Mobile payment apps – the basics: What they are, how they work and how to create your own

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  1. Introduction
  2. Types of mobile-payment apps
  3. How do mobile-payment apps work?
  4. Impact of mobile-payment apps for businesses
  5. How to create a mobile-payment app
  6. How Stripe supports mobile-payment apps

Mobile-payment apps are digital platforms that facilitate financial transactions via smartphones and other mobile devices. These platforms are becoming increasingly popular because they allow customers to make payments and conduct other financial activities without the need for traditional, physical methods, such as cash or credit cards. In 2022, according to the Pew Research Center, 76% of American adults said they had used at least one of the big four payment apps: Venmo, Cash App, Zelle and PayPal.

The broad adoption of mobile-payment apps speaks to their ability to offer customers a powerful combination of security, speed and convenience – all without restricting transactions to particular locations or transaction types. This technology has substantial implications both for individual customers and businesses across sectors. Businesses that want to accept payments via these platforms, or that are considering building their own payment apps for their brand, can benefit from understanding the processes and nuances behind mobile-payment apps. Below, we'll cover what you need to know to get started and look at how Stripe can help with powering payments on your app.

What's in this article?

  • Types of mobile-payment apps
  • How do mobile-payment apps work?
  • Impact of mobile-payment apps for businesses
  • How to create a mobile-payment app
  • How Stripe supports mobile-payment apps

Types of mobile-payment apps

Mobile-payment apps have transformed the way in which businesses and customers process transactions. To help understand how they work, we can sort them into three broad types:

  • Closed-loop apps
  • Open-loop apps
  • Peer-to-peer payment apps

Each category has its own set of features and implications for customers and businesses. Here's a quick look at them:

  • Closed-loop apps
    Individual retailers and sets of related businesses use closed-loop apps. Starbucks and Target are prime examples of these. As well as being payment apps, these types of apps often function as a loyalty programme as well, showing customers the points or rewards that they have accumulated for each transaction. In these apps, the payment process often bypasses external financial networks, minimising transaction fees for the retailer. It's a win-win for customers and businesses – customers appreciate the app's simplicity and loyalty rewards, while businesses collect valuable data through the app that can help them to optimise their operations.

  • Open-loop apps
    Unlike closed-loop apps, open-loop apps, such as Apple Pay, Google Pay and Samsung Pay, can be used at an extensive range of retailers. They often use near-field communication (NFC) to interact with point-of-sale (POS) systems in physical shops. These apps are digital wallets in which customers can store their debit, credit and loyalty cards. For retailers, accepting payments from these apps usually requires an updated POS system that is capable of communicating with the customer's mobile device. Adopting these systems can prompt businesses to re-evaluate existing payment workflows, which can lead to more advanced, customer-friendly setups.

  • Peer-to-peer payment apps
    Peer-to-peer payment apps, such as Venmo and Cash App, are designed to facilitate direct transactions between individuals. These apps are ideal for splitting bills at restaurants, transferring money to friends or even for conducting small-business transactions. Thanks to these apps, the process of sending money can be as easy as sending a text message. Peer-to-peer payment apps often leverage existing financial networks for fund transfers, and while transactions between customers within the same app are usually free, transferring money to a bank account may incur a fee.

Each category of mobile payment apps brings its own set of benefits and challenges:

  • Closed-loop apps
    Closed-loop apps allow companies to boost customer loyalty and gather valuable customer insights. However, they may require the business to make a substantial initial investment in technology and marketing.

  • Open-loop apps
    Open-loop apps require retailers to have the latest POS technology and may involve higher transaction fees, but they can improve the checkout experience for customers dramatically.

  • Peer-to-peer apps
    Peer-to-peer apps have democratised fund transfers, making a once-complicated process faster and more straightforward. However, they raise new challenges surrounding security and fraud prevention.

How do mobile-payment apps work?

Mobile-payment apps create a connection between the app and your existing financial accounts – whether that's a bank account, a debit card or a credit card. When you set up the app, you'll usually go through a verification process, which can involve small test transactions or authentication codes sent via short message service (SMS) or email to confirm that you are the owner of the financial account. Once you have verified this connection, the mobile app links to your bank account and can serve as a digital wallet.

This digital wallet acts as an electronic interface that communicates with your bank or credit card provider, using a set of secure electronic keys that represent your financial accounts. When you decide to make a purchase using the mobile app, a complex but swift series of actions takes place behind the scenes to complete the transaction.

Here's a breakdown of those steps:

  • Authentication: usually, the app will ask for confirmation of your identity before you make a purchase. This could consist of a fingerprint, a PIN or facial recognition.

  • Communication: once authentication has been completed, the app prepares to interact with the vendor's transaction system. This interaction can happen in several different ways:

    • Near-field communication (NFC): when you tap or hover your device near a compatible terminal, the exchange of encrypted information initiates the payment.
    • QR codes: scanning a machine-readable code with your phone's camera will initiate the payment process.
    • Online interface: for online purchases, you can select the app as a payment option and bypass the need to enter credit card details manually.
    • Transaction: after the initial communication between your device and the vendor's system, your financial institution receives a request for payment. This request includes various details, such as the amount to be paid and the vendor's identity.
  • Approval: your financial institution reviews the request and checks for sufficient funds, possible fraud or any other potential issues. If everything looks good, the financial institution sends back an approval.

  • Confirmation: both you and the vendor receive a confirmation, usually within seconds. The vendor's system is updated to show that the payment was received and you'll see the transaction appear in your mobile app's history.

  • Settlement: the vendor's bank communicates with your bank, and the agreed-upon amount is moved between accounts. This usually happens within a day or two, although the exact timeframe can vary.

  • Recordkeeping: as a final step, the app generates a digital receipt, which simplifies tracking and accounting for both you and the vendor.

Throughout this process, various layers of security protect the transaction. Encryption ensures that the data exchanged is unreadable to anyone who might intercept it, while multifactor authentication adds an extra layer of assurance that the only person who can initiate the transaction is the account owner. This operational architecture makes transactions convenient and safeguards them in ways that are often superior to traditional payment methods.

Impact of mobile-payment apps for businesses

The widespread use of mobile-payment apps has far-reaching implications that affect different aspects of commerce, individual behaviour and even regulatory policies. Here are some of the effects of mobile-payment apps:

  • Digital transformation: businesses that have relied solely on cash or card payments in the past are increasingly integrating mobile-payment solutions. This transition affects customer-facing roles as well as internal operations, such as accounting, data management and inventory control.

  • Shift in customer behaviour: the speed and convenience of mobile payments has changed customer expectations and behaviour. For example, it facilitates impulse buying, as the hassle of carrying cash or going through elaborate card-based processes is eliminated. The way in which people handle personal finance is also shifting, as mobile apps often include budgeting features and spending reports.

  • Data analytics: mobile-payment apps generate a wealth of data about customer behaviour. For businesses, this data is a valuable resource for tailored marketing, inventory forecasting and customer-relationship management. However, this also raises questions about data privacy and ownership.

  • Financial inclusion: in regions with limited banking infrastructure, mobile-payment apps provide an opportunity for financial inclusion. Individuals who previously had limited access to banking services can engage in electronic transactions, save money securely and even access financial products, such as loans and insurance.

  • Security concerns: while mobile-payment apps often have rigorous security measures, their growing prevalence makes them attractive targets for cybercriminals. This has led app developers and financial institutions to devise new and evolving strategies in cybersecurity and fraud prevention.

  • Regulatory challenges: the rise of mobile payments has caught the attention of regulatory bodies. Lawmakers are debating how to classify and regulate these services, protect consumer interests and ensure that there is fair competition in the market.

  • Evolution of retail: brick-and-mortar retail experiences are changing to accommodate mobile payments. Self-checkout systems, cashier-less shops and quick scan-and-go payment options are becoming more common, which has challenged traditional retail job duties and operational models.

  • Environmental impact: a reduction in the production and use of physical payment mediums, such as paper and coin currency, could have environmental benefits. However, the data centres that support mobile transactions also consume energy. The total result of these changes should be factored into any assessment of environmental impact.

  • Economic effects: the ease with which customers can make transactions could potentially stimulate spending and contribute to economic growth. Conversely, this could also discourage saving and increase overspending and debt.

  • Globalisation: as cross-border mobile-payment apps grow increasingly common, we're seeing a gradual move towards a more unified global payment system. This means that new opportunities – and challenges – for market entry and competition are on an international scale.

These interconnected implications create a complex network of effects that are shaping the future of commerce, financial services and customer behaviour. As mobile-payment technology continues to evolve, these considerations will also affect a wide range of stakeholders – from individual customers to global enterprises.

How to create a mobile-payment app

Creating a mobile-payment app, particularly a closed-loop type of app that is tailored to a specific business or a group of associated businesses, involves a series of carefully planned steps. Here's a road map for creating a closed-loop mobile-payment app for a business:

  • Project scope and objectives
    First, identify the purpose of the app and its target audience. Will it only be used as a payment tool? Or will it also integrate loyalty programmes, offers and promotions? Understanding the scope will help to allocate resources accordingly.

  • Feasibility study
    Assess the financial and technical aspects. This involves estimating the development cost and calculating the expected return on investment. A feasibility study should also cover regulatory requirements and potential security issues.

  • Development team selection
    Recruit a team of skilled app developers, UI/UX designers and project managers. For complex projects, a team with experience in fintech is an asset.

  • System architecture
    Sketch out the architecture and design structure for the app. Decide on the database models and how data will flow. Also consider how the app will integrate with existing systems, such as point-of-sale systems and inventory management.

  • Payment methods
    Decide what payment types the app will accept. Most closed-loop apps opt for in-app wallets that are funded through credit and debit cards, bank accounts or even cash payments at physical locations.

  • Security protocols
    Incorporate multi-layer security measures, such as two-factor authentication and encryption, to protect financial data and customer information.

  • User interface and experience
    The design should focus on ease of use and provide a straightforward experience from login to payment completion. Intuitive design elements will contribute to customer satisfaction and app adoption.

  • Development phase
    The coding starts here, following the frameworks and architecture laid out earlier. Such apps are usually developed in sprints, with each sprint resulting in a functional module that can be tested independently.

  • Quality assurance
    Each module should undergo thorough testing for usability, security and performance. Identify and fix bugs and vulnerabilities early on in the process.

  • Pilot testing
    Before a full-scale roll-out, test the app in a real-world setting but on a smaller scale. Feedback from this phase can provide valuable insights for improvements.

  • Launching and monitoring
    Once the app is ready and has been optimised based on pilot testing, plan for an official launch. After the launch, monitor its performance and customer feedback continuously to make any adjustments, as needed.

  • Updates and maintenance
    Regular updates fix bugs and provide new features, keeping the app fresh and engaging for customers. Careful, ongoing maintenance will protect the app's stability and security.

Creating a mobile-payment app demands technical prowess and also a keen knowledge of customer behaviour, legal frameworks and data security. Businesses need to adhere to financial regulations, guarantee data privacy and provide strong customer support for the app to reach its full potential.

How Stripe supports mobile-payment apps

In addition to accepting digital-wallet and payment apps with its suite of payment-processing solutions, Stripe also provides a scalable, secure and developer-friendly avenue for businesses to build their own custom payment apps. Whether a business is starting from scratch or adding to an existing payment system, Stripe's solutions can simplify the process.

Here's a breakdown of how a business might integrate Stripe into a custom payment app:

  • Research and planning: prioritise features and determine how Stripe will integrate with your app's existing or planned architecture.

  • Developer accounts: create a Stripe account and generate API keys for testing and live environments.

  • Back-end integration: use Stripe's server-side libraries to handle payment processing – including charge creation and subscription management – in your back-end code.

  • Front-end development: use Stripe's client-side libraries to build your payment forms, manage customer input and handle sensitive information securely.

  • Testing: test the payment process thoroughly in a safe, sandboxed environment (provided by Stripe). Validate that all transaction types, error handling and edge cases are covered.

  • Deployment: once you've tested the app, deploy the app to a live environment and switch from Stripe's test API keys to your live API keys.

  • Ongoing management: monitor transactions, manage refunds and handle customer disputes through Stripe's Dashboard or programmatically via the API.

  • Updates and improvements: as your app grows, it is easy to add more features or modify existing ones using Stripe's flexible APIs.

Learn more about incorporating Stripe to power your payment app.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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