Keeping Up with Consumer Demands and Behavior

Understanding and responding to consumer needs and behavior is the key to survival for the modern retailer. The challenge, however, is increasingly complex as retailers are confronted with a number of difficult industrywide trends and changing consumer behavior (Galgey and Pattinson, 2013).

• Empowered Price Sensitivity Consumers have always been concerned about price. In today’s retail environment, the consumer is more empowered than ever to find the lowest price available for a product. Using the Web and mobile technology, consumers can look up information about alternative products and prices from a variety of local and online retailers using a mobile device. Retailers need clear strategies to respond to the empowered consumer by price matching or finding ways to offer greater value.
• Nonlinear Search and Influence Patterns The path by which consumers pursue purchases today is often varied and unpredictable. In simpler times, consumers were largely influenced by mass media advertising that drove them to brick-and-mortar stores for purchase. While things were perhaps never quite that simple, consumers today are influenced by a range of new communications channels including social media, mobile ads, e-mail, search marketing, and other digital communications.
• Channel Hopping Just as consumers are influenced by a greater number of communications channels, their options for purchasing products have increased. Consumers can now purchase products through traditional retailers, online, and via mobile devices and apps. Some experts are beginning to view social media as a potential retail channel called social commerce. For instance, Dell sells millions of dollars of refurbished computer equipment each year through its @delloutlet Twitter account. The manner in which consumers use each channel varies. Some consumers will use a brick-and-mortar store to gather information about a product but purchase it online. Others will do their research online but prefer to purchase the product through a traditional retailer. Some may plan to purchase the product at a store, but if they find that the product they want is not available, they will buy it from their mobile device while in the store. The many combinations of shopping channel, communications channel, and stage of the shopping process are enormous and make strategic planning a challenge. Modern retailers will increasingly rely on data analytics to distinguish patterns or trends in consumer shopping behavior across channels to identify the best ways to satisfy customer needs.
• Digital Immigrants, Natives, and Dependents Retailers have long been aware of the difference between digital immigrants and digital natives. Digital natives are the first generation to have grown up surrounded by digital devices (i.e., computers, smartphones, digital cameras, video recorders, etc.) and Internet connectivity. They are comfortable using technology to move easily between various retail channels to optimize their purchasing on price, convenience, and desire for instant gratification. Digital immigrants, however, are older, and although they are increasingly comfortable with technology, they fundamentally view retail channels as separate and distinct. They are much less likely than natives to incorporate mobile technology into their shopping behavior. Digital dependents represent the emerging generation of young people who are growing up in a world of broadband connections, constant connectivity, and related technology and become uncomfortable if they do not have access to it. This generation will place even greater demands on retailers, expecting to use technology to accomplish all facets of the shopping experience. Brick-and-mortar retailers will continue to play an important role in the lives of this generation, but they will expect in-store shopping to be fully integrated with the technology they have come to depend on.
• Need for Convenience As economic and social factors lead to more stressful lives, consumers will be looking for products and shopping channels that reduce the impact on their time and financial resources, while satisfying their demand for immediate gratification and desirable goods and services.

The Omni-Channel Retailing Concept

As the retailing world began to evolve as a result of digital technology and the Internet, new channels emerged that were initially thought to be separate and distinct. Most retailers and a fairly large segment of the consumer market still view online shopping (e-commerce) and mobile commerce (m-commerce) channels as competing with traditional brick-and-mortar stores.

As you read in the opening case, Target feels threatened by customers who showroom its stores using mobile devices. However, as businesses learn about the full potential of mobile and other digital technologies, the distinction between the newer channels and in-store retailing is beginning to blur. While most businesses currently operate their e-commerce and mobile channels separately from the traditional retail channel, it is expected that strategies integrating the customer experience across channels will emerge, resulting in what the National Retail Federation (2011) refers to as the omni-channel retailing approach.

As illustrated in Figure 8.3, many businesses operate separate retail channels. For instance, in-store product prices may be different from those the customer finds on the company’s e-commerce website and direct mail catalog. Records of customer purchases from the e-commerce site may not be available to service personnel assisting the customer at the store level. But retail strategy is evolving. The ultimate goal is to offer consumers multiple brand-based “touchpoints” that leverage the strengths of each channel. For instance, a company with a truly integrated or omni-channel strategy might spark a customer’s interest using mobile advertising or direct mail catalogs. The customer then visits a brick-and-mortar store to examine the product firsthand and speak to a salesperson. In-store purchases might be made using one of the mobile payment methods discussed later in this chapter. If the store does not have the particular size or color of the product desired, the customer might order it by accessing the store’s e-commerce site with his or her smartphone by scanning a QR code placed strategically on an in-store display. The product would then be delivered through the mail. Product returns could be handled through the mail or returned to the store, depending on what is most convenient for the customer. Customer service reps in a call center would have a record of the customer’s purchase regardless of which channel the transaction had been completed through. The omni-channel strategy will also take into consideration the potential impact of social media, whereby customers interact with the brand on sites such as Facebook or Twitter and share brand experiences with others in their social network.

Concept Check 8.1

Online Banking

Online banking includes various banking activities conducted via the Internet instead of at a physical bank location. Online banking, also called direct banking, offers capabilities ranging from paying bills to applying for a loan. Customers can check balances and transfer funds at any time of day. For banks, it offers an inexpensive alternative to branch banking. Transaction costs are about 2 cents per transaction versus $1.07 at a physical branch.

Most brick-and-mortar conventional banks provide online banking services and use e-commerce as a major competitive strategy. Customers are aware that if they bank exclusively with a brick-and-mortar institution, they may be missing out on high-paying investment options or competitive loan rates that easily undercut those of many traditional banking entities. For an illustration of how online banks operate differently than traditional banks, see IT at Work 8.2.

International and Multiple-Currency Banking

International banking and the ability to handle trading in multiple currencies are critical for international trade. Electronic fund transfer (EFT) and electronic letters of credit are important services in international banking. An example of support for e-commerce global trade is provided by TradeCard (tradecard.com). TradeCard offers a software-as-a-service (SaaS) model that provides supply chain collaboration and a trade finance compliance platform.

Although some international retail purchasing can be done by giving a credit card number, other transactions may require cross-border banking support. For example, Hong Kong and Shanghai Bank (HSBC) has developed a special system, HSBCnet, to provide online banking in 60 countries. Using this system, the bank has leveraged its reputation and infrastructure in the developing economies of Asia to rapidly become a major international bank without developing an extensive new branch network.

Online Recruiting

Most companies and government agencies advertise job openings, accept résumés, and take applications via the Internet. The online job market is especially effective and active for technology-oriented jobs. While sites such as dice.com and monster.com can still be helpful, job seekers nowadays are employing a variety of social media tools, including the use of LinkedIn.com, to develop a network of contacts and establish an online reputation. A number of studies suggest that over 95% of recruiters use LinkedIn to identify prospective job candidates. Some candidates have used blogging as a way of creating a personal brand, establishing themselves as an expert in a particular area by sharing content that reflects their professional interests, expertise, and insight. For candidates that wish to employ this strategy without the hassle of maintaining their own personal blogs, LinkedIn provides a forum called LinkedIn Pulse. In many countries, governments must advertise job openings on the Internet.

Issues in Online Retailing

Despite the tremendous growth of online retailers, many face challenges that can interfere with business growth. Major issues include the following:

1. Resolving channel conflict Sellers that are click-and-mortar companies, such as Levi’s or GM, face a conflict with their regular wholesale and retail distributors when they circumvent those distributors by selling online directly to customers. (These distributors are other businesses that carry the company’s product.) This situation is called channel conflict because it is a conflict between an online selling channel and physical selling channels. Channel conflict has forced some companies to limit their B2C efforts or not to sell direct online. An alternative approach is to try to collaborate in some way with the existing distributors whose services may be restructured. For example, an auto company could allow customers to configure a car online but require that the car be picked up from a dealer, where customers could also arrange financing, warranties, and service.
2. Resolving conflicts within click-and-mortar organizations When an established company sells online directly to customers, it creates conflict with its own offline operations. Conflicts may arise in areas such as pricing of products and services, allocation of resources (e.g., advertising budget), and logistics services provided by the offline activities to the online activities (e.g., handling of returns of items bought online). To minimize this type of conflict, companies may separate the online division from the traditional division. The downside is that separation can increase expenses and reduce the synergy between the two organizational parts.
3. Managing order fulfillment and logistics Online retailers face tough order fulfillment and logistics problems when selling online because of the need to design systems to accept and process a huge volume of small orders, to physically pick items from warehouse shelves and put them into boxes, to be sure that the correct labels are applied, and to accept returns. The return process is referred to as reverse logistics.
4. Determining viability and risk of online retailers Many pure online retailers went bankrupt in the dot.com era, the result of problems with cash flow, customer acquisition, order fulfillment, and demand forecasting. Online competition, especially in commodity-type products such as CDs, toys, books, or groceries, became very fierce due to the ease of entry into the marketplace. As Porter’s (2008) five competitive forces model explains, low entry barriers intensify competition in an industry. So a problem most new and established online retailers face is to determine how long to operate while you are still losing money and how to finance those losses.
5. Identifying appropriate revenue (business) models One early dot.com model was to generate enough revenue from advertising to keep the business afloat until the customer base reached critical mass. This model did not always work. Too many dot.coms were competing for too few advertising dollars, which went mainly to a small number of well-known sites such as AOL, MSN, Google, and Yahoo. In addition, there was a “chicken-and-egg” problem: Sites could not get advertisers to come if they did not have enough visitors. To succeed in e-commerce, it is necessary to identify appropriate revenue models and modify those models as the market changes.

Online Business and Marketing Planning

Online marketing planning is very similar to any other marketing plan. It is not a best practice, though, and somewhat strange, to devise separate online and offline plans because that is not how customers perceive a business. Here are several online business and planning recommendations:

1. Build the marketing plan around the customer, rather than on products.
2. Monitor progress toward the one-year vision for the business in order to identify when adjustments are needed, and then be agile enough to respond.
3. Identify all key assumptions in the marketing plan. When there is evidence that those assumptions are wrong, identify the new assumptions and adjust the plan.
4. Make data-driven, fact-based plans.

Concept Check 8.2

Sell-Side Marketplaces

In sell-side B2B markets, there are basically two types of e-commerce: direct and marketplace. In direct e-commerce, organizations sell their products or services to other organizations from their own private website or one managed by a third party. This model is similar to the B2C model in which the buyer is expected to come to the seller’s site, view catalogs, and place an order. In the B2B sell-side marketplace, however, the buyer is an organization. B2B marketplace e-commerce takes place on websites where the products of many different companies can be purchased. The marketplace model creates much greater competition for the companies that sell their products on the site and therefore creates an advantage for buyers. For this reason, some sellers prefer the direct model. A recent introduction of a B2B marketplace website is Amazon Business. Alibaba is a wholesaling e-commerce site that primarily sells products from Chinese manufacturers to other companies around the world.

In an attempt to avoid the cut-throat competition that can be produced by marketplace e-commerce sites, some B2B sellers are integrating back-office solutions to their direct e-commerce sites that add extra value to their buyers and create exit barriers for customers. For example, integrated B2B solutions can include things such as digital order writing for fields sales staff, automated order sync, which integrates orders with accounting or other administrative software, and integrations with Enterprise Resource Planning (ERP) systems. These integrated solutions can streamline the procurement process, saving the buyer time and money, giving them a reason to stick with a seller that offers these benefits.

Some B2B sellers such as Dell Computer use auctions extensively. In addition to auctions from their own websites, organizations can use third-party auction sites, such as eBay, to liquidate items. Companies such as Overstock help organizations to auction obsolete and excess assets and inventories.

B2B e-commerce websites are used by hundreds of thousands of companies. This strategy can be especially powerful for companies with superb reputations. The seller can be either a manufacturer (e.g., IBM), or a distributor (e.g., avnet.com is an example of a large distributor in IT), or a retailer (e.g., Office Depot). The seller uses e-commerce to increase sales, reduce selling and advertising expenditures, increase delivery speed, and reduce administrative costs.

E-Sourcing

E-sourcing refers to many different procurement methods that make use of an electronic venue for identifying, evaluating, selecting, negotiating, and collaborating with suppliers. The primary methods are online auctions, RFQ (request for quote) processing, and private exchanges. E-sourcing also applies to many other secondary activities, which add to the cycle time and transaction costs when performed using traditional methods. Secondary activities include trading partner collaboration, contract negotiation, and supplier selection.

E-Procurement

Corporate procurement, also called corporate purchasing, deals with the transactional elements of buying products and services by an organization for its operational and functional needs. Organizations procure materials to produce finished goods, which is referred to as direct procurement, and products for daily operational needs, which is referred to as indirect procurement. E-procurement refers to the reengineered procurement process using e-business technologies and strategies. Strategies and solutions linked to e-procurement have two basic goals:

• Control costs The first goal is to control corporate spending. Organizations want to spend intelligently for procurement activities to maximize the value of their spending, that is, to ensure that money spent to procure items results in procuring the right products at the best value. Corporate e-procurement constitutes a substantial portion of an organization’s operational spending. For example, it is common for large manufacturing organizations to spend millions of U.S. dollars procuring products and services. Organizations thus design e-procurement systems to facilitate and control overall procurement spending.
• Simplify processes The second goal is to streamline the procurement process to make it efficient. Inefficiencies in the procurement process introduce delays in ordering and receiving items and tax internal resources.

The two goals of cost control and streamlining can be met in three ways:

1. Streamline the e-procurement process within an organization’s value chain. Doing so reduces the number of employees needed to process purchasing, reduces the procurement cycle time to order and receive items, and empowers an organization’s staff with enough information about the products and services to enable them to make intelligent decisions when procuring items.
2. Align the organization’s procurement process with those of other trading partners, which belong to the organization’s virtual supply chain. Alignment can be achieved by automating the process from end to end, including trading partner’s systems, and simplifies the buying process. This enables suppliers to react efficiently to buyers’ needs.
3. Use appropriate e-procurement strategies and solutions. Organizations analyze spending patterns in an effort to improve spending decisions and outcomes.

Electronic Data Interchange (EDI) Systems

Electronic data interchange (EDI) systems are typically set up by large companies for the efficient procurement of products from an assortment of established vendors. While EDI technologies predate large scale use of the Internet, most EDI systems now use the Internet as the primary method of transmitting data. EDI systems are designed as a way to efficiently exchange documents, eliminating many of the costs associated with processing paper documents. As such, they lend themselves to buyers and suppliers that need to convey information to each other in the form of purchase orders, invoices, bills of lading, customs documents, shipping status documents, payment documents, and so on. While EDIs use the Internet for data transmission, they are not accessible to the public. Instead, only approved or authorized vendors are given access to a company’s EDI system.

Public and Private Exchanges

Exchanges are sites where many buyers and sellers conduct business transactions. They may be public or private, depending on whether or not they are open to the public. The two most common types of B2B online exchanges are vertical and horizontal exchanges. Vertical exchanges serve one industry (e.g., automotive, chemical), along the entire supply chain. Horizontal exchanges serve many industries that use the same products or services (e.g., office supplies, cleaning materials), although many exchanges sell a variety of wholesale goods, primarily to retail businesses.

1. Vertical exchanges for direct materials These are B2B marketplaces where direct materials—materials that are inputs to manufacturing or specialized services such as health care—are traded, usually in large quantities. An example is PlasticsNet.com, a vertical marketplace for industry professionals.
2. Horizontal exchanges These are many-to-many e-marketplaces for indirect materials, such as office supplies, light bulbs, and cleaning materials used by any industry. Because these products are used for maintenance, repair, and operations (MRO) (and not resold to generate revenue), these indirect supplies are called MRO supplies. Prices are fixed or negotiated in this systematic exchange. Examples include Worldbid B2B Market, Global Sources and Alibaba.com.

Another important facet of managing procurement is demand management—knowing or predicting what to buy, when, and how much. The best procurement cost is zero, when people are not buying what they do not need.

Concept Check 8.3

Information: Competitive Advantage in Mobile Commerce

Integrating mobile technology with a brand’s retail and e-commerce strategy provides another important benefit to business: customer information and identification. When customers interact with a brand using a mobile device, information is collected about the customer that can be used to optimize the interaction. For instance, when customers use a brand’s mobile app to shop for products, their shopping experience can be customized based on the company’s knowledge of previous purchases, payment methods, product preferences, and even location.

• In-Store Tracking In-store shopping experiences can be optimized through mobile technology that can track a customer’s movement through a retail store. This is analogous to e-commerce sites that track the pages a customer looks at in order to better understand consumer interests and to make decisions about website design. Tracking how a customer moves through a store, noting what displays the customer looks at, or what departments the customer spends the most time in can be extremely helpful for understanding individual consumer preferences as well as creating optimal store layout. Systems for tracking customers based on signals emitted from cell phones and other mobile devices are being deployed. However, stores must be cautious about how they use these systems because consumers generally respond quite negatively to the idea when asked. Consumers generally don’t trust stores to keep their data private or secure. Recent news stories about data breaches involving credit card and other information at large retailers suggest there is reason for concern. Stores that use “opt-in” methods, receiving the customer’s permission in exchange for some defined benefit, are more likely to get a positive reception. Those that opt in typically expect to receive discounts or some form of meaningful convenience benefit. Some will only agree to in-store tracking in exchange for free products. Consumer acceptance is sometimes accomplished through loyalty programs that offer discounts and special premiums to customers who opt in.

  Not all tracking systems rely on user smartphones. Disney uses signal emitting wristbands to make everything in the Magic Kingdom more magical. The wristbands aid guests with hotel check-ins, replace tickets for park admission, make it easy to reserve times for popular rides, and even help Disney employees to deliver the correct dinners to hungry guests in large, crowded restaurants. Still, retailers and the makers of in-store tracking systems need to be concerned about consumer backlash related to this new technology since less magical applications are considered “creepy” by many shoppers. Therefore, it is important that brands involved in mobile e-commerce and mobile retailing have clear privacy statements and use an opt-in system to obtain permission from customers before tracking their online and offline shopping behaviors.

  While relatively few businesses fully utilize mobile tracking and monitoring systems at present, as brands become more sophisticated with mobile technology, it is expected they will strive to gain a competitive advantage by using this information to provide better service, convenience, and a more personalized, enjoyable shopping experience, both online and in traditional stores.

• Quick Response (QR) Codes In Japan, many products are tagged with QR codes. Consumers in that country frequently scan QR codes to access product information from a mobile device. Using a barcode scanner app and the camera feature of a mobile device, customers scan the QR code containing a link to an Internet Web page. You read in the case at the beginning of this chapter how Macy’s uses QR codes on in-store displays to direct customers to promotional videos that feature its products. The QR code is supposed to be an easier alternative to typing a URL address into a mobile browser (see Figure 8.7). While QR codes have not been as popular in the United States as they are in Asia, marketers have used them in print advertising and direct mail ads with some success. Charitable organizations use QR codes on the outside of direct mail solicitations. Scanning the code takes the user to a video explaining the mission of the organization and typically makes a more compelling request for a donation than is possible through print media. Additionally, responses to the QR code promotions can be tracked and used to evaluate program effectiveness.

Some experts believe, however, that QR code technology is never going to be as popular in the United States as it is in Asia. They cite studies reporting that many smartphone users simply do not know what to do with a QR code. Other research suggests users think that the scanning process is inconvenient or that QR codes frequently direct users to pages that do not really contain anything of interest. For QR codes to become something American consumers use frequently, businesses will have to prove that they help mobile users find content that is interesting and valuable. Mobile visual search technology is emerging as an alternative to QR codes. See Video Case 8.3 at the end of this chapter for additional information.

Mobile Entertainment

Mobile entertainment is expanding on wireless devices. Most notable are music, movies, videos, games, adult entertainment, sports, and gambling apps. For more information about the most popular mobile app category, mobile gaming, see IT at Work 8.3.

Sports enthusiasts enjoy a large number of apps and services on their mobile devices. Apps exist to check game scores; track news about specific athletes, teams, or sports; take part in fantasy team contests such as fantasy football; and participate in sports-oriented social networking services. A number of sports-related games such as mobile golf and sports trivia apps are widely available. There are even apps designed to provide tips and information for improving your own athletic performance. Apps are available to record workout times, schedule training exercises, record heart rates and a variety of other information related to athletic training. The iPhone even has an app that analyzes a person’s golf swing and provides advice for improving performance.

ESPN is widely acknowledged as a leader in mobile marketing to the sports fan. It offers a number of popular branded mobile apps that deliver information and entertainment to its target audience. It also utilizes well-designed mobile websites and has a large database of fans that have opted in to receive sports-related news alerts sent to their phones via text messages.

Industry analysts predict that recent improvements in mobile devices will lead to an even bigger increase in the number of people who watch video clips, movies, and television programming on their mobile devices. The screen size of tablet computers make watching video programming more attractive than on a smartphone. However, the number of people viewing video on smartphones seems to be increasing as well as smartphone sizes increase. Popular fee-based video streaming services such as Netflix, Amazon, and Hulu now offer mobile apps for most mobile devices.

The iTunes Store, Google, and Amazon continue to be leading distributors of digital music, movies, TV shows, e-books, and podcasts available to consumers. Mobile users can also access music from digital streaming sites such as Pandora.com and Spotify.com. Both of these services offer free streaming music. Users can upgrade their accounts by paying a subscription fee, which then reduces the amount of advertising they are exposed to.

While still relatively small, the mobile gambling industry is expected to grow substantially over the next few years. Some predict that this type of mobile commerce could generate as much as $20 billion in the near future. Primary growth of this market is expected to take place in Japan and other Asian countries, such as horse racing in Hong Kong. Current laws in the United States prohibit most forms of online gambling; consequently, gambling via mobile devices is largely unavailable in the United States.

Many mobile apps are available for consumers interested in home-based entertainment activities. The Food Network offers an app with tips and recipes for fine dining and entertaining. Martha Stewart publishes articles about home entertainment and lifestyle apps while a number of bartending apps with numerous recipes for cocktails and party drinks can be found on iTunes and Google Play.

Hotel Services and Travel Go Wireless

In recent years, smartphones and other mobile devices have become essential travel aids. Most major airlines, hotel chains, and Internet travel agencies have developed mobile apps to help travelers manage their arrangements. Airlines frequently give passengers the option of receiving up-to-date information about their flights through an app or via SMS text messaging. Google Maps is perhaps one of the most popular apps used by travelers, particularly those traveling by automobile. Even AAA, the automobile club, has a mobile app that helps drivers plan their trips and an app for drivers who need roadside assistance. Other interesting mobile travel tools include apps that translate voice or text when traveling abroad, apps for finding nearby Wi-Fi hotspots, and apps created by a number of popular travel guides.

Most large hotel chains, independent hotels, and inns offer guests in-room, wireless high-speed Internet connections, although this is not always a free service. Some of these same hotels offer Wi-Fi Internet access in public areas such as the lobby and meeting rooms. Larger hotel chains have apps that allow guests to make reservations, check their bills, and locate hotel services using a mobile app. Starwood, Hilton, and other hotels have mobile check-in programs whereby guests use their mobile devices to gain access to their rooms. This makes it possible to check in to the hotel without having to stop first at the front desk. Most airlines now offer travelers the option of loading a boarding pass onto their mobile devices (see Figure 8.8).

Mobile Social Networking

More people access social media from social apps than from personal computers now. As a result, Facebook and other popular sites have added mobile features in recent years to stay competitive. Some social media, such as the popular Snapchat platform, is entirely app based. Much as Web-based social networking, mobile social networking occurs in virtual communities. All of the most popular social networking sites offer apps that allow users to access their accounts from a smartphone or other mobile device, making social media a primary driver of growth in the mobile app industry.

Concept Check 8.4

Mobile Payment Systems

Consumers use mobile devices for a wide range of shopping and other activities. As discussed in the case at the beginning of this chapter, shoppers are using mobile devices to compare prices, research products prior to purchase, and identify alternative product options and alternative retailers. Increasingly, mobile devices are becoming an attractive way to pay for products. Mobile payment is increasingly being accepted by retailers and is popular with consumers who now can use a variety of apps available on iTunes, Google Play, and from banks, credit card companies, and even smartphone manufacturers such as Samsung. Some forms of mobile payment represent an attractive option for consumers who do not have credit cards. Additionally, retailers may benefit from new payment options that carry lower transaction costs compared to what banks charge when credit cards are used. In 2016, approximately 38.4 million Americans will have used a mobile phone to purchase goods or services at least once in the preceding six months. That’s only 19.4% of U.S. smartphone users; however by 2020, the figure is expect to increase to 33.1%. Proximity mobile payments, a common method based on RFID (Radio Frequency Identification) technology, are expected to reach $62.49 billion in 2017 and increase to more than $314 billion by 2020. RFID payment systems typically allow consumers to transfer payment authorization to a vendor by simply tapping on or passing their phone over the vendor’s mobile payment terminal.

While most consumer mobile payment systems are based on the use of a smartphone and related technologies such as SMS text messaging, some companies are building mobile payment into wristbands, key fobs, watches, and similar wearables. Lyle and Scott, a Scottish knitwear brand, has even built mobile payment into a jacket (more specifically, the wrist cuff of the jacket).

As mobile commerce grows, a greater demand exists for payment systems that make transactions from mobile devices convenient, safe, and secure. A number of businesses have attempted to meet this demand using a variety of technologies. There are two basic transaction types of interest: using a mobile device for the online purchase of goods and services (e.g., ordering a book from Amazon.com) and for payment of goods and services in a traditional brick-and-mortar store. Here are examples of some approaches under development or in use today:

• Charge to Phone Bill with SMS Confirmation This e-commerce payment solution is a lot easier than entering credit card and other information on a small mobile handheld device. It requires users to set up an account with a payment company such as zong.com. When completing an online transaction, users click the “ZONG–Buy with Mobile” button and enter their phone number. They receive an SMS text message with a secure PIN number that they enter on the e-commerce website to complete the transaction. The amount of the charge is then added to the payer’s phone bill, and the telecom carrier remits this amount to the payee. Telecom companies may deduct a service charge from the amount paid. Example: boku.com.
• Near-Field Communications (NFC) NFC is a high frequency form of RFID technology. Unlike other types of RFID technology, NFC devices are capable of both sending and receiving information with other NFC devices. At check-out, the mobile user simply passes or taps his or her phone on a merchant terminal and payment is transferred. Users receive an SMS text message confirmation. While Google Wallet has received considerable attention in the technology press, in part because of Google’s power and influence in the industry, relatively few consumers can use this option. Only a small number of phones have the required NFC feature. Additionally, the program is only available to people with Citi MasterCard with PayPass or Google’s prepaid credit card. However, the number of phones equipped with NFC technology is expected to increase, which in turn will increase mobile payment options based on NFC. Example: Google Wallet.
• QR Code Systems A number of companies are developing mobile payment systems that generate a QR code on the user’s phone, which is, in turn, scanned by the retailer. Starbucks uses this approach with its mobile payment system (Tsirulnik, 2011). Customers create an account with Starbucks as part of the retailer’s loyalty program and transfer money to a prepaid account. Upon check-out, a user activates the Starbucks app, which creates a barcode that can be scanned at check-out. The funds are then deducted from the user’s account. With other QR code systems, the merchant has a QR code that the customer scans and then authorizes payment when a confirmation message appears. Several other retailers are adopting QR-code-based systems including: Walmart, Kohls, IKEA, and Chase Pay.
• Credit Card 1 Webform Using a mobile Web browser, the buyer makes online purchases by entering his or her credit card number and other identifying information just the way that person would if using a personal computer. This process can be cumbersome given the smaller screens and keyboards on most mobile devices, but it is an option.
• Transfer of Funds from Payment Account Using SMS (see obopay.com and paypal.com). Using this approach, the user creates an account at a company such as obopay.com and transfers money into it from a bank or credit card account. Using a mobile phone and SMS, the user can then transfer money to anyone else with a mobile phone number. The receiver must create an account at the payment company in order to retrieve the funds. Example: obopay.com, paypal.com.
• Mobile Phone Card Reader (see Square.com and Paypal.com). This novel approach requires mobile phone users to insert a small card reader into the audio jack of their mobile device. The card reader, which resembles a small cube (Square) or pyramid (PayPal), allows those with accounts at Square or PayPal to make or receive credit card payments without a merchant account.

Almost all of the payment systems thus described are illustrated by videos on Youtube.com. Interested readers are encouraged to view these video resources for a more complete explanation of how the different mobile payment systems work.

Wireless payment systems transform mobile phones into secure, self-contained purchasing tools capable of instantly authorizing payments over the cellular network. One advantage of many mobile payment systems over traditional credit card systems is the ability to handle micropayments or transactions involving relatively small sums of money. The ability to make micropayments allows individuals to use their mobile devices to do things such as purchase a beverage from a vending machine or make a payment to a municipal parking meter. Many cities in Europe, and a growing number in the United States, have adopted mobile phone payment systems for parking and report dramatic increases in revenue because of the reduction in loss due to theft and broken meters and the reduced expense associated with collecting cash from traditional meters.

• Mobile Bill Payments In addition to paying bills through wireline banking or from ATMs, a number of companies are now providing their customers with the option of paying bills directly from a cell phone. Western Union, HDFC Bank in India, Citibank, and several other institutions worldwide currently offer mobile bill payment services. This trend is proving particularly attractive to mobile users in developing countries where many people do not have bank accounts.

Mobile Banking and Financial Services

Mobile banking is generally defined as carrying out banking transactions and other related activities via mobile devices (Figure 8.9). The services offered include bill payments and money transfers, account administration and checkbook requests, balance inquiries and statements on an account, interest and exchange rates, and so on.

Banks and other financial institutions allow customers to use mobile devices for a wide range of services (see Table 8.2).

People access financial services using a combination of mobile media channels including SMS, mobile Web browsers, and customized apps. Mobile banking is a natural extension of online banking services, which have grown in popularity over the last decade.

Throughout Europe, the United States, and Asia, an increasing percentage of banks offer mobile access to financial and account information. In 2009, ABI Research evaluated 29 U.S. banks on accessibility of their mobile banking services. Six of the banks received top marks: BB&T, Eastern Bank, Fifth Third Bank, Northeast Bank, USAA, and Wells Fargo. Bank of America and Chase also received positive evaluations.

In Sweden, Merita Bank has pioneered many services, and the Royal Bank of Scotland offers mobile payment services. Banamex, one of Mexico’s largest banks, is a strong provider of wireless services to customers. Many banks in Japan allow all banking transactions to be done via cell phone. Experts predict that growth in the mobile banking services sector could reach between 894 million and 1.5 billion customers globally by 2015. The Asia-Pacific region is expected to emerge as the predominant market for mobile banking services (berginsight.com, 2010, Global Industry Analysts, 2010).

Short Codes

Banks and financial service organizations have two basic options for providing mobile services. Smartphone users can download dedicated apps to conduct banking transactions. The other option is to provide service through SMS (text message) technology. As you know, text messaging is still widely popular, even with people who use smartphones. Many mobile financial services make use of short codes for sending SMS texts. A short code works similarly to a telephone number, except that it is only five or six characters long and easier to remember. Businesses lease short codes from the Common Short Code Association (CSCA) for $500 to $1,000 a month. The lower price is for randomly assigned codes, whereas companies that want a specific short code pay a higher monthly rate. Once a company has leased its short code, it can begin using that code in promotions and interactive exchanges with customers.

Short codes are used for a wide variety of SMS text services, not just financial services. For example, voting on the popular television show American Idol is done with short codes. Each contestant is assigned a specific short code, and viewers are encouraged to send text messages indicating which performer they like the best. The annual MTV Movie Awards also uses short code voting, which allows viewers to pick the winning entry in certain prize categories. On some telecommunications networks, ring tones are sold using short codes and SMS texts.

Security Issues

At present, the benefits associated with mobile banking seem to outweigh potential security threats. However, as the number of people who engage in mobile banking increases, the likelihood that criminals will target mobile financial activity is sure to grow as well. What kinds of threats exist to mobile banking? Table 8.3 lists the most common mobile banking risks.

Concept Check 8.5