8 Electronic and mobile payments
E-payments
LEARNING GOALS
Understand the importance and functionality of electronic payments in hospitality.
OBJECTIVES
- Understand the role and advantages of e-payments in hospitality.
- Distinguish among the factors that cause new developments in e-payments.
- Know the process of e-payments.
- Know how mobile payments distinguish from the rest of e-payments.
ROLE AND ADVANTAGES OF ELECTRONIC PAYMENTS
One of the most important aspects of any commercial activity is the ability to utilize electronic payments (thereafter referred to as e-payments). This is especially important in hospitality because hospitality is characterized by a large number of transactions. Many transactions are of relatively low value and reflect services that are part of broader hospitality experiences and require users to pay frequently. Thus, having the ability to pay electronically greatly enhances the effectiveness of any value chain in hospitality, and produces value for all participants to commerce.
Legacy advantages
E-payments have a series of legacy advantages that make them popular among consumers relative to other, more traditional types of payment. First, electronic transactions are very fast, with some types of transactions occurring relatively instantly. This is one of the areas of constant development, as consumers always appreciate the optimization transaction and shortening of the time that it takes to complete a transaction.
Another important advantage is traceability. Electronic transactions can trace various aspects of transactions (for example, time, value, method of payment used, etc.). This is important for managerial purposes for businesses. It is also important for consumers as the have accurate information to manage their expenses and future spending decisions.
E-payments can also be characterized by ubiquity. Ubiquity refers to availability of electronic transactions everywhere the consumer wishes to purchase. While the technology is continuously evolving and offers new places for consumers to use e-payments, the rate of adoption of e-payments is still not 100% in all geographical areas.
Finally, it is important to recognize that some of the new platforms for e- and mobile-payments are very innovative. New e-payment market entrants take advantage of a variety of novel technologies, consumer behaviors, and social norms to design platforms that provide innovative and convenient ways for consumers to pay.
NEW FACTORS THAT CONTRIBUTE TO DEVELOPMENT OF E-PAYMENTS
E-payments are continuously evolving. Their evolution is influenced by a series of contemporary factors that reflect the current technological, managerial, and societal advancements. Moreover, such factors have a specific influence on hospitality.
Multiple types of e-payments have evolved tremendously in recent years. While card payments have been popular in the past, new methods of payment that take advantage of the better Internet infrastructure, more secure communication protocols, well-developed apps that consumers have access to, and an overall positive consumer attitude toward e-payments have increased the popularity of these kinds of payments. The payment industry is currently very broad, with multiple directions for development. For example, there are continuous advancements in areas such as contactless payments, near field communications (NFC), QR code payments, digital wallets, and SMS payments.
Distancing from cash
One important factor that contributes to the development of e-payments is consumers’ tendencies to distance from cash, and to a certain extent, from traditional payment cards (plastic cards). For a long time, cash was one of the most popular methods of payment because it was popular to carry around. Then cards became popular, because they were designed to fit in a wallet and had other advantages (for example, building credit history, ability to accrue points or miles, etc.) However, new IT development allowed the creation of payment protocols that allow the consumers to engage in consumption without having to use cash or to carry a wallet with a card. Such situations enhance the convenience of e-payments and help create mass adoption behaviors.
Enhanced security
Security has always been a critical aspect of payments. E-payments need to be especially secure, as the use of computer networks expands the scope of the data pertaining to e-payment transactions. For example, payment data that travels from a POS terminal at the table in a restaurant to the hardwired terminal inside the restaurant needs to be encrypted. Not encrypting the data during this short travel could eventually risk being intercepted by unauthorized people.
To limit the risk of fraud, theft, or other unauthorized activity, e-payments typically have preset limits for transactions. For example, Venmo uses a $5,000 limit per week upon identity verification, while Zelle has limits determined by a user’s bank (Muchmore & Zamora, 2022).
E-payment security should comply with the latest security standards. Security standards are always evolving and are quickly deployed in applications to offer users the security that they need. Security technologies use on tokens, which representing encrypted surrogates of credit card numbers. The regulations are different from e-payment with cards versus person-to-person payments. Generally, users have zero liability for fraud when using card payments, but have full liability when they use person-to-person payment services (Muchmore & Zamora, 2022).
Low-value transactions and micropayments
Another factor that contributes to the development of e-payments is that hospitality consumers may engage in low-value transactions multiple times throughout a consumption episode, and especially during a stay at a destination. The high frequency of transactions makes it inconvenient for consumers to carry cash or plastic cards. Instead, consumers can rely on features that are available on their mobile devices, which consumers carry with them anyway. In response to consumers being able to engage in e-payments, multiple vendors have developed products or services that require low-value payments, which are less risky if conducted electronically, but at the same time very convenient for consumers.
Acceptance by the major existing players
A critical factor in the development of e- and mobile payments is that some of the new entrants in the payment market have been accepted by the established participants to the financial system. For example, new payment platforms such as Zelle and Venmo are being integrated with the major banks in the U.S. This level of integration makes it easier for consumers to trust these new businesses, which ultimately influences their adoption.
Strategic aspects
There are strategic choices regarding businesses’ willingness to accept e-payments. In other words, businesses need to decide what kind of methods of payment they accept, which should be in line with their overall strategies. This is important because each method of payment that is accepted by a business comes with a cost, typically in the form of fees. Therefore, businesses need to weigh the advantages and disadvantages of the methods of payment that they accept, by mediating two opposing aspects of doing business: (1) the cost of accepting certain methods of payment, and (2) the popularity of certain methods of payment among the target consumers of a particular business and the amount of revenue generated by consumers who prefer to use a particular method of payment.
Responding to market forces
One important aspect of e-payments is the opportunity that it gives the consumers to respond immediately to the changes in market dynamics. For example, some of the current pricing models for many products and services, including hospitality, rely on algorithms that cause the price to vary depending on the market conditions, even during short periods of time. This creates opportunities for consumers to purchase at favorable prices only during certain time intervals. Having the ability to complete a transaction and pay at a time when the price of a product is favorable for the consumer greatly increases the value of that particular transaction for the consumer. For example, consumers may find the room rate for a hotel to be relatively low at a certain time, and the ability to pay immediately for that room before the rate has a chance to change could greatly increase the value of the transaction.
PROCESS OF E-PAYMENTS
E-payments are an inherent part of transactions and are conducted fully electronically in e-commerce. While there are currently multiple types of payment systems that hospitality businesses can choose from, their process is relatively similar. There are multiple participants to electronic payments, including cardholders, merchants, issuers, acquirers, payment processors and payment getaways.
Most transactions require the utilization of a method a payment: a payment card (or account). A cardholder is the person who owns a payment card account (e.g., credit or debit card account), which is issued by a financial organization (e.g., bank). For transaction purposes, the cardholder’s bank is called an issuer (or issuing bank) like Chase or Bank of America. Card schemes are companies like Visa or MasterCard who manage credit cards while approving/denying payments. In transaction terms, the cardholder is the customer who engages in the online transaction (n.a., 2022). In order for the e-payments to work, the merchant (the business organization that sells the product) needs to establish an account with a financial institution. The financial institution that a merchant uses is called an acquirer (or acquiring bank), and one of its primary roles is to validate the cardholder’s account. The transaction involves the use of a payment processor, which is an organization that manages cardholders’ transactions with merchants. Finally, the payment getaway is the mechanism (including software, hardware, processes) that connects cardholders to merchants.
Generally, e-payments work as follows: A cardholder initiates a purchase online (click on “purchase” or “book now”) on a merchant’s website. The payment getaway checks with the issuing bank and makes sure that there are enough funds to cover the transaction. Then the payment getaway notifies the card schemes (via encrypted communication) that the transaction needs to be processed. Once the card schemes approve the transaction, the payment getaway informs the merchant website that the transaction can be completed. Then the payment getaway informs the acquirer that it should transfer the money from the cardholder’s account to the merchant (Miranda & Watts, 2022).
MOBILE PAYMENTS
Mobile payments are a subgroup of e-payments that can be completed using standalone transaction protocols that use mobile devices and payment features designed to support transactions, such as mobile wallets. They have developed in response to the increasing computing power of mobile/wearable devices to offer convenience to consumers that would like to pay without having to carry a wallet. Mobile payments are increasing in popularity among hospitality businesses, especially in contexts that are characterized by mobility. For example, mobile payments work great with hospitality vendors such as food trucks.
Because of well-established characteristics such as speed, convenience, and security, mobile payments are predicted to increase to $6 trillion by 2024 (Square, 2017) and to $15.5 trillion by 2027 (Globe Newswire, 2022). Data from Statista (2022) illustrate that some of the most popular mobile payment platforms in 2022 included PayPal, Apple Pay, Cash App, Google Pay, and Chase Pay.
There are multiple types of mobile payments. They can be classified based on the location of the consumer relative to the business during a transaction.
POS payments. They require the physical presence of the consumer at the POS terminal of the merchant to complete a transaction.
Near Field Communication (NFC) payments. NFC technology has been available for a while to smartphones. NFC allows devices equipped with Bluetooth technology to communicate and exchange encrypted information when they are in close proximity of each other. NFC payments represent a large percentage of the total mobile payments on the market. Some of their advantages include ease of use, technology being integrated within smartphones or wearable devices, and highly secure transactions.
To use NFC payments, users should register their methods of payment (card accounts) with their payment app on their mobile devices. Once that is set up, the user can pay using NFC payments at any merchant that accepts NFC payments. It is important to know that not all merchants accept NFC payments. To use NFC payments, the user must place their NFC enabled device in the proximity of the POS reader of the merchant (1-2 inches away), and typically follow the prompts issued by the POS system. Because the information exchanged between the users’ NFC enabled device and the POS terminal is encrypted, transactions are highly secure. In addition, relative to magnetic stripe swipe or chip card transactions, NFC payments are faster (Square, 2017).
Because NFC represent one of the most popular methods of mobile payments, NFC payments have been dedicated a lot of attention by academic research community. Generally, it was found that consumers follow the same adoption patterns as they would with other technologies. For example, research revealed that the most important factor influencing consumers’ adoption to adopt NFC payments in hotels is performance expectancy – in other words the ability of mobile payments to allow consumers to complete transactions in hotels. However, other important factors emerged, such as hedonic motivation, habits, and social influences. Very importantly, the sense of security provided by the NFC payment environment was also found to be a significant factor influencing consumers’ intentions to adopt such systems (Morosan & DeFranco, 2016).
A notable disadvantage of NFC payments is that they require businesses to have POS terminals that are NFC-enabled. Only those terminals can use consumers’ NFC-enabled devices to complete payments. For example, POS systems like Square or Clover accept NFC payments from Apple or Google devices.
Magnetic Secure Transmission. In MST, a user’s smartphone or similar device sends a magnetic signal to a POS terminal. This emulates the signal sent by a magnetic stripe swipe of a traditional credit card. This type of payment is very secure, as it based on encrypted tokens (Sorensen, 2018). Another notable advantage of MST is that it is generally accepted everywhere there is a payment terminal with a card reader, although various countries differ in terms of MST support (Samsung, 2022).
Like NFC, MST does not require the user’s device to touch the POS terminal. Therefore, both NFC and MST are referred to as contactless or proximity payments. While NFC and MST are relatively similar, MST is accepted by a larger number of POS terminal types, including those that are designed to accept NFC payments. MST is a proprietary technology used by Samsung Pay and has a high rate of adoption among Samsung device users (Clover, 2022).
Remote payments. Such payments do not require the consumer’s device to be in the physical proximity of the merchant’ POS system to complete a transaction.
QR (Quick Response) Code Payments. While QR codes have been available for many years to hospitality businesses, their popularity increased during the COVID-19 pandemic due to their ability to facilitate contactless transactions. Basically, QR codes link the user of a device equipped with a camera to a location, which can be to a web page, payment portal, e-mail address, etc.
For payment purposes, QR codes are linked to payment portals. The user needs to scan a QR code and have direct access to the payment portal to complete the payment. The payment could be initiated from any method of payment that the consumer has set up on their device. Despite the popularity of this payment method in Asia (Statista, 2022), its popularity in the U.S. is not so high. Yet, in places where QR codes are popular, their use in hospitality, especially in foodservice is high.
In terms of security, QR code payment could be very secure. They are secure because the payment process does not require the consumer to authenticate again on the merchant’s device. Authentication takes place on the consumers device, which is secure.
Payment links and SMS payments: To secure transactions, merchants may opt to send consumers direct links for payment. This can be done directly from the POS terminals. The POS system creates a unique link for the consumer to pay, which they can access using their own mobile devices. The transaction is secure because there is no need to authenticate the method of payment by the merchant. The transaction is processed as any other transaction on the Internet. The only interaction between the merchant and the consumer is that the merchant sends link to the consumer and the consumer follows that link and complete the payment on their own mobile device. Several modern POS systems accept this kind of technology, including Square (Square, 2022).
In addition, merchants can opt to send consumers direct payment links through SMS text messages. Consumers may accept to pay for the products, but instead of paying the business directly, the cost of the products is added to their mobile carrier bill. The customers pay the mobile carrier at the time of their monthly invoice.
Mobile wallets (or digital wallets): Mobile wallets represent software applications that are designed to securely store payment method data and facilitate payments (Square, 2017). The use of mobile wallets is straightforward, requiring only the input of payment method information and a secure authentication method. For this reason, mobile wallets are very convenient for consumers and therefore enjoy a higher rate of adoption. Like other modern e-payments, mobile wallets benefit from encryption. This means that the data stored on these applications is highly secure, which increases the security of transactions conducted through them.
The use of mobile wallets has become more popular in hospitality and travel. There are quite a lot of applications of mobile wallets in facilitating travel tasks, especially authentication. For example, mobile wallets are used in conjunction with airline apps for boarding pass management, and to manage authentication at airports. Specifically, a user traveling by air can receive an electronic boarding pass on their airline mobile app and transfer the boarding pass to the mobile wallet on their smartphone. The information on the boarding pass can be saved securely on the mobile wallet and retrieved whenever the consumer uses that information during the various stages of their travel.
The popularity of the concept of mobile wallet is continuously increasing. While the market is dominated by Apple Pay (92% market share in 2020), research indicates that these types of payments are continuing to be grow in popularity, especially among younger consumers (Statista, 2022).
INNOVATION IN E-PAYMENTS
Given the economic growth that is expected after the COVID-19 pandemic in hospitality and travel, it is obvious that e-payments, especially mobile payments will be increasingly popular. For example, researchers forecasts that the size of the market will exceed $500 billion for proximity payments in 2025, with the number of users expected to surpass 125 million by 2025 (Statista, 2022).
The ability to monetize on consumers’ utilization of Internet-connected devices is extremely important and it is not possible without a seamless, secure, fast, and convenient mobile payment interface. Large and resourceful companies such as PayPal, Apple, and Amazon have indicated their intent to invest significantly in the development of e-payments. In addition, the successful integration between social media platforms and mobile payments in China (Alipay and WeChat Pay) (Zavialova, 2021) has opened the door for more integration between social media and mobile commerce.
There are multiple innovations in e-payments. All these innovations are designed to provide consumers with frictionless services, and an ability to customize their consumption and increase the value that they derive from it. For example, consumers can split payments, earn loyalty points for using specific methods of payment, or use such payments to pre-order products (Muchmore & Zamora, 2022).
Default integration within the mobile devices
One of the most important questions of any new technology is related to potential adoption. Specifically, if a company develops a new app, will consumers download and use that particular app? To diminish the impact of this problem, major mobile technology manufacturers have designed payment systems that are by default integrated within the hardware and the operating systems of the devices that they produce. For example, Apple devices include digital wallets such as Apple Pay that are built into the operating systems. Apple provides it by default to the users of iOS operating systems. This way, the users of such devices do not need to download additional apps or learn how to use additional systems. In addition, big mobile ecosystems could also engage in vertical strategies, by issuing credit lines to users. For example, Apple offers an Apple credit card, which provides an extra layer of convenience to consumers who wish to have an integrated solution that does not involve other parties than Apple.
Integration with wearable technology
E-payments can be integrated with a multitude of mobile devices. At the same time, wearable devices, such as smartwatches and fitness trackers, are increasingly popular. The development in these devices and their ability to work without necessarily being connected to other devices (for example a smartphone) have created many opportunities for the utilization of wearable devices for payment purposes. While wearable devices have been more popular in countries like India and China (Statista, 2022), the development of the infrastructure in the U.S. is likely to facilitate a higher adoption of these devices in the future.
Person-to-person (or peer-to-peer) transactions
Generally, most transactions in hospitality are business-to-consumer transactions. However, throughout a consumption episode, and especially during a visit to the destination, the consumers may be in situations where they want to purchase products from individual vendors instead of established businesses. In such situations, engaging in transactions with local vendors is difficult in the absence of clear, straightforward, and secure methods of technology-based methods of payment. Therefore, one important direction for the development of e-payments is person-to-person (P2P or peer-to-peer) transactions, typically aided by mobile devices. Such approaches to payments allow virtually all consumers to accept payments for products or services that they provide, and increase the flexibility of transactions, which brings value to all parties engaged in transactions.
The size of the P2P sector in increasing. In the U.S., in 2022, a total of 42% of users have used direct money transfer services from PayPal (Statista, 2022). While PayPal dominated the market, other important participants became increasingly popular, such as Venmo, Zelle, Apple Pay, and Google Pay. The use of these services is likely to accelerate the development of small businesses and sole entrepreneurship in hospitality, as small vendors can now accept payments in situations where such payments were difficult to set up. For example, farmers market vendors, streetfood vendors, or street artists can all benefit from the popularity of these services and can add value to hospitality experiences.
Contactless purchasing and payments
An innovative concept is contactless purchasing and payment. Pioneered by Amazon at their brick-and-mortar retail stores in Seattle, this concept has become increasingly popular outside of the grocery store or convenience store industry. For example, major sporting venues such as the Minute Maid Park in Houston have retail outlets where consumers can buy products without necessarily having to check out and pay for their products in the classical sense. All consumers have to do is to enroll with the service by creating a profile that includes a method of payment (typically a credit card account). Once enrolled, consumers can just walk into the store, pick up the items that they would like to buy, and then walk out. The store has a system of cameras and sensor technologies that automatically add the purchased products to the consumer’s account, facilitating a frictionless purchasing and transaction experience.
Integration into blockchain
A very important development in e-payments is integration within blockchain technology. This is important for the hospitality and travel industries, as blockchain facilitates peer-to-peer commerce without intermediation. If this technology is mass adopted within the hospitality industry, it has the potential to disrupt entire segments, such as the distribution of hotel, car rental, or airline ticket products. Most importantly, blockchain technology allows for direct transactions between parties, which can have several important benefits for the value being generated from transactions. Such benefits gravitate around dis-intermediation. Generally, there is no need for intermediaries in such transactions, hence the increase value.
As payment technology is continuously developing, it will continue to offer consumers new ways to interact with businesses and with other consumers and provide opportunities to engage in transactions that are characterized by security, convenience, and ubiquity. The industry is developing rapidly, and only time will tell which methods of payment will remain popular over time. Regardless of the technologies and business models in place in the future, it is certain that these technology applications will be extremely popular for both hospitality consumers and businesses for many years to come.
References
Clover (2022). How do NFC and MST differ? What do I need to know? Retail – Payments & Processing, Retrieved August 17, 2022 from https://blog.clover.com/how-do-nfc-and-mst-differ-what-do-i-need-to-know/.
Globe Newswire (2022). Global Mobile Payment Market (2022 to 2027) – Featuring Alibaba, Apple and Google Among Others. Research and Markets, Retrieved on August 17, 2022 from https://www.globenewswire.com/en/news-release/2022/04/27/2430272/28124/en/Global-Mobile-Payment-Market-2022-to-2027-Featuring-Alibaba-Apple-and-Google-Among-Others.html
Miranda, D., & Watts, R. (2022). What’s A Payment Gateway And How Does It Work? Forbes Advisor. Retrieved from https://www.forbes.com/advisor/business/what-is-a-payment-gateway/
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Statista (2022). Proximity mobile payment transaction value in the United States in 2019 and 2020, with forecasts from 2021 to 2025 (in billion dollars). Mobile payments in the United States, Retrieved on August 17, 2022 from https://www.statista.com/statistics/244475/proximity-mobile-payment-transaction-value-in-the-united-states/
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