What's holding mobile payments back this holiday season?

Why aren't smart phone users paying at stores with their phones? The short answer to this complex question is user loyalty incentives that integrate with a centralized mobile payment hubs and education on the security standards of mobile payment systems.

Only 14 percent of U.S. adults with a smartphone or similar device plans to make even one purchase using mobile payments during the holiday season, according to personal-finance website Bankrate. Over the past year, only 28 percent of smartphone users made a mobile payment, according to the Federal Reserve.

Part of what's holding mobile payments back is there is a generational gap. The newest generation of shoppers, Millennials, are more comfortable making mobile payments than older generations. According to a report by the Consumer Technology Association, 70 percent of respondents between the age of 18 and 34 used a form of mobile payment, compared with 46 percent of respondents over the age of 35. Additionally, 35 percent of respondents between 18 and 34 years old say they're comfortable replacing all forms of payment with mobile payments, compared with 27 percent of respondents over the age of 35.

"Millennials rely on technology to allow them to shop in the most personalized and convenient way, and they'll remain loyal to the brand that recognizes them for their loyalty status," Don Yee, vice president at Boston Retail Partners, said. "In a way that loyalty will inspire them to spend more on a shopping trip and shop more often."

As far as all smartphone users go, analysts expect mobile payments to become more widely adopted in the future, but what's really holding it back now is incentivized loyalty and concerns around privacy and security.

Integration with loyalty rewards programs

Starbucks has arguably had the most success with mobile payments, with 20 percent of the coffee company's transactions in the U.S. made from mobile devices, up from 9 percent in 2013.

To reach that level of success, there needs to be an incentivized loyalty component. Nordstrom, which supports use of its store credit cards in the app, is another leader in this space, according to Yee. Customers can search the availability of products at local stores through the app, receive notifications when items become available when flagged on a wish list and find out when they can pick up the item. When customers receive the catalog, they can scan items they're interested in buying with their smartphones and purchase directly through the app. When checking out, the app scans the user's fingerprint on the phone as a security measure. Nordstrom shoppers accumulate points, promotions and personalized recommendations all in one place, rather than having separate experiences with the brand over snail mail, email and mobile, effectively eliminating the need for a physical Nordstrom credit card.

Other retailers, like Kohl's, see significant competitive advantage in its loyalty program, which features a wallet built into the mobile app. Tests have shown that loyalty customers, almost 60 percent of who don't have Kohl's charge cards, made two extra trips to the store and spent an incremental $80 per year, Ratnakar Lavu, Kohl's executive vice president for digital technology, told The Wall Street Journal in December.

All the perks associated with mobile shopping apps are great for consumers, but there should be a centralized hub, such as Android Pay, where users can make all purchases and reap rewards benefits. Both Nordstrom and Kohl's works with major mobile payment carriers, but overall these big box retailers are in the minority. A June report found that 87 percent of small merchants still do not accept mobile payments.

"It's not working the way it should be working," Yee said. "There needs to be additional due diligence to integrate the systems."

Security

Shoppers are wary as it is of their financial information being stolen. Given that mobile payments are a relatively new retail experience, we're even more cautious of connecting bank information to mobile apps and payment systems.

Mobile payment carriers use tokenization and fingerprint scanners over pins and passwords to authenticate payments. Tokenization requires the merchant and the issuer trade numbers that represent a person's real card number rather than the card number itself.

But most people don't understand exactly how their payments are authenticated, according to Jonathan Goodyear, founder and CEO of PlumReward.com.

"There's still this feeling of insecurity," Goodyear said. "Customers are always worried about their financial information, especially when there's a lot happening behind the scenes."

Some argue that tokenization and fingerprint scanning aren't enough to protect consumers, and that mobile payments must tie the identity of users to payments in other ways.

"Features such as proximity to Wi-Fi locations, 3G location, GPS data and the number and type of applications on the device build a unique profile for each phone," Richard Moulds, former vice president of product management and strategy for Thales e-Security, wrote in Wired. "Although not a silver bullet, they can comprise a valuable resource in determining the likelihood of a fraudulent transaction."

Banks have vast experience handling consumer financial information electronically, and consumer trust is what allowed mobile banking to become popular. It remains to be seen whether smartphone makers will achieve that same level of trust to propel mobile payments.

"Retailers and mobile payment carriers recognize that concern and are putting a lot of effort to eliminate it," Yee said.

Ultimately, there needs to be more value in mobile payment systems across the board to compel shoppers to use them.

"The consumer needs to see that retailers' app is engaging and offers functionality and services beyond the norm, and the retailer needs real-time capabilities in terms of knowing the customer and servicing them," Yee said. "Once the consumer feels safe making payments and is engaged with the app, they'll be more likely to use it."