Insights & Resources3 min read

SMS Payments: 101

SMS payments are a mobile payment method. And, they’re one of the fastest growing segments of the mobile payment market.

Michael Bratschi
SMS Payments 2x
SMS payments are a mobile payment method. And, they’re one of the fastest growing segments of the mobile payment market. Unlike other mobile payment methods, the buyer doesn’t need a smartphone to use SMS payments. They only need a text capable phone.

If your business doesn’t accept mobile payments, now is a great time to start. Here’s all the ground-level information you need to get started.

What are SMS payments?

SMS payments are useful for almost any transaction. The SMS payments infrastructure is easy and inexpensive to set up. And, the cellular service provider handles the banking transactions. So, businesses can accept SMS payments for both online and offline purchases. SMS payments can be used for loan and purchase plan repayment. People can even send money to each other using SMS payments.
SMS payments utilize a premium SMS to ensure that companies receive payments. When a purchaser sends an SMS to pay for an item or service, the message is sent to the mobile payment providers, who approve transactions between the purchase and the vendor. Transactions are added to a vendor’s monthly phone bill or deducted from a prepaid balance by the mobile phone operator. SMS payments are advantageous for both customers and vendors because it allows customers who don’t have a bank account or credit card to make purchases.
There are a few different ways that vendors can initiate a mobile payment.

Types of Mobile Payments

The types of mobile payments vary depending on vendors’ preferences and the nature of the customer’s purchasing journey. Here are a few ways that SMS payments can be made:
  • Through a website and a code: The customer is directed to a web page, where they are given directions to text a code to a number on the screen. Then, they will receive a text confirming their purchase, and will receive access to their ticket or receipt.
  • Through entering a phone number onto a website: A customer is prompted to enter their phone number in a field on the website. The SMS payment provider texts this number with a code, which the customer uses to access online content.
  • Through a direct text: This method is most widely used by charities and organizations like transportation providers. In this case, customers send a text to an advertised number and receives their purchase confirmation in return.

How to Set Up SMS Payment System

There are a few steps involved in setting up an SMS payment system and a few requirements that you will want to follow.
  • Choose a phone carrier setup: The most common type of phone carrier setup for SMS payments is for charities, where a donor texts a certain word to a number to give a donation. While this can be convenient, this setup is usually not great for business use cases because it often limits transaction amounts between $5-15$. Therefore, it is important to choose a carrier setup that supports the kind of messaging volume and transactions you’re expecting for your business.
  • Decide what channels you want to use: SMS style payment systems can actually be used with other social channels like Facebook, WhatsApp and Instagram. If your customer base might benefit from these additional methods of payment, it might be valuable to look into a service that provides a universal system across texting and social media apps.
  • Set up your messaging flows: SMS payments also double as a great marketing tool, and they can also serve as a way to alleviate friction in user experience by adding context to the payment interaction. Think through the points of entry that your customers will have to your payment system (from the SMS payment types above) and craft your messages in an intuitive and easy-to-understand manner. If you’re looking to automate responses for your payment system, it may be valuable to segment these responses based on relevant categorizations.

Accept Mobile Payments

When you decide to accept payments by SMS, you’ll work with a SMS provider that you can purchase and provision phone numbers from. Ideally, the SMS provider will also have a dashboard or other interface so that you can manage your texts and payments. You’ll also need to create an account with a processing company that enables SMS text payments. Once you start accepting mobile payments, you can leverage reporting and analytics to measure granular metrics like engagement, and use data to drive interactions like loyalty programs or promotional content.

SMS Payment Regulations

Beside from the general regulations regarding sending SMS to consumers, you might be curious about whether any other rules apply because of the nature of SMS payments.

What about PCI compliance?

Since the financial transactions are handled by the mobile phone provider, PCI compliance is usually not an issue for businesses that accept SMS payments.

PCI data security standards apply to companies that accept, process, store or transmit credit card information. The business that takes the SMS payment essentially sends the bill to the mobile phone provider, and they deal with the monetary transaction when it comes time for the buyer to pay their phone bill.

However, if you’re a mobile phone service provider who sends the cell phone bills, you must handle all credit card payment data in a secure environment, and encrypt credit card information whenever you store or transmit it.

Choosing an SMS provider

Typically, you need to purchase a short code number to accept SMS payments. This means choosing an SMS provider. When you assess an SMS provider, there are three major things to consider:
  • Security. Even though you’re not sending credit card information, it’s best to avoid exposing customer purchase information to potential cyberattacks. So, an ideal SMS provider transmits data over a secure private network, away from the public internet where information is easy to intercept.

  • Deliverability Any undelivered SMS payment message will cause an incomplete transaction. This issue is correctable. But, dealing with undelivered SMS payment messages erodes the convenience of SMS payments for both the business and the customer, and could cause payment delays if the purchase gets pushed to the next month’s cell phone bill.

  • API connectivity SMS payments are the most convenient when they’re almost entirely hands-free. An API enables you to integrate your SMS payments into your payment processing or point-of-sale system and accept SMS payments automatically.

Accepting SMS payments is quick and easy to set up. You don’t even have to add any credit card processing or bank connections. All you need is a short code number and a reliable SMS provider.

If you’re not using SMS payments yet, there’s no reason to put it off anymore. The first step is finding a suitable SMS provider for your short code number. Start by learning about Telnyx programmable SMS.
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