets and cater to a global customer base. This capability is particularly advantageous for e-commerce and digital services that rely on borderless transactions.

• Financial inclusion: Mobile payments provide access to a broader customer base, including regions and people who might not have access to traditional banking services or infrastructure.

• Strategic partnerships: Businesses that integrate mobile payments often become part of a broader digital ecosystem. This gives them access to technology providers, financial institutions, and digital platforms with whom they can form strategic partnerships that lead to new business opportunities, better service offerings, and a more competitive market position.

Challenges and risks of mobile payment technology

Here are some risks and challenges that businesses should be aware of when working with mobile payments.

Security vulnerabilities

Hackers frequently target mobile payment systems with cyberattacks. They develop their methods by seeking vulnerabilities in mobile applications, communication channels, and user devices. Businesses must invest heavily in security infrastructure, constantly update their systems to protect against these threats, and communicate clearly with customers about their security protocols to maintain confidence in these systems.

Regulatory and compliance challenges

Mobile payments are subject to a variety of regulations including data protection laws, payment processing regulations, and consumer protection standards. Businesses should work with legal and compliance experts to navigate these laws and regulations across all jurisdictions in which they operate and must continually update their policies, practices, and technologies as requirements evolve. Ongoing compliance comes with long-term operational costs and requires a dedicated compliance infrastructure.

Technology integration and maintenance

Integrating mobile payment technology with existing legacy systems can create major hurdles. Older POS systems, financial management software, and customer databases might not be fully compatible with new mobile payment platforms, which can lead to costly upgrades or the need for custom integration solutions. Mobile payment systems are also vulnerable to technical issues such as outages, slow processing times, and connectivity problems that can further disrupt business operations. Businesses must invest in infrastructure, including backup systems and redundancy.

Adoption and user experience

While mobile payments are growing in popularity, not all customers are comfortable with or interested in adopting this technology. Some might be resistant because of security concerns, lack of familiarity, or a preference for traditional payment methods. Refining the user experience can help encourage adoption, and businesses should invest in high-quality user interface and user experience design to avoid poorly designed interfaces, confusing authentication processes, and cumbersome payment steps that can lead to user frustration and abandoned transactions.

Financial risks and costs

The initial investment required to implement mobile payment technology can be substantial, especially for small and medium-sized enterprises (SMEs). Beyond the cost of the technology itself, there are expenses related to staff training, system integration, and ongoing maintenance, as well as transaction fees once the system is in use. Businesses must carefully calculate the return on investment to ensure that the benefits outweigh these costs, and they should try negotiating favourable terms with payment providers, if possible.

Market fragmentation and competition

The mobile payment market consists of multiple platforms (e.g., Apple Pay, Google Pay, Samsung Pay) and standards that change across regions and devices. This fragmentation can complicate the user experience and create a more complex and costly implementation process for businesses. It also creates competitive pressures among mobile payment providers, who must continually differentiate their payment experiences and invest in technology, marketing, and customer service to maintain a competitive edge.

Privacy concerns

Mobile payment systems collect vast amounts of data on customer behaviour, preferences, and transactions. While this data can be valuable for business analytics, it can also raise privacy concerns. Customers expect transparency and control over their personal information, and businesses must show that they respect customer privacy while complying with data protection laws.

Dependency on technology providers

Businesses that adopt mobile payment technology often depend on third-party providers for payment processing, security, and compliance. This reliance can be risky if the provider experiences technical issues, security breaches, or changes in service terms. Businesses must carefully vet their providers, establish strong contracts, and plan contingencies to mitigate these risks.