The announcement by the GSMA and its partners of another NFC demonstration pilot highlights how Near Field Communication is caught in the “trough of disillusionment.” Commerce innovators shouldn’t despair, the future is bright.
What a difference a couple of years make! During CES in 2008, visitors were treated to a variety of demonstrations at the “NFC Zone” where they could experience the power of simplicity NFC style. Yet, at last’s month edition of the consumer technology pilgrimage, NFC seemed to stand for “Not Found at this Conference.” What happened? Is it just the financial crisis, something more profound or the natural growing pains associated with a disruptive technology?
To first gain the proper perspective, it is useful to look back.
Sometime before the collapse of the internet bubble, executives from Nokia, Sony and Philips Semiconductors started to anticipate the evolution of mobile devices from telephony towards commerce. In particular, Dr. Karsten Ottenberg (then head of the Philips Semiconductors’ Identification Business Unit, now CEO of Giesecke & Devrient) evangelized a number of use cases such as peer-to-peer money transfer, ticketing and payments at the point-of-sale, which successfully demonstrated the simplicity, speed and security afforded by NFC transactions. Contactless technology was not in itself novel. It had been pioneered by such companies as Mifare, Gemplus and INSIDE Contactless for transit or product tagging. Yet, the vision behind NFC was bold: mobile phones were poised to become the wallet of the future, truly. It spoke of new and better customer service, higher revenues and retention for merchants, operators and issuers.
By 2002, MasterCard, under the leadership of Art Kranzley, saw the potential of contactless payments and NFC to capture everyday spend. Following a successful pilot in Florida, MasterCard started testing proximity payments with Nokia in Dallas. Consumer reactions were positive and the initial technical assessment proved that NFC did work at the same point-of-sales as contactless cards. In a sign of merchant interest, McDonald’s was enticed to deploy contactless acceptance as part of their U.S. terminalization program. Other pilots – such Citibank‘s trial with the New York subway – seemed to confirm the potential for differentiated issuer offerings. In parallel, Cassis and Venyon demonstrated both the technology and the business models for over-the-air provisioning of the service credentials. By 2005, Visa, MasterCard and American Express launched contactless payments initiatives in the U.S. and around the world. Within 18 months, the last missing piece of the puzzle, commercially available NFC handsets seemed destined to happen.
So, where did we miss a step? Today, in spite of the user appeal, the technology convergence, the collaboration between industry giants, and the successful tests around the world, NFC has stalled. As the American Banker recently remarked, there is “Lots of Talk about NFC Payments, Little Progress“. There is no denying that the financial crisis has had an important impact. Innovation is not the first priority when revenues fall sharply and the foundations of one’s business are crumbling. It would be too easy though to pin it on the economy and several fundamental problems remain:
- The economic buyers – i.e. the Mobile Operators and Issuers – have not solved their rivalry: Behind the scene a furious battle has raged on the ownership of the secure element used to secure transactions, a proxy for the question of who will own the customer relationship. Operators, looking for new revenues in the face of eroding growth in their core businesses, are championing the SIM card as the only acceptable trusted element, a position difficult to endorse for issuers and potentially regulators. Absent agreements on the roles and responsibility of each – from acquisition to customer support and risk management – and the associated revenue streams, the individual stakeholders are challenged to build a positive business case for the deployment of NFC. In fact, a closer examination of the early excitement around NFC finds that innovation divisions are chiefly involved, and that core business units still don’t participate. Notwithstanding the enthusiasm of the NFC champions, little of the debate and energy was focused on the consumers’ needs, as is often the case in the early stages of new technology. Thus, despite the buzz, NFC hasn’t crossed the chasm from Innovators/Early adopters to Mainstream buyers.
- Consumer have good enough methods of payments as it is: Without prejudice for the vision behind NFC, the need for a new method of payment delivery based on handsets is tenuous. The top justification for NFC is that more consumers have phones than cards, and that for most of them the phone plays a more important role in their daily life. For consumers though, payments demand first and foremost simplicity, trust, extreme reliability and streamlined costs. In that context cards are hard to beat as a payment token especially when enhanced with contactless interface. While handsets with NFC provide a potentially richer consumer experience, in most cases they also add complexity such as downloads, and clicks, and selections ,and PINs… to name a few, which limit their appeal for the common user. Furthermore for Financial Institutions, NFC introduces major changes in the accounts’ lifecycle along with associated expenses and operating risks, without a definitive incremental economic value. Absent a reason for consumers to want it and a business case for Issuers to support, standalone payments is an unlikely “killer application.”
- No good path has been proposed to reach a critical mass of users: If I had a penny for every time I have heard about “the-chicken-and-egg” problem, I would be retired by now. Cliché as it is though, it is true that without a critical mass of users and acceptors NFC payments will not take off. The business model issues are compounded here by the number of handset models available in the market and the factors that influence the selection of a device. Consumers chose their handsets principally as a function of the content and services they enable. With a small number of mobiles offering NFC, and unclear use cases, it is difficult for consumers to get excited about the functionality. Given the incremental bill of material of $3 to $5, it is equally difficult for the handset manufacturers and their clients to justify the expense across the billion or so handsets shipped every year. Considering the lack of success of co-brand cards associating Telecom providers and Issuers, it stands to reason that consumers do not select a bank as a function of their mobile service provider neither will they select a mobile operator because of their card issuer. Hence, it is unlikely that mass deployment of NFC handsets will stem from the ability to just pay at the PoS.
So, where do we go from here? I believe the path to NFC lies with rich integrated transactions. For a decade as they worked on the migration to chip cards, the payment networks elaborated the vision of “the relationship card” (aka the Super Smart Cards), a multi-application token that would simplify people’s life by combining applications needed to integrate services at the point of delivery. As recently as 2000, the smart Visa platform combined payments, loyalty, couponing, and online authentication to facilitate commerce on line and at large merchants. The key challenge of the relationship card though was one of usability: with only a few lines of a PoS to interface with the users and the constraints of ISO 8583 connectivity to pass application data, the relationship card was extremely difficult to market and sustain. Mobile devices easily overcome these shortcomings and , as we move from a world of impressions to a world of engagement, there is not a marketer that isn’t seeking to use mobile phones for relationship purposes. And the missing link is connecting the phone with the PoS, which NFC will provide.
Google now predicts a future where it will garner more revenues from mobile applications than the traditional Web, which echoes the insatiable appetite of consumers for “touch” devices with a broad number of “apps.” As envisioned by the inventors of NFC, mobile phones have evolved far beyond telephony becoming networked devices fulfilling a number of needs to stay connected, informed, engaged with one’s networks.
The adoption of iPhone-like devices continues to put strain on the wireless data networks which will justify embedding NFC for operators to satisfy peer-to-peer applications. After all, why clutter the network to exchange information between two persons next to one another? NFC in that perspective has a viral potential – call it the new “Friends and Family.” In addition, merchant engagement strategies combining personalization, real-time information at the time of decision, and targeted promotions at the time of purchase call for a future that utilizes NFC not as a substitute for a card, but as the logical interface to bridge the gap between data networks and payment networks. Once again, electronic payments will deliver value for the merchant community by delivering the sale; issuers and operators will derive revenues from higher usage and reduced churn and new services provided around the use of mobile networks; and as for creating critical mass, accessories in the form of skins, and SD cards will provide opportunities to market NFC independently of the handsets to break through the background noise.
With that in mind, I hope that this week, as the Mobile World Congress pilot gets discussed, NFC will stand for “Nearly Found the Code”.
Patrick Gauthier, is a senior payment industry executive with 20 years of experience in developing, selling and deploying new technologies for payment and commerce, on a international basis, in private and public companies ranging from start-ups to global organizations.