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Mobile Payment Options Grow for Small Companies

Credit Card swipe
Credit Card swipe

If all goes as planned, customers of family-owned Ben White Florist in Austin can start buying flowers this month by swiping a smartphone at checkout.

Representatives working for Isis, the mobile-payment company behind the technology, have been working with the shop's owner, Michael Martinez, to prepare for a new mobile payment system that can accept most credit cards, including American Express and Discover. That the system is free for now — subsidized by Isis — helped persuade Martinez to give it a try.

Martinez concedes that customers with smartphones sophisticated enough to use the technology will initially be a tiny group. "But Austin is a tech-savvy city. Customers don't want to do business with companies that look outdated. And it makes us seem like we're on top of things," he says.

As the retail world increasingly turns mobile, Martinez echoes the sentiment of thousands of small-business merchants drawn to mobile payments as a marketing boost and a salvation from the shackles of expensive point-of-sale terminals and magnetic-stripe card readers.

Small merchants are considered ideal testing grounds for new payment products because the businesses are nimbler in experimenting with new ideas and seeking customers in settings beyond bricks-and-mortar stores.

"We're seeing a huge explosion in small business," says Ebrahim Keshavarz, vice president of small-business product management at AT&T. The company is working with mobile payment developers that want to use its wireless network.

Eyeing the growing number of customers who rely on their "digital wallets" — credit card numbers stored on a phone app — small business owners are scrambling to find efficient means of accommodating these early adopters without too much cost to their operations or the need to overhaul existing payment systems.

Apps for tablets and smartphones that can scan credit cards have been offered as early answers. In February, about half the retailers polled by the National Retail Federation say they will use a mobile device as a cash register within a year to 18 months, compared with 6% that use them now.

Meanwhile, mobility solutions also are being developed for on-the-go merchants who derive sales from county fairs, trade shows and farmers' markets.

Because the technology is still in its infancy, "mobile payment" is something of an umbrella term that refers to a wide variety of approaches, including paying with: a smartphone equipped with a special chip; a credit card number stored in a phone app; or a key-fob-size device that turns a phone or tablet into a credit card processor.

Worldwide mobile payment transactions will total $171.5 billion in 2012, a 62 percent increase from $105.9 billion last year, and could reach $617 billion by 2016, according to research firm Gartner.

Consumers are still wary of sharing stored financial information, concerned about privacy, fraudulent charges, personal information being distributed to third parties, or of losing devices that contain that information.

Small-business owners are skeptical about spending money on yet another piece of hardware. With so many options available, consumer confusion is inevitable.

Payment Revolution

Still, a confluence of recent developments suggests that the payment revolution engendered by mobile devices will forge ahead.

Innovation from start-ups

Small businesses are looking to shave costs wherever they can, so companies such as Square and PayPal are wooing shop owners to ditch their expensive point-of-sale equipment by offering per-transaction fees, simple loyalty programs and sales analysis.

A traditional retail payment system — including a cash register, credit card scanner, product scanner and software — can cost as much as $1,000 to $3,000. Credit card processors also often ask for long-term contracts, a monthly fee, a percentage of sales and an early-termination fee.

Square, a San Francisco company, has made huge gains in grabbing market share from traditional checkout operators. Shop owners who buy Square's small, white plastic scanner dongle and sign up can plug it into a smartphone or tablet and quickly process credit cards, while generating reports about sales volumes and patterns. Square charges 2.75% of each transaction.

Its growth has exceeded its own internal estimates. About 2 million merchants use Square, and about $6 billion in transactions have been processed since Square's debut in 2010.

Andy Nguyen, who with his wife, Uyen operates a Vietnamese-sandwich food truck called Lemongrass in the Washington, D.C.-area, considered several other wireless credit card payment processors but chose Square for its size and convenience.

With Square's dongle in his iPad, he can revise his menu and prices while keeping track of which items sell more than others, he says. "I don't have that much space here," he says, adding that about half his customers use credit cards. "I could go all-cash, but I didn't want to alienate anyone."

Wireless carriers — which stand to make money from all purchase-transaction data traffic carried on their networks — also are aggressively pushing the mobile-payment effort.

YiShaun Yang, owner of children's book publisher AdoraPet in Manhattan, was in search of ways to accept credit card payments at book shows when she walked into a Verizon store and saw Intuit GoPayment on display. A competitor to Square, GoPayment also is a phone dongle for scanning credit cards.

While she had considered other wireless payment systems, she was turned off by fees and long contracts, she says.

"It's hard when you have a small business, because you don't know how long you're going to be in the business," she says. "I wanted something that fits my small business. Not (a product) that imposed its bigger business model onto my small business."

Unlike Square, Intuit either charges a per-transaction fee of 2.7 percent, or, for merchants with high volume, a plan with a monthly fee of $12.75 and a 1.7 percent per-transaction fee.

VeriFone, a payment systems maker, and online payment stalwart PayPal also have recently introduced competing products that turn a phone or tablet into a card scanner. VeriFone's Sail and PayPal Here both charge 2.7 percent per transaction. VeriFone also offers the option of paying $9.95 per month for a lower 1.95 percent per-transaction charge.

LevelUp, another mobile payment start-up, is hoping to stand out from the pack with a greater focus on points redemption.

Customers who store their credit card information on its app receive a designated QR (Quick Response) code that's read at the merchant checkout. Customers who spend $50 get a $5 credit.

LevelUp makes money by charging merchants 40 cents per $1 of credit used by customers. For a $25 monthly fee, LevelUp waives merchants' customary per-transaction fees.

Tailored Payment Systems

LevelUp's loyalty program and its no-per-transaction fee policy persuaded Kirk Francis, owner of Captain Cookie and the Milk Man, a food truck in Washington, D.C., to experiment even as he was told LevelUp still had a small number of users in the area.

"My upfront cost was zero. There is no commission fee. That was attractive," he says. "It's the new kid on the block."

Francis is still not fully convinced he'll keep it. He sees only "one or two" LevelUp users a week, and the $25 monthly fee "is a lot," he says. "It's a trial a phase for me. I don't get a great deal at this point."

Still, Francis, also a Square customer, says he can't imagine operating without mobile payments. "It makes vendors like me look more legitimate, rather than my customers seeing me dealing with cash out of a bucket," he says.

Interest by technology giants

Meanwhile, the biggest names in technology are muscling into mobile payments, hoping to snuff out smaller competitors that are developing "digital wallets."

Google Wallet, which was released last year with a partnership with just one bank, said last week it's now compatible with all domestic credit cards. Users must input their card information into the Google Wallet app, and waive the phone at a contactless (called near field communication, or NFC) reader pad, such as the ones branded by MasterCard's PayPass and Visa's payWave.

For now, Google Wallet works only on six phone models issued by Sprint or Virgin Mobile, limiting further adoption.

Eager for a slice of the burgeoning market, a consortium of wireless carriers —Verizon Wireless, AT&Tand T-Mobile — is launching Isis as a competitor to Google Wallet.

Also a digital wallet in your phone, Isis is swiped at retailers' contactless terminals. Isis will likely launch this month in Salt Lake City and Austin with national large retail chains and smaller merchants such as Martinez of Ben White Florist.

Don't expect consumers to flock to contactless phone payments soon, says Thomas Husson, an analyst at Forrester Research. Google Wallet and Isis work only on smartphones that are equipped with an NFC chip. While more NFC phones will be sold in coming years, they're still hard to find.

Still, the likely slow adoption of digital wallets hasn't waned Martinez's enthusiasm for the technology.

"The easier you can make it for people to spend money, the more likely they'll spend," he says.

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