Banks have much more to fear from cloud-based mobile payment than from NFC, even if mobile operators control the secure elements that hold the banks’ payment applications.
That’s according to senior analyst Zilvinas Bareisis of U.S.-based research and consulting firm Celent, whose new report, Launching NFC Payments, draws on lessons and observations from recent launches in the emerging mobile-payments arena.
Bareisis, who is based in the UK for Celent, a firm that focuses on financial services, noted that the firm had long been skeptical of the viability of NFC payments in developed markets because of its complexity, upfront investment, delays in availability of phones and the uncertain value proposition so far.
But the “NFC train seems to be gathering steam," he said.
“Whether we want it or not, NFC is happening,” he told NFC Times. “It’s easy to dismiss NFC as: ‘it’s too late; it’s all these issues.’ The fact of the matter is, these issues are getting resolved. If banks aren’t careful, others will steal the march on them.”
Cloud-Based Threats
Among the threats are cloud-based wallets and such technologies as QR codes, which are not a friend of banks. But delays and other issues holding back NFC could give these technologies an opening, Bareisis said.
PayPal, an Internet player that is eschewing NFC for cloud-based technologies as it tries to make its move to the physical point of sale, is one such major threat. U.S.-based mobile-payment startup LevelUp, which uses QR codes to trigger cloud-based payments, is another example of a possible threat, though NFC could also serve as a trigger in the future to cloud-based payments.
Google Wallet, in its present form, conducts an NFC-based transaction at contactless POS terminals supporting MasterCard PayPass with a Google sponsored prepaid card. These transactions are then funded by cloud-based credit or debit cards consumers can load into their wallets. Google is believed to be restructuring its wallet.
While bank-issued credit cards could fund transactions for these cloud-based services, the banks still lose the relationship with their customers, said Bareisis.
“Alternatives–the world moves to cloud solutions, and cloud solutions banks can’t control,” he said. “There is a loss of relevance, even if the bank doesn’t lose the transaction.”
NFC in card-emulation mode “remains an attractive technology for payments because it offers a guarantee of payment to merchants, uses hardware-based security and “tapping is easy and fast,” said the report.
“The banks still keep those relationships, they still keep and get the same interchange revenue as they would in normal card transactions, as opposed to cloud transactions, (in which) the other party takes the merchant revenue,” Bareisis told NFC Times.
NFC Infrastructure Investments Ramp Up
There are signs that industry players are ramping up investments in NFC, said the report.
It noted that NFC infrastructure is expanding, including nine of the top 10 handset manufacturers supporting NFC, with the notable exception of Apple, and more than 100 NFC phone and tablet models released as of the end of 2012, with “many more planned in 2013.”
In addition, smart card vendor group Eurosmart is estimating a large increase in shipments of secure elements for NFC phones, said Bareisis.
The vendor group estimated shipments of 150 million secure elements globally in 2012 and projected a large increase to 250 million in 2013, as NFC Times reported. Most of the secure elements in both years will be embedded chips in NFC phones, with nearly all of the rest NFC SIM cards.
Premier among the handset makers rolling out embedded chips is Samsung Electronics, which has deals with Visa and likely other payment brands, such as MasterCard Worldwide, to preload their applets on the chip, to be personalized over the air by trusted service managers.
The base of contactless point-of-sale terminals is also growing, noted Bareisis and contactless card figures are growing quickly, as well, in a number of markets.
According to MasterCard, more than 550,000 retail locations globally could accept its PayPass application at the end of the third quarter of 2012 and that increased to 700,000 locations globally at the end of 2012, NFC Times reported. Many of these locations have multiple contactless terminals. And Visa Europe recently estimated that there were more than 700,000 active contactless point-of-sale terminals in Europe accepting Visa payWave. Most of the same merchant locations and terminals that accept PayPass also accept payWave, and vice versa.
“Perhaps most importantly from the bank’s perspective, NFC offers an opportunity to maintain leadership in mobile payments by ensuring bank-issued credentials continue to be used for core payment transactions,” said the report. “However, many NFC projects today are driven by mobile network operators, which see payments as a source of new revenue and as a way to reduce customer churn. There is a risk that banks may find themselves in the back seat even in NFC payment solutions.”
Among scenarios in which banks could get squeezed by telcos with NFC is if telcos are successful in moving deeper into the payments business, as many of them hope to do.
Major mobile operator groups in Europe have been doing deals with Visa and MasterCard to roll out co-branded cards and applications for their NFC SIM cards. In some cases, such as Deutsche Telekom in Germany, the telco will issue its own payment application–in this case, supporting PayPass and using an e-money license recognized in the European Union.
“What happens if the customer takes that (telco payment) account? If all it does is replaces cash, then it’s good news for the banks, saving on ATM management, less cash (handling),” Bareisis told NFC Times. “I suspect that will go beyond cash replacement. There is a risk even with NFC, banks might be pushed. Nobody knows how consumers will adopt this. There are scenarios where this could eat into what banks are doing.”
Bareisis’ research included a look at some early NFC launches or large pilots, such as Google Wallet, Isis Mobile Wallet, Quick Tap from Barclaycard and Orange UK, and Move and Pay by Intesa Sanpaolo bank of Italy. It also included some study of moves by such banks as Barclays in the UK, France’s BNP Paribas, Garanti of Turkey, la Caixa of Spain and NatWest, also of the UK; and activities by such telcos as Everything Everywhere of the UK, Germany’s Deutsche Telekom, Canadian telco consortium EnStream, Spain-based Telefónica and Turkcell of Turkey.
Business-Model Issues
Beyond the obvious advice, such as ensuring the new mobile payment services are secure and well-promoted to consumers, for those banks wanting to launch NFC, Celent recommends they approach negotiations with telcos and other parties carefully and agree on a business model.
He said mobile operators and other new players in the payments ecosystem should forget about trying to get a cut of the payment transaction fees that banks earn.
And banks should “expect to pay for provisioning their payment credentials on mobile phones, but should try to keep those costs consistent with the cost of card issuing.”
Telcos are generally asking for more than what it costs banks to issue cards for SIM rental fees or related options, however, NFC Times has reported. And banks still have to continue to issue cards. In addition, some telcos are still pushing the idea of earning a cut of transaction fees, perhaps in exchange for reducing or not charging SIM rental fees, sources have told NFC Times.
Besides SIM rental or related costs, some mobile operators have discussed charging fees to banks for offering other services, such as real-time communication and messaging, said the report.
Besides playing host to payment applications on their SIMs, mobile operators or telco joint ventures, such as Isis in the U.S. and Weve in the UK–the latter a group of the three largest UK telcos–are interested in trying to earn revenue from fees for giving merchants opportunities to advertise through their wallets. The telcos’ mobile-commerce platforms would enable merchants or other advertisers to send targeted promotions to consumers.
Weve is believed to be putting off enabling NFC payments until next year and is focusing more on “accelerating the development of mobile marketing and wallet services in the UK,” said Bareisis in the report.
The mobile-commerce play involves monetizing data. But he cautioned that the various parties have only certain rights to access data. Consumers should have access to their own transaction data, while merchants should only have a right to access data for customer transactions in their own stores. And payment credential issuers should get access only to transaction data from their own applications.
“Anyone else can only access customer data if the customer has given them explicit permission to do so,” said Bareisis.