Components: Mobile Payments in Code

 

Barcodes for payments by smart phone have a proven track record and a diverse group of supporters, but many in the payments industry regard them as merely a way station on the road NFC-based mobile payments. Here’s where they stand today.

By Jim Daly

Sure, the techies and lots of people who work for payment processors and in the back offices of banks all know about mobile payments based on near-field communication, or NFC.

 

But despite a huge amount of press, few North American consumers have yet heard of the technology for transmitting data by radio wave between an NFC chip in a card or mobile phone and a terminal, and even fewer have ever completed an NFC transaction.

 

In contrast, many thousands of consumers are already making purchases through mobile devices equipped with barcode technology. Just ask coffee giant Starbucks Corp., whose barcode-based mobile app generated 26 million transactions in its first nine months (“Starbucks Gives Mobile Payments a Jolt,” January).

 

Fidelity National Information Services Inc. (FIS), one of the nation’s largest payment processors, is joining Starbucks in bellying up to the barcode bar.

 

Jacksonville, Fla.-based FIS in January announced that two financial-institution processing clients were testing its new mobile application developed by Paydiant Inc. And several tech companies are peddling their own variants of barcode payment systems, with varying degrees of success.

 

Infected Code

 

Barcodes come in a variety of flavors. The granddaddy of the family is the familiar, one-dimensional Universal Product Code (UPC), the 12-digit, black-and-white lined rectangle on packaging that functions as a product’s price tag and is scanned by the store clerk at the point of sale.

 

Then there is the Quick Response (QR), or 2-D, barcode, whose use is booming. Merchants of all types are putting QR codes on packaging and advertising, and once scanned by a smart phone’s camera they connect to the merchant’s Web site. Consumers can access and read barcodes on their smart phones by downloading any number of special apps.

 

Barcodes have several advantages when adapted for mobile payments. Probably the biggest is getting a solution into consumers’ pockets and onto merchant countertops quickly with minimal capital investment. There’s no need, as with NFC, for an expensive chip-reading terminal, or for the phone to have an NFC chip.

 

“We think NFC might require more time to market,” says Doug Brown, senior vice president of mobile financial services at FIS. “This looked like an opportunity to accelerate time to market.”

 

Adds Chris Gardner, co-founder of Wellesley, Mass.-based Paydiant: “That’ll be a three- to-five-year head start on NFC.”

 

Barcodes also are easy for consumers to use, and they’re as if not more secure than the old-fashioned magnetic stripe on today’s credit and debit cards. But they’re not invulnerable.

 

A February report by the Federal Reserve Bank of Atlanta says 2-D barcodes can direct a user to malicious Web sites or software applications, and consumers can’t tell just by looking at the barcode if it’s the work of a hacker. “Infected QR code problems are just beginning to emerge because most people simply don’t know the best way to protect their mobile device,” the report says.

 

So far, however, reports of payment fraud arising from nefarious barcodes have been rare. Bigger issues stand in the way of barcodes winning the mobile-payments race despite their early lead.

 

The first is simply that the payment card networks, many national merchants, POS terminal manufacturers, and general-purpose credit and debit card issuers are beginning to prepare for NFC-based mobile payments.

 

The names are familiar in payments circles: Google Inc. and its Google Wallet, the Isis joint venture of AT&T Mobility, Verizon Wireless, and T-Mobile USA, Visa Inc. with its V.me mobile wallet, and more.

 

NFC dovetails fairly easily with the so-called EMV chip, which has replaced or is in the process of replacing magnetic-stripe cards in the entire developed world outside of the U.S. Visa, MasterCard Inc., and Discover Financial Services have announced plans to nudge the U.S. toward EMV payments.

 

With the major exception of FIS’s new program, most barcode-payment schemes are single-merchant programs, akin to private-label credit cards or closed-loop prepaid cards.

 

“We haven’t seen it too much in open-loop [payments],” says Rick Oglesby, senior analyst at Boston-based Aite Group LLC. “If you want a barcode-based solution, that’s not really where the networks are going, which almost forces you to create a new payment brand.”

 

There’s a reason merchants view chip-based mobile payments favorably despite the upfront cost of installing chip-reading terminals: A mobile phone with an NFC chip contains the cardholder’s account credentials, which means the transaction will qualify for card-present interchange rates. “The phone is the card,” Oglesby says.

 

Transactions using barcodes don’t offer such authentication, which means merchants pay higher, card-not-present interchange rates. “Barcode solutions will not get card-present rates,” says Oglesby.

 

Barcode Players

 

So where does that leave barcodes for mobile payments? Still very much in the running in the short and medium term as merchants consider options that they could roll out fairly quickly.

 

As Oglesby notes, many payments executives are willing to consider an “all-of-the-above” approach in 2012.

 

Thus, here’s a quick rundown, by no means exhaustive, of some barcode payment systems.

 

 

 

FIS. Fidelity is positioning its new mobile wallet as a white-label service that potentially could be used by thousands of its bank and credit-union clients as part of their mobile-banking services. FIS has another advantage in that merchants can hook up to the software-only service through the FIS-owned NYCE electronic funds transfer network.

 

“We think we’re different from some of the other third-party models in that we’re not putting our brand out in front of them,” says Brown.

 

Two financial institutions are testing the FIS wallet in what Brown calls a “pre-commercial launch.” FIS also is working with merchant acquirers that would sell the service to their merchant clients, as well as some large retailers directly.

 

FIS’s system uses barcodes somewhat differently than Starbucks. At Starbucks, a customer with a smart phone opens the coffee company’s mobile app and pulls up a 2-D barcode that the clerk scans with a reader to debit the customer’s registered prepaid Starbucks account.

 

With FIS’s wallet, the merchant shows a QR code, either through the display on a POS terminal or electronic cash register, or, typically in the case of small merchant, by printing it out through the terminal. The customer then opens her bank or credit union’s mobile-wallet application with an iPhone or smart phone running Google’s Android operating system to scan the code and charge the purchase to a credit or debit card or bank account registered in the wallet.

 

“It’s similar but different” from Starbucks, says Brown. “It works for all merchants.”

 

Customers’ payment data are stored on off-site servers (“in the cloud”) and not held by merchants, reducing their security burden. The QR codes contain alphanumeric values readable only by FIS’s server and don’t hold any customer or transaction detail, according to Brown. The FIS wallet, like its competitors, will offer merchants marketing capabilities such as electronic coupons.

 

“What has been a very positive thing for us is we’re seeing strong interest and acceptance by banks and retailers, but also intermediary players like processors,” says Brown.

 

Paydiant provides the basic technology, though FIS is doing the integration work. Paydiant was founded only in 2010 and obtained $7.6 million in venture-capital funding in February.

 

But Gardner says he and Paydiant’s two other co-founders, Kevin Laracey and Joe Paratore, all founded or had major positions at edocs, an online-billing firm acquired by Siebel Systems in 2005; Siebel is now part of Oracle Corp. Gardner and Paratore then went on to m-Qube, a text-message payments provider for downloaded ring tones acquired by VeriSign Inc. in 2006.

 

“This is really kind of our third whack,” says Gardner. “We’ve got a lot of experience.”

 

 

 

Cimbal. As unusual as it is, Paydiant’s twist on barcode scanning—with the merchant displaying the code and the customer scanning it to complete a payment—is not unique in the market. Palo Alto, Calif.-based Cimbal Inc. is also marketing the concept for mobile payments.

 

Company president and chief executive Chris Boone says “a number of large merchants” are testing its system, and he expects some announcements about rollouts in the second quarter.

 

Consumers will log in to the Cimbal app with a user name and password, and all transactions require a PIN. Cimbal also uses a number of other protocols for security, which Boone wouldn’t reveal publicly.

 

Cimbal is trying to distinguish itself through simplicity for both the merchant and consumer, according to Boone. Small merchants need merely to download an app while larger ones need only to do “a light integration” with their POS systems, he says.

 

“We want to offer a very simple, secure solution to the consumer with an emphasis on ease of use in any medium,” says Boone, who adds that Cimbal has expanded its original prototype over the past two years to become “a full-fledged commerce platform” that handles loyalty programs, gift cards, and coupons in addition to mobile payments.

 

 

 

Mocapay. One of the earliest startups in the mobile-payments space, Mocapay Inc. has revamped its business model and technology to include barcodes.

 

Mocapay launched in 2006 and by 2008 had booked about 200 merchants in Boulder, Colo. At the time, Mocapay said it was poised for a national expansion, but progress turned out to be slow for the Denver-based company, which relied only on its internal sales staff.

 

Late last year, with a new emphasis on marketing in combination with payments, it recruited two value-added resellers and two advertising agencies to offer its service to merchants, according to president Doug Dwyre, a former executive at First Data Corp. who joined Mocapay in 2011.

 

Although all four are small companies, the new strategy already is showing results. Dwyre won’t give a number, but says the difference in the number of merchants at the start of 2011 “versus what we have for accounts now is 10-fold.”

 

Mocapay merchants can be found in Colorado and Wyoming and include the Yumilicious yogurt chain in Texas and a restaurant in Chicago. Mocapay expected to announce in early spring that a major national retailer would become an acceptor. And Mocapay also is recruiting larger independent sales organizations and payment processors to sell its services.

 

Stuck in Neutral

 

Under its old technology model, Mocapay performed authentication using short-message-service (SMS) transmissions to users’ mobile phones. Funding came through automated clearing house transfers from the consumer’s registered demand-deposit account.

 

Today, Mocapay retains the text-message service but also uses barcodes, and the system will work with NFC, according to Dwyre. Funding options for Mocapay’s wallet now include major-brand payment cards as well as gift and loyalty cards.

 

The consumer creates an account by downloading the Mocapay app to an iPhone or an Android smart phone and then entering her mobile-phone number, after which she receives a text-message confirmation.

 

To make a purchase, the user selects a funding option from her Mocapay wallet and then hits the “Get Payment Code” button on the phone’s screen. Mocapay then sends a one-time code or token that is a proxy for the consumer’s credentials to the phone. The code is rendered as a barcode that the clerk scans.

 

Depending on merchant preference, the display can be a UPC or 2-D barcode. “We can render any one the merchant wants,” says Dwyre, adding that merchants can integrate Mocapay into their own apps. Settlement works similarly with a credit or debit card sale. “For the merchant, it looks just like another transaction,” he says.

 

Users of other phones can access Mocapay through the mobile Web and pay at the point of sale by giving the clerk the six-digit code. “The [modus operandi] for Mocapay is we don’t want to disintermediate any consumers,” says Dwyre.

 

Mocapay has received an undisclosed amount of venture funding from Lacuna Gap Capital in Boulder and Spartan Mobile, Dallas. “We were early, very early, into mobile payments, which was good and bad,” says Dwyre. “Luckily for us, our investors are patient folks.”

 

 

 

FaceCash. While Mocapay hopes to get out of the gate soon after a long development period, Think Computer Corp.’s FaceCash barcode mobile-payment system finds itself stuck in the legal muck in its home state of California. Asked how many merchants FaceCash has, Think Computer president and chief executive Aaron Greenspan glumly replies, “None, because it’s illegal.”

 

The issue, according to Greenspan, is a new California law regulating domestic money transfers. Greenspan says big industry companies wrote the law, and as a small business, Palo Alto-based Think Computer has found it impossible to get information from the state about what it needs to do to get a money-transmitter license.

 

Think Computer in November filed suit against the state government in U.S. District Court in San Jose, Calif., seeking damages and to have the law declared unconstitutional. As of late winter, the suit was winding its way through the litigation process.

 

No ‘Religion’

 

Should it resolve its legal issues, Think Computer would offer merchants a barcode displayed on the mobile device or on paper printed out by the consumer. The barcode could be either a UPC or 2-D code. Consumers would register for the system by submitting an electronic photo that the merchant’s POS system would display.

 

FaceCash’s woes exemplify the risk inherent in any new payments venture. Still, players in the barcode space display a highly fluid attitude toward technology and the payments market in general.

 

FIS, for example, recently reported that it had increased its investment in mFoundry Inc., a Larkspur, Calif.-based mobile-banking and payments company whose technology powers Starbucks’s mobile app.

 

And many executives say their systems can be adapted for NFC when the day comes. Paydiant’s Gardner says his company already has an NFC version of its mobile-pay technology.

 

“We do not have religion about whether it’s barcodes or NFC,” says Gardner.

 

 

 

Mobeam Hopes To Beam  Its Way Into Mobile Phones

 

Mobile payments and couponing systems are about as un-mechanical as any business process could be, but that doesn’t mean there aren’t problems. Point-of-sale scanners can have problems reading barcodes, for example.

 

Enter mobeam Inc., a San Francisco startup with a software solution that it claims is attracting interest from retailers and developers of mobile marketing systems.

 

Mobeam chief executive Christopher Sellers says retailers worldwide have installed about 165 million red-laser scanners to read the 1-D barcodes, or Universal Product Codes, on products. When scanned, these ubiquitous barcodes access the price and inventory data. UPC scanners cost only $30 to $35 apiece, according to Sellers. But a 1-D scanner can’t very well read a barcode displayed on a mobile phone, he says.

 

Newer 2-D barcodes, or QR codes, are more flexible and can link a mobile phone to a company’s Web site when a picture of it is snapped with the phone’s camera using a downloadable application. They also can be used for payment when displayed on a smart phone.

 

Starbucks Corp. uses 2-D barcodes in its mobile-payment app, but a 2-D scanner costs three to five times as much as a 1-D scanner, Sellers says.

 

With its software, Mobeam is attempting to overcome that obstacle and make barcode-based mobile marketing programs more accessible to merchants. The software uses a light source from the phone. “We convert a barcode that’s on the phone into a pulse of light that goes directly into your scanner,” says Sellers. The scanner essentially thinks it has a reflection of the light beam, from which the data can then be captured.

 

Mobeam is doing prototype tests on mobile phones and offers a keychain fob called nümi to hold electronic coupons and loyalty and gift cards. The company in December struck a deal with consumer brands giant The Procter & Gamble Co. to put scanable coupons on mobile phones. Sellers also says developers of all the major mobile-wallet systems “are in the process of testing our technology today.” He wouldn’t identify those firms.