Published on Smart Card & Identity News
Monday, May 02, 2011
It is clear that Near Field Communication (NFC) technology is making a huge impact in the financial services and payments world.
Whether or not this leads to new products and services being launched – and adopted by consumers – we will have to see. But one thing is clear: there is a large majority of organisations – including many banks – who feel that there isn’t yet a strong enough business case to get involved. In fact, a recent poll at the GSMA Mobile World Congress found that 76 per cent of the industry believes NFC payments technology is still at least 24 months away . But if financial institutions don’t get in on the act soon, will they be overtaken by more nimble payments providers from the ‘virtual’ world, for example PayPal, Google and Apple? A number of relationships are currently being formed between players from the virtual world and the banking world, but which side will ultimately profit from NFC payments?
On the virtual side, Bling Nation – now powered by PayPal – allows consumers to use NFC stickers to charge items in the physical world to their online accounts. Meanwhile PayPal’s iPhone app allows people to make payments in online stores and the company has just announced it is extending its remit to the offline bricks and mortar world, with the appointment of Don Kingsborough as vice president for retail and pre-paid products.
Google is in on the act too; all phones using the new 2.3 version of Google’s Android operating system will be NFC capable. They are also looking to build a mobile wallet (‘Cream’) which will sit on all Android phones and could use NFC to perform contactless mobile payments. Add to that the fact that Google has recently acquired Zetawire, an e-wallet provider, and it makes you wonder how far Google is likely to go down the payments route. Meanwhile it looks like Apple’s iPhone 5 and iPad 2 will not incorporate NFC in their latest releases, but rumours are that they are still investigating a closed loop proposition that would allow users to charge payments in the physical world to their iTunes account rather than a traditional credit card. This type of business model would allow these Internet businesses to cut out the card schemes and tap into a lucrative payments market traditionally cornered by the banks. All this sounds fantastic, but there are some challenges that they will face.
First of all, why would merchants want to get involved? A lack of NFC readers at the point of sale is a major barrier seen by many in the industry as the main culprit behind slow adoption. Furthermore, merchants are not keen on cluttering up their shops with more than one POS device, so how can these competing solutions all make use of the same device? Then there is the problem of getting enough people to have NFC-enabled handsets to make this a reality. Finally, who in the industry can provide the global standards and specifications that can provide the framework for multiple stakeholders to take part and succeed?
On the banking side, it is clear that there exists a massive payment infrastructure for cards, providing very functional acquiring, switching, authorising, clearing and settlement. From a technical perspective, it would be relatively simple operation for banks to view phones as “virtual” cards, add these “virtual” cards to their existing card management system and bolt on a capability to download payment apps to their customers’ smartphones. Obviously, there are many challenges in such a project, but the technical challenges this provides are probably not as great the challenges around defining the business case.
The primary difference between the virtual and banking approaches seems to be that although the phone could be viewed as simply a new token with which to make payments, the introduction of a phone into the payment business brings in a large number of new stakeholders. Mobile network operators, handset providers, Trusted Service Managers (TSM)s and virtual wallet providers to name but a few. This makes the business case less attractive to banks, leading them to either adopt a defensive position on mobile, or more often, to adopt no position at all. But by not doing anything, the banks are playing into the hands of the virtual players, despite the challenges they face as outlined above. These new, flexible players, who do not have outdated legacy banking systems to maintain, but do have experience of switching, billing and settling and are therefore in a very strong position vis-a-vis the banks. They can move very quickly, have a younger, move technical-savvy customer base, who are more willing to try out new payment methods and they have the financial backing to attack the market.
As the fight between the virtual providers and the banks commences, we are seeing a small number of forward thinking banks, partnering with mobile network operators, providing their customers with new contactless mobile payments methods: Barclaycard and Everything Everywhere being one example. But the vast majority are playing a waiting game, burying their head in the sand, not realising that the threat to their business is just over the horizon. But Banks must realise there is a massive opportunity here. Firstly, consumers have shown that they want to use their phone in all areas of their day-to-day life, and that includes payment. Secondly, and importantly for banks, until the whole acquiring infrastructure has been upgraded, consumers will need both a phone and a card for payment, which should put the banks in the ascendency. Whether banks will take up the challenge, is still not clear – we await the outcome with bated breath.
By Gareth Ellis, Solution Consultant, ACI Worldwide