Beacons—those little Bluetooth mechanisms stores use to beam ads to shoppers' phones—may someday play a critical role in payments. But the technology is still years away from being a practical alternative to cards and NFC-based mobile wallets.

Beacons communicate with a shopper's smartphone app through a Bluetooth Low Energy signal. The devices have a short enough range that they can be scattered throughout a store, providing offers based on which department the consumer is in. They have clear potential for payments, particularly if consumers are receptive to the offers they pitch, but few beacon deployments today look past the marketing aspect.

"This is Step One, which is where we are today," said Robert Hanczor, CEO of beacon vendor Piper. "The next step is where credit, loyalty and other information is available in the app. Bluetooth recognition, where I can choose 'buy,' we're not there yet, but that's where are moving to in the next generation."

One of the major hurdles to beacon payments is the design of most stores. Retailers have spent decades perfecting the design of their shopping flow — there's a reason the milk is always in the back of the grocery store — so the idea of making purchases from anywhere in the store is much more disruptive than just affixing a nightlight-sized beacon at the end of each aisle.

A beacon-friendly product-delivery system might require creating a separate area in the store for the shopper to pick up any product purchased through the app. There are two downsides to that system. First, it requires more space, which is at a premium in many retailers, especially mall-based stores with small footprints. Secondly, it could simply trade one bottleneck (the checkout line) for another (the product pickup line). 

A more labor-intensive—and therefore more expensive—option is to alert a store employee to grab the product and to deliver it to the shopper, possibly using the phone's geolocation to find the shopper. The employee would then need to verify the shopper's identity, creating another source of friction. 

"Beacon payment is in its infancy. We are barely seeing any BLE (Bluetooth Low-Energy) pilots at all," said Prashanth Shenoy, senior director of enterprise networking and mobility for Cisco. "The low-hanging fruit is proximity-based marketing and even that is in its infancy."

The appeal of beacons stems from their ability to combine the convenience of an e-commerce experience with the immediacy of an in-store shopping experience. Many times, shoppers will browse merchandise in a store but then order it online to get a better deal or to avoid waiting in line at the cashier to pay. But in a beacon-enabled environment, where a retailer is using its mobile app to offer an incentive to buy the item then and there, it might be necessary to deliver the item in-store rather than default to an e-commerce sale.

"With most retail organizations, they are still struggling with this tug of war" between online and offline, said Ryan Craver, a consultant who was recently the senior vice president of corporate strategy at Lord & Taylor. "It's all about the store not getting credit," and beacons could be a key answer to that problem, he said. A shopper could make a purchase and receive the merchandise in the aisle through a beacon-based mobile wallet.

SCVNGR's LevelUp, a mobile loyalty and payments app, added beacons in the first quarter of this year. Its mobile wallet is designed around attracting consumers to stores to redeem offers and earn credit for future purchases. To pay, consumers present a QR code in the LevelUp app, and the cashier scans it with a special reader at the counter.

The addition of beacons did not change the way LevelUp handles payments. "Payment is still at the counter and not remote," said LevelUp spokesperson Alex Shuck.

There are many technological and operational roadblocks to beacon payments, even if the app is using an existing mobile wallet to actually tender, Shuck said.

The biggest operational hurdle is "figuring out how to integrate those purchases into the store's order system," Shuck said. "It's an operations challenge."

 The beacon-based shopping system would need to alert the store's inventory system of the purchased item, and to then associate that purchase with that shopper and that store in real time.

It's also important to not underestimate the technical challenges in even the simplest mobile wallet integrations. Even something as straightforward as Apple Pay, which works with existing Near Field Communication terminals, is a challenge for the merchants that plan to do more with it, such as use it within their own mobile apps.

"The Apple Pay integration is not trivial. It's an incredibly lengthy effort, taking months and months and months," said Mark Elfenbein, CEO of mobile image recognition vendor Slyce. "Even if the retailer accepts Apple Pay, that doesn't mean that you can utilize it as a third party."

 The goal for all beacon users is finding creative ways to reduce various points of friction. Amazon, which is the retail giant that most beacons companies are trying to fight, has arguably painted the most ambitious frictionless shopping experience in one of its patent filings. That Amazon concept envisions a store where a shopper grabs a product and needs do nothing at all to pay for it; cameras, RFID and Bluetooth devices would identify the shopper and the product when they leave the store. 

Piper's Hanczor argued that the biggest potential near-term improvement for beacons is expanding who will be making the offers to consumers. Today, it's overwhelmingly retailers and consumer goods manufacturers. But why not get banks in on the action?

He spoke of a beacon detecting a shopper standing for 10 minutes in front of a display of 4G televisions.

"This creates an opportunity for the issuer, a Chase card or a Citibank card, to beam out an offer based on standing in front of an item," Hanczor said. "Maybe it's 'have a few months of no payments.' We could work with different processors to make these services work with their merchants."

At a sports arena, one implementation offered seat upgrades instead of discounts, said Ted Mann, CEO of digital coupon company SnipSnap. The beacons were placed "in the nosebleed section, and they offered instant upgrades via the mobile app," Mann said.

But this type of location-based interaction has a downside, Mann said. In his firm's testing, they learned that a shopper using an iPhone can inadvertently shut off beacon capabilities by turning off geolocation, he said. That may prove to a bigger hurdle because shoppers—wary of privacy perceptions—may be inclined to shut down geolocation tracking.  

The biggest hurdles for beacon-based payments relate to security. A beacon requires that smartphones need to be connected wirelessly and have Bluetooth activated, which makes the user's device just as visible to hackers as it is to retailers. 

"There are a large number of Bluetooth sniffing and wardriving software out there. We recommend people keep Bluetooth off," said Wolfgang Goerlich, a cybersecurity strategist at CBI, an IT risk management company. He adds that there are essentially no ways to secure Bluetooth communications, which are essential for beacon interactions.

"Bluetooth is easier to fake than NFC and it doesn't require you to do anything physical. (Thieves) can attack the phone and take control of the phone," Goerlich said. "This is huge potential identity theft. They can install back doors, take over camera, microphone and they can mimic the biometric authentication."

Other communication methods, such as WiFi, are also vulnerable to data thieves, Goerlich said. The better approach would be to improve security on the device itself and to improve authentication of the user when handing over any purchases.

"Pickup fraud is just moved forward, even if you're following all the proper procedures," Goerlich said. "You're swapping one kind of friction for another."

The beacons themselves might also become targets for theft, since they are small and easily moved.

Shifting the payment to Bluetooth and away from current mobile wallet technologies such as NFC abandons many of the security benefits inherent to those systems, Cisco's Shenoy said.

"NFC has the better security infrastructure, when compared with BLE. NFC was built to do payments," he said. "I would be very wary of using Bluetooth. In terms of stringent security requirements, BLE is not there yet."

But when it's comes to shoppers—especially in the U.S.—just because something is insecure doesn't mean it won't be widely used.

"Whenever it comes down to convenience versus security, consumers opt for convenience," Goerlich said.

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