NFC & Mobile Payments - are we ready?
Mobile Payments and NFC adoption by retail banks have been slow to take hold over the recent years. The slow adoption can be attributed to a lack of mobile handsets to offer the capability to consumers. Mobile carriers are now starting to provide handsets with NFC capabilities built into them, so look for the consumerization of NFC-enabled handsets to take shape over the next 12 to 18 months.
Retail banks have been experimenting with mobile banking capabilities over mobile handsets for the last several years. Look for banks to begin incorporating NFC and mobile payment capability into those applications as consumers start to demand it. Retail banks also have their eyes on PayPal, who has been offering person-to-person mobile payments now for several years and has recently introduced remote deposit capture capabilities into their mobile application.
Cisco is positioned to provide infrastructure products and solutions to compliment a broad scale deployment of NFC capabilities both on the carrier side as well as in the Enterprise and Commercial space. Look for Cisco to utilize our partner ecosystem to round out our solutions and capabilities in this area. As consumers begin to adopt the use of mobile payments more and more and retail banks begin to make modifications and upgrades to their infrastructure to support the service, I look for this to become more of a focus internally. As their customers start to adopt NFC, Cisco can provide security technologies, load balancing solutions as well as their UCS platform to help retail banks prepare for the onslaught of mobile payment users which is expected to grow to $245 billion in payments by 2014.
The History of NFC
Although the term is being used more and more, many firms have been excited about the prospects of near field communications (NFC) and its potential to transform their businesses. In 2004, Nokia, Sony, and Royal Philips Electronics founded the NFC Forum. Since that time, 150 firms have joined the forum with the primary objective of advancing the use of NFC technology. The forum's approaches for developing this technology are threefold:
- To jointly develop specifications.
- To ensure the interoperability amongst devices and services.
- To educate the marketing about NFC technology.
To support this vision of the forum, there is a cross section of financial services firms, hardware and software manufacturers as well as public and private transport companies as well as retailers that are members of the NFC Forum.
What is NFC?
To technology behind NFC is based on the technology found in radio frequency identification (RFID) tags, contactless payment cards, and inductive coupling. RFID tags are a technology that uses radio waves to transmit data from an electronic tag to a device capable of receiving those radio waves. There are several types of tags i.e. active or passive RFID tags, and there are several forums that have set standards for the use of RFID tags.
Inductive coupling involves magnetic fields, which is a naturally occurring phenomenon of electrical current moving through a wire. Anytime current moves through a wire, a circular magnetic field is created around the wire. Bending the wire into a coil causes the magnetic field to be amplified. It is this technology that is used to control the distance that a RFID chip works and hence limits the range that NFC technologies work.
According to the specifications published by the NFC Forum, NFC can operate in one of three modes:
- Reader / Writer Mode: In this mode, a reader/writer can collect and write information on a smart tag. NFC Developer Innovision explains the concept in a white paper they authored as the tag essentially being an integrated circuit containing data and connected to an antenna.
- Peer-to-peer mode: As the name suggests, this mode allows two NFC devices to exchange data between each other.
- Card Emulation Mode: In this mode, an NFC Device appears to a reader like a contactless payment card or contactless transportation card.
Due to NFC’s short range, it makes it attractive to use in the card emulation mode in mobile wallet and contactless payment applications.
Current examples of NFC & Mobile Wallet Technology
Google Wallet was officially launched in the third week of September 2011. Google's is referring to their NFC-based solution as Google Wallet. Google has partnered with Citi and MasterCard to provide their service. Google is also launching this initial version on the Sprint Mobile network and specifically on Samsung's Nexus 4G phone. According to published reports, Visa, Discover, and American Express are the next card issuers who are waiting to be included in the next release of Google Wallet.
For a consumer to use Google Wallet, they wave their Nexus phone over a MasterCard PayPass point-of-sale terminal. These terminals are located mostly in taxis, fast food restaurants, and convenience stores. Once the payment has been processed, the PayPass terminal beeps, indicating the payment has been processed. Furthermore, the payment is tied to the Consumer's eligible Citi PayPass-enabled credit card. If the consumer is not a Citi credit card member, then Google is offering a Google Prepaid card, which can be funded with any credit card.
ISIS is a mobile payment platform that is a joint venture between AT&T Mobility, Verizon, and T-Mobile. This technology will use NFC to enable a mobile payment platform across many different smartphones. HTC, LG, Samsung, Motorola, Sony, and RIM are some of the larger manufacturers that have committed to embedding ISIS enable NFC capabilities into the next generation handsets.
ISIS is still in the development stages but according to their website is slated for a launch in select cities in 2012, including Salt Lake City, UT, and Austin, TX. Also, there is no information as to whether ISIS will support global transactions or only transactions in the United States.
Amazon pioneered the streamlined checkout experience when they rolled out Amazon 1-Click ordering capability on their website in 2003. Amazon still relies on traditional payment methods that include ACH debits from a checking account, or the use of a credit card to pay for a transaction. Amazon also offers their branded gift cards as well as Amazon branded credit and financing offerings through Chase Bank USA, NA and GE Capital Retail Bank respectively.
Amazon has also embraced the mobile platform in a big way in that they allow customers to order goods from a mobile based application with the same 1-Click ordering capability found on their website.
PayPal has also introduced their version of a mobile wallet, which is more like a mobile payments platform. PayPal's approach has been to remain carrier and payment card agnostic. PayPal is relying on their software to act as a mobile payments platform as well as a person-to-person payment platform.
PayPal has some convincing data to back up their approach to the future of mobile payments.
- As of Q2 2011, PayPal has 100 million active accounts (with activity within the last twelve months) and is available in 190 countries.
- PayPal supports 25 currencies, so it has global capabilities for mobile payment processing.
- PayPal has localized websites in 21 countries.
- As of Q2 2011, PayPal revenues for the quarter were more than $1 Billion, a 31 percent year over year increase
- PayPal’s international business generated $521 million in revenue in Q2 2011, up 39 percent year over year. International revenue represents nearly 49 percent of PayPal’s overall revenue.
- PayPal has an extremely low loss rate at less than a quarter of once percent (0.23%)
- According to a Forrester report, PayPal’s total payment in 2010 represented nearly 18 percent of all global e-commerce.
- PayPal transacted nearly $3,650 in Total Payment Volume every second in Q2 2011.
What are retail banks doing to support Mobile Payments and NFC?
The value of mobile payments is expected to surge more than seven-fold by 2014 according to research firm Gartner, Inc. In the same study, Gartner estimates that total transaction volume will be $245 billion.
Since NFC is a cashless, and in many cases a cardless solution, banks will be forced to modify many of their business processes to account for this payment medium. Banks are already accustomed to moving payments via the Automated Clearing House system (ACH), so the introduction of card-less mobile payments should not be a massive change in existing business processes.
As with any new technology, there will be security issues to contend with concerning securing the end-to-end payment process. Banks will need to ensure that the entire process is secure, or consumers will not embrace the technology. Look for banks to employ multi-factor authentication to improve the security of the transaction.
What is the short-term sentiment of retailers?
In most cases, due to the technology of NFC, retailers will be forced to retrofit, or completely change their POS solutions to accommodate the acceptance of NFC-enabled devices. Retailers will be somewhat reluctant to make this investment, especially in the current economic environment, if there are not clear benefits for the deployment of NFC in their stores.
What are the business drivers for NFC adoption?
Many of the business drivers exist on the consumer side of the equation. As handset manufacturers begin releasing handsets with NFC capabilities and the mobile carriers start selling those devices, it is expected consumer demand will slowly drive the industry to embrace NFC on a large scale.
Mobile carriers may work on ways to provide cashless transactions via NFC and allowing the customer to pay for NFC-based transactions as part of their mobile bill.
From a retailer's perspective, NFC is believed to enhance and streamline the checkout process. Instead of a consumer having to carry around cash or credit cards, they just can swipe their NFC-enabled phone to pay for their purchases.
What are the barriers to entry for NFC adoption?
Industry experts still contend that most consumers are just not comfortable with the NFC and mobile payments platform. In most cases, their mobile payment platform is their physical credit card. Some of these experts contend that the killer application for mobile payments just hasn't come to market yet.
With that being said, MasterCard International has conducted some recent research that has shown that the younger generations, such as Generation Y, are the most likely adopters of mobile payment and NFC enabled platforms. In this research, MasterCard found that members of Generation Y are not using their phones just to shop, but also further to build relationships with the brands that they like. This generation, especially, considers their phone an enabling device, helping them connect to their social network in a multitude of ways. They now expect retailers to engage with them on their mobile devices, whether it is a smart phone or tablet, as they compare products and services with their friends on their social networks. Ultimately, this generation will then use a mobile payments platform to make a purchase over these very same devices.
Mobile banking application usage differs widely among customers of different credit cards and banks. According to Lightspeed Research:
- Smartphone penetration is highest among American Express and HSBC customers – both at 37%.
- Discover is the only card issuer with more than 50% of it customers still using “basic mobile phones.” In line with this, they have the lowest penetration of smartphone users at 28%.
- 37% of Wells Fargo credit card customers said they had downloaded the Wells Fargo Mobile – the highest penetration among the card issuers that Lightspeed analyzed.
Without the use of encryption technologies, NFC is not a secure transport mechanism. Look for regulators to require secure transport of all mobile wallet and NFC-based payment transactions.
The FFIEC (Federal Financial Institutions Examination Council) already is requiring a layered security approach and stronger authentication methods for online banking environments. Banks have used out-of-band authentication methods to help mitigate the myriad of security threats that exist in the online banking environment such as key loggers, malware, and MITM (man in the middle) attacks. Regulators will be applying this recommendation stating in January 2012. It is anticipated that these same sorts of methods will be used to authenticate and keep mobile payments and NFC payments secure.
What’s in it for Cisco?
Cisco is well positioned to provide many products and services as our customers being to embrace mobile payment solutions. Look for opportunities in the financial services space centered on infrastructure and application security as well as the application infrastructure to run these new payment systems.
As mobile payments opportunities increase for banks, many banks will be looking to deploy these applications on dynamic infrastructure, much like offered by the Cisco UCS platform. Cisco's UCS platform allows banks to dynamically grow their mobile payments platform to meet the needs of customers during heavy seasonal periods of demand.
I would anticipate Cisco to continue to make strategic acquisitions of firms that are involved with providing hardware and software that support mobile payments or NFC platform.