Mobile payments could replace the physical wallet in the near future.

Are Mobile Payments About To Replace Your Wallet?

As smart devices become increasingly important parts of our lives, it seems logical to use them for mobile payments.

Mobile payments have been predicted as the next big thing for years (as we pointed out here), and while usage has grown rapidly in Japan and in developing nations, the U.S. has yet to see widespread adoption.

Ideally, the technology could completely replace wallets, allowing consumers to transfer money with just a wave of their device.

Are mobile payments already a reality?

Using your device to buy an app or a song is fairly common, according to (pdf) a 2013 McKinsey survey, and with Apple Pay now supporting nine out of 10 bank cards used in the U.S. mobile payments are too.

It’s also becoming more normal to use devices for person-to-person transactions. Venmo, a peer-to-peer payments app owned by eBay, reported a 62% increase in transactions in the first quarter of 2014.

But while consumers seem to be quickly warming up to the idea of transferring money through their devices, the holy grail of the mobile payments – completely replacing the physical wallet – is still far away:

Only 8% of respondents to the McKinsey Survey had used devices for mobile payments in a store at the point of sale.

Part of this is the technology being used. Apps like Venmo simply send their data across the normal cellular network, while true point-of-sale mobile payments are usually envisioned to work by merely waving device in front of an eligible sensor.

The current technology being used includes (tap titles to expand):

Near-field communications (NFC) and Apple Pay

Near-field communications tech beams (pdf) encrypted data between devices held at a distance of 2-4 inches, providing a simple way for consumers to make payments.

Despite the ease of use, adaption has fallen behind the previously rosy estimates of analysts, in part because merchants have been hesitant to invest in NFC platforms.

That may be about to change, however: Apple has announced that the latest iPhone models will use Apple Pay, which allows users to pay via NFC. Extra security is provided by the fingerprint sensor the user has to activate to authorize the payment.

QR codes

Essentially a barcode in a square, QR codes have actually been around since 1994. With the advent of cell phone cameras capable of reading the code, however, it became a way to transmit information, like the price of a product, to mobile devices.

Despite its somewhat primitive usage method (take out phone, open app, take picture of code, send) it’s become relatively popular – the Starbucks QR app alone generated more than $1 billion in sales in 2013, according to Yankee Group.

iBeacon and Bluetooth

Similar to NFC, this technology allows users to do contact-less in-store transactions with a tap on their phones. It also allows stores to locate users’ devices to contextualize product and service information.

However, iBeacon uses Bluetooth Low Energy (BLE, a low-power version of the popular wireless tech), which gives it a few advantages: it’s usable at any range within the store, and allows the store to send personalized messages to the consumer.

Because it uses Bluetooth, it can also communicate with most mobile devices.

Mobile payments in the future

The technology hasn’t caught on in the U.S. yet, partially because it has no clear value proposition for users, who don’t see it as much more convenient than cash or credit.

But in Japan, being able to pay for mass transit with a simple tap of your smartphone simply made it a more convenient alternative to regular payments, according to U.S. Federal Reserve research.

Meanwhile, in developing African nations it has gained traction because it’s the most convenient non-cash payment alternative.

Though the growth of mobile payments in the US hasn’t exactly hit its forecast billion-dollar targets, more frequent usage of mobile payments seems inevitable.

In the McKinsey survey (pdf), almost two-thirds of respondents expressed an interest in using their mobile devices to pay for in-store purchases.

Meanwhile, tech companies will work on new ways to reduce the entry barrier for users. Samsung, for instance, recently introduced fingerprint password verification for the PayPal app, making it easier to use for millions of users.

And if you’re feeling adventurous, there’s plenty of Bitcoin payment apps.

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Ole Skaar