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I have been following with rapt attention the enthusiasm about NFC and mobile payments. As an early participant in the build out of the NFC ecosystem and currently a payments consultant, I’m in a position to see both the unequivocal positives of NFC mobile payments technology, and the complexity it will take to build it out. Any serious payment pro knows that change in this market takes time. Consumers will adjust behavior, but over long periods of time. Even the best innovations (and NFC is probably in that class) take many years to displace people’s habits.
Numerous reports have been released about the iPad 2, the iPhone 5 and the inevitablity of NFC and the wonders of mobile payments all that will bring. On Wall Street, expectations like these can be devastating when companies fail to live up. While I”m not worried about Apple’s future, and certainly not their stock price, what about NFC? What if the iPad 2 does not come out with NFC this coming Wednesday? Have the pundits pushed up the NFC expectations so high that there’s going to be a crash in expectations?
The truth is that no one outside of Apple really knows if there will be NFC (or anything else) in the new iPad 2. When Apple rolls out an NFC system, as I believe they ultimately will, it’s bound to change things substantially. Is it realistic to think they could make such a big announcement without any tangible evidence a couple days ahead of time? Maybe so, but it seems hard to imagine. We’ll know if the iPad 2 has NFC soon. But if it doesn’t have NFC, what will happen to the NFC market?
Today the Fed has issued their proposed interchange regulations. They boil down to three key proposals:
1. The Fed gutted interchange by setting prices at least 80% lower than today. They proposed two choices for interchange prices, which amount to a giant win for retailers and a commensurate loss for issuers: Either a flat $0.12 cap, or a $0.12 cap with a $0.07 safe harbor. This means that each bank would have to justify their fees if over $0.07, and they’d still have a hard cap of $0.12.
2. They have delayed any decision on fraud prevention. They aptly pointed out that there are a number of approaches that could lead to improved fraud prevention, and they’re signaling their willingness to give incentives for fraud prevention. It’s not clear whether the Fed will prescribe certain approaches like EMV, but they leave room for that, and I think signal in their proposal an interest in going that direction.
3. They punted the big decision on network exclusivity. The Fed issued two competing proposals for comment and has reserved their judgment on which way to go. Choice One would require two unaffiliated networks for each card, without regard for whether the two networks are Signature or PIN. Choice 2 would require two unaffiliated PIN networks AND two unaffiliated Signature networks. This choice would lead to a big change in the way cards are processed in the US.
There is no doubt that this ruling is heavily weighted towards the retailers side of the argument. Future posts will explore what the secondary and tertiary effects will be including what will happen to alternative payments, and mobile payments in particular.
The AT&T, Verizon & T-Mobile mobile payments venture has been the worst kept secret in payments for months now since Bloomberg ran the story leaking it. Now at long last, it appears they are getting ready to announce it. What’s most interesting, though, is their new CEO, reportedly Michael Abbot of GE Capital. Since they first started a few months ago making rounds shopping this idea (and long before they hired the new CEO) the constant drumbeat I heard from retailers was that this venture was completely tone deaf to their number one pain point: merchant fees. No new payment venture can be successful without addressing this critical issue for retail. By hiring an executive from GE Capital, with one of the largest private label portfolios among retail, they seem to be more attuned to reality. Time will tell whether he can keep the carriers from being too overzealous with merchant fees.
I’ve been saying that this mobile payments company has an excellent shot, despite what some pundits say, because it is built from enormous consumer brands who are excellent at gaining consumer adoption of mobile technologies. They have to navigate the merchant community effectively, and to do so need a leader who will have instant credibility with retailers. Michael Abbott has the reputation to be just that guy. We’ll see how well he can pull it off.
M-Paisa is a mobile payments scheme in Afghanistan modeled after the wildly successful M-PESA in Kenya that was launched in 2007 and now boasts over 12.5m subscribers. From the mobile carrier Roshan paying it’s employees to the Afghan National Police force distributing salaries (and in some cases bumping salaries up to fend off the Taliban), this impressive offering serves as another example where mobile payments are democratizing commerce in the 3rd world. The smart money is on more acceleration on mobile money activities like these around the world.
Although Afghanistan is the poorest nation in the world outside of Africa (36% of the population is under the poverty line), mobile phones are still prolific - 40% of the population has one. Mobile is a natural medium to use for a payment scheme. Of course, a couple of mobile phones does not a payment system make. Critical to the success of M-paisa (like M-pesa before it) is that retailers are the liaison between paper and mobile money. In a real sense, retailers in Kenya and Afghanistan are now the banks for the previously unbanked. Without this critical link between the physical (paper) and mobile (electronic) world, the system loses it’s meaning. After all, being able to get money to my phone is only as valuable as where I can use it or where I can convert it to “real” money. This service will invevitably end up at the point of sale – in fact just last week, M-PESA announced POS acceptance at two Kenyan grocery stores, and plans to bring on gas stations, pharmacies, restaurants and hotels.
You can expect to see many more mobile money initiatives across the third world, albeit limited by the regulatory hurdles of frictionless movement of money… no small consideration in person to person payments. But, that discussion is for another day.
[tags] text message, sms payment, mobile money, money transfer, p2p, person to person payments, mobile payments, global mobile payents, double diamond group, mobile carrier, text to pay, text payment, gsma, m-pesa, m-paisa, remote mobile payments, bill gates, bill & melinda gates foundation /[tags]
This week saw the announcement that Nokia is shipping their C7 smartphone with Near Field Communications (NFC) hardware capability and the promise of an NFC software upgrade coming soon. in the past, I’ve posted on Remote Mobile Payments, developments on the rumored AT&T, Verizon and T-Mobile consortium, and opinions on how the parties should approach adoption of NFC payments. Based on this news, and many questions I’ve received about what NFC solutions look like in the marketplace, I thought I’d post a simple primer on the ways companies are rolling out NFC solutions on mobile phones. This is by no means a definitive list, but should be instructive on the major groups of NFC based embedded and add-on solutions designed for mobile phones.
There are at least 3 distinct methods for NFC Mobile Phone enablement:
1) Tags are stickers that include an RF chip can add a basic NFC capability to a phone. Examples include RFinity’s mobile payment sticker, Bling Nation’s Bling Tags, First Data’s Go-Tag, Discover’s Zip, Oberthur’s “Fly-Buy”, and many others. Some of these tags use a memory card like a MiFare or DesFire chip, commonly used in transit applications around the world, while others use a microprocessor based chip like an Inside Contactless MicroPass chip, which are required for solutions that are branded with Visa, MasterCard, Discover or American Express. These are simple and relatively inexpensive, and they work with any phone, but lack integration into the phone. Some of these providers have added some SMS or application features that are designed to create the illusion of integration, but ultimately what makes this group distinct is that there is no connectivity between the phone and the sticker.
2) Add-on devices can upgrade a phone to be an NFC phone. These include products by Device Fidelity and Tyfone, who make Micro-SD add-ons to upgrade any phone with a Micro-SD slot into an NFC phone. Device Fidelity also has an attachment “sleeve” that adds the Micro-SD slot to an iPhone (which doesn’t otherwise have a Micro-SD slot). There are SIM based solutions with antenna add-ons, such as Gemalto’s Upteq N-Flex and other approaches like the Twinlinx MyMax which uses Bluetooth to interface with the phone. These add-on devices all provide connectivity and typically deeper integration into the phone’s software, allowing the consumer to operate a wallet in the phone, which interacts with the add-on device. These solutions also work with many different phones – according to Device Fidelity, there are Micro-SD slots on approximately 65% of phones in use worldwide. The downside of an add-on device is the additional hardware cost, which is substantially more expensive than a sticker, as well as the installation, which in some cases can be challenging.
3) Embedded NFC phones are manufactured with NFC fully integrated into the phone, like the recently launched C7 smartphone from Nokia. For more examples of phone models, there is a self-proclaimed definitive list of embedded NFC Phones on the NFC World blog. Phone with embedded NFC have taken multiple approaches, but they typically have an embedded antenna, and they use the SIM card or a dedicated chip as a secure element to store card data. These phones integrate NFC capabilities right into the phone’s operating system, and offer the highest level of integration at a relatively low incremental cost. The downside of embedded NFC phones is that there are not yet very many on the market and to get one, a consumer must buy a new phone.
There are many reasons that different stakeholders would choose one or another of the above options, but all are viable solutions in the marketplace. In a future post, I’ll explain some of the nuances on why stakeholders might choose one or another.
The reporter who broke the AT&T/Verizon/T-Mobile NFC Mobile Payments story this week just came out with a follow-up story that names the initiative and suggests the cities where it will pilot next year. Apparently it’s caled Mercury, and the cities being contemplated are in Texas, Utah and Minnesota. I’ll keep tracking the news on this story and post more here as warranted.
Fear and Greed are often discussed among investors and others as the great emotional motivators among capitalists. Looking through this filter let’s take a look at the big recent news in mobile payments: a big deal between three of the largest US mobile carriers, a bank and a card network.
AT&T, Verizon and T-Mobile made big news Monday when Bloomberg reported the three of them joining in a mobile payments venture to bring Near Field Communications (NFC) payments to US consumers and merchants. Adding to the frenzy of excitement, the deal reportedly includes Barclays as the banking and account management entity and Discover Network as the payment “rails”. For those of us who have been involved in and seen results of consumer NFC trials, this is welcome news and has been a long time coming. In the trials I’ve seen, consumers absolutely loved using the phone as a contactless payment device, and gave the experience outstanding ratings. But, as has happened so far, greed and fear will govern the future of NFC, and how those dynamics play out will determine what happens in this market.
Much has been made of why NFC has not yet come to market, and the consensus has been a euphemism, “lack of business model”. Translated into our fear and greed filter, it’s simply greed. It’s widely known that the limiting factor to NFC adoption has been that the very large players have not been able to agree on how the proceeds from this new payment type should be shared. Actually, they don’t even agree that it should be shared. Each of the major players is looking to make sure they can extract maximum value from this inevitable new paradigm. The major card brands and banks say, “it’s OUR consumer – we’re the trusted financial relationship and we shouldn’t have to share interchange.” The carriers say, “it’s OUR customer. WE are the ones who supply and support the phone, so we deserve a (big) piece of the pie.” The retailers then turn around and say, “this is just payment! The whole reason OUR customer is paying for something is because they’re loyal to OUR store! We pay too much already for payments and this new technology should lower our costs substantially. And, by the way, we’re fresh off victory in Congress, and we’re going to get this whole interchange thing fixed there.”
The banks and card brands have been working on and piloting various forms of NFC payments for some time, and we’ve seen plenty of activity around their attempts to add NFC to a phone without carrier involvement. This new venture appears to be their response to the major card brands approach, which have reportedly refused to share interchange. The real question becomes how will greed play into the negotiations on pricing vs. adoption, and what will that mean for the market? I’ve said that I believe these are very smart players who have been trialing and studying this market for years, and they undoubtedly know what we all do: price of acceptance is critical to retailers. I don’t know what kind of pricing has been proposed in those closed-door meetings, but reports have already come back that the large retailers were underwhelmed at best. To be successful, this new entity must recognize retailers’ strong motivation for lower cost payments and factor that concern into its pricing. But, it’s equally important to recognize that the retailers who are undoubtedly planning to drive a hard bargain should make sure that greed doesn’t blind them to the possible benefits of a successful rollout. Competition in the new mobile payments realm will take a very strong consumer outreach with an enormous amount of education. The carriers have the background of educating consumers on new ways to use their phone, and as consumers get more comfortable making payments with their phone, they’ll also be open to much more seamless interaction with the mobile offers they will get from retailers. Equally, the launch of NFC based mobile payments from the carriers will instill fear in the banks and card brands ONLY if it is successful. In that event, this venture could set off an intense competition to drive adoption by the card brands, benefitting retailers and consumers alike.
If retailers want to drive cost of payments down, they should engage in the competitive process as mobile payments rolls out. This could mean that retailers drive their own payment type on the mobile phone. To do that, you need the technology to be adopted – the sooner the better. If carriers want a piece of mobile payments revenue they need to engage in a reasonable way with retailers. As for the lowly consumers, they get to sit and wait as usual.
For more on NFC, and other mobile payments and payments industry topics, check out www.doublediamondgroup.net. For more on mobile payments, including a breakdown of the types of remote mobile payments generating interest and revenue today, check out my column in Transaction Trends magazine : Remote Mobile Payments.
Amidst all the hype, politics and lobbying in the Durbin Amendment interchange fees debate, is a little-noticed component that could have a big impact on the state of payment technology in the US. I believe the changes offered by the House and accepted by Durbin and the Senate could lead to regulations that force the US payment system toward EMV and very likely Chip and PIN. This is a very complicated topic, so bear with me as I lay out the logic.
This bill will likely cause interchange fees to be extremely low for debit transactions, UNLESS the issuing bank complies with fraud prevention technology meeting the standards to be set by the Federal Reserve. So, banks that do not meet the standards will collect much less interchange, and likely will have higher fraud losses (assuming the chosen fraud technology is effective) while banks that do meet the standards will collect much higher interchange, because it will include the technology costs of the fraud prevention, and they will lower losses due to that fraud prevention. Which would you choose?
The Durbin Amendment provides for issuers to include fraud reduction in the interchange fee if and only if “such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer; and the issuer complies with the fraud-related standards established by the [Federal Reserve] Board… which any fraud-related adjustment of the charge-backs) received from consumers, merchants, or payment card transactions involving the issuer; and… require issuers to take effective steps to reduce the occurrence of, and costs from, fraud in relation to electronic debit transactions, including through the development and implementation of cost-effective fraud prevention technology.”
If we make the assumption that the banks under this bill will clearly choose the latter, the question remains, “what will the Federal Reserve issue as fraud prevention technology standards?” To answer that, one must consider what the large retailers want it to be. I think it’s safe to say that most of the language in this bill is to the liking of the large retailers who seem to be in favor with the Washington community right now (or more so than the banks at least). A few weeks ago, those of us at the Smart Card Alliance event heard Walmart begin advocating for EMV and Chip and PIN in the US. Is this connected? I’m not sure, but it appears too closely connected to dismiss. What I can say is that the global payments community has adopted EMV and Chip + Pin as the fraud prevention technology for card present transactions over $25 (USD Equivalent). It’s been adopted in every major region of the world, and now it’s been adopted in both US neighbors, Canada and Mexico.
The retailers argue that banks have long had a disincentive to improve fraud protection beyond a mag-stripe and signature, because PIN debit interchange was lower (hence less revenue for the banks), and the overall fraud losses on signature debit were much lower than the interchange benefit. Regardless of whether one agrees with this argument, it seems clear this legislation aims to reverse the incentives, leading the banks to adopt EMV and Chip and PIN technology much sooner. The chance of EMV adoption in the US just went up in a big way.
As 2010 approaches its midpoint, we continue to track mobile payments of all types. NFC-based mobile payments keep moving forward with announcements in China and Turkey. By far, the largest and fastest growing commercial market is remote mobile payments, which received a major boost this year from donations generated to support relief efforts in Haiti after the horrific earthquake. In just a few days, $25 Million was raised via text message. We expect to see continued explosive growth in this area. According to the most recent forecast from Generator Research, global mobile payments is forecast to grow to $633billion by 2014. They are not alone in their prediction. Just this month Juniper also came out with a similar forecast of $630 billion, with a large majority still coming from remote mobile payments, even in five years. I expect to see more NFC announcements through this year and next. Some of the opportunities that are in progress, or at least rumored to be in progress, could be game changers. It will continue to be fun to watch!
For more on remote mobile payments, including a breakdown of the types of remote mobile payments generating interest and revenue today, check out my column in this month’s Transaction Trends magazine : Remote Mobile Payments.
My name is Todd Ablowitz, and I’m here to help you distill and understand the payments industry, especially payments technology and mobile payments. I welcome your comments and critique!
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