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Bye-Bye Plastic: How New Digital Payment Mechanisms Will Forever Change Shopping


For consumers and retailers, the future of contactless payments is now. Here's what executives can focus on today to ready their businesses.

Upon unveiling the first mainstream smartphone payment option last year, Apple CEO Tim Cook announced, "Apple Pay will forever change the way we buy." While competing merchants, banks and startups with alternative technologies in the works may beg to differ, experts agree that Apple Pay will eventually do to credit cards what the latter did to cash: overtake it as the preferred payment method.

The reason for this optimism has a lot to do with Apple's core strengths: innovative product design, attention to security and deep understanding of customers. Not to mention, the experience is delightfully simple: Hold your iPhone near a compatible register. Within a few seconds, your phone will automatically respond, ask to scan your finger and then beep and vibrate once payment is accepted.

Should Apple Pay take off, its security features will surely be a key element. In addition to its fingerprint ID system, credit card information is only tied to a single, tokenized device, so an individual's actual bank information is never shared with merchants, cashiers or even online servers. Apple doesn't know what the customer bought, the location of the sale or how much was paid. The transaction is between the customer, the merchant and the bank. Not even the cashier can see the customer's information.

Figure 1

As a result, major data breaches of customer financial data (i.e., Target and Home Depot) may become a thing of the past, reports Top Tech News. And since the contactless payment happens over near-field communication, hackers would theoretically be unable to remotely skim a customer credit card over the Internet. Under those circumstances, thieves would have to be within a few feet of the customer and hack individual devices one by one instead of breaching thousands or millions at once.

In other words, Apple Pay reduces the liability of all involved: retailers, consumers, banks, credit cards and payment gateways. With the exception of thieves, everybody wins.

Peace of mind aside, the emergence of contactless payments is further evidence of how Code Halo™ thinking (i.e., deriving meaning from digital footprints) is making shopping more contextual and less painful for consumers. Code Halos1 can also serve as an identification service, explains Narayn Sridharan, director of Cognizant's Internet of Things business. With authenticated digital identities—rather than magnetic cards that anyone can use – individuals' smartphones will become more relevant, Sridharan predicts, similar to what Google did to search results.

For instance, the building blocks of Apple Pay will eventually allow users to unlock their homes and intelligently interact with them once inside with the phone in their pocket. Not only will this change how we spend money and authenticate our identities, Sridharan says, but it will also enable us to better manage and budget our spending. For example, your phone might alert you at checkout if you're spending according to plan. Or it could automate deposits to savings accounts and boost charitable giving with tap-and-go technology.

Sellers, too, will benefit. Although contactless payments privatize transactions more than credit cards do, which makes it more difficult to find meaning in aggregate transactions, they also increase the volume of permission-based marketing and intimate brand exposure, according to Sridharan. It provides another opportunity to interact, engage and connect with consumers on a very personal device.

For instance, point-of-sale readers with Bluetooth low energy or Apple iBeacon technology could awaken a shopper's phone as she walks by, alerting her to special promotions. Some experts even expect fast-pay technology to reduce employee overhead and further automate data collection.

So how far out are mass-market phone payments and who will ultimately handle them all? Something like this will be very common in two to three years, Sridharan predicts, adding that Apple Pay and Google Wallet will likely be the victors. But he also expects significant Apple Pay usage by year's end, as participating stores and compatible devices already number in the tens of millions.

To get started, retailers need at least one mobile payment reader, which start at $300 to $500, according to RetailWire. But companies with existing NFC readers are likely already equipped to accept Apple Pay and Google Wallet today. Contactless migration also doesn't disrupt merchant processes to a large extent, beyond sending payment tokens and cryptograms in place of credit card numbers and approval codes.

And while the loss of transactional data may negatively impact loyalty programs, this can be offset by ensuring customers' loyalty cards are also stored in Apple or Google passbooks, Sridharan says, and then adding a supplemental database to map tokens issued by Apple Pay to update and make meaning from loyalty card activity.

With those systems in place, the real question becomes not whether you will use contactless payments but when and how you will delight your customers with them.

To learn more about the future of smartphone payments, visit Cognizant's retail practice.

1 For more on Code Halos and innovation, read "Code Rules: A Playbook for Managing at the Crossroads," Cognizant Technology Solutions, June 2013, Documents/code-rules.pdf and the book, "Code Halos: How the Digital Lives of People, Things and Organizations are Changing the Rules of Business," by Malcolm Frank, Paul Roehrig and Ben Pring, published by John Wiley & Sons. April 2014, 1118862074.html.

Bye-Bye Plastic: How New Digital Payment Mechanisms Will Forever Change Shopping