industry solutions manager,
worldwide financial services,
The problem with mobile payments is that everyone has a different definition. Efforts to define what constitutes a mobile payment are complicated by different geographic expectations, mobile users’ experiences, payment systems, regulations and the relative strength of mobile telecom versus banking infrastructures.
Every day there are new startups, alliances and technology announcements about the next generation of mobile payments: most recently, using near field communication (NFC) as the channel in chip-enabled phones. Inevitably, not all scenarios are workable in all geographies, so very regionalised solutions are created.
What is NFC?
To understand the excitement around NFC, let’s start by looking at the development of the technology. NFC stems from Radio Frequency Identification (RFID) developed during the early 1990s. This wireless technology enables communication between devices placed in close proximity to each other (distances of only a few centimetres at most). Initial deployments of NFC have included retail and manufacturing where items could be tracked electronically through a production line or distribution chain. To provide additional transactional value, such as for payment execution, the NFC chip in the hardware device must also integrate with an application to process the data being exchanged and to execute some form of payment instruction or authorisation. To achieve this, the chip is integrated to a defined store of value, or digital wallet, which may be pre-loaded with a currency amount or be capable of replenishment from an external source.
Devices used in pilots over the past five or six years include key fob tokens, watches, wristbands and, of course, phones. Before the current rash of new schemes there were examples of Visa and MasterCard pilots for transit systems, as well as some early RFID innovation in the form of the Mobil Speedpass used at Mobil fuel pumps and McDonald’s restaurants dating back to 1997, but discontinued by the mid-2000s.
The primary NFC benefit and usage scenario is still for low value transactions in a fast-paced environment, such as transit locations, vending machines and quick service restaurant (QSR) environments. However, use cases in traditional point of sale (POS) retail will also likely grow for transactions under the ‘no signature’ limit for debit cards (typically about $25 equivalent). This still equates to a speedy checkout process and the ability to dynamically pull coupons from the digital wallet. However, the process gets trickier as the amounts get higher and some additional form of authentication is required; typically a PIN entry.
Moving towards mass adoption
What will it take for mass adoption this time when Speedpass, for example, failed? NFC success will be based on moving away from the single issuer closed loop payment schemes and form factors toward true open loop interoperability. NFC chips embedded in portable devices communicate on a defined frequency, and the standards for interoperability are defined by the NFC Forum established in 2004. This is true not only at the device level, but also regarding the ability to access more and more digital wallets, not just pre-loaded value on the device. Therein perhaps is one of the greatest ‘challenges’ for NFC adoption: it is merely one of several mobile payment channels. True payment mobility is based on access to, and the functionality of, the digital wallet across multiple payment channels and scenarios. To understand this we need to look at mobile wallet and payment strategy.
Holistic mobile payments strategy
When developing a mobile payments strategy, the first objective is to recognise the different forms of mobile payment interactions. In other words, who are the payers and the receivers, and what are their usage requirements? At a very high level, we can define these in the following ways:
1. Payment to a biller for utilities or other invoiced services.
2. Payment to another person on an individual basis. This includes sole proprietor small businesses.
3. Payment to online merchants and ecommerce.
4. Payment to retailers at Point of Sale (POS).
5. Payment at an unmanned device, such as a vending machine or a transportation entry gate.
In the UK there is a well-known idiom, "horses for courses." In essence, this means that what is right for one scenario may not be right for another. The same is true for mobile payments solutions, including NFC. Each scenario above (even when offered in the same country) likely demands a different model of interaction based on the needs of the payer and the payee at the time of payment.
What is essential is that this intrinsic store of value can be accessed via multiple channels. The wallet is at the core and should be accessible by online and mobile devices. Even then, however, NFC is a channel from a given device and is primarily restricted to POS transactions and automated devices (points four and five above).
Why is the wallet so critical? If one thinks about a physical wallet, it contains everything from payment instruments (cash and cards) and tickets to coupons and loyalty cards. The digital wallet can contain all these instruments, plus other items such as identity credentials and airline boarding passes.
NFC Payments - Build it and they will come?
Enabling devices is a step in the right direction for some mobile payment scenarios but widespread adoption in the US and Europe is still some way off. My 'feet on the street' evidence to support this is based on local stores of national retailers in your area. Look to see if they have contactless POS installed and ask a cashier how many times people pay with a contactless card. Usually the answer is ‘handfuls.’ That's not in a day, or a week - but ever. The reality is that contactless payment technology in one form or another has existed for several years, but technical capability does not automatically drive adoption.
This situation applies to North America and to a lesser extent Europe where transit pilots have been the predominant pilot solutions, but the rest of the world is of course a little different. NFC and the concept of contactless and phone-based transactions have been very successful in parts of Asia, notably through the efforts of NTT Docomo in Japan and South Korea.
How does one cut through the buzz today to predict the future of NFC payments, particularly from the source of much innovation, the US? NFC transactions at POS from mobile phones will become mainstream in the US, but not for quite some time.
The US consumer market is notoriously slow to adopt new payment mechanisms. Billions of checks are still processed each year, the use of debit cards, direct debits and adoption of chip-based cards and Europay, MasterCard and VISA (EMV) has lagged behind every other mature payments market. In each of these cases, technology capability was never the issue. Instead, a legacy view of banking and slow moving consumer preferences were the barriers to adoption. Speedpass was certainly innovative, but was it just ahead of its time, or a technology that just did not add value?
For NFC payments to become universally successful, we need to recognise where and why that channel is useful, and where it is not. The functionality and accessibility of the digital wallet are at the heart of mobile payments adoption and there needs to be a complementary and compelling value proposition to use a phone over a card (NFC, chip or magnetic stripe) before we’ll ever see mass adoption. Even then, the mobile payment experience needs to cover all the payments use cases to be of true value to payers and receivers.
Ideally, the mobile experience will become consistent and seamless - regardless of payer/payee scenario. That is what it will take for mainstream replacement of that plastic rectangle in our wallets.