Most of my last week was spent on this discussion – online, offline, phone, home, work, everywhere! So I thought I will write those points here. These are my opinions and feel free to support me or bash me up

NFC based wallet requires a complicated ecosystem. At a minimum, there needs to be support/involvement from the payment networks, issuers, a TSM, POS manufacturers and MNOs  apart from the wallet provider.  The TSM manages the unique secure element, the MNOs distributes the phones, the payment networks and issuers need to agree for Card Present (CP) rate and so on. Not an easy co-ordination task for the wallet provider, especially many of these players are coming up with their own wallets.

See how ISIS is stuck and how Google is struggling to grow its user base?  If you have a Citi card and have a Sprint connection and a particular phone model, you can shop at some stores with a Google Wallet. That possibility is almost close to finding a $10 note on the street I don’t even want to get into the ISIS model. A consumer can add only certain cards that ISIS approves!!

So, all these complexities to get a Card Present (CP) rate from VISA/MC?

Look at Paypal and Pay with Square cloud-based solutions. Elegant! They don’t get a CP rate, but they are building up their user base. So, what can be done to avoid CNP rate in a cloud-based wallet?

1. Provide alternate payment instruments in the wallet. Not an easy task, I know, but life isn’t either. If you can develop and issue your own pre-paid cards, you don’t have to worry about the issuers/payment networks! Google is on the track to do this. With their TxVia acquisition, they can provide this stored value payment instrument.

2. Use ACH as a funding mechanism and recommend the user to pay with those funds. This is what Paypal does when the users link the bank accounts to the Paypal accounts. Of course, there is credit risk, but if you have a good risk management system, you can do this!

3. Work with a bank to set up a decoupled direct debit system.  Target does this with its physical REDcard through its TargetBank. It is a long shot,  but worth looking into it.

4. Have a great risk management system, underwrite the fraud losses and convince V/MC/AXP and the issuers to enable CP rates.  This requires you to have at least 400m credit card users, a great historical transaction database and a clout to challenge/convince the financial organizations. Oh yeah, I almost forgot. You need to have at least $100b in your bank – in case you !

To conclude, I guess the best approach is start with a cloud-based wallet and when NFC becomes more ubiquitous, use that to build a secure, elegant system. So, the strategy should not be “Cloud Vs. NFC” but more of a “Cloud and NFC wallet”.

Note: I just heard that Microsoft plans to use a secure SIM as an identity mechanism for its wallet. Looks interesting, but need to checkout more details..