Mobile Payments Emerging as Major Alternative to Credit Card Swipes

Thanks to rapid advances in technology and continued innovation in the financial services industry, consumers have a variety of ways to pay for purchases at retailers. Mobile payments, or the ability to make online and point-of-sale purchases from a smartphone, have become more popular in recent years given the ease and convenience they provide above and beyond what cash, credit, and debit cards can offer. According to Pew Charitable Trusts, nearly 46% of U.S. consumers have used a smartphone to complete a purchase in the last two years, equating to an estimated 114 million adults.

While the growth of the mobile payments market continues to show strong signs of adoption across multiple consumer groups, widespread use of mobile to complete transactions is still a far cry from the norm.

Recent Research Shows Slow Growth

Data compiled by eMarketer this year highlights the increased use of mobile payments within the United States, citing more than 38.4 million Americans over the age of 14 have used a smartphone to pay for a product or service at least once in the previous six months.

However, that figure represents only 19% of all consumers, and the total is expected to reach only 33% by the year 2020. New technology typically takes some time to break through as a viable alternative to conventional methods, but mobile payments offer a unique insight into the preferences of consumers and their buying habits.

First, it’s important to understand that mobile payments come in two broad forms: proximity payments and peer-to-peer payments. Proximity payments are defined as transactions that take place in-store without using a physical form of money. Instead of grabbing plastic or cash, the buyer simply holds his or her phone near a mobile payment reader that then generates a unique code to pay for the amount entered by the retailer.

However, consumers must first download an application that acts as a digital wallet, input their card or bank account information, and establish a PIN or other security function to ensure the data remains safe for use. Proximity payments are not as widely adopted as peer-to-peer payments which allow individuals to transfer money from a smartphone or tablet to another individual, a bank, or a retailer.

Although the use of mobile payments has grown in recent years, proximity payments present a challenge to individual consumers which ultimately stalls widespread use. Per the eMarketer data, many individuals are still unsure if using mobile payment through a digital wallet or a merchant’s app is as safe as a credit card, especially with the push toward EMV chip-enabled cards as the security standard.

Similarly, widespread use has not yet saturated the merchant side of business, meaning mobile payments are only available at a small number of stores to date. Individuals also have yet to understand or accept the value of mobile payments as a convenient method to complete transactions, since very few mobile payment systems offer additional incentives for use. Each of these factors plays a part in the slow growth of mobile proximity payments around the country.

Oddly enough, the use of mobile payments for peer-to-peer transfers has grown significantly in the last five years. In 2016, it is estimated that nearly 45.8 million adults within the United States will use a peer-to-peer app at least once per month, with total transactions totally $59.42 by the end of the year. By 2018, the number of users is expected to increase to one-third of the population, exceeding $92 billion in total transactions at that time. Comparatively, mobile proximity payments are slated to increase to $27.67 billion by the end of 2016 and $62.49 by the end of 2017.

Who’s Using Mobile Payments?

It should come as no surprise that the majority of mobile payment adopters are from younger generations. As digital natives, millennials are far more apt to utilize their smartphones to pay for transactions both in person and online. Nearly 11.9 million consumers aged 25 to 34 make up mobile payment users in the U.S., comprising 31.1% of all users. By 2020, the number of millennials using proximity payments will total 21 million, with other generations adding to the mix.

The benefits of mobile payments are plenty, including the fact that carrying a bulky wallet or purse is no longer necessary as a way of life. Instead, consumers can simply have their phone handy when they want to make a purchase.

Additionally, the increasingly popular trend of wearable technology, like a smartwatch, can be used for mobile payment transactions as well, creating that much more convenience for those who are on the go. Millennial consumers also like the fact that the device they are already deeply attached to has the details they need to make purchases and transfers a breeze.

Based on consumer preference data, it seems mobile payments are the way of the future. However, some work needs to be done in order for the widespread adoption of mobile payments to take place. First, more merchants need to make mobile proximity payments available at checkout.

As it stands now, only a select few retailers, restaurants, and other brick-and-mortar stores offer the service to customers. In addition to a great number of stores adopting the service as a payment alternative, consumers need to understand how mobile payments work and know they are a safe way to conduct financial business. In time, mobile payments stand to be the go-to form of spending money among all consumer groups.