Paying by Phone – Conveniences and Cautions

It seems like every time I get to the register of a chain store, they offer me a new way to pay with my phone. But these new modes of paying have serious pros and cons – and there may be compelling reasons not to dive into mobile payments just yet, despite their growth.

Mobile Payments Predicted To Go Up 44% in 2013
Research firm Gartner says over $235 million in payments will be made with mobile devices this year. In retail outlets, those pay-by-phone options break down into three main categories: brand specific apps (like the Starbucks app), payment apps (like PayPal or Square Wallet), and NFC – Near Field Communications (special phones linked to a Google Wallet or Isis account).

NFC – Near Field Communication
Let’s start with NFC since it’s gotten all the hot press. This technology is built into certain devices, predominantly Android and Blackberry phones. You link the phone either to a Google Wallet account (tied to your bank or credit card), to an NFC credit card account (like Mastercard PayPass), or to an Isis account (tied to your mobile phone billing), then tap a terminal at the checkout to pay. But these tap-and-go contact-less payments will account for only 2% of all mobile payments in 2013 according to Gartner. Stores with NFC terminals are limited, and only a handful of phones have NFC technology built in (and the iPhone is NOT one of those).

Probably the biggest issue is that NFC is a solution in search of a problem: how difficult is it to swipe a credit card? More explicitly, what does NFC payment do for the consumer’s convenience that swiping a credit card can’t? If NFC terminals were everywhere, maybe it would facilitate leaving home without cash or a credit card, but until then, the technology faces significant inertia, and I wouldn’t buy one phone over another just because it has NFC baked in.

Brand-Specific Apps
Many chains have their own apps that let you input your credit card info and “load” money on the app for in-store payments. By combining the payment functionality with apps that track purchases and reward loyalty, “regulars” get a significant convenience and can even frequent their favorite joint without a wallet. Do you go for a run every morning and grab a coffee when you finish? Hello Starbucks app on your phone!

I particularly like the order ahead and pay by mobile functionality that chains like California Pizza Kitchen App have brought to market. This makes the take-out pizza experience incredibly easy. Order and pay by app, walk in, tell them your name, get your food and walk out in under three minutes. The app even remembers your previous orders so you can replicate them with one click – genius. Jamba Juice is said to be testing pre-order and pre-pay for their app, and when this is a feature is replicated by more chains, it will bring many loyal customers into the mobile payment world.

Wallet Apps
Paypal and Square wallet are the two biggest players in app-based mobile payments. Stores that offer payment by app either let you key in your mobile phone number and a pin or use location data captured by your phone, in which case the phone will generate a QR code to be scanned at the register. Again, stores need special equipment and merchant accounts. Plus, the major benefits of using Paypal or Square are still limited to people who don’t have a bank account or credit cards and prefer a mobile option.

Money Transfers
While in-store mobile purchases are growing, 71% of all mobile payments are money transfers – and most often, person-to-person transfers. The clear winner here is Paypal, which lets you email or even text money to anyone’s phone or email address. The recipient needs to have a Paypal account (or sign up for one) but so long as it’s not a business payment, just between individuals, there are no fees.

These types of transfers are ideal for repaying a friend, or sending money to a family member who needs the cash immediately. Some services don’t even need a bank account to work – good news for the 8% of US households that don’t have bank accounts. Customers can use cash to purchase a PayPal card or Money Pak card in retail outlets, and then use the pin numbers on those cards to deposit money into the Paypal mobile account (but beware: prepaid card purchases can have fees associated).

Text Money From your Online Banking App
Banks like Wells Fargo and Chase now allow you to send money to individuals directly from their phone app. There’s also a brand new mobile phone-based bank called GoBank that, among many other innovative features, lets you send money directly to a friend from your GoBank account.

Send Money via Gmail
Google is also entering the mobile transfer space; they are trying out a product that lets you send money through Gmail, almost like an attachment. Google said in a statement this is only available to users over 18. It’s slowly being rolled out to users in the U.S., and we assume later, internationally.

Person-to-Person Credit Card Payments
PayPal and Square both offer credit card readers that plug into a smart phone and allow anyone to swipe a credit card and accept payment. If you have an account, the readers are free. They make great sense for small business owners, fundraising events, or even collecting money around the office for a baby gift. But the big gotcha here is the roughly 3% that the services charge you to accept money via credit card.

The weakest link in the mobile payment security chain is not the wireless transmission of your data via NFC or the scanning of QR codes from a store’s app. The technology is not the problem; it’s what that technology enables: more corporations may have your credit card and billing info on their servers (hello hacking target). And an even bigger vulnerability: if your phone is stolen, thieves have access to a treasure trove of accounts and payment methods. If you plan to pay with your phone, you’d better have security software enabled, like Lookout for Android or Find My iPhone – both of which allow you to erase your phone remotely as soon as it’s stolen.

[Related: How To Lock Down Your Cell Phone If It’s Stolen]

Bottom Line: Mobile payments make sense if you don’t have a bank account or credit card, if you frequent a chain that offers mobile payments and reward features, or if you want to transfer money to friends and family in a secure and convenient way. But be sure you know the fees associated with these payments and can remotely erase your phone if it’s stolen.