The Magic Touch

For many within the mobile financial services ecosystem—and in particular for mobile operators—mass adoption of NFC-enabled payment from the mobile device is the end game. For years now, the tap-to-pay dream has been held up as The Future, positioning the mobile phone so visibly at the centre of the transaction. But here we are in 2012, and the use of mobile phone-based contactless payment is still far from mainstream. In fact, it remains decidedly niche.

It is not altogether absent, and advocates of the technology are keen to point to Japan and South Korea, where

NFC-enabled handsets are in ready supply, and services that exploit their presence are well established. In South Korea NFC handsets are “flying off the shelves” says Nav Bains, business lead for mobile NFC services at GSMA. In 2011, five million units were sold in the market, he says, enabling ten per cent of the population.

And forecasts for future uptake elsewhere in the world offer signs of encouragement. A recent report from analyst firm Berg Insight shows that global sales of NFC-enabled handsets increased ten-fold in 2011 to 30 million units, with 40 different models from a range of vendors on the market. The report also finds that sales of handsets are growing at a compound annual growth rate of 87.8 per cent and forecasts that shipments of NFC handsets will hit 700 million units in 2016.

But availability of the handset and uptake of a specific service are two very different things—and in research firm Gartner’s Hype Cycle for Emerging Technologies, 2011, published in the summer of last year and outlining the firm’s predictions for the take-up of new technology, NFC was at the “Peak of Inflated Expectations”. This translates into Gartner’s belief that the technology is four to nine years away from mainstream adoption.

In addition, a survey carried out at this year’s Mobile World Congress by mobile commerce and messaging firm Sybase 365 found that 81 per cent of mobile industry executives believe that NFC will not emerge as a driver for mass adoption of mobile payment services for another two to five years. Less than ten per cent of delegates polled said they believed that NFC payments would become mainstream in the next year.

So why is it taking so long for NFC-based mobile payment usage to become popular? As you would expect, there are a number of reasons. The first is the simplest; handset vendors do not necessarily have NFC at the top of their ‘to-do’ list. “NFC is a handset issue,” says Fred Huet, managing partner at Greenwich Consulting. “And at the moment the handset manufacturers are having to share their profits with the OS manufacturers, so subsidising NFC as well is not a top priority for them.”

Second is the fact that, within the complex, multi-faceted mobile financial services ecosystem—where several groups of stakeholders are vying for leadership—SIM-based NFC is viewed as the mobile operators’ ace card, raising their importance in the value chain. “Mobile NFC means that financial institutions will have to share part of the revenue that they see from pure payment solutions [with MNOs] says Jean-Noel Georges, smart cards director at Frost & Sullivan. “This is why they were not interested [in NFC] before,” he adds

The third reason for the delay is more subtle. There is a conflation of NFC and mobile payments in the outlook of some within the industry that does more to confuse the issue than to clarify it. “I’m still not convinced why some people are linking NFC and mobile payment,” says Fred Huet. “NFC is a means to an end, it’s not the end in itself—it’s just a connection.”

Indeed payment is just one possible use case for NFC, and not one that has a powerful enough pull to accelerate the deployment of the contactless technology. The vision that NFC technology providers have involves services that allow consumers to simply tap phones together to share information, photos or other content, or to automatically set a driver profile for a family car, for example. Those in the payment space are more concerned about the take up of NFC than the NFC technology providers are about the take up of payments.

This reflects perception of user demand for NFC. “Nobody is going to buy a mobile phone just because they can use it for mobile payments,” says David Birch, director at Consult Hyperion. “Once they’ve bought it for some other reason, then they will start using it for payments. But payment is not a buying trigger,” he says.

It is for this reason that US mobile wallet provider Isis, owned by Verizon, AT&T and T-Mobile and set to launch in the summer of this year, has chosen launch markets where NFC is already popular for other reasons. “The reason we’re in Salt Lake City (Utah) as one of our first markets is because the city’s public transit system is open loop contactless-enabled. You can tap to ride with your NFC-enabled bank card. They’re the first in the US to have this, so it will work with your phone too,” says Jaymee Johnson, head of marketing at Isis.

Orange is another operator exploring a variety of uses for NFC in a bid to help stimulate the payment business. It has mobile payment partnerships in the UK with Barclaycard and in France with BNP Paribas, but it is taking a wider view of the technology and its potential. “The core proposition that we offer is enabling third parties to use a security infrastructure that we put in place and operate, which is based on the secure element,” explains Vincent Barnaud, director for contactless services at Orange.

“But a secure element connected to nothing is useless, so we don’t just provide the SIM, we provide the full system to which third parties can connect so that they can download their private data into the hands of the customer. They can develop their own business with their own customers, which happen to also be Orange customers.”

Barnaud says that the operator is in the R&D stages of its NFC-related work with airlines. But it has successfully carried out concept demonstrations with airline association SITA, where boarding passes have been loaded onto a smartphone SIM to enable a passenger to go through a boarding gate, using NFC as the connection.

Orange is also working with hotels, to provide guests with a key to their room embedded into their handsets, and with car rental companies, so that customers can register and then get the keys of the car in a city, rent it for a period of time, and then leave it somewhere for the car to be ready for somebody else.

“We have demonstrated we can do this for large number of use cases,” says Barnaud. “What is missing is the number of customers that are able to use it, which is why we have seeded the market with handsets and SIMs to create the customer base because we believe the service providers are ready to go if and when there is a customer base ready to use it,” he adds.

While it doesn’t make sense to lump NFC and mobile payments together, they do have one thing in common: How Apple will play in both spheres is the source of much anticipation within the mobile industry. Apple’s ability to drive fundamental shifts in user behaviour, while not infallible, is rightly taken very seriously and NFC is just the kind of technology that the firm has the knack for exploiting with dynamic results.

“Once we see the likes of Apple integrating NFC into the iPhone, then we’ll start to see other use cases, perhaps using NFC to access office documents, or for airport check-in,” says Simon Collins, VP at Praesidium, the business consulting division of WeDo Technologies. “There have to be a number of uses that act as a catalyst for why I would use this type of payment,” he adds.

The inclusion of NFC was expected with the iPhone 4 and 4S and, Apple being Apple, the reasons for its absence are anyone’s guess. Paradoxically for mobile operators, though, there is a feeling that—when Apple does embrace some kind of mobile payment and deploy NFC—it will not be along the lines that the operators have in mind.

“Apple will find some way of making NFC really cute to use. But it is very unlikely that Apple will play the game and go with SIM-based NFC,” says David Birch. “In fact, I’m sure they won’t.” »

Indeed there are alternatives to NFC for payment, and some believe there is a real opportunity to embed, exploit and extend the reach of these alternatives during the time it takes for NFC to become mainstream. Premium SMS and operator billing are two options that will be used by the Swedish mobile wallet JV 4T when it launches in the summer of 2012 (see feature, p10 and interview p16), for example. There are also “siren voices” calling from the cloud, according to Consult Hyperion’s David Birch, while a number of retailers are seeing traction with self-branded smartphone apps.

This is not to say that NFC-payment cannot be done. One operator that has successfully exploited the opportunities NFC has to offer is Japan’s NTT DoCoMo; a favourite among NFC proponents looking to demonstrate proof of concept. Japan is one of the most mature markets for mobile payment services; DoCoMo launched its mobile wallet in 2004 and has been processing mobile payments for the mass market ever since.

But this example is one that is difficult for other operators to follow, says Ovum analyst Eden Zoller. “The Japanese market is quite unique; at least, NTT DoCoMo’s role in that market is quite unique. It has a very dominant position in the entire mobile ecosystem, not just payments. It has been able to create a payment ecosystem around its core proposition because, way back, it invested in a credit card issuer and developed its own proprietary technology with Sony—the FeliCa mobile payment network,” she says.

In fact, DoCoMo’s mobile payment proposition is so entrenched that FeliCa is licensed to other operators. But there are few operators in other markets that enjoy such a position.

“The Japanese have shown you can do it, but they’ve only shown that you can do it on a proprietary system,” says Orange’s Vincent Barnaud. “No-one outside of Japan is willing to do this using a proprietary solution—nobody is like DoCoMo. In other markets, stakeholders need to come to an agreement which works on a standard solution, and that takes more time.”

Nonetheless, there are lessons to be learned from NTT DoCoMo. Nokia’s Juha Kuosmanen, director and group manager for the firm’s Windows Phone programme management, believes that in Japan, stakeholders have been better able to clarify the roles in the ecosystem. “Many of the payment technologies have been adopted quite well because there have been clear players and clear roles in what people are doing in the ecosystem,” he says. “In Europe, or US, everyone is still trying to find their place in the ecosystem.”

Unusual markets like Japan aside, NFC does have key assets in the mobile payment space. The fact that it is a standard, as Vincent Barnaud points out, is essential. “You can use your GSM phone anywhere in the world today to receive voice and data; the standard is at the heart of that interoperability,” says GSMA’s Nav Bains. “By having a similarly common platform for NFC services that is interoperable, the consumer will be able to use the offering wherever they go.”

From a consumer perspective the NFC usage model speaks to the human nature of pointing and touching. It is quicker than other forms of payment authentication, which appeals to retailers, and the NFC can be combined with other functions of the handset; providing haptic or visual feedback on the transaction.

But perhaps the most significant positive for NFC is that there is now serious momentum behind it. “When you see the number of handsets coming to the market and the number of countries where merchants are deploying PoS equipment—it’s just a momentum that cannot be stopped,” says Orange’s Vincent Barnaud. “Really the question is now what will be the value proposition developed by the service providers? How innovative will they be, and how aggressive form a commercial point of view will they be? We have no answer to that.”

Security Services—it’s all about the context

transact-commerce

For mobile payments to take off in a meaningful way, the protection of the user’s funds is paramount. When any new technology that uses sensitive information enters the fray—especially one that deals with users’ money—customers need to feel assured that their details are secure.

But security in mobile payments is not just about he fears of the end user—it is also about the very real costs borne by the financial services provider, which will be held liable for any losses of its customers’ funds. “The user just wants to buy products, but it’s the service provider that has to pick up the pieces if it goes wrong,” says Rob Brown, secure solutions segment marketing manager at ARM.

How security is managed and implemented in the mobile financial services space depends on the business model and the service in question. When SIM-based NFC is the connection mechanism, operators have a significant role to play in security, which many hope to leverage in order to maintain their stake in the value chain. But there are some in the mobile payment ecosystem who argue that it is important, from a security perspective, not to store any personal financial data on the device whatsoever.

“The minute you start storing personal information on the device, there are issues around losing the device and that information becoming readily available to somebody else,” says Russel Sheffiled, director of innovation and development at Paythru “The mobile wallet application also sits alongside other applications, and you don’t necessarily know what they’re doing,” he adds. Sheffield argues that the security flaw recently exposed in the Google Wallet (although that is not handset based), proves the danger.

Earlier this year Google had to address a security flaw in its wallet product that could have allowed a hacker access to the user’s prepaid balance. The ability to provision new prepaid cards was suspended pending the update, and subsequently restored.

“The scare with Google Wallet didn’t help,” says Eden Zoller of Ovum. “And if there’s even a perception that a mobile wallet service might be slightly insecure, it’s going to have a huge effect on consumers.”

“It is the role of the operator/financial service provider to establish the appropriate processes and systems to prevent fraud and to ensure that the system is compliant with regulation,” says Katia Hilal, VP marketing & alliances at eServ Global.  “Security is crucial and recent news shows that a vulnerable system can cost operators excessive amounts.” Yet providers of these services need to balance security with usability. The likely solution to this is contextual security. When buying goods and services below a certain threshold, say €15, the NFC swipe will be sufficient. At a higher spending level a separate PIN might be required. Further up again and another layer of authentication could be added.

Security is the first issue that consumers will think about when using a new payment method, but usability must also be addressed.