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Low-Value Transactions: A Mobile Payments Dilemma

Lowering processing costs could open up an opportunity for mobile payments to gain traction in low-value payments.

Low-value payments offer an excellent opportunity for mobile payments to gain adoption among consumers. Earlier this year Canadian Bank RBC partnered with McDonald’s and others to offer mobile NFC debit payments at Candian McDonald’s locations, and found customers were very receptive to using their phones to make quick low-value purchases.

The parties involved didn’t release the results of the pilot, but they said that it was successful enough that they’re expanding it to new partners, and RBC plans to roll out mobile debit payments to all of its account holders later this year.

It makes sense that customers would be happy to pay with their phones in line at a fast food restaurant from a convenience perspective. But the math doesn’t add up for the merchant and payments providers to encourage mobile payments for such low-value transactions, says Nebo Djurdjevic, CEO of payments solutions provider Cardis International.

[See Related: The Future Marriage of Virtual Currency and Mobile Payments in Canada]

“The processing cost per transaction usually comes to 14 or 15 cents on the issuer and acquirer side,” Djurdjevic explains. “For a $50-100 transaction, that 15 cents is pretty insignificant. But for transactions under $10, those 15 cents needed by the [payments] providers to at least break even become a big part of the transaction.”

Fast food restaurants already have thin profit margins, so it makes sense for merchants to prefer that these low-value transactions are made in cash, which they often are in the U.S., Djurdjevic points out.

The answer to this conundrum and make it mobile payments profitable in low-value transactions the rails those transactions travel on for processing need to change, Djurdjevic says. Cardis offers a processing solution that aggregates several low-value transactions into one larger transaction for processing through a payment network, which lowers the processing cost per transaction for the merchant and providers involved. The consumer’s issuer provides the consumer with a specific digital balance to be used for offline transactions (much like a cash transaction). The consumer can use that balance, whether paying with a card or mobile device, at any retailer.

Cardis announced last week a partnership with Spindle to offer their technology in Spindle’s mobile wallet. Spindle also provides payments solutions for merchants, and has a strong presence with fast food retailers and other segments that take a high number of low-value transactions, according to Djurdjevic. The partnership will allow merchants to accept mobile payments while paying a lower processing cost through Cardis’ system, he notes.

It will be interesting to see if Cardis and Spindle can have some success with this proposition for consumers and merchants. We often talk about mobile payments in terms of replacing plastic, but the real opportunity might be in replacing cash. Low-value payments would be a logical place to test that theory.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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Jonathan_Camhi
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Jonathan_Camhi,
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10/24/2013 | 4:02:54 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
I'm sure that they will also look to partner with other wallet providers besides Spindle. It's really just one part of the issues facing mobile payments adoption, but lower the processing costs would obviously interest merchants.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
10/24/2013 | 12:16:53 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
Cardis is one solution that aggregates small transactions throughout the day and then settles the transactions together at the end of the day, ultimately lowering overall fees.
MosheT939
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MosheT939,
User Rank: Apprentice
10/24/2013 | 7:19:02 AM
re: Low-Value Transactions: A Mobile Payments Dilemma
Cardis has the solution for the problem is this article
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
10/23/2013 | 8:03:29 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
The 15 cents is the actual processing costs, which is different than the interchange fees.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
10/18/2013 | 10:09:05 AM
re: Low-Value Transactions: A Mobile Payments Dilemma
Great article, and perspective. Thanks for sharing. It might just take a $.01 transaction fee to get this whole thing started!
AlexanderP451
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AlexanderP451,
User Rank: Apprentice
10/18/2013 | 9:05:29 AM
re: Low-Value Transactions: A Mobile Payments Dilemma
KBurger
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KBurger,
User Rank: Author
10/17/2013 | 2:25:55 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
As usual it's going to be less about the technology per se -- the ability to securely process mobile payments exists -- and more about politics, turf, standards, marketing, etc. Right now there is no compelling reason other than the cool factor for a consumer to replace a debit or credit card -- which is small, easy to transport, and works very well and reliability -- with a smartphone to make payments.
Zarna Patel
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Zarna Patel,
User Rank: Apprentice
10/17/2013 | 1:17:26 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
I guess it depends on how often you make small purchases which could include vending machines, coffee, fast food, snacks, trinkets picked up on drug store counters, etc. Also, mobile allows me to see how much money is squandered on fees.

Also, it's one thing if I wanna waste all my money on Starbucks everyday, it's another when someone is charging me to use my money, regardless of the cost difference.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
10/17/2013 | 12:24:41 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
Exactly. Right now mobile payment market is too scattered and fragmented, and you can only complete mobile payments at a few places. It's going to be a much longer road for mobile payments...perhaps another 4-5 years before we see mass adoption, IMO.
Nathan Golia
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Nathan Golia,
User Rank: Author
10/15/2013 | 7:38:03 PM
re: Low-Value Transactions: A Mobile Payments Dilemma
15 cents doesn't seem that bad. Aren't credit interchange fees nearly $2? This seems like a bargain. Either way, why would I go through the hassle of setting up a payment system on my phone if I could only use it in corner cases (big purchases)?
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