You are on page 1of 84

Mobile NFC Services

Guillermo Escofet, Shailendra Pandey

www.informatm.com

Copyright
2010 Informa UK Ltd. All rights reserved. The contents of this publication are protected by international copyright laws, database rights and other intellectual property rights. The owner of these rights is Informa UK Ltd, our affiliates or other third party licensors. All product and company names and logos contained within or appearing on this publication are the trade marks, service marks or trading names of their respective owners, including Informa UK Ltd. This publication may not be:(a) copied or reproduced; or (b) lent, resold, hired out or otherwise circulated in any way or form without the prior permission of Informa UK Ltd. Whilst reasonable efforts have been made to ensure that the information and content of this publication was correct as at the date of first publication, neither Informa UK Ltd nor any person engaged or employed by Informa UK Ltd accepts any liability for any errors, omissions or other inaccuracies. Readers should independently verify any facts and figures as no liability can be accepted in this regard - readers assume full responsibility and risk accordingly for their use of such information and content. Any views and/or opinions expressed in this publication by individual authors or contributors are their personal

www.informatm.com

2011 Informa Telecoms & Media

Contents
Mobile NFC ecosystem and value chain.......................................................................... 1
Fig. 1: Mobile NFC value chain............................................................................................................................................................... 2 Fig. 2: Credit card value chain.................................................................................................................................................................8 Fig. 3: Options for location of secure element in mobile NFC handsets............................................................................13 Fig. 4: Mobile operators supporting the Pay-Buy-Mobile initiative, Aug-11...................................................................15

Current trends and immediate opportunities...............................................................17


Fig. 1: Global, no. of mobile NFC announcements, Jul-10 to May-11................................................................................ 18 Fig. 2: Barriers to the takeoff of mobile NFC services................................................................................................................ 19 Fig. 3: Consumer NFC handsets announced/available in Western markets................................................................... 20 Fig. 4: Competing approaches to enabling secure NFC applications on phones........................................................... 21 Fig. 5: Overview of immediate opportunities in mobile NFC services................................................................................ 23

Market-player strategies................................................................................................ 25
Fig. 1: Pros and cons of SIM-based secure element.....................................................................................................................26 Fig. 2: Recently announced unilateral NFC operator initiatives........................................................................................... 28 Fig. 3: Recently announced NFC operator alliances................................................................................................................... 29 Fig. 4: Comparison of Isis and Google Wallet NFC-payment services................................................................................ 30

Analyzing the business case for contactless payments................................................34


Fig. 1: Main drivers for market players' involvement in mobile NFC payments........................................................... 35 Fig. 2: Germany, share of payment instruments by turnover and number of transactions, 2009........................36 Fig. 3: EU, annual per-capita transactions by payment instrument, 2008..................................................................... 37 Fig. 4: Results of poll into UK consumers attitudes to mobile NFC payments, YouGov, Jun-11.............................39 Fig. 5: Results of poll into UK consumers attitudes to mobile NFC payments, YouGov, Jun-11.............................39 Fig. 6: Japan, take up of FeliCa payment services, 2010.......................................................................................................... 40 Fig. 7: Sitges mobile contactless payment trial results, May-Oct 2010............................................................................. 41 Fig. 8: Breakdown of interconnect fees taken from US$100 transaction in the US..................................................... 42 Fig. 9: Sitges mobile contactless payments trial, distribution of purchases by merchant type...............................43 Fig. 10: Stand-alone vs. integrated NFC point-of-sale terminal............................................................................................43 Fig. 11: Mobile-contactless-payments business model for banks.........................................................................................46 Fig. 12: Mobile-contactless-payments business model for operators................................................................................. 47

Contactless-payment deployment strategies............................................................... 49


Fig. 1: Quick Tap facts...............................................................................................................................................................................50 Fig. 2: Ericsson IPX trusted-service-manager model...................................................................................................................52 Fig. 3: Split TSM architecture.................................................................................................................................................................54 Fig. 4: iPhone NFC plug in, iCarte....................................................................................................................................................... 55 Fig. 5: NFC sticker used in UniCredit Bank mobile-contactless-payments deployment, Slovakia..........................56 Fig. 6: Square iPhone payments device and application..........................................................................................................58

The technology and its many potential uses................................................................59


Fig. 1: Mobile NFC operating modes..................................................................................................................................................59 Fig. 2: Uses, drivers and barriers for mobile NFC reader/writer-mode services.............................................................. 60 Fig. 3: NFC tags vs. QR codes, pros and cons..................................................................................................................................61 Fig. 4: How Groupon works....................................................................................................................................................................63 Fig. 5: Uses, drivers and barriers for mobile NFC monitoring services (reader/writer mode)................................... 65
www.informatm.com 2011 Informa Telecoms & Media

Fig. 6: Contactless workplace access...................................................................................................................................................67 Fig. 7: Uses, drivers and barriers for mobile NFC P2P-mode services..................................................................................69 Fig. 8: Business card incorporating NFC chip................................................................................................................................ 69 Fig. 9: Uses, drivers and barriers for mobile NFC card-emulation services.......................................................................70

Mobile NFC market forecasts, 2010-2015.....................................................................73


Fig. 1: Global, NFC handset shipments, 2010-2015....................................................................................................................75 Fig. 2: Global, NFC penetration in handsets, 2010-2015......................................................................................................... 75 Fig. 3: Global, NFC handset shipments, by OS, 2010-2015......................................................................................................76 Fig. 4: Global, NFC handset shipments, by region, 2010-2015..............................................................................................76 Fig. 5: Global, mobile NFC service users, by region, 2010-2015............................................................................................ 77 Fig. 6: Global, mobile NFC transactions, by region, 2010-2015............................................................................................ 78 Fig. 7: Global, mobile NFC total transaction value, by region, 2010-2015...................................................................... 78

www.informatm.com

2011 Informa Telecoms & Media

Mobile NFC ecosystem and value chain


07 September 2011 Shailendra Pandey
Key points

Mobile NFC is gradually progressing from the trial stage to the commercial rollout of services. The mobile NFC value chain players are forming alliances with other stakeholders to ensure the successful deployment of services for a large user base. It is likely that many mobile operators will continue to pursue their individual mobile NFC plans, while at the same time collaborate with other operators and form joint ventures to compete with the OTT players. By grouping together, operators can offer nationwide coverage to service providers and big-volume orders to handset makers. But antitrust laws limit how much the operators can integrate services; for example, in most jurisdictions, they cannot offer service providers a commonly-agreed rate for renting space on the SIM. Both mobile operators and handset vendors will deploy NFC services in the coming years and the existence of different smartphone OSs and competing mobile app stores means that there is bound to be much fragmentation in the mobile NFC market. The success of the mobile app stores indicates that many of the mobile NFC services will be offered as applications via these stores. The mobile NFC value chain players need to work together to ensure that NFC solutions and, in particular, handsets can be certified to ensure all parties are satisfied with security and technical compatibility. Backwards-compatibility is also necessary to ensure that future mobile NFC implementations can use existing NFC infrastructures where possible. The tussle for dominance among players for the control of the SE (secure element) has resulted in different solutions and deployment approaches: Smartphone and OS vendors want to bypass the mobile operators; banks also see mobile operators as potential competitors; while credit card companies want greater control for certifying NFC readers and devices. Operators in emerging markets have a stronger position because of their extensive distribution networks and existing relationships with the merchants and retailers. In most cases, operators also have a stronger brand and good government support. Therefore, the other players are more likely to partner with the operators for NFC rollout in emerging markets.

Overview There are many players in the mobile NFC ecosystem, and it continues to expand further with the entry of new players in the market. As of now, the mobile NFC market is highly fragmented and it is expected that the collaboration and coordination between value-chain players will initially be complex. In order to understand the complexity of the ecosystem and the challenges and opportunities for players involved it is necessary to consider the role and motivations of each of the key players in the value chain. The mobile NFC value chain (see fig. 1) comprises of many stakeholders including the mobile operators, banks and financial institutions, merchants and retailers, handset and OS vendors, payment network providers, chipset manufacturers, trusted service managers (TSMs), NFC hardware and component manufacturers, payment service providers, and NFC application service providers and software vendors.

www.informatm.com

2011 Informa Telecoms & Media

Fig. 1: Mobile NFC value chain

The results from various trials over the last two to three years have indicated a positive response from consumers to the use of mobile NFC as an alternative to cash for small-value, frequent exact-change transactions such as purchasing public transport tickets, snacks and drinks. These findings have attracted more companies to become part of the mobile NFC ecosystem to get a share of its potential revenues. In the last 12-18 months, following Googles backing of NFC technology and also the fear of Apples entry into the market the mobile NFC market has regained the momentum it lost. This has resulted in a rush from a number of mobile operators in Europe and other parts of the world to launch their NFC services. Mobile operators Mobile operators see NFC as an enabler technology for payments made via the m-wallet. The place in the NFC value chain that operators are hoping to fill is managing the SE (secure element) and renting out space on the SIM card to NFC service providers. Operators are keen to keep hold of the SE which provides authentication for service access, stores customer data and provides security. In Japan, NTT DoCoMo has been providing the Osaifu-Keitai (mobile wallet) services on mobile phones equipped with contactless smart card applications since 2003, using the proprietary NFC technology FeliCa from Sony. Following DoCoMos lead, other mobile operators and businesses in Japan have launched numerous related services, including DCMX, Mobile Suica, Kesaka, Edy and Nanaco, which allow FeliCa-enabled mobile phones to be used as electronic money, credit cards, electronic tickets, membership cards and airline tickets. Meanwhile, in South Korea, all three mobile operators have offered a similar range of services using FeliCaenabled phones. In February 2011, NTT DoCoMo and KT, South Koreas second-largest mobile operator, announced that they will work together to develop new cross-border mobile NFC services including mobile payments, mass-transit ticket and promotional virtual coupons. Both operators are presently jointly determining common NFC specifications that will be built into their devices, networks and billing platforms in order to enable them to deliver a seamless service to customers travelling between Japan and South Korea. In preparation for the service launch, both companies will accelerate the development of their existing infrastructures and start conversations with NFC-based service providers in different industries to encourage their participation in the project.

www.informatm.com

2011 Informa Telecoms & Media

However, outside Japan and South Korea, the deployment of mobile NFC services thus far has mainly been limited to market trials. The results of most of these trials have been positive with clear evidence that there is a latent demand for these types of proximity payment services. In Poland, Orange is running an NFC payment service trial in partnership with the Polish bank Zachodni WBK, Mastercard and Gemalto. Around two million Orange mobile subscribers are expected use the pilot service, which will allow them to pay for goods and services using their mobile phones; payments of US$50 or more will require a PIN to be entered into the users handset to enable the transaction. In the UK, Everything Everywhere, owned by France Telecom and Deutsche Telekom, along with O2 and Vodafone have recently formed a stand-alone JV to define m-commerce standards and accelerate uptake of services. This move closely echoes the one announced in Spain in March 2011, which, saw the countrys major network operators Telefonica, Vodafone and Orange coming together to jointly develop NFC payments. Similarly, in France, operators have been working closely together on a city-by-city basis to define the NFC ecosystem and lay the foundations for mass-market uptake based on operator-led common standards and approaches. The UK mobile operators are looking towards a key target date of 2012 for mass market availability of mobile NFC services. This is driven mainly by the desire to make the London Olympics a cashless event a laudable objective as this would give considerable visibility and credence to the mobile NFC business. It seems a reasonable assumption that by 2012 a number of NFC handset models will be available in large volumes from multiple vendors, and that contactless point-of-sale (POS) infrastructure should be widespread at least in the heart of London. In the US, Verizon Wireless, AT&T Mobility and T-Mobile have formed the Isis alliance, a mobile commerce joint venture that has partnered with the four major payment networks Visa, MasterCard, Discover and American Express to drive the mobile payments market. Isis plans to operate as a TSM for mobile NFC services. The initial Isis launches will be in Salt Lake City in Utah and Austin in Texas, mobile NFC services will be rolled out in these cities in the first half of 2012. It is believed that Isis is also in talks with Google to form an agreement and establish an m-commerce solution that will allow users to keep the same mobile wallet, while switching from one operator to the other. In Germany, T-Mobile, Vodafone and Telefonica O2 aim to extend their mPass payments service to NFC. T-Mobile plans to introduce an NFC-enabled m-wallet service in Germany and Poland in 2011, and further rollouts are planned in Holland and Czech Republic in 2012. In Germany, 60% of retail purchases are still made in cash and T-Mobile believes there are opportunities in offering mobile NFC services as a cash replacement tool. In addition to Western Europe and the US, operators have also started rolling out mobile NFC services in other regions. In Turkey, Turkcell, in collaboration with SmartSoft and Plastkart, has launched a MasterCardapproved TSM solution. The operators subsidiary Turkcell Technology has developed an NFC gateway that can support multiple applications over one SIM card, and OTA platforms. Turkcell claims this will allow it to offer an end-to-end solution for mobile NFC transactions to service providers. Turkcells NFC-enabled mobile wallet service is called "Turkcell Cep-T Cuzdan"; NFC-enabled handsets can be used to perform credit-card and toll-pass-card functions. Gemalto is supplying Turkcell with NFC-enabled SIM cards that can connect to the NFC chips in phones via the single-wire protocol. For its subscribers without NFC handsets, Turkcell is offering two antenna devices which subscribers can purchase and use to equip their handsets with NFC payment capability. In Tanzania, Etisalat Group has launched the first commercial NFC payment service in the country through its subsidiary, Zantel. The service, called Touch and Go, was developed by Etisalat in partnership with Oberthur Technologies and MasterCard and will enhance Zantels mobile money transfer service, ZPESA. Etisalat plans to roll out mobile financial services using NFC technology across its 18 markets in the Middle East, Africa and Asia.

www.informatm.com

2011 Informa Telecoms & Media

Key findings Mobile operators are pushing to deploy NFC services to prevent over-the-top (OTT) giants like Apple and Google from taking the lead in this market. In addition to their own initiatives, operators have also joined forces in a number of markets to push for the rollout of NFC handsets and services. To avoid losing out to the OTT players, mobile operators have formed joint ventures and alliances in a number of countries, including France, Germany, Netherlands, Spain, the UK and the US, to drive uptake of operator-deployed services. By working together, operators can offer nationwide coverage to service providers and big-volume orders to handset makers but they need to find a way of doing this while adhering to the antitrust laws. For example, in most jurisdictions, operators cannot offer service providers a commonly-agreed rate for renting space on the SIM. Mobile operators argue that the SE should be embedded in the SIM card and claim that this is preferable because SIM cards can be swapped, changed or upgraded if there are any security issues (i.e., operators can disable services over the air if a phone has been lost or stolen). However, NFC has many use cases which are unrelated to the mobile subscription so, in the longer term, mobile operators may lose the battle of having the SE in the SIM card. As the real estate on the SIM is limited, it has real value that banks or other PSPs (payment service providers) may be willing to pay for. This could be a relatively straightforward way for the mobile operator to extract value from mobile NFC services; each issuing bank or PSP would be charged a monthly fee per payment application. Many mobile operators see the business-to-business sector as their greatest opportunity in NFC, realizing that they have an uphill struggle to compete with OTT players on the consumer front. Operators have existing relationships with many enterprises as communication service providers and should look for opportunities to also offer NFC-based workplace access service to those organizations. For mobile operators, the business case for NFC may be stronger in some of the developing markets. The low penetration of the fixed Internet as well as banking and credit/debit cards in these markets means that operators have an edge over the likes of Apple, Google and the banks there. Handset and OS vendors It has been predicted that, over the coming years, mobile phones will gradually replace the physical wallet and credit/debit cards and function as a depository for virtual or eCards from different issuers for different applications (e.g., payments, loyalty and access control). This trend will be driven by the use of NFC technology in mobile phones as the means of communicating with the payment infrastructure. NFC-enabled mobile phones can interact with the present ISO 14443 contactless cards and readers, allowing users to authorize payments, access services and information, and use on existing contactless infrastructure on public transport systems. An NFC-enabled mobile handset adds the advantage of user interaction via a display and keypad, as well as an Internet connection, which enables the use of applications like payments, ticket services, access control and loyalty programs on mobile phones. A fundamental barrier to mobile NFC services, however, is the lack of handset choice. Only a handful of NFC-enabled mobile phone models from Nokia, Mobiwire (Sagem) and Samsung, plus Googles Nexus S, are on sale outside Japan and South Korea. More handsets from RIM, LG and Samsung are set to ship in the near future but initially are expected to only be introduced in selected markets. Hewlett-Packard has announced that it will add NFC to its WebOS smartphones and tablets. Motorola, Sony Ericsson and HTC also have NFC in their roadmaps but are not expected to deliver NFC mobile phones before 1Q12. Mobile operators want handset vendors to ramp up production of NFC-enabled mobile phones but vendors are still reluctant to commit to anything beyond the availability of a couple of models in 2011. Most handset vendors want to see a widely-deployed NFC POS infrastructure in place before they start shipping more NFC-enabled devices. Another key reason why handset vendors have been slow to introduce NFC devices is the disagreement between value chain players on how the SE will be implemented in the mobile phones. Handset vendors prefer devices with embedded secure elements (eSEs) but, considering that most mobile NFC service announcements so far have been from the operators, it is likely that many handset vendors, at least initially, will come out with NFC devices with an eSE that also provides a link between the NFC chip in the handset and a secure

www.informatm.com

2011 Informa Telecoms & Media

element in the SIM card, a system referred to as single-wire protocol (SWP). For example, the Nexus S has an eSE managed by Google that also supports SWP. In the longer term, Google, Apple and other handset vendors with mobile app stores would prefer to ship devices with eSEs and be the ones to provision security for developers making NFC applications for their devices and platforms. If the SE is embedded in the handset, mobile NFC services and applications can be used by any user with the device, and not be limited to specific mobile networks. Initially, the majority of the NFC-enabled handsets launched will be high-end smartphones. However, announcements from some vendors indicate that mid-range NFC handsets will also become available soon. ZTE has reported its willingness to ship NFC devices for operators; it has signed a deal with NXP Semiconductors and will build NXPs PN544 chip into its feature phones and smartphones. Fly Mobile has already launched an NFC-enabled touchscreen feature phone. Fly Mobile was established in 2003 and has offices in the UK, France, Germany, India, Russia, Ukraine and Nigeria; Eastern European markets and India account for most of its handset sales. A concern raised about NFC-enabled mobile phones is the possibility of the screen cracking or breaking with the frequent use of the device to tap on readers and POS hardware. The possibility of this happening is greater in touch-screen devices, most of which happen to be high-end smartphones. For NFC, handset vendors may have to consider developing devices with a stronger screen and outer body. However, this will have an impact on the costs, production cycle and shipments of these devices. And, more importantly, it's unlikely that users of devices such as the iPhone or Nexus S will be willing to switch to the speciallymanufactured NFC handsets. Google Many industry experts believe that Google will emerge as the strongest player in the mobile NFC ecosystem. In just over six months, Google has added NFC to the Android OS, announced its Wallet and Offers services, and announced plans to acquire Motorola Mobility. It has also launched the Nexus S NFC phone and signed agreements with MasterCard and a number of retailers including Subway, Macy's, American Eagle and RadioShack. Googles approach to drive the mobile NFC market is to get the NFC hardware embedded in a large number of Android devices. The Google Wallet is essentially an Android app which can store virtual credit cards, coupons, vouchers, gift-cards, etc. users can make transactions at contactless terminals simply by running the app on an NFC-enabled handset such as the Nexus S. Googles business is advertising and NFC provides it with an opportunity to link the ads and offers that it serves in the virtual world with purchases in the physical world. With the growing preference for CPA (cost-per-action) based pricing for Internet advertising, NFC can enable Google to prove to advertisers that the page impressions, or click-throughs, theyve paid for have translated into the desired customer action and/or sales at shop tills. In addition, Google has developed Google Offers, a service that will present users with discount coupons and offers in Googles search results. Users will be able to get deals by e-mail and collect offers from NFC tags; NFC-enabled mobile phones can then be used to redeem the discounts and offers at NFC POS terminals. The big challenge for Google will be to ensure the security of transactions. The open nature of the Android OS means greater risks from hackers attempting to break into the software and misuse the wallet app. To enhance security, Google is considering putting a system of three PIN codes in place before a user is able to carry out a payment on the mobile phone: The first PIN to unlock the phone; the second PIN to access the m-wallet; and the 3rd PIN to finally pay. This will no doubt be good for security but wont make mobile payments any faster than using plastic cards. Nokia Nokia has been talking in support of NFC for several years but currently only distributes two NFC-enabled devices the C7 and the N9. A year ago, Nokia had plans to have NFC in all its smartphones that shipped in 2011 but none of the smartphones it announced by July 2011 included NFC.

www.informatm.com

2011 Informa Telecoms & Media

Nokias C7 handset is enabled for SWP only and doesnt have an eSE. However, considering that Nokia is working with Microsoft for its smartphone roadmap, it is likely that both companies will choose the eSE option for many, if not all, of their devices in the future. Recently, Nokia launched NFC Hub, an online service it claims will help businesses to adopt NFC tag-reading solutions; it believes that initially there will be greater opportunities with NFC tags than mobile NFC payments. Nokias NFC Hub service will allow companies and businesses to buy generic NFC-tagged posters, aimed at directing people to websites or to get more information. Nokia will also provide account management service for larger businesses. NFC Hub will also allow the URLs to which the tags are pointing to be changed, enabling businesses to update their campaigns without having to change the tags and posters. RIM RIM had stated that many of its new BlackBerry handsets in 2011 would be NFC-enabled but by July 2011 had only announced two devices, the BlackBerry Bold 9900 and 9930, which are expected to start shipping in 3Q11. These devices will incorporate the BlackBerry 7 OS which supports NFC and includes an API and tag-reader tools to allow developers to build NFC applications. In the US, RIM is at odds with the operators over the issue of which company controls the SE or the users mobile payment credentials. The US operators want this data stored on the SIM cards, while RIM wants it embedded in its BlackBerry devices. As a result, RIM and the operators are working separately on mobile payments. RIM has partnered with MasterCard and Bank of America for a mobile payments trial, while Verizon Wireless, AT&T Mobility, and T-Mobile have formed the joint venture Isis to sign deals with the merchants. Samsung Of the top five handset vendors, Samsung has the largest number of NFC devices available in the market as of August 2011. In contrast with other vendors, Samsung seems willing to let the operators have control over the SE and is happy to provide them with NFC devices. In Europe, Orange is selling Samsungs Wave 578 NFC handset while Samsungs Nexus S NFC mobile phone is being offered by AT&T, T-Mobile and Sprint in the US. Samsung has also developed an entry-level NFC smartphone, Player City, available in France and the NFC version of Samsung Galaxy S2 is also expected to start shipping in the UK in 3Q11. Apple Apple could make the biggest impact on the mobile NFC market with the launch of an NFCenabled iPhone. It had been expected that the new iPhone in 2011 would include NFC but recent reports indicate that Apple may choose to wait until 2012 to launch the NFC version of the iPhone. It is believed that one of the factors holding Apple back from including NFC in the iPhone is concerns that repeated tapping on NFC tags and readers could cause iPhone screens to crack. Unlike Googles focus on advertising revenues, Apples business model is selling devices linked to compelling content and applications on iTunes and the App Store. It sells a broad range of devices including desktops, laptops, tablets, smartphones, portable media players and TV sets and the use of NFC technology will provide a way of sharing content and apps across all of its devices. Apples strength in being able to offer an end-to-end ecosystem for NFC services makes it a big threat for competitors. The vendor has complete control of the software and hardware that goes into the iPhone and it has the most successful mobile app store. To have an iPhone app has become a priority for many brands, retailers, merchants and banks. Furthermore, Apple already has a well-established payment platform in the form of iTunes. Key findings The tussle among mobile operators, handset/OS vendors and service providers over the control of the SE continues to delay the shipments of NFC handsets. Handset vendors argue in favor of embedding the SE in the device and claim that most service providers will also prefer not having to pay the operators for renting space on the SIM card. It will take a couple of years before NFC-enabled handsets will be shipped in significant volumes, and with sufficient choice, for them to satisfy the expected demand from consumers. Consensus in the industry is that market penetration of handsets of at least 20% is necessary before the mobile NFC market really starts to reach its potential. Smartphones allow users to download any applications and software which also means that there are risks of viruses and malware. Handset vendors will need to
www.informatm.com 2011 Informa Telecoms & Media 6

ensure security from such threats, while at the same time continuing to provide an open ecosystem to developers to enable them to build attractive NFC applications. Googles main interest in NFC is not payments but the activity leading up to payments, such as search, advertising and special offers. It sees NFC as an extension of its advertising business model. The acquisition of Motorola will take Google closer to having an Apple-like end-toend ecosystem for mobile devices and services; so far, this has been Apples key differentiating strength. Apple has complete control of the software and hardware that goes into the iPhone and, with the Motorola acquisition, Google will also have similar control over devices manufactured by Motorola Mobility. Even if it is considered likely that 40% of handsets shipped will be NFC-enabled by 2015, the penetration of users with NFC mobile phones wont reach more than 20-25%. So it's unlikely that more than 15-20% of global mobile subscribers will be active users of mobile NFC services by 2015.

Banks The current economic woes caused by the credit crunch mean that banks and other financial institutions face significant challenges as their payment revenues decline rapidly because of initiatives like the SEPA (Single Euro Payments Area) which aims to reduce the cost of crossborder electronic money and payments transactions in Europe and increasingly more onerous regulation in the financial services sector around the world. Mobile NFC services can provide a means for the banks to stimulate greater use of their services especially for card payments, encourage customer loyalty by taking advantage of the value-added benefits of mobility, and help in reducing fraud. In the context of card payments, two entities are involved: the card issuing banks (CIBs) and the merchant acquiring banks (MABs):

CIBs maintain cardholders accounts; they issue the cards, extend credit to cardholders (in the case of credit cards) and bill cardholders for purchases against their card. The CIB is typically responsible for customer care and handling the cardholders personal data, although this may be provided by third-party processors or card program managers. The CIB is responsible for transferring payment to the relevant merchants accounts (via the payments network and merchant acquirer) for the cardholders purchases. MABs maintain the merchants accounts that allow them to accept credit and debit transactions. The merchant acquirers provide the means to authorize valid card transactions via the interface to the appropriate payment network and facilitate the clearing and settlement of the transactions through the payment network. The acquiring bank receives funds from a cardholder when a credit card transaction is completed, and deposits the payment amount, less any fees, into the merchant's account and from there into its business checking account.

Historically, a single bank would have performed both functions in well-defined geographic markets but, thanks to the globalization of retailing and banking and advances in technology, the industry is now dominated by large-scale, specialist organizations and the issuing and acquiring functions are typically offered by independent entities, some of which are not banks. Investing in mobile NFC could result in the following benefits for banks:

Reduced costs of handling cash and checks. Reduced costs of plastic card issuing and management. Incremental revenues from consumers and/or merchants driven by the greater volume of transactions, and perhaps also higher payment fees for the greater convenience and security offered by mobile NFC payments. Gaining or protecting market share the early adoption of mobile NFC can help banks differentiate and could also provide opportunities to offer more interactive services to their customers. Access to new markets and to reach and serve new customer segments previously inaccessible to them (i.e., the unbanked or the under-banked user segments). Increased usage of contactless infrastructure that has already been deployed, leading to faster pay-back and higher ROI.

In France, BNP Paribas, Credit Mutuel, CIC and Credit Agricole, together with mobile operators France Telecom, SFR, Bouygues Telecom and NRJ Mobile, have plans to deploy nationwide interoperable NFC-enabled payment services in early 2012.
www.informatm.com 2011 Informa Telecoms & Media 7

The Slovakian bank UniCredit is using NFC stickers supplied by Gemalto for a commercial mobile NFC deployment. The stickers will be used in conjunction with MasterCard PayPass readers, which are deployed in about 3,000 outlets around Slovakia. UniCredit Slovakia is part of the much wider UniCredit Group, which has 9,600 branches in about 50 countries around the world. Despite the benefits of mobile NFC, there are a number of gaps or uncertainties in the business case that is causing some banks to pause and look very hard at the mobile NFC opportunity before offering their full commitment. Mobile NFC is unlikely to reduce cash-handling costs any more than contactless cards do and the potential to increase revenues from increased transactions can also be attributed to contactless cards. In addition, the potential threat from mobile operators eventually offering competitive financial services is also a concern for the banks. Key findings Partnerships with mobile operators to deliver mobile NFC payments will allow banks to reach and serve new customer segments previously inaccessible to them (i.e., the unbanked or under-banked) and grow their revenues. Mobile NFC will lead to an increase in the use of the existing contactless infrastructure that several banks have deployed, generating additional payment traffic on already deployed or planned contactless infrastructure, which will accelerate the pay-back on existing or planned investments. Some banks have concerns about potential conflict or competition between the standard contactless cards, to which many banks are already committed, and NFCenabled mobile phones. Many banks are in favor of having NFC functionality embedded in microSD cards, rather than in the SIM card or the mobile phone. For banks, having NFC in microSD cards means they can offer a service which is both operator- and handset-agnostic, allowing them to reach a large customer base without having to partner with an operator or handset vendor. Payment network providers The providers of the payment networks, such as Visa, MasterCard, American Express and Discover Network, are the companies behind the credit and some debit and prepaid cards. They maintain the infrastructure and provide services, such as approval and certification, to CIBs as well as defining their own brand requirements for different payment form factors. They also define payment specifications and provide transaction-processing services to support them (see fig. 2). Although critical to many mobile payment services, such as creditcard-linked remote payments and NFC payments, there are unlikely to be major changes in the way these payment networks operate. Mobile NFC will potentially just reduce the lifecycle management costs of existing card payment systems. Fig. 2: Credit card value chain

www.informatm.com

2011 Informa Telecoms & Media

NFC POS infrastructure is being deployed in countries all over the world, driven primarily by the payment network providers Visa and MasterCard, which are aggressively promoting their respective contactless card schemes payWave and PayPass. EMV Europay, MasterCard and Visa formed EMV (Europay, MasterCard and Visa) in 1999 to manage, maintain and enhance the EMV integrated circuit (smart) card specifications for payment systems. MasterCard acquired Europay in 2002 and the Japanese card company (JCB) joined the organization in 2004 so EMV is currently operated by JCB, MasterCard and Visa. The companys primary role now is to manage, maintain and enhance the EMV integrated circuit card specifications to ensure interoperability and acceptance of payment system integrated circuit cards on a worldwide basis. Visa, MasterCard and other payment networks have adopted a visual symbol to indicate contactless payment functionality on cards and terminals. The symbol must be shown on the front of the card and on the reader at the POS. Visa payWave Visa payWave is an EMV-compatible payment platform based on the ISO 14443 specifications. The payWave cards are issued with both the conventional chip or magnetic strip for contact transactions and the embedded chip with payWave technology. Financial institutions offering Visa payWave cards include Amegy Bank, Arvest Bank, Barclaycard US, BB&T, Chase, First Internet Bank of Indiana, INOVA FCU, PNC Bank, SunTrust, Wells Fargo and Zions Bank. Visa is migrating to an enhanced global contactless payment specification, Visa Contactless 2.0, which will ensure that Visa cardholders can use their contactless cards worldwide while still providing issuers with the flexibility to customize programs to meet local market needs. The specification provides additional security options and enhanced performance for faster transaction processing. Another major feature of the specification is that communications between the card and terminal have been streamlined to provide faster transaction processing. This makes Visa payWave ideal for environments where speed is of the essence, such as car parks, mass transit systems, fast food restaurants and convenience stores. Mastercard PayPass MasterCard PayPass is also an EMV-compatible, contactless payment platform based on ISO 14443. MasterCard began trialing PayPass in 2003. Its first market trial was in the US, in Orlando, Florida, with JPMorgan Chase, Citibank and MBNA; more than 16,000 cardholders and 60 retail locations participated in the market trial. A 2007 MasterCard PayPass Benchmark Study found that about 90% of respondents that use PayPass were satisfied with their experience, and 71% of these PayPass consumers said they use PayPass as their primary card for everyday purchases. Since 2005, MasterCard has rolled out commercial PayPass services in a number of markets outside the US including Canada, the UK, Germany, Poland, Australia, Turkey, the Philippines, Malaysia and South Korea. MasterCard has worked with Nokia, AT&T Wireless and JPMorgan Chase to incorporate MasterCard PayPass into mobile phones using NFC technology, trialing it in Dallas, Texas. American Express ExpressPay ExpressPay, which comes embedded in a card or in other separate forms such as a key fob, is also EMV-compatible and based on ISO 14443. In June 2005, American Express became the first card issuer in the US to launch a contactless-enabled credit card; it was called Blue and had the ExpressPay feature. American Express claims that pilot tests in Phoenix and New York demonstrated the significant merchant benefits of ExpressPay in the form of time savings and increases in spend. Based on a three-day sample, customers got through the queue 53% faster with ExpressPay than with magnetic strip transactions, and 63% faster than with cash. Discover Financial Services Discover Financial Services runs the POS network that Isis is connected to; it is the fourthlargest in the US. The company operates the Discover card and its payment businesses include the Discover Network with millions of merchants and cash access locations, the PULSE ATM/

www.informatm.com

2011 Informa Telecoms & Media

debit networks, and the Diners Club International global payments network which is accepted in over 185 countries. Discovers Zip contactless application is accepted in over 100,000 merchant locations in the US but there are not many users because the company only introduced contactless stickers and cards in November 2010 and issued these only to selected customers. The company is working to enable Zip payment from mobile phones and claims that Zip will be accepted at around 90% of the locations that take PayPass or payWave in the US. Key findings The business case for payment network providers to invest in mobile NFC is to displace cash payments by growing the number of users of mobile NFC payments. Adoption of mobile NFC can also lead to strong growth in cashless transactions in emerging markets, which tend to have a low credit/debit card penetration, thereby increasing revenues for payment network providers. According to American Express, contactless transactions can be 63% faster than cash and 53% faster than using credit cards. MasterCard found that the most significant time savings are realized in a drive-through environment where using contactless payments can save 12-18 seconds per transaction as compared with cash payments. To accelerate the growth of mobile NFC transactions, payment network providers should also promote the use of NFC stickers to complement contactless cards in developed markets. NFC stickers will also help in driving the adoption of mobile NFC payments in emerging markets without the need for huge upfront investment. Payment network providers should also explore opportunities of developing a fully fledged secure m-commerce platform which they can customize and market to merchants and banks, as well as Internet and media companies. In addition to revenue growth, investing in mobile NFC is also important for payment network providers to ensure that they dont lose out to payment platforms like PayPal and iTunes, to which users can directly link their bank accounts and bypass the payment network providers. In the coming years, the payment network providers are likely to face more competition from Google and Apple, which already have and will continue to grow their direct customer connections. Merchants and retailers Mobile NFC has a significant relevance for certain types of merchants. For example, transport operators are already using contactless cards for ticketing, especially in mass-transit applications, to increase throughput and increase customer satisfaction. Similar benefits will be experienced by ticket vendors for live events, museums, cinemas and theaters where purchasers can be fast-tracked into the venue. Currently, NFC readers are most widely deployed by public transportation systems. Informa Telecoms & Media estimates that, by July 2011, about 930 cities in at least 50 countries had introduced NFC-based ticketing in public transportation systems. In Japan, around 60% of the handsets sold now are NFC-enabled and about 20% of people with such phones have reportedly activated them for use on public transportation. Only a small minority of retailers outside Japan and South Korea have NFC-enabled POS terminals in their stores. In January 2011, Starbucks announced that all of its US stores are now accepting NFC payments via mobile phones. Retailers in the US and the UK have started deploying contactless POS terminals but currently only about 3% of POS infrastructure in the US is enabled for contactless payments. In the UK, it has been reported that the Post Office is planning to deploy new POS terminals with contactless payment facility in 12,000 of its branches in early 2012. By October 2012, it expects to have contactless POS terminals in all of its branches, around 30,000-35,000 terminals, making it largest merchant accepting contactless payments in the UK. The London Transit Authority expects to install around 20,000 contactless POS terminals during 2012, while it is believed that, as of July 2011, there were around 60,000 contactless POS terminals installed at merchant locations in the UK and about 15 million contactless bank cards have been issued. Mobile NFC payments offer merchants and retailers the opportunity to improve their customers experience of purchasing, through improved ease of use, convenience and transaction speed, and potentially greater security. For merchants and retailers, mobile NFC offers the following key benefits:
www.informatm.com 2011 Informa Telecoms & Media 10

Increasing throughput by reducing transaction times. Potentially generating more transactions, especially for micro-payments. Exploiting impulse purchasing behavior more effectively. Reducing cash handling costs and risks. Running marketing campaigns offering coupons and vouchers to increase customer loyalty.

Mobile NFC offers more opportunities to run loyalty programs, enabling merchants and retailers to exploit e-vouchers and advertising delivered either via the cellular network or locally via NFC (e.g., using smart posters) and stored on the handset. Key findings The adoption of mobile NFC transactions is likely to be fastest in the public transport sector, especially in places where a good deal of contactless POS infrastructure is already in place. The resulting cost savings in ticket issuing and cash handling will strengthen the business case. Merchants and retailers will be interested in NFC if it helps to reduce costs, increase sales and provide better protection against fraud. They arent likely to mind whether a user pays with a contactless plastic card or an NFC-enabled mobile phone; in fact, in some cases, they might prefer payments via contactless plastic cards if its faster than paying by mobile phones. An important incentive for retailers is the potential of using NFC for their own mobile wallet services, such as store-payment cards, loyalty cards and coupons and vouchers. A reduced cash-handling cost is cited as one of the key benefits for merchants and retailers to enable NFC payments but it also means that retailers will have to pay more for card-payment fees with the increase in cashless transactions. In addition to the potential cost of new hardware and potentially higher fees, there is still some resistance to mobile NFC from merchants and retailers due to security concerns and the need for additional training of staff. Trusted service managers The role of a trusted service manager (TSM) is to distribute, provision, and manage mobile payment applications on behalf of the application owners. A number of independent companies are establishing themselves as TSMs including Atos Worldwide, Cassis, SmartTrust, Giesecke & Devrient (G&D), First Data, Gemalto and Ericsson IPX. TSMs provide the link between the mobile operators and the issuing banks or other application owners such as transportation service providers. For example, First Data is playing the role of TSM, delivering and managing payment applications over the air to the embedded SE in the Nexus S, Google Wallets launch device. The role of the TSM is clearly a vital one in the ecosystem and carries significant responsibility. The TSM will hold the master key to the SE and manage downloads to it; it would also be responsible for invoicing and supporting the application owners. Therefore, a TSM must be a trusted party. As the owner of the SIM, it would appear that the mobile operator would be the best candidate to act as the TSM but many in the industry argue in favor of an independent third party to be the TSM. Key findings It has been proposed that a TSM will be required to distribute, provision and manage mobile payment applications on behalf of the application owners but there are uncertainties about whether the TSM should be independent or not. It seems the most efficient and transparent approach would be to use a third party as TSM, which could act as a single point of contact for application owners and mobile operators. Although TSMs are meant to be facilitators, they nevertheless add an extra layer of complexity and count as one more party taking a slice of the mobile NFC service revenues. NFC hardware and component vendors Smartcard manufacturers The term smartcard can be used to refer to a memory card, a microprocessor card, or a contactless card. Memory cards provide more data storage space than a magnetic strip but cant process the data. In comparison, microprocessor cards (or microcontrollers) have the capacity to process data and the applications on these cards can be customized or processed via an OS. Contactless cards are based on radio-frequency communication technologies and
www.informatm.com 2011 Informa Telecoms & Media 11

can interact and exchange data with readers via an electromagnetic field, without the need for any physical or electrical connections. Smartcard manufacturers include Gemalto, Oberthur Technologies, Sony, Morpho and Giesecke & Devrient; these four companies account for over 80% of the global smartcard market. In addition, there are a few Chinese smartcard manufactures, such as Watchdata, Datang and Eastcompeace, but these companies mostly only cater to the domestic Chinese market. Bell ID, the smartcard and NFC software provider, ViVOtech, the NFC software developer, and PPC Card, the credit/debit-card manufacturer are working together to enable the mass-market rollout of mobile NFC services in Europe. As NFC is compatible with Philips' MIFARE and Sony's FeliCa contactless smartcard platforms, NFC devices can read information from these cards. NFC devices can also operate like a contactless card, even when switched off, making them compatible with the huge installed infrastructure of MIFARE and FeliCa systems. It is believed that Google will subsidize contactless POS terminals to accelerate their deployment by retailers and merchants. The replacement cycle for POS infrastructure is usually five to seven years for most retailers. Therefore, to accelerate the growth of NFC payments, it is important to encourage more retailers to deploy contactless POS systems and providing terminals at subsidized rates will help to drive this. NFC POS terminal and reader manufacturers The POS terminal and reader vendors are vital players in the mobile NFC value chain as they provide the NFC-enabled terminals and readers to the merchants and acquirers. The big vendors in this field are Ingenico, Verifone, Hypercom and Vivotech; other players, including IBM, Micros and Radiant Systems, also provide contactless POS systems. Most terminals and readers for mobile NFC transactions tend to be the same as those that can be used, or are already in use, for transactions with contactless payment cards. Contactless card readers are provided by companies such as OTI (On Track Innovations) and ROAM Data. Some interim solutions have also been proposed to drive the NFC market. One example is the iCarte 110 NFC reader and contactless payment adaptor manufactured by Wireless Dynamics Inc. and designed for the iPhone 3G/3GS; the readers dimensions are 62 x 26.5 x 12.3 mm and it can be attached at the bottom of the iPhone. The iCarte 110 NFC reader has an embedded chip which can be configured as credit/ debit cards, prepaid cards and loyalty cards for contactless payments and transactions, and communicated by the attached iPhone. It can also read NFC coupons, smart-posters, etc., as well as used for enterprise applications including access control and asset tracking. The iCarte 110 NFC reader is currently only available for payment with Visa contactless protocol and the SDK is available for purchases exceeding 1,000 units. Wireless Dynamics Inc. has also developed NFC readers such as the SDiD 1010 in SD format which can be inserted in devices with an SD card slot. Payment and transaction information can be processed via the cellular network as well as using Wi-Fi and Bluetooth. Chipset manufacturers For chipset manufacturers, the mobile NFC market offers a new value-add by providing them with the opportunity to sell more chips, and at a higher premium. There are three types of relevant chipset vendors:

The UICC vendor: The universal integrated circuit card (UICC), more commonly known as the SIM card, is the key element in mobile NFC payment systems as the UICC is where one or more of the security domains are provisioned. IC chip vendor: Typically the manufacturers of chips used in EMV credit and debit cards are the same as those supplying the UICC manufacturers for the mobile industry, providing valuable cross-sector expertise. NFC chip vendor: The role of this value chain member is to supply the standardsconforming NFC chip to the handset manufacturer for integration with the handset.

Although they are not directly involved in mobile payments, the chipset manufacturers are critical to the mobile NFC market as they provide the chipsets to handset manufacturers to enable them to produce NFC devices. Furthermore, the chipset manufacturers work to bring the technology improvement and innovation which then lowers the costs of NFC chips and
www.informatm.com 2011 Informa Telecoms & Media 12

therefore the BOM (bill-of-material) cost of NFC handsets will initially be only slightly more than for non-NFC phones. In a couple of years, it can be expected that handset vendors will be able to provide NFC-enabled devices that are in the same price range as non-NFC devices. Inside Contactless and NXP are two leading NFC chipset suppliers. Broadcom and Qualcomm are also developing NFC chipsets. Inside Contactless, in partnership with Infineon and Giesecke & Devrient, has developed the SecuRead system-in-package (SIP) NFC solution to provide handset manufacturers with a single package that includes both an NFC controller and an embedded secure element (SE). The solution comprises the MicroRead NFC controller, Inside Contactless' open NFC protocol stack for Android, Windows Mobile, Linux and Java devices and an embedded SE manufactured by Infineon Technologies; it runs a GlobalPlatform-compliant Java Card operating system supplied by Giesecke & Devrient. The solution will make it easier for device manufacturers to embed NFC technology in their products. NXP Semiconductors has reported that its NFC chipsets have been integrated in over 60 mobile phones currently being developed by handset vendors. NXP's NFC software is open source on the Android platform and enables the Google Wallet application. Gemalto has contracted NXP to incorporate the companys MIFARE contactless-payment technology into its UICC cards; Gemalto has been chosen by KDDI to provide User Identity Module cards and Trusted Service Management for its NFC program. Another company, Watchdata, provides the SIMpass SIM card-based mobile NFC solution. China Telecom has deployed the SIMpass solution in over 20 provinces and has over half a million users of the mobile NFC service. Similarly, Watchdata claims to have shipped over 100,000 SIMpass cards to the Thai mobile operator True for its True Money Service, which allows users to make mobile NFC payments at McDonalds and other retailers. Memory card manufacturers Memory card manufacturers argue in favor of embedding the SE (secure element) in the memory card, rather than in the SIM or the mobile phone. They claim that having the SE in a memory card is better than having it on the SIM which has storage limitations. Having the SE on a memory card also means that users are not tied to a particular operator or mobile phone and can take out and plug the memory card in other handsets to use NFC services (see fig. 3). Fig. 3: Options for location of secure element in mobile NFC handsets

In Dec 2010, In2Pay microSD, developed by DeviceFidelity, became the first NFC solution certified by Visa for commercial deployment. Another company, Tyfone, has developed the SideTap memory-card solution to enable NFC services in a large number of mobile phones. The solution consists of a Micro SD card with integrated SE and NFC antenna and allows users to make their handsets NFC-capable by simply using the Micro SD card in their handsets. Tyfone claims that the solution will allow users to remove their confidential information from the handset when switching to a new device.

www.informatm.com

2011 Informa Telecoms & Media

13

Key findings The migration of the banking and payments industry towards EMV standards, the growth of contactless payments and the opportunities in emerging markets are acting as key drivers for revenue growth for the POS terminal and reader vendors. However, these manufacturers are facing increasing price competition, in particular from Chinese manufacturers, and, as a result, their profit margins have fallen. To grow their revenues, the manufacturers are evolving their business to also offer the management of payments and related services. This includes ensuring the proper running of the terminals, providing the necessary software for the terminals and readers, managing the different payment methods, and ensuring adequate security and protection against fraud in collaboration with banks. Many vendors are developing and launching a variety of interim NFC solutions such as stickers, and NFC functionality embedded in microSD and SD cards to enable NFC services on existing mobile phones. NFC readers that can be attached to mobile phones, such as the iCarte 110 reader for the iPhone, are good interim solutions but unlikely to get mass-market adoption. Most users wont want to extend the size of their mobile phones with additional hardware and also wont want to pay extra for it. A key challenge for the POS terminal and reader manufacturers is to ensure adequate protection against the growing malware and security attacks on contactless and mobile terminals. To accelerate the market growth of NFC payments, it is important for the vendors to encourage new retailers to deploy contactless POS systems. Providing NFC POS terminals at subsidized rates will encourage more retailers to deploy contactless infrastructure. Payment service providers Payment services that are currently largely confined to the digital and online worlds, such as ecommerce payment platforms (e.g., PayPal, Amazon), digital-content platforms (e.g., iTunes), carrier billing, and even social media and gaming virtual currencies (e.g., Facebook Credits, World of Warcraft Gold, Angry Birds Bad Piggy Bank), could use mobile NFC to extend their reach to physical-world purchases. Paypal PayPal is well-established as a payment service for online purchases; it allows users the option of making payments directly from their bank account without needing to have a credit or debit card. Mobile NFC offers further growth opportunities for PayPal because retailers may prefer their customers to pay by PayPal if that means transaction fees that are lower than using the payment networks of credit card companies. Mass adoption of PayPal will therefore be a big threat to the likes of Visa, MasterCard and other credit card companies. iTunes iTunes is now one of the worlds biggest online payment platforms with more than 200 million people registered with an iTunes account. This also makes iTunes possibly the biggest creditcard hub on the Web, since users must register their credit/debit card details to open an iTunes account and start making purchases. It remains to be seen whether Apple will introduce an NFC-enabled iPhone in 2012 and extend iTunes payments beyond the realm of digital goods into the physical world. Informa Telecoms & Media expects Apple to do that in a couple of years as adoption of NFC services starts to grow. Key findings Mobile NFC offers the opportunity to online-payment platforms such as PayPal, Amazon and iTunes to extend their reach to local payments in the physical world. It also provides an opportunity for virtual currencies, for example Facebook Credits, to be used for purchasing physical goods. Retailers may prefer customers to use services such as PayPal for NFC payments if it incurs lower transaction fees than those charged by the credit card brands. Security concerns may inhibit customers from using the online payment service providers for making NFC-based local payments. To grow their business in the mobile NFC market, these companies will have to ensure that people trust them as much they trust the credit card brands. Application service providers and software vendors The mobile NFC market represents a significant opportunity for application service providers and software vendors many of whom are relatively small, entrepreneurial technology companies. There are companies that provide solutions, such as coding, programming,
www.informatm.com 2011 Informa Telecoms & Media 14

hardware implementation, etc., to integrate NFC in new and existing products companies like DeviceFidelity, Inside Secure, Monitise, Proxama, Airtag, Tyfone, Zenius, United Tectsa, Schreiner ProSecure, ISS and Near Field Solutions a few examples include:

DeviceFidelity has developed solutions to enable NFC services on mobile phones. Recently, it was granted a patent for the implementation of NFC in mobile devices to enable them to function like mobile wallets capable of conducting contactless payments and transactions using credentials issued by multiple different enterprises at POS terminals. Inside Secure will provide ZTE's GSM and TD-SCDMA handsets with its NFC solutions, allowing users of the devices to access NFC services including payments, loyalty, ticketing, and access control. In April 2011, Proxama, the NFC software development company, announced the launch of NFC services in South Africa that enable users to make contactless payments on transport networks.

The mobile NFC market also presents opportunities to e-commerce and m-commerce companies to extend their presence to local mobile payments. Some of these companies for example Monetise, Fundamo, Vesta, PayBox, and Bango have developed business-tobusiness (B2B) service solutions that are used by mobile operators or banks which brand and retail the mobile payment service themselves. These solutions are often provided on a managed services basis, where the technology platform and associated infrastructure is deployed outside the mobile operators or banks networks. Other mobile application service providers, such as OboPay, Luup and Crandy, have built business-to-consumer (B2C) service solutions and have established their own independent consumer brands, selling services directly to the mobile consumer. Mobile NFC services will also allow these players to exploit transaction data for location-based marketing services. Industry forums and associations Many industry forums and associations, including the GSMA, NFC Forum, Mobey Forum and the Contactless Payments Council, have been instrumental in driving the development of NFC standards and specifications, as well as encouraging market trials and commercial rollouts of mobile NFC services. GSMA NFC technology has the backing of the GSMAs Pay-Buy-Mobile (PBM) initiative and 52 mobile operators were supporting the initiative as of August 2011 (see fig. 4). A number of these operators are already conducting trials of mobile NFC services as part of the PBM initiative.

Fig. 4: Mobile operators supporting the Pay-Buy-Mobile initiative, Aug-11

www.informatm.com

2011 Informa Telecoms & Media

15

In addition to the mobile operators, banks and credit card companies, a number of other important mobile NFC value-chain players are involved in the PBM initiative including: handset vendors, such as LG, Nokia, Samsung and Mobiwire (Sagem); UICC card suppliers, such as Gemalto, G&D and KEBT; and NFC reader manufacturers, such as Vivotech and Harex. NFC Forum Formed in 2004, the NFC Forum now has over 150 members. It was formed to advance the use of NFC technology by developing specifications and ensuring interoperability among devices and services. The main goals of the NFC Forum include developing standards-based NFC specifications, encouraging products based on those specifications, and driving awareness of NFC technology among consumers and enterprises. The NFC Forum has released 15 specifications to date, which provide a roadmap to ecosystem players for developing NFC-based products and solutions. Mobey Forum The Mobey Forum, established in May 2000 is a non-profit organization; its mission is to encourage the use of mobile technology in financial services. The forum has over 50 members including banks, handset manufacturers, credit card companies, technology vendors and a few mobile operators. The Mobey Forum has published a number of white papers on best practice for mobile payments and documentation on the recommended architecture for a wide range of mobile financial services. To support its recommendations, the forum has completed demonstrations and trials based on its recommendations and principles and it is supporting members implementations. Informa viewpoint Informa Telecoms & Media recommends that mobile operators and other value-chain players must look more carefully before investing in NFC services because the technology will require a large upfront investment and take at least three to four years to reach a critical mass of users and transactions. Mobile operators are hoping that the SIM will become the default method of securing NFC applications, but it is more likely especially in the developed markets that security embedded in the handset will eventually prevail. Without the presence of a broad network of retailers and service providers that will accept NFC payments, the opportunity for mobile NFC will be very limited. There are few markets where anyone other than the banks and payment network providers has the dominance to make this happen. It is unlikely that the pure operator-driven model that NTT DoCoMo adopted will be repeated elsewhere. It will take a couple of years before NFC-enabled handsets will be shipped in significant volumes. The consensus in the industry is that a market penetration of handsets of at least 20% is necessary before the mobile NFC market really starts to reach its potential. Google has implemented the necessary NFC software in its Android OS Gingerbread and wants to get the NFC hardware embedded in large number of Android devices. Its acquisition of Motorolas handset business means that Google will be in a position to drive NFC device shipments. However, there is a high degree of fragmentation in the mobile NFC market and this will continue to restrict the rollout of commercial services for the next two to three years. Mobile NFC services can generate significant revenues for value-chain players provided all stakeholders take a pragmatic approach and recognize and accept the contribution and importance of each to the overall NFC business. The need for collaboration is clear. Revenue sharing as well as risk and investment sharing will be necessary, especially where there is no pre-existing contactless infrastructure.

www.informatm.com

2011 Informa Telecoms & Media

16

Current trends and immediate opportunities


05 September 2011 Guillermo Escofet
Key points

The momentum is back in mobile NFC, but the perennial barriers remain largely in place, especially when it comes to contactless payments. Many players have been spurred to enter the market by fear of Apples and Googles ambitions in the sector. Google has already played its hand, overshadowing moves by carriers in its home territory, the US. Apple is still waiting in the wings, leaving everyone guessing. Operators have ganged up in joint ventures and alliances Austria, the Czech Republic, Denmark, France, Germany, Netherlands, Spain, the UK and the US to push the NFC market in a different direction than the one OTT players want. Although contactless payments are what most appeal to would-be players, they will be the hardest service to roll out and wont give much room for mobile players to take a share of revenue. There will be more potential to make money from CRM and marketing activity leading up to payments, such as coupons, offers and loyalty points. The most immediate opportunities in mobile NFC include public transportation and workplace access, because thats where NFC infrastructure is most widely deployed. The tussle among operators, handset makers/OS providers and service providers over where the secure element should go in phones, to enable secure services such as payments, continues to delay the rollout of NFC phones. There is growing frustration with the slow pace of progress, leading to calls to change the focus from payment services to open NFC services that dont require a secure element.

Renewed activity A year ago, the momentum behind mobile near-field-communications (NFC) technology had pretty much run out. The technology had been trialed and debated to death for several years, without much to show for it. The only places where commercial mobile NFC services were a reality in any significant way were Japan and South Korea. The use case and business case for the technology were being seriously questioned, and the market barriers still looked a long way from being lifted. But all of a sudden, interest in mobile NFC was reignited in November, amid a flurry of announcements from operators, banks, payment firms and chip makers. Operators ganged up in alliances to push for mobile NFC payment services in the US, Germany and the UK, and they announced ambitious plans to have large chunks of their handset portfolios NFC-enabled within the next one to two years. Orange even appointed an NFC evangelist at board level and followed up in May with the launch of the UKs first commercial mobile-NFC-payment service, Quick Tap, in partnership with credit-card firm Barclaycard. Google debuted the first Android NFC phone in December the Nexus S and last month it unveiled Google Wallet, in partnership with US mobile carrier Sprint and financial-service providers MasterCard, CitiGroup and First Data. The application enables users to make contactless payments and store and redeem offers and loyalty points on NFC-enabled Android phones. There were strong rumors that Apples next version of the iPhone, expected to be unveiled in September, would be NFC-enabled, though the latest speculation among industry insiders is that Apple is not ready for NFC. Not to be outdone, numerous other handset makers, such as Nokia, RIM, Samsung and ZTE, have made pledges to make NFC a common feature in their device road maps, though they have largely failed to stick to the time frames theyve laid out for incorporating NFC. There has been little let up in the pace of mobile NFC announcements over the past 10 months (see fig. 1), with many observers and would-be market players saying that mobile NFC is finally happening that the pieces in the complex mobile NFC puzzle are falling into place. But are they?
www.informatm.com 2011 Informa Telecoms & Media 17

Fig. 1: Global, no. of mobile NFC announcements, Jul-10 to May-11

More than anything, what has provoked the recent excitement and activity in the mobile NFC sector is the anticipated moves in the sector by the mobile industrys most feared over-thetop players, Apple and Google, rather than a magical lifting of the barriers that have long held up service rollouts. Rumors that the two Silicon-Valley companies were planning moves in NFC had been bubbling for a couple of years. And there were strong indications that the second Googlebranded Android phone, the Nexus S, would be NFC-enabled, as it indeed turned out to be. The operators were spurred into action, fearful that if they were not seen to take the lead in the mobile NFC market they would be cut out of the value chain, as they have to a great extent in many other mobile services now dominated by OTT players. In the US, AT&T Mobility and Verizon Wireless two carriers that dont make natural bedfellows formed the Isis joint venture in November, together with fellow carrier TMobile USA, point-of-sale (POS) network Discover Financial Services and credit-card issuer Barclaycard. The aim was to set up a nationwide mobile commerce network based on POS NFC payments. Also in November, German operators T-Mobile, Vodafone and O2 joined forces to extend online-payment service Mpass to NFC payments in bricks-and-mortar stores. And in March, Spanish operators Telefonica, Vodafone and Orange agreed to jointly develop mobile NFC payment services in Spain. French carriers Orange, SFR and Bouygues have completed a joint trial in Nice and are ready for a nationwide push. Most recently, UK carriers Everything Everywhere (combining Orange and T-Mobile), Telefonica and Vodafone have formed a mobile-marketing-and-payments joint venture that covers NFC-enabled m-wallet services. It is designed as a single point of contact for advertisers, marketing partners, retailers and banks. The venture is subject to competition clearance and is aiming to launch before the end of the year. A similar JV was announced by Denmarks four operators, Telia, TDC, Telenor and Three. Handsets The prospect of an NFC-enabled iPhone also appears to have panicked many of Apples rival smartphone manufacturers into making bold statements about the number of NFC handsets they would be bringing out in the near future. Nokia said that all its new smartphone models in 2011 would include NFC, a statement it subsequently wriggled out of. It launched the C7 smartphone in October, but its NFC capability was not turned on until a long-awaited Symbian update (Anna) was made available over the air in August. NFC-smartphone-launch announcements have come in thick and fast from Nokia over the past couple of months, however, including the MeeGo N9 handset, due out in 4Q11, and the Symbian Belle 700, 701 and 600 handsets, whose release also seems imminent. BlackBerry maker RIM was almost as bold, saying that many if not most of its new handsets in 2011 would be NFC-enabled. But, based on subsequent declarations, it too seems to have scaled down its ambitions, saying that it is committed to releasing at least two NFC BlackBerry models this year. It has NFC versions of the BlackBerry Bold (the 9900 and 9930) and BlackBerry Curve (the 9350, 9360 and 9370) coming out any time now.
www.informatm.com 2011 Informa Telecoms & Media 18

ZTE, the worlds fourth-largest handset maker, announced at the Mobile World Congress in February that it would introduce NFC in all phones as of 2Q11. But the Chinese manufacturer has since backtracked, saying that it will supply NFC phones only if operator orders are forthcoming. Another Far Eastern handset maker, HTC, has said that its first NFC phone is still a year away. Motorola and Sony Ericsson also have NFC in their road maps but are not expected to deliver NFC phones before 1Q12. For Microsoft, NFC is not a top priority it has bigger fish to fry, trying to claw back market share from top dogs Android and Apple so the firm is unlikely to be launching any contactless devices this year. Chipmaker NXP Semiconductors, which claims to have a market share for NFC chips of more than 90%, has revised down its initially bullish forecast for NFC phone shipments in 2011, from 70 million to 40 million. At one point earlier this year, it had even spoken of a possible 100 million. NXP has toned down its predictions because NFC handset rollouts have been slower than predicted. But the chipmaker says that it knows of 66 phone models in the pipeline that are earmarked for NFC functionality. Barriers The main barriers to mobile NFC services remain largely in place (see fig. 2). And arguably the biggest barrier is the continued focus on contactless payments. Payments are the most complex mobile NFC service to enable, because of the numerous elements that have to be put in place at the device and retail levels. But the debate about mobile NFC has from the start been hijacked by the subject of payments, because thats where most would-be players see the greatest potential for making money.

Fig. 2: Barriers to the takeoff of mobile NFC services

The fundamental barrier to all consumer-facing NFC services is the lack of handset choice. With enterprise services, handset choice is not that much of a problem, because normally only one handset model is deployed across the whole user base. In 1H11, only four NFC-enabled handset models from Nokia, Mobiwire (Sagem) and Samsung were on sale outside Japan and South Korea, which have raced ahead of the rest of the world with their own proprietary mobile NFC ecosystems (see fig. 3). Eight more handsets from Nokia, RIM and Samsung have been unveiled and are set to ship in the near future. Another from LG, the T530 touch-screen feature phone, is rumored to be on its way to stores soon. However, not all of them will be available in all the major markets. Availability is patchy, especially since some of the handset models ship in different versions, only some of which are NFC-enabled.

www.informatm.com

2011 Informa Telecoms & Media

19

Fig. 3: Consumer NFC handsets announced/available in Western markets

Contactless payments have the added barrier of requiring NFC-enabled POS terminals in shops, a barrier that is arguably more formidable than that of handset choice, since mobile industry players have no control over whether retailers deploy such terminals or not, unless they are willing to foot the cost themselves. Only a small minority of retailers outside Japan and South Korea have placed NFC-enabled POS terminals in their stores. The major Western markets that are farthest along in that respect are the UK and US, but only about 3% of POS infrastructure in the US is enabled for contactless payments. Many other markets have no or hardly any NFC POS terminals in place. And POS-infrastructure-replacement cycles can be long, up to five to seven years for many retailers. The secure element Another barrier for payments is the requirement of a secure element (SE) in phones to identify the user, something also required by other secure NFC services, such as access controls and ticketing. The barrier is not so much technical as one of clashing interests between would-be value-chain members pushing for rival SE implementations in phones, in an effort to grab control of the provisioning of secure services. The main players in this tussle are mobile operators, service providers including banks and payment-card companies and handset/OS makers. Operators are pushing for the SE to sit in the only piece of phone real estate over which they still have absolute control: the SIM. Handset makers and OS providers are pushing for the SE to be embedded in devices. And many service providers are pushing for the SE to sit in microSD cards that slot into phones, provided independently of operators and handset makers (see fig. 4).

www.informatm.com

2011 Informa Telecoms & Media

20

Fig. 4: Competing approaches to enabling secure NFC applications on phones

With the secure element comes the added requirement of trusted-service managers (TSMs). Although there are different interpretations of the TSM role, or what it should be, it is essentially about facilitating third-party services on the secure element. The TSM role is also thought to be necessary for the successful mass deployment of secure NFC services. But although TSMs are meant to be facilitators, they nevertheless add an extra layer of complexity and count as one more party taking a slice of the profit. A lot of time in mobile NFC conferences is spent debating what TSMs are, what they should do and who should be entrusted with the responsibility. Call for change of focus The debate about how to make NFC services secure has been a long-running tussle that still dominates the most heated discussions about mobile NFC, even though the players involved are officially all friends and working for the common good. And it is what has most delayed the introduction of NFC technology into phones, to the point that many in the industry have begin calling for a change of focus from secure services to open services, i.e., NFC services that dont require a secure element. The priority, some argue, is to get NFC phones into the market, regardless of the kind of secure element they have, or whether they have one at all, and regardless of whether profit models have been worked out. NFC has plenty of potential applications that dont require a secure element. Application developers should be left to experiment with NFC and find monetization models themselves, and users should be left to get used to using NFC on phones, some argue. One high-profile market player that is calling for this change of focus is Nokia, which was early to market with prototype NFC handsets used in numerous trials and is often a major sponsor at mobile NFC conferences and exhibitions. Nokias vice president of sales and industry collaborations, Mark Selby, gave an impassioned keynote speech at the Global NFC Applications Products & Services Congress, held in Monaco in April, saying that the industry could not afford to wait for the secure-services value chain to sort itself out before moving fullsteam ahead with the launch of NFC phones. In Nokias view, secure services will account for the smallest share of the NFC markets total value. It estimates that open services will account for 68% of the markets value in 2013. The fact that the handset giant had just a week earlier unveiled two non-NFC-enabled smartphones the E6 and X7 didnt lend much strength to Selbys argument, especially when viewed in light of the announcement made a year ago by Nokias executive vice president for markets, Anssi Vanjoki, that all Nokia smartphones would be shipping with NFC starting in 2011. Nokia has since unveiled four NFC smartphones that dont include secure elements and are focused on device pairing and content sharing. The handsets, powered by the latest version of the Symbian OS, dubbed Belle, will come preinstalled with NFC-enabled games and will be sold alongside NFC-enabled accessories such as speakers and headsets.

www.informatm.com

2011 Informa Telecoms & Media

21

Potential open services The range of open services that can be enabled with NFC phones is mind-boggling. They boil down to two broad categories: reading NFC tags and communicating with other NFC phones or devices, such as TV sets and settop boxes. Things that can be done with the former include getting dietary information about a product on a supermarket shelf, picking up coupons or vouchers, viewing a movie trailer from a poster, downloading a bus timetable or voice-guided museum tour, checking in to a location in Foursquare or Facebook Places and leaving a review for a bar or restaurant. Examples of things that can be done with the latter include sharing music playlists, playing multiplayer games, turning your phone into a TV remote control, exchanging business cards and automatically adding someone as a friend on a social network such as Facebook. All in all, open services are expected to account for 80-90% of mobile NFC services. Secure services also referred to as card-emulation services focus mostly on payments, transportation and event ticketing and electronic door keys to get into, for example, office buildings and hotel rooms, all functions that are currently enabled by NFC cards. But not even all ticketing and access controls necessarily need a secure element. For example, only tickets that passengers or event attendees need to show in conjunction with an ID card, such as season tickets, need to be SE-enabled. Revenue opportunities It is tempting to think that secure services will generate more revenue than open services. After all, most open services will be free to the end-user and will not involve any obvious financial element. When mobile contactless payments finally take off which wont be any time soon the sky is the limit in terms of the amount of money that could be transacted through them. But margins are tight in the payments industry, with pressure rising from merchants and lawmakers to reduce payment fees. So there will be little or no room in the value chain for other players to squeeze in and take a share of the revenue. There is likely to be a greater opportunity for mobile players to make money from CRM and marketing activity leading up to transactions, such as coupons, vouchers and loyalty points. These activities are expected to be the main driver of mobile commerce in coming years. Coupons, especially, is a booming sector that has been revitalized by innovative services such as Groupon and the recent entry of powerful players such as Google. But although mobile coupons and vouchers are already a reality via SMS, bar codes and QR codes, it will be a while before they are commonly obtained and redeemed via NFC. Although no secure element is needed in phones, NFC tags need to be deployed by retailers, product manufacturers and service providers, from which users can collect coupons by tapping their NFC phones. And for a seamless user experience, NFC readers are needed at the point of sale, enabling users to tap their phone to redeem the coupons, though such an element is not essential. NFC-delivered coupons can also be redeemed by manually inputting a code or by displaying a bar or QR code for scanning. Immediate opportunities The closest opportunities in the mobile NFC market are where NFC-reader infrastructure is already in place and where handset choice is not that important. The areas where NFC readers are most widely deployed include public transportation systems and office buildings. And enterprise services are where handset choice is generally less critical (see fig. 5).

www.informatm.com

2011 Informa Telecoms & Media

22

Fig. 5: Overview of immediate opportunities in mobile NFC services

One potential sweet spot, therefore, could be workplace-access controls, which combine already deployed NFC infrastructure with an enterprise play, since the systems for such controls are sold to enterprises, not end-users. But the potential market is limited to enterprises that equip employees with mobile phones. And although mobile has the advantage of delivering electronic keys digitally over the air, circumventing the need to order NFC cards or fobs and physically hand them to employees, it is questionable how high up on IT managers list of priorities door access will be when choosing which handset to offer to employees when hardware is due to be replaced. The optimum handset for an enterprises other needs might not necessarily be among those that are NFC-enabled. Workplace access is nevertheless an opportunity worth pursuing, especially for mobile operators, which have a stronger hand to play in enterprise services than in consumer services. In the latter sector, operators are likely to be overshadowed by the OTT players, but operators can exploit the relationships they already have with enterprises in each territory as communication-service providers to those organizations. Transportation In terms of sheer size, public transportation is the biggest, most easily seized opportunity that mobile NFC can tap into. Informa Telecoms & Media estimates that about 930 cities in at least 50 countries have introduced NFC-based ticketing in public transportation systems. The cities probably account for more than 1.5 billion of the worlds population. But the extent to which this opportunity can be exploited will depend on various factors, including the number of passengers with NFC-enabled phones, the compatibility of the phones NFC antennas with the NFC readers in each local implementation, the speed with which public-transportation authorities will extend their contactless ticketing to phones and the willingness of the authorities to open up their contactless-ticketing systems to third-party payment providers. In Japan, which has the worlds highest penetration of NFC phones over 60% only about 20% of people with such phones have reportedly activated them for use on public transportation, even though that was initially the main reason for placing the contactless Felica technology in handsets. Equally, in the Cityzi pilot that kicked off in Nice, France, in May 2010 the most high-profile implementation of mobile NFC in Europe only about 20% of participants used their phones to pay for and board public transportation.
www.informatm.com 2011 Informa Telecoms & Media 23

Mobile has big advantages over cards, however, in terms of providing a portable screen on which passengers can see how much theyve been charged after walking through the ticket barriers and how much prepaid credit they have left, with the option to remotely top up if need be. With cards, users have to line up at ticket machines to check and top up their balance, so there is a definite use case for mobile NFC ticketing. Contactless transportation ticketing is also a sector that could soon be left wide open to third parties, if developments in London are replicated worldwide. Transport for London will soon allow passengers with contactless credit and debit cards to pay fares directly at turnstiles and ticket barriers on buses and at subway and train stations, in preparation for the 2012 Olympics. Emerging markets NFC has all along been seen as a First World opportunity. But in the developing world, the widespread deployment of m-wallet services and the lack of legacy point-of-sale infrastructure in stores could prove to be propitious conditions for the spread of NFC payments. Also, the simplicity of NFC in terms of requiring a simple tap, rather than navigating and keying in information on a screen makes it more suited to markets with high levels of illiteracy. In February, carrier group Bharti Airtel announced the launch of mobile NFC payments in Kenya, Tanzania and Gabon. The service is set to gradually be deployed in Airtels other African markets in 2011. Vendor Oberthur Technologies developed both the NFC SIM and mcommerce security systems behind the service, which enables Airtel subscribers to pay for goods and services in stores via their phones. In July, the Tanzanian subsidiary of carrier group Etisalat, Zantel, launched a commercial NFC payments service in partnership with Oberthur Technologies and MasterCard. Touch and Go is an extension of Zantels mobile-money service and is earmarked for group-wide rollout across Etisalats footprint in Africa, Asia and the Middle East. At the same time, South Africa-based Fundamo a white-label mobile-money-platform provider with 55 operator and banking customers, which was recently acquired by Visa and Accells, a contactless-network provider, joined forces at the Mobile World Congress in February to showcase how NFC payments could be deployed in emerging markets. Fundamo told Informa that several of its customers in Africa whose mobile money services are in their second or third year of operation are looking at contactless payments to boost transaction traffic. Fundamo says it expects to get the first NFC-payment pilots underway by 2H11. Its plan is to use stickers that incorporate an NFC antenna and secure element, to be attached to the phones distributed to users, and supply low-cost NFC readers to retailers. Although the rollout of NFCenabled point-of-sale terminals is considered a big barrier in developed countries, it is seen as an opportunity in emerging countries, because no legacy infrastructure is in place. Informa viewpoint The main drivers for the rollout of mobile NFC will vary from region to region. Public transportation is likely to be the greatest impetus in Asia and, together with payments, will spearhead the market in Europe. In the US, payments will be the main driver. The same goes for Africa, where well-established mobile money services are looking for new opportunities for expansion. But although transportation is a relatively immediate opportunity because of the widespread deployment of NFC-reader infrastructure in public transit systems around the world, it is likely to take at least three to four years before contactless-payment technology becomes commonplace on phones. Emerging markets might get there sooner, by taking deployment shortcuts and avoiding some of the legacy problems hampering developed markets. Coupons, loyalty points and other CRM and marketing activities are likely to offer a greater revenue opportunity in developed markets for non-financial-service players.

www.informatm.com

2011 Informa Telecoms & Media

24

Market-player strategies
05 September 2011 Guillermo Escofet
Key points

Mobile operators want a place in the value chain but are not prepared to invest much money to secure it. They are banking instead on the prospect that the SIM will become the default method of securing NFC applications. But security embedded in the handset is likely to prevail. For the time being, most handset makers are hedging their bets and enabling phones for both embedded and SIM-based security. Operators are not satisfied with this compromise, demanding that handset makers choose one or the other, saying that having more than one secure element in the phone will cause technical problems. In the face of strong resistance from banks and payment providers, operators have abandoned ambitions to charge fees per transaction. Instead, they will charge a rental fee for applications placed on the secure element (SE). An embedded SE makes more sense for service providers that want universal reach instead of secure-application features that are limited to certain networks only. Having to negotiate separate SIM-space rental rates with each operator is not something they relish either. Operators are trying to address these concerns by grouping into joint ventures, such as the one recently announced by the UKs top four carriers. Similar initiatives are happening in Austria, Czech Republic, France, Germany, Netherlands, Spain and the US. Googles main interest in NFC is not payments but the activity leading up to payments, such as search, advertising and special offers. It sees NFC as an extension of its advertising business model. Apple is the best-positioned mobile player to exploit payment services, because of the formidable payment infrastructure it has in the shape of iTunes. Other online-payment platforms, such as PayPal, view NFC as a chance of extending their reach to physical-world payments and encroaching on the territory of the creditcard networks.

Would-be value-chain players Out of all the main would-be mobile NFC value-chain members, operators are the ones that most risk being left out, even though they have been the leading protagonists in most of the mobile NFC trials that have taken place down the years, and have been the ones to spearhead NFC-industry get-togethers and standards committees. They have also been the parties that have taken the lead in the parts of the world where mobile NFC services have gotten farthest. The most developed mobile NFC market, Japan, was crafted by operator NTT DoCoMo, in collaboration with Sony and its contactless smartcard technology, Felica. DoCoMo, which has the majority of mobile subscriptions in Japan, characteristically took a long-term view of what was required to enable a new ecosystem and was prepared to risk a significant investment. It bought a US$1 billion stake in Japans No. 2 credit-card company, Sumitomo Mitsui Card, to secure itself a place in the payment value chain and has been subsidizing the cost to retailers of installing NFC-enabled point-of-sale (POS) terminals. It has also given handset makers an incentive to produce Felica phones by putting its money where its mouth is and placing large device orders. Sources close to the Japanese market have told Informa Telecoms & Media that DoCoMo has yet to make a return on investment from its Felica service, largely due to the huge upfront cost of bankrolling the POS infrastructure. In South Korea, operators are also making a significant investment to put all the elements in place for the rollout of mobile NFC services. Western operators, however, are not willing to take any significant upfront risks with NFC. They are all eager to see mobile NFC happen and secure a crucial place in its value chain. But based on conversations that Informa has had with the heads of mobile commerce at leading operators, it is obvious that they arent planning to invest significantly in NFC. They are not willing to contribute to the cost of rolling out NFC POS infrastructure, and they are even dragging their feet over placing big NFC-enabled-handset orders. Nor do they want to play the role of banks.
www.informatm.com 2011 Informa Telecoms & Media 25

Operators are pinning their main hopes of securing a place in the value chain on the prospect that SIM cards will become the most accepted way of introducing the NFC secure element (SE) in phones. If that happens, it will be operators that control access to the SE since they own the SIM and they will be able to charge providers of secure NFC services for the privilege of gaining access to the secure element. As such, they see their opportunity in mobile NFC as limited to secure services. And it is in secure services primarily payments and transportation ticketing that most operators predict mobile NFC will generate the most revenue. Handset-maker moves It is still too early to know how the SE will be predominantly implemented in phones. The indications are that many NFC phones will be launched with embedded secure elements (eSEs). But it is also likely that many handset makers will hedge their bets and bring out phones with an eSE that also provide a link between the NFC chip in the handset and a secure element in the SIM card, a system referred to as single-wire protocol (SWP). The initial crop of NFC handsets is a mixed bag in terms of SE implementation. For example, the Nexus S has an embedded SE managed by Google but also supports SWP. Nokias C7, on the other hand, is enabled for SWP only and doesnt have a secure element of its own. But this doesnt mean that Nokia wont be bringing out NFC phones with eSEs in future. Microsoft, with which Nokia has teamed up for its smartphone road map, is reportedly pursuing the eSE option. So is RIM. And if the sleeping giant in the sector, Apple, also incorporates NFC into its devices, it will undoubtedly be with an eSE, with no concession to operators on the SWP front. As has already become obvious from the App Store the application ecosystem created by Apple for iPhone, iPod Touch and iPad devices the computer giant is eager to keep the operators firmly shut out of its walled garden. For handset makers and OS providers with mobile application ecosystems of their own, it makes sense to want eSEs (see fig. 1). They want to be the ones to provision security for developers making NFC applications for their devices and platforms, not only because they want to be in control, but because that is likely to be what developers will most want. Depending on operators for the secure element will limit the reach of applications to specific networks and territories, since not all operators will be geared up to support NFC services or have a ready supply of NFC-enabled SIM cards. If the SE is provisioned by the handset maker or OS provider, however, the application will work everywhere.

Fig. 1: Pros and cons of SIM-based secure element

Also, if developers have to deal with the operators, it will mean negotiating separate rates and conditions with each operator to place their application on the SE. Developers would much rather sign up once with a handset maker or OS provider, in the manner to which they have become accustomed under the application-store model, where there is the same revenuesharing deal for all. Operators argue that having the SE on the SIM makes services handset-agnostic, enabling users to take services with them when upgrading their phones. And operators can disable services over the air if a phone has been lost or stolen.

www.informatm.com

2011 Informa Telecoms & Media

26

Dual-SE disagreement Handset makers cant completely ignore the wishes of the operators. In many territories, the operators are the main distribution channel for handsets, often subsidizing their retail price where allowed by regulators to entice customers to take contracts. And if operators go to handset makers with a fat checkbook to place large orders of phones for resale, it gives them a fair amount of bargaining power over handset specs, so most of the handset makers embedding SEs into their devices are leaving their options open with operators by also including SWP. Operators are not happy with this compromise, however, arguing that equipping handsets with more than one SE could cause problems. For example, an NFC reader at a supermarket checkout might be unsure where to debit money from if the handset in question has two active secure elements with different payment apps in each, they argue. GlobalPlatform, the international organization that standardizes the management of applications on securechip technology, has finalized standards for SIM-based secure elements, making them fully interoperable with all key elements within and outside the handset. But eSE interoperability is still a work in progress. Operators also argue that having applications on multiple secure elements in the handset could be confusing for users, saying that if a problem were to arise with an application, the user might not know who to call. Operators say handset makers must choose either eSE or SWP. But many in the industry appear unconvinced by these arguments, saying that they are a smokescreen created by operators to hide the real motive behind their opposition to multiple secure elements: their desire to keep the secure element within their sphere of influence. If so, operators might be calling handset makers bluff, hoping that they choose to drop their eSE plans. But theres a danger that the tactic might backfire and that, pushed into a corner, handset makers might decide to drop SWP instead. Orange France, for example, is telling handset makers that it wont sell any handsets on which more than one secure element could be activated. It is in talks with makers of dual-SE handsets to see how the problem can be resolved. Aside from the option of removing one of the two SEs, a system could be implemented that blocks one or gets one to override the other. Renting out space Another problem with SIM-based secure elements is capacity. The latest generation of NFC SIMs can reportedly fit at least five average-sized apps. But that might not be enough to store all of the secure NFC applications that a user might want on his handset, though Felica SIMs in Japan reportedly fit only two apps on average. Some operator sources have told Informa that demand for NFC SIM space might outstrip supply. And operators could potentially use this scarcity to prod service providers into bidding wars for the available space. They could also use it to encourage service providers to join operator m-wallets, to secure themselves a place on the SIM, one operator source told Informa. Operators have had to scale back their ambitions in terms of how much they can charge for their SE-enabler role, however. They initially came to the negotiating table demanding a pertransaction share of revenue. But most are now resigned to making do with a rental charge for service providers wanting to place their applications on the SIM. This would typically be a fixed monthly or yearly fee per user for each app. One operator told Informa that it might charge 1 (US$1.42) a month, but it is too early to say what the typical rate would be. It is in markets where operators have taken a greater financial risk with NFC, such as Japan and South Korea, that they are getting away with per-transaction charging for contactless payments. Operators in emerging markets, such as Africa, will also be able to charge pertransaction fees, just as they do for other mobile payments enabled by their m-wallet services. Operator deployments All operators offering NFC services will do so in the context of an m-wallet. In many cases, the m-wallet will be based on financial products that the operator has already launched. Orange UK, for example, launched a credit card with Barclaycard last year. And this year, it has launched a prepaid card with Barclaycard, MasterCard and PPS. The carrier hopes that the prepaid card will get users used to the idea of an electronic wallet, a service that Orange brought to mobile with its recently launched Quick Tap NFC service (see fig. 2).

www.informatm.com

2011 Informa Telecoms & Media

27

Fig. 2: Recently announced unilateral NFC operator initiatives

Quick Tap is available on only one handset so far a Samsung touch-screen feature phone so Orange is unlikely to be expecting much take-up, at least not until it starts adding more handsets. But its early launch was part of its effort to be seen as a market leader. The Telefonica group, meanwhile, plans to compete at two levels in the mobile payment sector: with its own-brand payment services, such as the prepaid cash card that its UK subsidiary, O2, launched in 2009; and by acting as a reseller or as cobranding partner for thirdparty payment services. In February, O2 applied for an e-money license. T-Mobile plans to roll out an m-wallet service this year that will initially be NFC-enabled in Germany and Poland. It has rollouts planned for the Netherlands and Czech Republic next year. Operators are trying to address their lack of universal reach by teaming up with local rival carriers, such as in the Cityzi project in France, the Isis joint venture in the US, Mpass in Germany and the recently announced carrier joint venture in the UK (see fig. 3). By grouping together, operators can offer nationwide coverage to service providers and big-volume orders to handset makers. But antitrust laws limit how much they can integrate services. For example, in most jurisdictions they cannot offer service providers a commonly agreed rate for renting space on the SIM.

www.informatm.com

2011 Informa Telecoms & Media

28

Fig. 3: Recently announced NFC operator alliances

Privately, many carriers see the business-to-business sector as their greatest opportunity in NFC, realizing that they have an uphill struggle to compete with over-the-top (OTT) players on the consumer front. App stores Native apps are where the main focus and energy are in mobile services, and it is hard to see how it will be any different with NFC services. Just as OS/OEM app stores have become mobile users main channel of discovery for mobile content and services, so it will be with NFC. Any brand worth its salt be it a bank, credit-card company, supermarket or transportation operator has an application on the Apple App Store at least, and most likely also has one on Googles Android Market and perhaps on RIMs BlackBerry App World, Nokias Ovi Store and Microsofts Marketplace for Windows Phone 7. And as the handsets and platforms connected to these stores become NFC-enabled, it is likely that NFC functionality will be added to a lot of these apps. Some operators are also looking to the major app stores to publish their m-wallet apps. TMobile, for example, intends to do so on Android Market. Of the app-store giants, Google has most clearly signaled its intent to play a leading role in mobile NFC services. In the space of just over six months, Google has brought out a flagship NFC phone, added NFC to the Android operating system in its latest incarnation, Gingerbread and, last month, launched the Google Wallet and Offers services. Its moves are monopolizing the industrys gaze. But it is Apple that could make the biggest impact, if and when it decides to play its hand, since it holds the most cards when it comes to the ability to offer an end-to-end system for NFC services. Not only are iPhone apps No. 1 on the list of banks and retailers m-commerce strategies, but Apple has complete control over the software and hardware that goes into its devices. It also has a formidable payment platform, in the form of iTunes. By contrast, Google Checkout is one of the weakest weapons in Googles armory. Even though its the payment platform used on Android Market, it remains relatively obscure, with not many users signed up to it. Google is enabling payments on its m-wallet service through third parties: credit-card company MasterCard, bank CitiGroup and merchant-processing-service provider First Data. It might also end up working with the likes of PayPal and Amazon on mobile payments. Googles influence In the open-source world of the Android operating system, Google has limited say over what gets put into phones. Android has overtaken other smartphone OSes in terms of shipments, thanks in great part to its free availability to any OEM wanting to incorporate it into its handsets. But just because a phone is powered by Android doesnt mean that Google can sneak in with its services. A lot of the hardware specs and preinstalled apps are determined by the OEM or whoever is paying for the phone, which more often than not is an operator. There is little Google can do to prevent an operator from ordering an NFC Android phone preinstalled with its own m-wallet service, not Google Wallet, and designed to work with a SIM-based secure element, not an embedded one.
www.informatm.com 2011 Informa Telecoms & Media 29

Google can nevertheless counterattack on three fronts: through the attractiveness of its services to both OEMs and end-users, by providing incentives to OEMs to do things its own way and by exploiting divisions among operators. And now that it is acquiring Motorolas mobile phone business, it will have its own device-making capabilities and be able to churn out Motorola phones to its own specifications. Motorola has an 11% share of the US smartphone market and a 2% share of the global smartphone market. If Google Wallet becomes popular among mobile users, it becomes a selling point for phones incorporating it. And a lot of OEMs would rather have services on their phones that work universally than on specific networks only. Also, if Google Wallet becomes a popular download on Android Market, it could quickly push aside any preinstalled service. Google could choose to exercise a more direct form of influence over OEMs by using its deep pockets to pay them subsidies to configure phones the way it wants. In the US, it has managed to get Sprint to break ranks with other operators and join Google Wallet. Google courted Sprint after it was left out of the Isis NFC joint venture, composed of national US carriers. With Sprint on board, it has secured at least one handset-distribution channel for its service, in a market where operators are by far the dominant handset retailers. Google Wallet Google initially attracted far bigger fish to its m-wallet service than the Isis partners did. Although the card-payment network that Isis first signed up, run by Discover Financial Services, is the fourth-largest in the US, Google Wallet managed to sign up from the word go the mighty MasterCard, which has NFC terminals fitted in 120,000 US retail locations as part of its PayPass network. And Isis initial banking partner, Barclaycard, is a relatively obscure name in the US compared with that of Google Wallets, Wall Street giant Citigroup. In a bid to catch up, however, Isis recently announced that it had got the three top cardpayment networks on board Visa, MasterCard and American Express (see fig. 4). It also said that it would be investing around US$100 million in the rollout of its nationwide m-commerce network.

Fig. 4: Comparison of Isis and Google Wallet NFC-payment services

But Google is ahead in terms of rollout schedule. Its wallet service will soon be launching commercially in New York, San Francisco and a handful of other major US cities. And it plans to debut in a major European city sometime in the first half of next year. Isis, by contrast, is moving at a far slower pace. Its first commercial rollouts are not due till 1H12, in the more modest cities of Salt Lake City, Utah and Austin other cities wont follow until the end of 2012 or early 2013.

www.informatm.com

2011 Informa Telecoms & Media

30

Google Wallet has also signed up retail giants Macys, Subway, Walgreens and Toys R Us, among others, in addition to merchants that already accept NFC payments. And in contrast to operators, Google will reportedly be subsidizing the contactless POS terminals that will be installed by the new merchants. It is working closely with terminal vendors VeriFone, Hypercom, Ingenico and Vivotech. First Data is playing the role of trusted service manager, delivering and managing payment applications over the air to the embedded SE in the Nexus S, Google Wallets launch device. Googles interest in NFC is not mobile payments as such. Its business model is advertising, and NFC provides it with an opportunity to link the ads and offers it serves in the virtual world with purchases in the physical world. It provides the means to prove to advertisers that the page impressions or click-throughs theyve paid for on Googles network have translated into sales at shop tills. NFC also links in with Google Offers, the search giants answer to coupon services Groupon and LivingSocial. Users will be presented with offers in Googles search results, receive deals of the day through e-mail and even collect offers from NFC tags. They can sync these offers with their Google Wallet and redeem them via NFC POS terminals. In essence, NFC is an extension of Googles advertising business model. Where the likes of Google and Apple can add most value and take on a market-leading role is in creating an appealing proposition for mobile NFC when it comes to tagging and collecting deals and offers. Apples strategy Working out what Apple most wants out of NFC is less straightforward. Apple characteristically leaves the market guessing about its impending launches, and its still not certain whether it will be launching NFC this year. It is unlikely, however, to want to give Google too much of a head start. There have been several reports over the past two years that Apple has applied for patents connected to NFC, and a prototype iPhone equipped with NFC or RFID was reportedly spotted in late 2009, all of which has contributed to fevered speculation among industry insiders. But Apple recently complained that the technology was not sufficiently standardized, and the latest rumors are that an NFC iPhone launch wont happen until next year. Informa has learned that one of the factors holding back Apple is concerns that repeated tapping on NFC tags and readers could cause iPhone screens to crack. This would imply that Apple is looking into making a more rugged version of the iPhones trend-setting glass front. Beyond enabling NFC for its huge community of application developers, Apple is likely to have ambitions of its own for the technology. Apples business model is selling devices, linked to compelling content and applications on iTunes and the App Store. Its broad range of devices includes desktops, laptops, tablets, smartphones, portable media players and TV sets, and providing a way of sharing content and apps across all of those device types is one of its objectives. One way it is doing that is through the cloud, with its recently launched iCloud service. But it also wants its devices to be able to transfer content wirelessly to each other. One way of doing that is by pairing devices via NFC. iTunes role Payments could be another area in which Apple hopes to benefit from NFC. iTunes has become one of the worlds biggest online-payment platforms. In March, Apple announced that there were 200 million people with Apple ID (iTunes) accounts, possibly making iTunes the biggest credit-card hub on the Web, since users must register their credit/debit card details to open an iTunes account and start making purchases. As of end-March, the platform had processed US $6.66 billion in App Store transactions alone, in just over two-and-a-half years. The question is whether Apple wants to extend iTunes payments beyond the realm of digital goods and into the physical world. In one possible scenario, an iPhone Foursquare app user could check into a Starbucks and get a discount coupon that could be redeemed through an inapp transaction, via iTunes, to get a cup of coffee, all enabled by NFC. The scenario is certainly possible, especially in the context of a social-location service such as Foursquare, where the dividing line between the virtual and real worlds blurs and whose users would probably not think twice about paying for physical goods over the counter with their iTunes account.

www.informatm.com

2011 Informa Telecoms & Media

31

But Apple would have to come up with an alternative revenue-sharing model for payments for physical goods. Its model for mobile application payments is to take a 30% cut of each transaction, leaving the rest to the application provider, but no bricks-and-mortar retailers would accept that kind of commission structure. Apple would need to reduce its cut by a factor of 10, to about 3%, to compete with credit-card providers. This would mean introducing a two-tier rate system: one for digital goods and another for physical. But would the massive gulf between the two rates upset application providers, putting pressure on Apple to reduce the cut it takes from digital purchases? Its possible. Also, users might not find it natural to start paying for groceries through iTunes. One factor that might inhibit users is security concerns. There have been reports of iTunes accounts that have been hacked, causing account holders to lose money. One account holder told Informa that he had about US$500 siphoned off his iTunes account by a hacker in China and found Apples e-mail-based customer support service unhelpful. It was his bank, and not Apple, that eventually sorted out the problem. User trust might be a significant barrier for online-payment providers such as Apple. Online-payment providers Mobile NFC provides an opportunity for online-payment platforms to extend their reach to purchases in the physical world. That is true of iTunes and Google Checkout, and especially of e-commerce platforms such as PayPal and Amazon, which are already geared toward purchases of physical goods in an online environment. It also provides an opportunity for virtual currencies, such as Facebook Credits, to be used for physical goods. PayPal, which is reportedly working on its own POS service, filed a lawsuit against Google after the Google Wallet launch last month, saying that Google stole trade secrets from its mobile payments business. PayPal alleges that Stephanie Tilenius, vice president of commerce at Google and a former PayPal employee, broke her contractual obligations with her former employer by head-hunting Osama Bedier from PayPal and appointing him vice president of payments at Google. Mobile NFC could upset the balance of power in POS payments, currently dominated by the big credit-card brands such as Visa and MasterCard. Retailers might encourage customers to pay with the likes of PayPal if that means lower transaction fees. Margins are often tight in retailing, and retailers are always looking to reduce the amount they pay to payment providers. The likes of PayPal, which gives users the option of making payments directly from their bank account, could even start disintermediating the likes of Visa and MasterCard. That is bad news not only for credit-card companies but for banks, which tend to make most of their money from card payments, not bank-account products. Informa viewpoint There is bound to be much fragmentation in the mobile NFC market, despite all the progress that has been made over the past few years in hashing out industry standards. Fragmentation will come from a proliferation of OS implementations, handset specs and competing services. Much of the service-rollout and -discovery activity will happen via OTT application stores. There is likely to be a profusion of m-wallet services, as operators, banks, credit-card companies, online-payment providers, retailers, handset makers and OS providers all launch their own. Banks and other payment providers will develop a multiplicity of routes to market by going direct-to-consumer with their own m-wallet services and joining those of operators, OTT players and other service providers. Operators will pursue a two-pronged strategy: They will continue to pursue their individual mobile NFC plans, while hooking up to cross-network initiatives in joint ventures with rival carriers. Although many are billing 2011 as the year of mobile NFC, that statement could be interpreted many ways. The market is certainly seeing a turning point this year and would be turbocharged if Apple were to enter but mass-market deployments are still a long way away. With both Google and Apple on board, momentum would rapidly build up behind mobile NFC services and the pace of developments would accelerate, as has already begun to happen over

www.informatm.com

2011 Informa Telecoms & Media

32

the past nine months, largely due to players speculation about the plans of the two Silicon Valley giants.

www.informatm.com

2011 Informa Telecoms & Media

33

Analyzing the business case for contactless payments


05 September 2011 Guillermo Escofet
Key points

For banks and retailers, there are cost-saving opportunities in replacing cash payments with contactless payments. Potential savings can also be made by banks and operators from decreased customer churn. Another factor driving bank and operator enthusiasm for mobile contactless payments is their common fear of becoming dumb pipes as online players use NFC to extend their reach to the physical world. All would-be market players also share a common interest in promoting their respective payment products via mobile NFC, such as store cards in the case of retailers and carrier billing and own-brand cards in the case of operators. The main revenue-making opportunities lie in the additional fees that would be earned by banks and card-network providers through a greater number of cashless transactions and newly-enabled P2P payments. For retailers, there is the potential for greater turnover through the faster throughput of customers at the point of sale. It is unlikely, however, that mobile users will pay more for the privilege of making contactless payments on their phones other than in emerging markets. There will be little or no additional revenue to share with new value-chain members, such as operators and other mobile providers, especially as regulators are increasingly squeezing margins by placing strict caps on card-payment fees. There is a big cash-replacement opportunity for NFC payments, even in developed markets. But it will be in those markets where card payments are most rooted, and where plastic-NFC infrastructure is most deployed, that mobile contactless payments have the most immediate opportunity. Evidence from trials, polls and NFC-card deployments shows that contactless payments do have the potential to eat into cash payments. But adoption of both plastic and mobile NFC payments can be slow, as evidenced in the US, UK and Japan.

Business case The main business case for NFC payments is replacing cash transactions. Substituting cash with electronic payments represents a cost saving for banks and increased revenue for credit card companies and their issuers (again, the banks), as they earn commission on the greater volume of transactions processed through them. There is also a cost saving for retailers, which, according to research, can lose more than 2% of their cash turnover from theft, cash handling and accounting errors. However, what retailers can save on cash-handling costs is probably more than offset by the commission they have to pay on credit/debit card payments. A bigger selling point for retailers is the potential of contactless payments to speed up customer throughput at the checkout and increase turnover. Mobile wallets and NFC also provide retailers with the chance to make their closed-loop store payment cards more prominent, against the increasing dominance of the open-loop card networks belonging to Visa and MasterCard. Extending the reach, or defending the current position, of their respective payment services is the most common driver for the players that are likely to battle it out in the mobile contactless payments space (see fig. 1).

www.informatm.com

2011 Informa Telecoms & Media

34

Fig. 1: Main drivers for market players' involvement in mobile NFC payments

The tap-and-go nature of NFC payments, where a card doesnt need to be inserted into a payment terminal or a personal identification number (PIN) keyed in, means that these payments have a good chance of extending into the realm of cash-dominated, sub-20 (or US$25) transactions, argue advocates. Contactless payments are meant to be twice as fast as other cashless payments. However, the jury is still out on how effective they are at replacing cash. And, just as contactless payments have the capability of substituting cash, they are also capable of cannibalizing existing chip-and-PIN card payments. In fact, one of the bigger advantages that mobile offers over mere plastic is that it makes it easier to extend NFC transactions beyond the micropayment threshold to which they are normally subject, by enabling users to key in a PIN on their phone screen to authenticate higher-value transactions although this is also possible with NFC cards used on NFC point-of-sale terminals incorporating a chip-and-PIN interface. There wont be any additional revenue for existing payment providers in instances where NFC payments simply substitute existing card payments. In fact, the providers share of revenue might be diminished if they need to pay part of it to the mobile specialists providing the technology and systems needed to enable contactless payments on phones. Not that the revenue opportunity for mobile players looks that good either. Users in developed countries wont want to pay a higher commission for such payments. Nor will retailers. There is plenty of cashless-payment options already available to users in developed countries, making mobile NFC payments are nice-to-have rather than a must-have. So there wont be any more revenue to share with additional value-chain members than that already made from existing cashless payments. The revenue opportunity for mobile providers will be mostly limited to fixed monthly or annual service charges per user around the provisioning of mobile-payment apps including rental of space on the secure element, lifecycle management and personalization rather than a per-transaction share of revenue. Whats more, margins are tight in cashless payments. And they are likely to get even tighter as both retailers and regulators place increasing pressure on card-payment networks and cardissuing banks to reduce payment-processing fees. Mobile NFC does, however, provide the opportunity for an additional revenue stream for cardpayment providers: peer-to-peer payments. The idea is that someone could pay back money to a friend or contribute to a whip-round, say, by tapping phones with the recipient as long as both he and the recipient are equipped with NFC phones. Such face-to-face transactions are usually made with cash, so NFC would again be playing a cash-replacement role. But NFC phone penetration needs to be pretty high for people to commonly find themselves in a situation where they can pay friends and acquaintances in this way. Also, mobile NFC provides an opportunity for online payment providers, such as PayPal, Amazon and iTunes, to extend their reach to physical-world purchases, alongside cardwww.informatm.com 2011 Informa Telecoms & Media 35

payment networks, store cards and others. In a recent press conference, Stephanie Tilenius, vice president of commerce at Google, said that e-commerce accounts for only 8% of total retail. This means 92% happens in the physical world, she said. With smartphones, geolocation and NFC technology, we're about to embark on a new era of commerce, where we bring online and offline together. Another possibility that has been mooted by payment providers is that of enabling one-click payments on websites through cards loaded on phones for contactless-payment purposes. How this might be enabled has not yet been properly worked out, but, if it were to happen, it could increase the online mobile payments opportunity for card-payment providers. And it could encroach on territory where carrier-billing services, such as Boku and Zong, have made big strides in recent years. Cash is still king Despite the widespread availability of plastic money, cash still makes up the bulk of transactions in many developed countries. And in emerging countries cash is unquestionably king, it being most peoples only payment option, beyond bartering. In the US, for example, cash and checks still underpin 60% of economic activity. And in Germany, Europes largest economy, cash accounted for just over 82% of transactions and 58% of turnover in 2009, according to a survey commissioned by the countrys national bank, Deutsche Bundesbank (see fig. 2). By contrast, debit/credit cards accounted for 13.4% of transactions and 29% of turnover.

Fig. 2: Germany, share of payment instruments by turnover and number of transactions, 2009

Italy, one of Europes four biggest economies, is also predominantly cash driven. Its paymentcard usage is, together with Germanys, less than half the European Union average. The highest usage in the EU is in the Netherlands and the UK, according to statistics collected by Italys national bank, Banca dItalia (see fig. 3). Yet, in 2009, cash payments still made up 66% of transactions in the UK. And 38% of cash payments were for purchases of more than 5.

www.informatm.com

2011 Informa Telecoms & Media

36

Fig. 3: EU, annual per-capita transactions by payment instrument, 2008

Generally speaking, southern European economies tend to be more cash-driven than northern ones, with the notable exception of Germany. Cash-handling costs are estimated to amount to 10 billion a year in Italy for both banks and retailers largely in terms of increased security and labor. In the US, the cost is more than US$70 billion a year. And globally, its calculated at US$300 billion. Much cash handling is labor-intensive involving counting and double-counting of coins and bills, and their transportation, under heavy security, from one location to another. Cashs manual nature also exposes it to loss or theft through human error or design. According to recent surveys, 1.5 billion a year is lost by UK retailers through internal and external theft and handling errors at till points and during cashing up. Cash replacement It would be tempting to see the more cash-driven economies as a greater opportunity for contactless payments. But in most cases there are strong cultural reasons for these economies adherence to cash. In Western Europe, these economies have no shortage of people with bank accounts or of card-issuing banks yet credit cards are relatively rare and cash remains the preferred method of payment for many. A big reason for the adherence to cash is tax evasion. A lot of companies pay their employees in cash and a lot of merchants and service providers demand to be paid in cash so as to not to have to declare such transactions to the taxman. The Italian government, for example, loses about 100 billion a year from untaxed transactions; as in other southern European countries, it has a big underground economy, accounting for 22% of GDP. Merchants also resent paying the commission on card payments. Although cash-handling costs are more or less equal to the money charged to retailers in card-payment fees now that the EU has capped such fees they are more hidden and are something that merchants have been living with for centuries. So, all and all, there are less options to pay by card in these countries and, where card payments are accepted, customers usually get saddled with a surcharge as merchants pass on interchange-fee costs. There also tend to be more conservative attitudes to personal finance in many southern European countries, as well as Germany. Credit-card usage is very low in Germany and Italy because people there are less comfortable about taking on debt and are big savers. Italy has the EUs least indebted consumers, for example. So the biggest opportunity for mobile NFC payments is likely to be in markets where cashless payments are most dominant. In fact, mobile NFC payments will follow on the heels of plastic NFC payments at least initially. It will therefore be in those markets where contactlesspayment cards and the accompanying reader infrastructure are most widespread that mobile contactless payments will find the most fertile ground.

www.informatm.com

2011 Informa Telecoms & Media

37

Most fertile ground In Europe, that means first and foremost the UK, which contains the vast majority of the contactless-payment cards issued in the region. Out of the roughly 18 million Visa NFC cards that had been issued in Europe by 1Q11, around 13-14 million were in the UK. Meanwhile, Visa is seeing the fastest growth in issued NFC cards in Poland and Turkey. A fair amount of cards are also appearing in France and Spain, as well as in some Eastern European markets, led by the Czech Republic, reports Visa. Moves are afoot to introduce NFC cards in Germany too. In late June, 428 German savings banks belonging to the German Savings Banks and Giro Association (DSGV) announced their intention to convert their customers debit cards into contactless payment cards. The DSGVs member banks have 45 million debit cards in circulation, accounting for about half of debit cards issued in Germany. The cards wont be introduced immediately, however. The DSGV will begin with a pilot project involving 900,000 cards in early 2012 in Braunschweig, Wolfsburg and Hanover. It doesnt foresee converting all cards to NFC until 2015. The associations head of payments, Wolfgang Adamiok, was quoted in the German press as saying that NFC-based payments will be introduced no later than 2014. Digital-security vendor Gemalto, meanwhile, reports fast growth in contactless-card shipments. Not surprisingly, the UK is also the European country with the greatest number of NFCenabled payment terminals. Visa expects that 60,000 of these terminals will have been deployed by UK retailers by the end of 2011 (there were around 40,000 at the beginning of the year) and double that number will have been deployed by the end of the following year. It also expects most of the payments that will be made on these terminals over the next year and a half to be plastic based. Poland, meanwhile, has approximately 35,000 NFC POS terminals, notably in fast food restaurants, cinemas and supermarkets. The terminals will be used for a mobile contactless payments trial announced in June by PTK Centertel, Orange Groups affiliate carrier, involving several thousand users. But Europe is dwarfed by the US in terms of both cards and terminals for contactless payments. There are around 80 million US consumers walking around with NFC payment cards, and NFC payment terminals have been available for years, mostly in fast-food, drug-store and gasstation chains; hamburger giant McDonalds is one. With the launch of Google Wallet in May, the range of retailers that will be supporting NFC payments in stores has been significantly broadened to include: toy store Toys R Us; clothing merchants American Eagle Outfitters, Foot Locker and Guess; department stores Macys and Bloomingdales; and electronics store RadioShack. Googles executive chairman Eric Schmidt was recently quoted as saying that a third of check-out terminals in retail stores and restaurants will be upgraded to NFC within the next year. That sounds a tad optimistic, considering that only around 3% of POS terminals in the US are currently NFC enabled. Low take-up Uptake of contactless payments has been disappointing so far. Reportedly, more than 90% of the US consumers with NFC cards are not engaging in contactless payments most are not even aware that they have the capability to do so. In the UK, meanwhile, just below 70% of people with NFC-enabled credit or debit cards have never made a contactless payment, according to a survey by pollster YouGov published in June (see figs. 4 and 5). As in the US, a lack of awareness seems to be an issue. Around 90% of respondents to the YouGov poll said they had never heard of NFC and 70% had never heard of a mobile wallet.

www.informatm.com

2011 Informa Telecoms & Media

38

Fig. 4: Results of poll into UK consumers attitudes to mobile NFC payments, YouGov, Jun-11

Fig. 5: Results of poll into UK consumers attitudes to mobile NFC payments, YouGov, Jun-11

Informa has learnt from talking to UK bank staff that, when there is awareness, it is often accompanied by confusion. Many customers who have been upgraded to NFC-enabled cards panic and contact their bank branch asking to replace their new card with an old-style one, say bank staff. Thats because they think the card is only enabled for payments of up to 15 (the ceiling in the UK for contactless payments) without realizing that it can also be used as a normal chip-and-PIN card. The low take-up and confusion can be largely put down to poor marketing by banks and retailers. Also, retail staff have been slow to warm to the technology. In current deployments, NFC at the point of sale tends to be a stand-alone reader separate from the main payment terminal, which POS staff often ignore unless customers make a special point of wanting to use it. Informa has learned from staff at NFC-enabled outlets in London that there is demand from customers to use the readers but that the readers can be temperamental, often requiring several taps from customers before they register a payment, and that they sometimes dont work at all. There have been instances of people being double charged, thinking that the contactless payment hasnt registered and then paying with the chip-and-PIN machine
www.informatm.com 2011 Informa Telecoms & Media 39

instead, only to find later that they have been billed twice although these cases are more the exception than the rule. Whatever the reasons, the low take-up shows that, just because the technology is made available to consumers, adoption is not a given. Marketing and end-user/POS staff education are also necessary. Japan numbers In Japan, which has the worlds highest penetration of contactless-enabled cards and phones, the number of mobile-contactless-payment accounts was 13.5 million as of August last year based on data presented by FeliCa Networks (see fig. 6), a subsidiary of carrier NTT DoCoMo and media and technology giant Sony that runs FeliCa, the mobile version of Sonys contactless technology, which is based on a different RFID standard to that arrived at in the West for NFC. However, this total of 13.5 million equals just a tenth of the number of contactless payment cards issued in Japan, which totaled 135 million in May 2010.

Fig. 6: Japan, take up of FeliCa payment services, 2010

The proportion is in reality probably bigger, however, since in the information presented by FeliCa Networks there were no user numbers for four of the seven contactless payment cards available as Mobile FeliCa apps although that might be because the numbers were not impressive enough for publication. Also, it is impossible to work out the percentage of FeliCa phone owners who are using their phone to make contactless payments, since the total of 13.5 million does not necessarily refer to unique users. It adds up users of three different contactless-payment services and it is possible that some users might have more than one of these services in their FeliCa mobile wallet, leading to double counting. However, if we ignore that, the number would account for around 20% of FeliCa handset owners based on a count of 66 million in March 2010. Thats within six years of Mobile FeliCa launching in 2004. The lions share of payment users (10 million) on Mobile FeliCa are signed up to prepaid card Edy, issued by electronic payments firm bitWallet and accepted at more than 220,000 participating stores, as well as vending machines and websites. Then follow the 2.2 million signed up to Suica, a prepaid card issued by rail company JR East that is mainly used for ticketing but can also be used as electronic money at around 100,000 stores and kiosks, primarily within train stations. Another 1.3 million use Nanaco, another prepaid card, issued by convenience-store chain 7-Eleven and accepted only in 7-Eleven stores, of which there are more than 60,000 in Japan. Cash replacement But how far does NFC eat into cash payments? From what has been observed so far in both mobile NFC trials and plastic NFC deployments, NFC does seem to bring down the threshold for cashless payments to a lower transaction value. Plastic NFC brings it down a peg and mobile NFC brings it down a little further. Also, in the YouGov poll conducted recently in the UK, 23% of respondents said that they were interested in paying for items using their mobile phone, instead of cash. According to research by MasterCard, meanwhile, PayPass contactless-card holders increased their spending by 19% and usage by 29% compared with traditional card holders. Although countless mobile NFC trials have been conducted, hard numbers on mobilepayment usage are difficult to come by. For example, Europes most high-profile trial, the Cityzi project in Nice, France which drew the participation of the countrys main operators and banks hasnt published any stats on mobile payments. Informa requested to see some, but
www.informatm.com 2011 Informa Telecoms & Media 40

the query came to nought. Some sources close to the trial have told Informa that take-up of mobile payments during the trial was low and that not all merchants were happy with the way the technology worked. The trial has, however, been officially described as a success. It must be added that its focus was not just on payments but a whole plethora of mobile NFC services. The most compelling evidence so far perhaps comes from a mobile NFC payments trial conducted last year in Sitges, Spain by operator Telefonica, bank La Caixa and card-payment network Visa; 1,500 users and 500 merchants participated in the trial. Participants on average carried out 30% more transactions using the Visa card stored in their NFC phones than they had previously with traditional plastic cards. That translated to an average of 23% more spending per user on cashless transactions. During the six-month trial, 60% of the transactions made were less than or equal to 20 the ceiling placed on PIN-less NFC transactions in the Euro zone 35% were for less than or equal to 6 (see fig. 7). In the 20 bracket, the average per transaction was 9, which, according to Jordi Guaus, head of mobile payments at La Caixa, is lower than for ordinary card payments although he didnt specify how much lower. Fig. 7: Sitges mobile contactless payment trial results, May-Oct 2010

During the trial, 40% of the payments made required entering a PIN and were therefore little different from chip-and-PIN transactions (other than they were conducted via phones) especially since in Sitges users had to key in the number on the POS terminal, not the phone. Thats because in Spain banks are all linked to an online payments system, requiring the PIN to be keyed in on devices connected to that system and not locally on the phone. Most of the participants (90%) made at least one purchase with their mobile phone during the trial, and 80% of merchants received mobile NFC payments. Satisfaction levels with the mobile contactless service, which used a virtual Visa card loaded on Telefonicas m-wallet Cartera Movistar, were high, averaging a rating of 7.7 out of 10. However, trials rarely mirror real-life conditions accurately. The participants were volunteers who, by the very nature of being volunteers, were already predisposed to trying out the service. And each one attended a one-hour training session and received a user guide explaining how to use the technology. Declining margins Regulatory moves in different parts of the world are forcing banks and payment networks to reduce the amount they charge retailers for handling card payments what are technically referred to as interchange fees. These fees can vary a lot from country to country, and on the kind of card or transaction, or on the size of the retailer and its bargaining power. For example, interchange fees tend to be higher for credit cards than debit cards; also for remote payments rather than local payments, where the card is physically present during the transaction. The fees are split between the cardholders bank (referred to as the issuing bank), the merchants bank (referred to as the acquiring bank) and the card-payment network (for example, Visa and MasterCard). The lions share is kept by the issuing bank; the second-largest share by the payment network; and the remainder by the acquiring bank. In the US, for example, where interchange fees average out to roughly 2% of credit-card transactions, the
www.informatm.com 2011 Informa Telecoms & Media 41

cut taken by each party from a US$100 transaction would be: US$1.75 by the issuing bank; US $0.18 by the payment network; and US$0.07 by the acquiring bank (see fig. 8).

Fig. 8: Breakdown of interconnect fees taken from US$100 transaction in the US

There has been a steady rise in interchange fees throughout much of the past decade. But the tide is turning, largely due to regulatory pressure, often in the form of antitrust investigations. In the US, a law capping debit-card interchange fees to US$0.12 per transaction goes into effect on July 21. These fees currently average US$0.44 per transaction in the US so the cap will represent a big drop in earnings for payment providers, which currently make around US$16 billion a year in the US from interchange fees. Meanwhile, in the EU, Visa Europe is reducing debit-card fees to 0.2% per transaction, as part of a deal struck in December to end an antitrust probe by the European Commission. MasterCard came to a similar settlement with the Commission last year, also reducing debitcard transaction fees to 0.2% and credit-card fees to 0.3%. Proving the case for retailers Merchant resistance to deploying NFC point-of-sale terminals is arguably the biggest barrier to contactless payments. With NFC credit and debit cards still the exception rather than the rule in most countries and rarely any offers from other parties to help pay the cost of upgrading POS infrastructure, most retailers are in no hurry to enable contactless payments at their stores. The retailers for whom contactless payments make most sense are those that handle a large volume of low-value transactions every day and for whom speed at the checkout is essential to ensure time-poor customers dont walk out without making a purchase. Food and drink chains such as fast-food joints, sandwich bars and coffee shops fit this profile. These outlets are exposed to frenetic peaks of activity at meal times, and most of their sales are for less than 20 or US$25, within the limit for contactless payments not requiring a PIN. It is no coincidence then that they tend to be among the first to embrace NFC. Supermarkets and convenience stores are also likely candidates. In the Sitges contactless payments trial, supermarkets accounted for the majority of transactions (see fig. 9).

www.informatm.com

2011 Informa Telecoms & Media

42

Fig. 9: Sitges mobile contactless payments trial, distribution of purchases by merchant type

Also, retailers in busy urban centers are more likely to want NFC than those in sleepier suburbs or provincial towns. The initial crop of NFC POS terminals in the UK, for example, has been seen primarily in London. But retail chains dont like deploying multiple kinds of terminals across their footprint. They like to deploy the same terminals and accompanying infrastructure in every store, to cut down on complexity and maintenance costs. Therefore, it is unlikely that big chains will choose to focus NFC-enabled POS terminal deployments on their busiest stores only. It is most likely to be an all or nothing decision unless what is being deployed is stand-alone NFC readers that sit alongside the main POS terminals (see fig. 10). Stand-alone readers have been typically deployed by early-to-market retailers, in some cases subsidized by card-payment networks and banks; for example, Visa told Informa that it has contributed to the cost of early deployments as a way of kick-starting the market. Fig. 10: Stand-alone vs. integrated NFC point-of-sale terminal

Some retailers Informa has spoken to question the use case of mobile NFC payments. They say that existing payment options, such as cash and cards, are already fast enough for most customers. And that, unlike a prepaid card for transport ticketing, where a mobile screen adds a useful dimension for checking how much credit a ticket-barrier has just debited from a card, and how much is left, there is no such need in retail payments, because by law shoppers have to be offered a paper receipt for each purchase anyway. There are already plenty of ways for users to check on their bank balance on their phone, whether that may be via SMS or a downloaded app. Security is also a concern for retailers, who fear that contactless payments might expose them to fraud from hackers.

www.informatm.com

2011 Informa Telecoms & Media

43

Upgrading retail infrastructure Assuming that a retail chain decides to deploy NFC across its entire POS infrastructure, the next question is when is it next due to replace its terminals POS-terminal replacement cycles vary from retailer to retailer, but they can be as long as seven years. In the case of supermarkets, where POS-terminal use can be intense, the replacement cycle can be as short as two years, but in the case of department stores, where checkout traffic tends to be less heavy, it is more typically around five years. The replacement cycle for POS systems is even longer. Retailers invest in these only once a decade on average. Upgrading POS infrastructure is the highest cost component of a retailers IT investment, including as it does not only the expense of buying and installing new hardware, but also of buying and installing new software and training store staff to use the new terminals and systems. So anything that might add to that expense is likely to be closely scrutinized by retailer IT heads. However, POS terminals that incorporate contactless-payment capabilities are not necessarily much more expensive than standard ones. According to VeriFone, one of the worlds biggest POS-terminal makers, the price difference is negligible. It says that its new VX 820 terminal, which comes with NFC as optional, is only a bit more expensive than its non-NFC-enabled predecessor the VX 810 without specifying how much exactly. And the difference will become more and more negligible as NFC chips are produced in higher volumes and their cost decreases, it adds. The price of terminals is not an issue, a VeriFone spokeswoman told Informa. The bigger concerns for retailers are, first, development and integration time for NFC applications, second, having to make changes to their existing POS systems to accommodate NFC and, third, consumer awareness of what NFC is and how to use it. In March, VeriFone announced that it would include NFC in all its future POS terminals. That should make it easier for retailers to decide whether or not to specify the technology when ordering their next batch of terminals from VeriFone, even though they will be able to opt out of that option if they so wish. It will be interesting to see how long it will be before other POSterminal makers follow suit and make NFC a standard feature on all their products. There are two main models for deploying POS terminals in retail outlets: one is followed primarily by large retailers and the other primarily by small-to-medium-sized retailers. Large retailers with big chains tend to buy and install their own terminals and integrate them into their own IT systems. Smaller retailers tend to rent terminals from banks. In the latter model, there is a greater chance of influencing the kind of POS technology deployed by retailers. Banks that are issuing NFC-enabled payment cards are also likely push NFC-enabled POS terminals to their business clients. POS replacement Rather than adding to the POS infrastructure bill, NFC could potentially reduce it by obviating the need for checkout counters. Retailers are keen to reduce POS staffing costs and, to that end, are introducing self-service checkout counters. This is especially true of supermarkets. With NFC, they could go a step further by getting customers to download a checkout application to their NFC phones with which to scan items as they place them in their basket or cart. On the way out of the store, all they would need to do is wave their phone in front of an NFC reader to pay for the scanned items. This would dispense with the need of a counter altogether. Only a wall-mounted reader would be needed. Of course, introducing such an app would not provide an instant replacement for checkout counters. There would have to be a certain critical mass of customers walking around with NFC phones first, and then sufficient education and encouragement for these customers to download the app, before a retailer could start reducing the number of checkouts. And just as there remains a need for manned checkouts at stores where self-service checkouts are now the norm, so would there still be a need for a minimum number of checkouts of both descriptions in stores even where a majority of customers were checking out items through their phones. Another way in which mobile phones might dispense with the need for dedicated payment machines is by getting NFC-enabled phones to act as POS terminals something that is already possible. Just as its possible to enable P2P payments by tapping one NFC phone with another, so it is possible for a small retailer or service provider to use his NFC phone to accept
www.informatm.com 2011 Informa Telecoms & Media 44

payments from customers who also have NFC phones. This method was successfully tested last year with taxi drivers in the city of Valencia in Spain, for example. Store-card fight back Beyond quicker transactions, reducing cash-handling costs is normally cited as the strongest driver for retailers to enable NFC payments. But that argument is questionable, since what retailers can save in cash-handling costs they can more than end up paying in card-payment fees. A greater incentive for retailers is the potential of using NFC for their own mobile-wallet services, such as store-payment cards, loyalty cards and coupons and vouchers. Retailers have long sought to reduce the fees they pay on card payments by issuing their own store cards and offering customers discounts and other incentives to pay with these instead of their bank cards. Store cards come in various forms, including: private-label credit, prepaid or gift cards; co-branded retailer cards; PIN debit cards; lower fee-based branded cards; and cards that process transactions over automated-clearinghouse networks. But these closed-loop cards so called because they are only accepted at the issuing-retailers stores have been fighting a losing battle over the past two decades against open-loop bank cards that can be used in all stores. With most wallets already stuffed with plastic, it is more likely that people will leave their store cards at home than their Visa or MasterCard bank cards when going out shopping. The limited space in physical wallets could, however, be overcome by digitizing cards and placing them in mobile wallets. Once a retailer-preferred payment card is issued to a customer's NFC-enabled mobile phone, the customer always carries that payment card with the phone, says a report published on the subject by the US National Retail Federation. Retailers may, therefore, be able to drive higher acceptance rates of their preferred-payment options than is possible with plastic cards. Retailers could also use NFC and mobile wallets to integrate store cards with loyalty points and offers, such as coupons. Democratization of payment options Just as mobile NFC can give a greater chance for store cards to compete against more established cards, so it can leave the door wide open to other payment options. Payment services that are currently largely confined to the digital and online worlds, such as ecommerce payment platforms (e.g. PayPal, Amazon), digital-content platforms (e.g. iTunes), carrier billing, and even social media and gaming virtual currencies (e.g. Facebook Credits, World of Warcraft Gold, Angry Birds Bad Piggy Bank), could use mobile NFC to extend their reach to physical-world purchases, undermining the hegemony of the big card-payment brands. For the card-payment networks and card-issuing banks, entering the mobile NFC space is not just about pursuing cash-replacement and new-revenue-stream opportunities it is also a defensive move to ensure that their brands are prominently in that space before others start muscling in. Their biggest nightmare is a dumb-pipe scenario where users on platforms such as PayPal and iTunes link their bank accounts directly to those platforms, bypassing credit and debit cards and the rich pickings that the banks and card networks make from these cards. In the YouGov poll conducted recently in the UK, for example, 64% of respondents said that they would like their mobile-wallet payments to be linked directly to their bank account. This nightmare echoes that which has been haunting mobile operators in the last few years, as they have seen themselves gradually disintermediated by online players in many mobile services. The dumb-pipe fear shared by both banks and operators was starkly expressed by Peter Van Leeuwen, strategy and business development manager at Dutch carrier KPN, at last months GSMAs Mobile Money Summit in Singapore. Van Leeuwen made common cause with the banks, saying that, just as operators risk becoming the bit pipes of the communications industry, so banks risk becoming the bit pipes of the financial industry. By working together, banks and operators can strengthen their position in their own markets, he told delegates. We need to own the market space and prevent market differentiation before any other party enters the market with enough money.

www.informatm.com

2011 Informa Telecoms & Media

45

KPN is part of a joint venture formed by the Netherlands top banks and operators that aims to launch commercial NFC services by the second or third quarter of 2012. The card networks also want to make sure they enter mobile NFC early to retain market relevance, as payment methods and habits evolve. Visa, for example, made up its mind early on that NFC would be part of the future payments landscape and wanted to be seen at the cutting edge of the market, playing a leading role in trials and other activities. Not all creditcard companies have jumped into the fray in the same way, however. American Express, for example, has yet to make any moves in NFC. It is taking a wait-and-see approach instead. Banks business case Beyond defending themselves from disintermediation, the banks business case for mobile NFC boils down to savings and additional revenue (see fig. 11). Banks can not only save on cash and check handling costs, including the costly business of keeping ATMs topped up with cash, but also on plastic-handling costs. The expense of printing, posting and replacing cards (if they have expired or have been lost or stolen) can be greatly reduced by the over-the-air delivery of virtual cards to mobile phones as long as mobile-provisioning prices are not too steep.

Fig. 11: Mobile-contactless-payments business model for banks

Another potential saving comes in the shape of churn reduction. If a bank is early to market and can differentiate itself from the competition with things like mobile wallets and NFC microSD cards to turn ordinary phones into contactless payment devices it has a greater chance of retaining customers, as well as acquiring new ones. Having said that, though, churn is not as big an issue for banks as it is in the telecoms industry. Bank-current-account churn in Europe is running at around 5%, for example. Additional revenue can come from the commission earned on the greater number of cashless transactions that NFC will supposedly bring, as well as on new services such as P2P payments. Card payments are a significant revenue stream for banks. This revenue is comprised of transaction fees and interest payments (the latter, in the case of credit cards). In Barclays case, for example, 67.5% of its card revenues come from interest payments and 32.5% from transaction fees. Operators business case Like the banks, the operators business case for NFC payments boils down to savings and additional revenue (see fig. 12). But the savings component would come entirely from customer retention and acquisition. Again, there would be first-mover benefits for operators that are early to market with NFC and mobile wallets in theory creating greater stickiness and a greater chance of churn from other operators. In markets where churn is running at 30% or even higher, a reduction of just 1% could be worth as much as US$100 million per year to a large operator.

www.informatm.com

2011 Informa Telecoms & Media

46

Fig. 12: Mobile-contactless-payments business model for operators

The extra-revenue component would come from: transactions, service provisioning, customer support, data traffic and carrier billing. Operators getting a per-transaction-cut of contactless payments are possibilities only in emerging markets, where mobile-wallet services are the only cashless-payment option for most people, or, in the developed world, where operators buy their way into the payments value chain by acquiring a credit-card company or bank, as seen in Japan and South Korea. For example, in South Korea, SK Telekom receives 1.3% of transaction revenues from its Moneta mobile NFC service; however, the upfront cost of the latter is high, requiring huge volumes of transactions to generate an adequate return. The Western operators main hope of securing a place in the contactless payments value chain is by authenticating payments via the SIM card. If the SIM card becomes employed in this way, operators can then rent space on it to banks and other payment providers. In addition to that rental income, operators could also earn revenue from selling customersupport products for mobile NFC services, such as remote-device management and insurance. Mobile users usually turn to operators rather than handset makers or service providers when something goes wrong with their phone. So operators feel that customer support is one of the strong cards they can bring to the table. Operators could also earn revenue by playing the trusted-service-manager role, charging banks and payment service providers to manage their NFC-payment applications. However, the skills and knowhow required to be a TSM are not core to operators and most operators are not looking to take on this role, delegating it instead to companies such as Gemalto. Mobile data traffic revenues are not one of the big selling points of NFC for operators. NFC operates over an unlicensed short-range frequency separate from the cellular network. In the case of contactless payments, most of the transfer of data happens via NFC transmission between the phone and the POS terminal and via fixed-line transmission between the terminal and the issuing and acquiring banks. The mobile network only comes into the picture in a support capacity, taking on a serviceprovisioning and customer-relations role. For example, mobile-wallet apps can be installed, uninstalled, blocked or updated over the cellular network, and users can look up account balances and purchase records, top up (in the case of prepaid payment services) and personalize applications, again over the cellular network. All of this wont add up to a lot of data, but will provide another reason for mobile users to subscribe to a data plan or just generate pay-as-you-go data revenue. Carrier billing Carrier billing is a more compelling proposition for operators, revenue wise. Operators have for years provided mobile users with the ability to charge content purchases to their mobile bill not only for content sold by themselves but by third parties as well. In fact, carrier billing is one of the first capabilities that operators chose to expose to developers in their open-API programs. Although it is mostly used to purchase digital content consumed on phones and other devices, it is also sometimes used to purchase physical-world goods such as parking and transport tickets. These purchases are currently made remotely via either SMS or a WAP site,
www.informatm.com 2011 Informa Telecoms & Media 47

but NFC could allow users to buy directly from NFC-enabled parking and ticket machines, as well as buy all sorts of other goods at the point of sale. Austria, for example, has the most advanced mobile payments system in Europe, covering all mobile networks and handsets. Here, carrier billing is the most popular payment method out of the options offered by the Paybox m-wallet service. The other options include paying by credit card and directly from a bank account again, parking and ticketing purchases seem to be what Austrias carrier billing is most used for. There are, nevertheless, a few cases of retailers experimenting with carrier billing for small physical goods. UK department store Marks & Spencer, for example, offers customers the option of ordering and paying, via premium SMS, for a 5 (US$8) packet of 50 school-uniform name tags. But carrier billing has several limitations. It is expensive, for one. The share of revenue kept by operators typically averages 30%, but can be as high as 50% far, far greater than the proportion kept by card-payment providers. So it doesnt make it ideal for physical-goods purchases. In some countries, operators have introduced two-tier pricing for carrier billing, depending on the size of the transaction. In the UK, for example, which has some of the lowest off-portal carrier billing rates in the West, transactions of 5 or less in value are charged at around 20-25%, and those above 5 at as little as 10%. But that is not a typical scenario. Another limitation is that there is a strict limit on how much users can spend per transaction (roughly around what is allowed for PIN-less NFC transactions) and, in some cases, as a total per month. This is because operators dont want to risk fronting too much money to subscribers. Again, this places a limitation on the e-commerce application of carrier billing. The biggest advantage that carrier billing has over other payment methods from a user perspective is that it doesnt require pre-registration. An operator can roll out an NFC m-wallet through which users can start making payments charged to their phone bill, straight out of the box, without even registering their credit or debit card details. So it makes take-up easier. For example, Austrias Paybox service got low take-up when it first launched 12 years ago due to a pre-registration procedure that it required from users. It wasnt until it lifted that requirement that usage took off. At the same time, however, if m-wallets loaded with credit and debit cards become the norm, carrier billing risks being pushed aside especially since it is unlikely that many stores will accept it as a form of payment, unless operators drastically drop their per-transaction charges. And, worse still, mobile card payments could also start encroaching on the ground conquered by operators online in website micropayments but only if one-click payments can be enabled on websites from phone-loaded cards. How that could be done is not clear yet.

www.informatm.com

2011 Informa Telecoms & Media

48

Contactless-payment deployment strategies


02 September 2011 Guillermo Escofet
Key points

Partnerships are key to the mobile-contactless-payment-deployment strategies of most market players. At the top of everyones list of companies they must partner with are banks and cardpayment networks since they are the ones that provide all of the necessary payments back-end. The card networks, and most banks, are happy to team up with whoever offers their payment services a route to mobile enablement be that mobile operators, handset makers or over-the-top players. But they are also exploring bridging mobile NFC technologies, such as microSD cards and smart stickers, to bypass partnerships and go down a handset- and operatoragnostic route to market. Mobile operators are seeking strength in numbers by creating cross-network alliances and joint ventures to compete with the global reach of OTT players. At the same time, they are pursuing their own individual rollout plans focused on own-brand mobilewallet and prepaid-cash products. Meanwhile, interesting alternatives to enabling mobile point-of-sale payments are cropping up, such as plug-in-card-reader-based Square and sound-wave-based Zoosh, which provide a more immediate solution than NFC.

Introduction Competing ecosystems are being established to enable mobile contactless payments. In an unusual spirit of fraternity, rival mobile operators are grouping together into alliances and joint ventures in each territory to lay the foundations for NFC services secured by the only piece of handset real estate over which they still have control: the SIM card. Handset and operating-system makers are pulling in a different direction, looking to secure NFC payments from chips embedded in phones for their native-application ecosystems. Banks and payment providers, meanwhile, are playing along with both of the above, as well as exploring alternatives of their own, such as microSD-card-secured services. It would seem that operators are the furthest ahead with their NFC-service-rollout plans. After all, they are the ones that have collectively dominated the mobile NFC headlines over the past year, with news of partnerships, trials and commercial launches across numerous countries. By comparison, most handset/OS players have remained cagey about their NFC plans other than saying that they want to make NFC phones. The only one to fully show its hand has been Google, which has launched its own NFC phone, the Nexus S; incorporated NFC into the Android OS SDK; and launched its own mobile wallet for contactless payments and coupons. Google Wallet will compete with operators m-wallet initiatives. What all NFC m-wallet rollouts have in common is mobilizing credit- and debit-card payments. So the players that are common to most rollouts are the card networks, such as MasterCard and Visa, and the associated card-issuing banks. As key players in the payments value chain, they will by necessity also play a key role in the mobile-contactless-payments value chain. And they are taking a multipronged approach to playing that role. Operators For operators, contactless payments are part of their mobile-wallet strategies. And many are paving the way for contactless payments and m-wallets with own-brand credit and prepaid cards and other financial products they have launched. In the UK, for example, France Telecom-owned Orange introduced a contactless credit card last year and a contactless prepaid card this year. The carrier sees the prepaid card as a way of getting users used to using an electronic wallet one that it recently mobilized with the launch of mobile-NFC-payments service Quick Tap.

www.informatm.com

2011 Informa Telecoms & Media

49

Rival carrier O2, owned by Spanish incumbent Telefonica, was earlier to market with a prepaid card, O2 Money, which it launched in 2009. Although essentially a plastic-money product that was not enabled for contactless payments, O2 launched it as a first step toward bringing card payments and phones together. Its only mobile element were text alerts sent out after every transaction informing users of how much they had spent and their remaining balance. Oranges cards offer a similar service. In May, O2 announced the partners for an m-wallet service it plans to launch in 2H11, saying that, as well as contactless payments, the wallet would offer airtime top-ups and peer-to-peer payments. The partners include card network Visa, e-payments company Wave Crest, banking technology vendor FIS and digital-banking software provider Intelligent Environments. At the same time, O2 has applied for an e-money license that will allow it to handle prepaid cash paid into the m-wallet by its customers. Similarly, Orange is relying on the banking license of Quick Tap launch partner Barclaycard. As with O2s upcoming m-wallet, Quick Tap works as a stored-value account, with users paying in money from their Orange credit card, Barclaycard credit card or Barclays debit card (Barclaycard is the credit-card arm of Barclays bank). Users can store up to 150 at any one time (see fig. 1). Fig. 1: Quick Tap facts

Orange is one of the operators that have moved forward most aggressively with NFC. At the end of last year it appointed someone at group-board level to promote NFC internally and gave January deadlines to its local-subsidiary CEOs to come up with an action plan for NFC. The carrier felt that for far too long NFC had been stuck with the technologists within its organization, in a bottom-up approach, and that it needed a new top-down, business-led approach. With stored-value wallets, operators are trying to target sectors of society that are underserved by banks and other financial services those who have no bank accounts or credit cards, such as migrant workers and teenagers. Another target audience are those on a tight budget, or just budget conscious, who want to put money aside for certain expenses and make sure they dont spend more than that amount. The text alerts are especially helpful for customers eager to keep a tight rein on their expenditure.

www.informatm.com

2011 Informa Telecoms & Media

50

Strength in numbers In parallel to these individual moves, all the major mobile-network operators in the UK including O2 and Orange (under its new guise as Everything Everywhere, after its merger with T-Mobile) have teamed up to form a mobile-commerce joint venture aimed at providing one-stop access to NFC m-wallet services. The only MNO not involved is Hutchison Whampoa subsidiary 3, whose network has about 10% market share in the UK. It has complained of being deliberately left out by the other carriers. The JV is not a fait accompli it is subject to competition clearance by regulators and, with 3 accusing it of being anticompetitive, its approval could run into trouble. Its three partners Everything Everywhere, O2 and Vodafone hope to have the JV up and running by year-end and have pledged to provide the necessary startup capital. The JV will combine two strands mobile marketing and mobile payments connecting offers, loyalty points and coupons delivered to m-wallet users with contactless payments at the point of sale. During a teleconference on the day of the announcement, Ronan Dunne, CEO of O2, said that there is a real appetite in the market to bring both strands together, as demonstrated by feedback from customers of the carriers O2 More mobile marketing service to which 2.5 million O2 subscribers are opted in. Operators are increasingly seeking strength in numbers in the face of the overwhelming competition they have encountered in recent years from over-the-top players such as Apple and Google on the mobile services front. Ganging together enables them to compete more effectively against the global reach that platforms such as Apples App Store and Googles Android Market offer developers and other third parties. The proposed UK joint venture mirrors similar mobile NFC multilateral operator initiatives in other countries, including the Czech Republic, Denmark, France, Germany, the Netherlands, Spain and the US. This newfound spirit of fraternity wont stop each of the operators involved in these initiatives from offering their own NFC services in competition with their alliance or joint-venture partners. But rather than expect third parties to go to each mobile network individually to rent slots on SIM cards for securing NFC apps, operators can make life much easier for third parties through these alliances and JVs. Aggregating connections But the extent to which it will be possible to present third parties with a single, cross-network offering will depend on antitrust regulation in each territory. For example, it is unlikely that in most territories operators will be able to offer third parties common SIM-slot-rental prices, because regulators would consider that to be collusion. Mobile-network-connectivity aggregators operating in the fields of messaging and carrier billing could provide a fix, though. One such company, Ericsson IPX, is extending into NFC, offering to aggregate access to the rental of SIM slots from all operators in each territory in essence, playing a kind of trusted-service-manager (TSM) role (see fig. 2). As part of that, it would offer one contract, with an aggregated price, covering all SIMs in the same way that it, and other aggregators like it, already do with messaging and billing.

www.informatm.com

2011 Informa Telecoms & Media

51

Fig. 2: Ericsson IPX trusted-service-manager model

However, Ericsson IPX is so far the only mobile aggregator to try to extend to NFC. One of its competitors, mBlox, looked into the feasibility of doing so but concluded that there wasnt much of a business in it. It didnt see much of a long-term future for SIM-secured NFC services and not enough revenue in it, since in most cases operators wont be getting per-transaction revenue unlike in the case of SMS and billing. Initial JV focus The speed at which each operator rolls out NFC services will, of course, vary, and that might have a knock-on effect on cross-network initiatives. Operator sources close to the UK joint venture have told Informa that the initial focus of the JV will be on mobile marketing rather than contactless payments, since all operators are already geared up for the former via basic mobile technologies such as SMS and WAP. It is unlikely that all JV partners will be geared up for NFC by the end of the year, the sources add. And although contactless payments add the ultimate wow factor to m-wallets, they are not the be-all and end-all. M-wallets can still serve a useful purpose without being able to do contactless payments. Online and other remote forms of payment are useful enough, the sources say. As well as providing one-stop shops in each country, operators are also striving to make services interoperable across borders. In June, Orange claimed to be the first to introduce an international NFC-payment service, by ensuring that, starting this summer, users of its UK Quick Tap service will be able to use their phones to make payments in Nice, the launch pad of Frances Cityzi NFC service, in which Orange is a leading protagonist. Telefonica is also working toward offering the same cross-border experience. The phones that were used by Telefonica Spain in a trial alongside Visa and Spanish bank La Caixa in Sitges, Spain, last year use the same underlying technology as those used by O2 in UK contactlesspayment trials at selected stores, for example. In Asia Pacific, meanwhile, Japanese operator NTT DoCoMo and South Korean operator KT announced plans in February to launch cross-border NFC services, including mobile payments, mass-transit ticketing and virtual coupons. B2B forte A strong card that operators feel they have up their sleeve with regard to the OTT players is their business-to-business relationship with enterprises in each country. The likes of Apple and Google might excel at enabling developers to link up directly to a global audience of consumers, but they dont have local sales teams that have nurtured long-term relationships with organizations that are key to enabling mobile NFC services such as retailers, transportation companies, banks, local authorities, centers of learning and carmakers, to name but a few.
www.informatm.com 2011 Informa Telecoms & Media 52

In relation to retailers, for example, operators have a growing machine-to-machine business supplying SIMs for wireless POS terminals, which are increasingly relying on mobilebroadband connectivity. In Germany, meanwhile, most operators have an M2M relationship with automotive companies, which they could exploit for NFC. And firms for which operators supply work-force connectivity services are likely to turn to those same operators if they are interested in equipping their employees with mobile-NFC-access controls. Operators can also play an evangelist role, using their sales teams to spread the mobile NFC message to B2B customers, such as retailers. That is not to say, however, that OTT players cannot rally businesses around their initiatives. Google, for example, has in the US attracted an impressive roster of big retailer brands to its recently unveiled Google Wallet service, something the Isis operator partners have yet to do, even though their joint venture was unveiled more than six months before Google Wallet. For consumer-facing NFC services, some operators will be taking an if-you-cant-beat-themjoin-them approach and publishing NFC apps on the OTT platforms. For example, Deutsche Telekom-owned T-Mobile is planning to place its m-wallet in the Android Market. Security Another advantage operators feel they have over OTT players is consumer trust. They feel that with issues of security and data protection, users are more likely to trust them than online or device players. And securing NFC apps via the SIM card is what they see as their main or only role in the mobile NFC market. Mobile users are getting used to making credit- and debit-card-enabled payments on their phones, primarily via online platforms such as iTunes and PayPal. But it will require a big psychological step for them to feel comfortable about turning their phones into wallets, loading them with their cards and magically tapping them in stores to buy goods. Although mobile contactless payments should be no riskier than their plastic equivalent if properly secured, users are likely to need convincing of that. Operators argue that they can offer the reassurance that users need. After all, it is to them that mobile users first turn when something goes wrong, such as if the phone stops working or is lost or stolen, they say. And operators are far better set up for customer-support functions than most OTT players, employing call-center staff rather than expecting customers to make queries via e-mail, for example. By placing the secure element in the SIM, they add, the customer-support responsibility will fall naturally on their shoulders. Not only will they be able to instantly disable NFC apps over the air in emergencies, but having the apps in the SIM will mean that users will be able to take the apps with them if they want to change handset to a different make or OS. OTT players would argue that that is all very well as long as users dont want to change operator. But maybe that is one problem that the cross-network NFC alliances being set up in each country could address. Some operators, such as T-Mobile, are looking at going beyond what is required by financial regulation and providing users with preferences to add extra safeguards around contactless payments. So, for example, although in the EU contactless payments dont require keying in a PIN if the transaction totals 20 (US$28.45) or less, operators could provide the option of keying it in for lower amounts down to 10, say just for users peace of mind. TSM role Key to ensuring scalability when provisioning secure NFC services, for both operators and service providers, such as banks, is the use of a trusted service manager (TSM). Although views vary on the exact role of a TSM, it is essentially an intermediary, such as Gemalto, that specializes in digital security and takes care of managing the life cycle of secure elements or applications, or both depending on whether it is contracted by an operator or a service provider or both. The most likely arrangement will be a split-TSM model, in which one TSM acts on behalf of the secure-element issuer, or operator (in a SIM-based scenario), and another or several others act on behalf of the service providers, such as banks and transportation companies (see fig. 3). This model has been successfully tested in trials such as the one in Nice.

www.informatm.com

2011 Informa Telecoms & Media

53

Fig. 3: Split TSM architecture

All operators and banks interested in enabling mobile NFC payments agree on the need to have a TSM. It is considered a must for ensuring bulletproof security. And the consensus is that rather than develop a TSM capability in-house, most operators would prefer to outsource that role. However, Informa understands that some operators are installing TSM platforms inhouse. Operators dont usually like to outsource UICC (SIM card) over-the-air platforms. But with the complexities of NFC, most are considering outsourcing, at least initially, the extension required to those platforms for issuing and managing NFC secure elements on SIM cards separately from their legacy platforms. In the long term, however, they aim to eventually bring this capability in-house. Also, operator groups with a systems-integration arm, such as Deutsche Telekoms T-Systems, could start offering TSM services via that arm. Gemalto, which is a world-leading SIM and smart-card maker and a leading contender in the mobile NFC TSM field, either offers trusted-service management as a hosted service or sells it as a licensed product. Its hosted-service business model is to be paid an annual fee per user for every application activated on the SIM card when acting as an operator TSM. Banks and card networks Plastic, not mobile, is the first step taken by banks wanting to offer contactless payments to customers. They issue NFC-compatible credit and debit cards enabled by the contactless payment systems set up by card-payment networks American Express, MasterCard and Visa. MasterCard was the earliest to market, with its PayPass system, which it launched in December 2002, and Visa launched PayWave in September 2007. American Express has had its contactless-payments system, ExpressPay, up and running since June 2005. But even though the first of these systems has been available for nearly a decade and the rest for at least five years, banks have been slow to issue NFC cards. Many have not done so in any significant scale and some not at all. For example, in the UK, which is the European country with the most NFC-enabled retail outlets, Barclays Bank was left looking nervously over its shoulder to see if any other UK banks would follow suit after its March 2009 blanket introduction of NFC chips on debit cards. Its taken about two years for some of the other banks to make a similarly bold move. The banks focus is likely to remain on plastic for the foreseeable future, while the choice of NFC handsets remains limited and NFC-handset penetration takes its time to build up enough critical mass. For example, Spanish bank La Caixa is not using mobile in the follow-up to the Sitges trial, an NFC pilot that kicked off in the Balearic Islands in May, because there arent enough NFC phones available in the market. Instead, the bank has issued 120,000 NFC payment cards for the pilot.
www.informatm.com 2011 Informa Telecoms & Media 54

Banks and card-payment networks are taking an agnostic approach to how they enable contactless payments on phones. As the payment enablers, they are the ones that everyone else needs to partner with to launch mobile contactless payments unless these are enabled by online-payment platforms, such as PayPal or iTunes, or by carrier billing. And they are maximizing their options by partnering or cooperating with anyone offering them a route to market be that operators, handset makers or online players. Bridging technologies At the same time, banks and card-payment networks have been the most enthusiastic explorers of bridging mobile NFC technologies, such as stickers and microSD cards not only because these provide a shortcut to NFC-enabling the vast majority of handsets out there that do not incorporate NFC, but also because they can be deployed without needing to team up with and share the limelight and revenues with anyone else. Also, bridging technologies are both carrier- and handset-agnostic. In fact, microSD cards are the mobile-NFC-deployment option most favored by many banks. Both the secure element and NFC chip can be embedded in a microSD card and inserted into any microSD-compatible phone to instantly enable that phone for contactless payments. Or, alternatively, the microSD card can contain just the secure element and be inserted into a phone that is already NFC-enabled as Chinese card-payment network China UnionPay intends to do. China UnionPay is placing its contactless-payments application onto microSD cards that will be used on the NFC Android phone made by HTC. The Taiwanese handset maker has reportedly put a hardware connection between the NFC chip and the microSD card slot in the phone, which resembles a single-wire protocol connection. MicroSD cards are a standardized technology that works with any phone with a microSD-card slot. Its critics point out, however, that the NFC antennas that can be fitted inside them need to be especially small, making them hard to read, and that the applications loaded on them cannot be updated over the air. Although Visa is a regular partner in SIM-based NFC trials with operators, it has also partnered with mobile-NFC-technology vendor DeviceFidelity to have its PayWave application installed in microSD cards. It has done the same with iCarte, maker of an iPhone plug-in peripheral that turns the Apple handset into an NFC device (see fig. 4). Fig. 4: iPhone NFC plug in, iCarte

www.informatm.com

2011 Informa Telecoms & Media

55

In June, Visa teamed up with BPCE, Frances second-largest banking group and owner of Banque Populaire and Caisse dEpargne, to trial NFC microSD cards supplied by Device Fidelity in the cities of Nice and Strasbourg later this year. The microSD cards will be tested on iPhone, Samsung Galaxy S and BlackBerry Bold 9700/9780 devices. In Turkey, one of the countrys biggest banks, Akbank, sees microSD cards as its best option and is piloting them for a potential commercial launch. Fellow Turkish bank Yapi Kredi, meanwhile, is offering the iCarte plug-in. In Slovakia, UniCredit is using NFC stickers supplied by Gemalto for a commercial mobilecontactless-payments deployment (see fig. 5) the countrys first. The stickers will be used in conjunction with MasterCard PayPass readers, which are deployed in about 3,000 outlets around Slovakia. UniCredit Slovakia is part of the much wider UniCredit Group, with 9,600 branches in about 50 countries around the world. Fig. 5: NFC sticker used in UniCredit Bank mobile-contactless-payments deployment, Slovakia

Native apps Another route to market that no self-respecting bank can afford to ignore is the smartphone application stores primarily Apples App Store, Googles Android Market and RIMs BlackBerry App World. Nowadays, a bank is no longer seen as a credible contender if it has no presence in these app stores even though in the UK, for example, no bank is present on all three yet. The mobile banking explosion in Europe and North America over the past two or three years has occurred largely because of the native-app phenomenon spearheaded by the iPhone. Figures released recently by market-research firm ComScore show that of the more than 20 million Europeans who are regularly using mobile banking services, 70% are smartphone users. And those with iPhones are the most frequent users, accessing m-banking services twice as much as Android-device owners. For example, Spanish bank Bankinter, a mobile banking pioneer in Spain that even has its own MVNO, revealed in March that 53% of its m-banking traffic comes from iOS app users. Android app users accounted for another 12% of traffic. So, all and all, native apps are now dwarfing traffic from the banks comprehensive range of SMS services, some of which it started offering in 2000. It is inevitable, then, that as native-app platforms such as Android and iOS add NFC tools for developers as has already happened in the case of Android, and will sooner or later happen in the case of iOS contactless-payment capabilities will start to be added to the m-banking offerings on those platforms. And, just as native apps now lead in m-banking traffic, there is a high probability that they will also lead in mobile-contactless-payment traffic. In that case, it will be the handset-embedded secure element favored by native-app-platform providers that will become the main route to market for banks and other payment providers NFC services.
www.informatm.com 2011 Informa Telecoms & Media 56

Working with operators The likes of MasterCard and Visa and most banks are nevertheless eager to star in operatorled mobile-NFC ventures. Officially, most back the operators NFC agenda. Visa, for example, has publicly stated that it sees most mass-market potential in the SIM-based model, because of operators distribution and marketing muscle. The relationship between operators and banks is growing closer as mobile phones become more and more important bearers of banking and payment services. For many people in emerging markets, mobile phones are the only bearers of such services, and operators in those markets are increasingly taking on the role of banks as they launch mobile money services geared toward people who dont have bank accounts either on their own, when the regulatory system allows, or by piggybacking on the banking license of a local bank. In some developed markets, such as Japan and South Korea, operators have acquired banks and card-payment networks. It has also happened in Austria, where Mobilkom bought A1 bank. And some banks, such as Bankinter in Spain and Rabobank in the Netherlands, have taken on the role of operators by launching MVNOs. These banks will be following a SIM-based approach for any NFC services they launch through their MVNOs. Recently, Orange and French bank BNP Paribas announced plans to launch a bundled service in November for the banks customers in France, including a smartphone, unlimited data and m-payment and m-banking apps. Orange and BNP Paribas also formed part of a joint initiative announced in June by all three French mobile-network operators and four leading French banks to deploy an interoperable nationwide NFC-payments service in early 2012. Most secure-element implementations have been on the SIM-based side, according to TSMs such as Gemalto. Gemalto told Informa that a lot of operators are putting money on the table to manage the UICC as a secure element (SE) platform. Relatively few handset vendors, on the other hand, have approached Gemalto to supply them with SEs and TSM services for embedded implementations. POS terminals Another key question in the NFC strategy of the banks and card-payment networks is whether they should try to accelerate market development by helping merchants foot the bill for NFCenabling their point-of-sale infrastructure. Some parties are putting pressure on payment providers to do just that. For example, Eric Schmidt, Googles executive chairman, was quoted in the press recently as saying: That money [to convert terminals] is going to be spent not by Google and not by the phone guys but by the credit-card companies, because the fraud rates are so much lower. Nobody knows how quickly this will occur, but its in their interests to convert as fast as they humanly can. Visa, for example, has invested in seeding contactless POS terminals in key markets to get the ball rolling among retailers. But the brunt of the cost going forward will inevitably be borne by retailers. Alternatives for merchants A wide array of new options has cropped up, largely through smartphone apps and peripherals, which offer alternatives to NFC for enabling mobile payments at the point of sale. And some look quite compelling especially for small-business owners for whom investing in dedicated POS and checkout infrastructure is too much of a stretch. US startup Square, for example, has developed a small card-reader device that plugs into smartphones and reads the magnetic strip of credit and debit cards (see fig. 6). The device, combined with the Square app, turns an iPhone or iPad into a POS terminal incorporating many accounting and CRM functions. The company, which charges a 2.75% fee per purchase, has attracted major investment and in June added Larry Summers, former secretary of the US Treasury, to its board of directors.

www.informatm.com

2011 Informa Telecoms & Media

57

Fig. 6: Square iPhone payments device and application

A similar product, called Pointofsale, is offered by Latvian company Erply, which last year attracted US$2 million in venture capital. Its main market focus is in the UK and the US. Square is available only in the US. Another alternative is Zoosh, an application developed by Silicon Valley startup Naratte that uses sound waves to make mobile payments and is compatible with any device with a speaker and microphone. UK restaurant chain Pizza Express, meanwhile, recently launched an iPhone app allowing customers to pay their restaurant bill with their mobile phone. Mobile NFC phones can also provide an alternative to POS terminals either in P2P mode or by accepting payments from a contactless card. But it doesnt provide the immediate reach that systems such as Square and Zoosh can.

www.informatm.com

2011 Informa Telecoms & Media

58

The technology and its many potential uses


02 September 2011 Guillermo Escofet
Key points

Mobile extends the possibilities of what can be done with near-field-communication technology, not only introducing a whole new NFC operating mode peer-to-peer but also extending into exciting new areas, such as augmented reality. Beyond payments, great potential exists for mobile NFC in the areas of transportation, access controls, and CRM and marketing, including couponing and smart posters/ packaging. But mobile NFC is not moving into a vacuum. There are other mobile technologies, such as SMS and QR codes, as well as pre-existing contactless-smart-card implementations that will compete and coexist with mobile NFC. The added value that mobile NFC can bring in relation to these other enablers varies from service to service.

The technology Near-field communication (NFC) is a wireless technology that operates at very close range 4cm at the most in the unlicensed 13.56MHz band. It is suitable for end-user-initiated, or pull, activities and, because of its close range, is less prone to interference and therefore more secure. There are three main operating modes for NFC tag reading and writing; peer-to-peer; and card emulation and numerous applications for each (see fig. 1).

Fig. 1: Mobile NFC operating modes

The end-user generates a radio-frequency (RF) field with his NFC device, which, in most instances, powers a passive NFC chip, or tag, as it is commonly referred to. Because tags dont necessarily need a power source, they can be incorporated into all manner of objects, including posters, stickers, cards and key fobs. Tags contain data, such as a URL to which to link users, and are typically read-only, but may be rewriteable too. NFC builds on pre-existing RFID (radio-frequency identity) tag and contactless-smart-card technologies. It is based on contactless-payment and -ticketing standards that are already used on a daily basis by millions of people worldwide. These standards determine not only
www.informatm.com 2011 Informa Telecoms & Media 59

the contactless operating environment, such as the physical requirements of the antennas, but also the format of the data to be transferred and the data rates for that transfer. NFC standards are acknowledged by ISO/IEC (International Organization for Standardization/ International Electrotechnical Commission), ETSI (European Telecommunications Standards Institute) and ECMA (European association for standardizing information and communication systems). In the case of P2P activities, the NFC chips at both ends need to be powered. Typically, P2P would occur between two powered NFC-enabled devices, most likely mobile phones, so it extends beyond the realm of what is possible with contactless cards. Another differentiator is services that require a secure element in the phone and those that dont. The former category is largely composed of payment and access-control services. The latter encompasses all other services. Mobile NFC systems can work either placing most of the intelligence and the communication with the back end in the device, combined with an offline passive tag, or the other way around, where the device does little more than a normal smart card would and all of the processing happens at the tag side, via a fixed connection to the back end. Reading/writing mode Tag reading, or tagging, as it is often referred to, is the richest NFC communication mode in terms of potential uses. There is an endless list of activities it can be applied to including downloading a trailer from a movie poster, authenticating a pill bottle and reporting a faulty public toilet. Informa has subdivided these uses into two broad categories: one comprising uses that are about gaining access to places, content and information, such as the workplace, coupons or allergy warnings (see fig. 2), and another comprising uses that are about sending information, such as reporting noncompliance with a recycling-refuse program, remotely updating a doctor on ones health or voting in a local-government referendum.

Fig. 2: Uses, drivers and barriers for mobile NFC reader/writer-mode services

www.informatm.com

2011 Informa Telecoms & Media

60

The biggest, most immediate opportunities for tagging can be found in two areas:

Marketing, including linking shoppers to a products information page online and to discount coupons, as well as to promotional content, such as video clips. Access controls, especially where NFC or RFID cards are already being used as a means of authorizing entry into restricted-access areas, such as office buildings, hotels and stadiums.

Mobile NFC provides an opportunity to link the physical and digital worlds within the context of brick-and-mortar stores. It is often described as an augmented-reality technology. But whereas some stores already have NFC point-of-sale infrastructure to enable contactless payments, primarily via NFC cards, they have precious little in the way of NFC tags. Thats because a website cannot be accessed from a plastic card. For that link to cyberspace a shopper needs an Internet-connected device, such as a smartphone and NFC-enabled smartphones, or indeed any kind of NFC-enabled phone, are still rare, at least outside Japan and South Korea. Tags vs. other methods Meanwhile, there are already more-established alternatives to linking phones to remote information about products on store shelves and delivering and redeeming mobile coupons and vouchers namely QR codes (as well as bar codes), and good old SMS and its multimedia variant, MMS. Although QR codes require a scanning app to be preloaded or downloaded on phones and offer less of a seamless experience than NFC, the cost of adding them to packaging is negligible compared with NFC tags, since QR codes are printed they are essentially ink (see fig. 3). The cost of making NFC tags is gradually falling, as design efficiencies are introduced and production volumes go up, but they are nevertheless priced at around US$0.10 a piece. That rules them out from being added to low-cost items, such as a can of beans or a carton of milk. Also, although a phone needs to get pretty close to an NFC tag to read it, faced with a shelf tightly packed with tag-bearing products it is possible that it will end up reading the wrong tag something that doesnt happen with QR codes.

Fig. 3: NFC tags vs. QR codes, pros and cons

However, the main idea with NFC tags is to place them next to the products being sold, as stickers on shelving or posters on walls, rather than on the products themselves. Only with bigticket items, such as an electronic appliance or a bottle of champagne, would they be added to packaging. NFC tags therefore lend themselves more to retailers than manufacturers. A manufacturer can supply its products to a store together with NFC stickers and instructions for these to be placed next to the products, but it will be more certain of getting its message to shoppers if the tag or code comes incorporated in its packaging. It is, however, more common to see QR codes printed on billboards and other print ads than on packaging.

www.informatm.com

2011 Informa Telecoms & Media

61

Coexistence Because of their differences in applicability, NFC tags are likely to coexist with QR codes and might even be used alongside each other in support of the same products. Although QR codes havent exactly taken the market by storm, they have gained enough momentum to remain part of the picture at least while NFC tags remain relatively pricy. For example, in the high-profile mobile NFC pilot conducted last year in Nice by French operators and banks, NFC tags were displayed alongside QR codes and SMS short codes on the same Cityzi smart posters at bus and tram stops. And Japan and South Korea, which lead the world in mobile NFC, are also where QR codes have achieved the most widespread use. It remains to be seen whether NFC tags will gradually replace QR codes in those countries, but the latter are far too well established to be easily pushed aside. In the Seoul subway, for example, supermarket chain Tesco recently put up wall-length billboards replicating the look of supermarket shelves, and each product on those shelves has a QR code that passersby can scan and add to their basket for online grocery shopping. Another UK retailer, department-store chain Marks & Spencer, announced plans last year to introduce QR codes on its own-brand food and drink products, which would work with a scanning app that customers must first download. SMS is also being used by some retailers as a way of connecting shoppers to remote product information, as well as to customer-support staff. Electronics retail chain Best Buy, for example, places an SMS short code in stores and inserts to which users can text a product keyword and receive an SMS with the products details, including customer ratings and a link to the product page on the Best Buy mobile site. Tagging drivers Two clashing trends are making it increasingly necessary for manufacturers and retailers to connect shoppers to remote information about their products. On the one hand, manufacturers and retailers are coming under increasing pressure to reduce packaging for environmental reasons, leaving less room to print information about products. On the other, consumers are becoming more discerning, demanding information on the ethical, environmental and health implications of purchasing products. There is also more in the way of legislation and guidelines requiring labeling and descriptions of aspects such as nutritional quality and allergy risks. For example, French supermarket chain E.Leclerc, which participated in the Nice Cityzi pilot, is mainly interested in NFC as a bearer for product information and offers, not payments. Its customers want less junk mail shoved through their letterbox, and the chain is looking for ways to cut back on its direct-mail marketing. So it placed NFC tags around its stores in Nice where shoppers could connect to product information and offers. Coupons and vouchers The couponing business has boomed in recent years, especially online, with services such as Groupon, which has more than 83 million subscribers in hundreds of cities across the US and Europe (an eightfold year-on-year increase) and has sold more than 30 million groupons (discount offers that are sold to a group of subscribers once enough people have pledged to pay for each of those offers) (see fig. 4).

www.informatm.com

2011 Informa Telecoms & Media

62

Fig. 4: How Groupon works

In the US alone, 367 billion coupons were issued in 2009, according to a report from transaction-settlement provider Inmar. In the UK the number issued in 2009 was far more modest but nevertheless sizable: 4.8 billion. And interest in coupons is ballooning. For example, Google recently reported 800% year-on-year growth in the search term coupons on its mobile search service in the UK. Google is eager to get a slice of the action and is piloting a couponing service, Google Offers, in the US. The service is likely to regularly feature as a link on Google mobile search results in the not-too-distant future, alongside the click-to-call and mapping links that appear now. The growth in interest has been largely fueled by new takes on the couponing business model, in which the concept of daily deals has been mixed in with a strong social-media element such as group-based coupons pioneered by Groupon and location-based coupons pioneered by the likes of social network Foursquare with its Deals offering. Coupons are also part of the vision for the Google Wallet NFC service unveiled recently. All these coupons are delivered electronically often via e-mail.
Daily deals

This fast-growing sector of the couponing market, commonly referred to as daily deals, has reached fever-pitch levels of hype, and its leading lights are gearing up to go public. LivingSocial, which is expected to soon unveil plans for an IPO, could be valued at US$15 billion, according to market speculation. Groupon is about to float any time now and is also hoping for an initial valuation of US $15 billion. The company has registered phenomenal growth. Its 1Q11 revenue jumped 1,475% year-on-year, to US$645 million, dwarfing the first-to-second-year results of legendary Internet-growth names such as Google, Amazon and eBay. Daily-deal companies employ sales reps who call local merchants to get them to spend their marketing budgets on e-mail deals rather than on Google search, Yellow Pages or local newspapers. In New York alone, there are reportedly about 150 daily-deal startups in operation. Even mobile operators are getting in on the act. For example, T-Mobile USA last month launched a daily-deal aggregation service, More for Me, as an Android app. But it looks as if the industry has reached unsustainable levels of competition in the US, at least and as if a backlash is building up among merchants. Merchants increasingly complain that although coupons are effective in bringing new customers through their doors, most are compulsive bargain hunters who do not turn into repeat customers they get to eat a heavily discounted lunch once and are never seen again, unless they are offered another deal. In heavily saturated markets like New York, it is reportedly getting harder and harder to extract deals from merchants. There are even questions about the business soundness of success story Groupon, which, despite a huge, fast-growing turnover, is hemorrhaging money at an equally fast pace.
www.informatm.com 2011 Informa Telecoms & Media 63

It would not be surprising if sooner or later the bubble bursts on the daily-deals market, leading to a major shakeout.
Mobilizing coupons

Of the 367 billion coupons issued in the US in 2009, only 3.3 billion were redeemed, Inmar reports. The bulk of issued coupons, around 85%, were paper. A problem with paper coupons and vouchers is that users often forget to take them with them or forget they have them buried somewhere in their wallet or handbag. But since people tend to always carry their mobile with them, an SMS- or e-mail-delivered coupon, or one downloaded to the phone via an NFC tag, is much more likely to be at hand when its time to redeem it. Evidence from mobile voucher provider Eagle Eye Solutions indicates that mobile can be far more effective than paper at least in the case of vouchers. For example, after introducing SMS vouchers last year, UK electronics retailer Comet experienced a 500% jump in sales of its business-to-business vouchers, which enterprises offer to their employees as rewards. Clothing retail group Aurora Fashions, meanwhile, saw mobile gift vouchers outsell its traditional gift vouchers 3-to-1 within six weeks of launch. There are already a few established ways of enabling coupons and vouchers on mobile. However, they all have an element of clunkiness and more often than not end up relying on manual input at the point of sale as a matter of course in the case of SMS, and because of scanner-readability problems in the case of bar and QR codes.
Delivery of coupons

Current ways of delivering coupons and vouchers to mobile phones include SMS/MMS, e-mail and online downloads, via two methods:

They are pushed, for example by people buying gift vouchers on behalf of the recipient or by a coupon service to which the recipient subscribes to. Or they are pulled, by the recipient, when invited to by a billboard or print ad, for example.

The latter is traditionally done via SMS: Users text a keyword to an SMS short code and receive an SMS or MMS with the coupon or voucher, or a WAP-push message with a link to a Web page from which the coupon or voucher can be downloaded. QR codes provide a more direct way of connecting to a coupon- or voucher-download page. NFC tags are designed to work even more instantaneously. With QR codes, users need to fire up the camera in their phone, take a picture of the code and then get a reader app on their phone to scan the code. With NFC they need to just tap on the tag to be instantly directed to the download page. The most common way of redeeming mobile coupons and vouchers in stores and other establishments is by manual input of a code contained within the coupon or voucher sent or downloaded to the phone. As with NFC, QR codes require the point-of-sale infrastructure to be especially adapted. Thats because code-scanners at most checkout counters are designed to read only bar codes, not QR codes. Even mobile coupons or vouchers bearing bar codes often present legibility problems. Thats because many mobile-phone screens are unable to render bar codes properly especially in the case of feature and lower-end phones. Social location and blogging In a social-location context, such as services Foursquare and Facebook Places, NFC tagging is being touted as a proof-of-presence devised to keep users from falsely claiming rewards from merchants a problem that is causing increasing concern. Users would check in at locations by tapping their NFC phone on a tag, and a back-end server would confirm that the tag being tapped is the correct one. There are social-location users who check into places without actually being there. NFC tags would offer a more foolproof form of authentication than QR codes, because there would be nothing stopping users from sending a picture they had just taken of a code to a friend so they can also redeem the reward on offer. Tags could also be placed in stores and other physical locations for users to leave comments and reviews. For example, US local-search service Yelp, which has built up more than 20 million reviews from users, could place tags in restaurants and other locations for users to tap onto and connect to that business landing page on Yelp to leave a review and read what others have said about it.
www.informatm.com 2011 Informa Telecoms & Media 64

Games Gaming is also fertile ground for NFC tagging in the case of both single- and multiplayer games. For example, at its Research Center in Palo Alto, CA, Nokia has developed several card games involving the use of NFC tags. The tags, or cards, are blank, and if none are provided, any kind will do. To set up a game, users first tap the tags with their NFC phone to assign them a meaning, depending on the game about to be played. One of the games developed by Nokia is Shakespeare Shuffle, in which each tag is assigned part of a Shakespearean quote and then jumbled with the other tags, and the object of the game is to put the tags in the right order by tapping on each one to reveal the hidden words. A similar game requires players to place the tags into matching pairs. Yet another requires players to repeat a drum-kit beat by tapping the tags in the right order, after each tag has been assigned a specific sound. Many of these games are designed to run on the Nokia C7 NFC smartphone. Other ways NFC tagging can be integrated into mobile gaming are in the context of treasure hunts, in which participants tap on a tag at each stage to reveal the next clue, and quizzes, in which participants tap on tags on a smart poster to reveal questions and pick multiple-choice answers. Tagging is also being looked at as a means of bringing together mobile-game marketing and merchandising with gameplay. Rovio, developer of best-selling iPhone game Angry Birds, has created an NFC version of the game called Angry Birds Magic, which initially is being exclusively preinstalled on Nokia NFC handsets. As part of the marketing around the game, it is thinking of putting cardboard cutouts of Angry Bird character The Mighty Eagle in Nokia stores, incorporating tags that users can tap on to unlock the character in the Angry Birds Magic app on their Nokia handsets. Until now, The Mighty Eagle has been exclusive to the iOS version of the game. Rovio is also considering embedding tags in Angry Birds merchandising, such as the fluffytoy versions of the games characters it sells. Users would tap on the tags and earn some of Angry Birds virtual currency or set the character personified by the toy as their avatar on, say, Facebook. Monitoring There are numerous uses to which mobile NFC can be put for feedback and monitoring purposes (see fig. 5).

Fig. 5: Uses, drivers and barriers for mobile NFC monitoring services (reader/writer mode)

Health

For example, Germanys Kassel University has conducted a three-month trial with patients suffering from amyotrophic lateral sclerosis (ALS), a rare fatal illness that leaves victims increasingly disabled and leads to death within three to five years of diagnosis. In Germany, ALS sufferers are normally expected to visit their doctor for three- or six-monthly checkups,
www.informatm.com 2011 Informa Telecoms & Media 65

something that becomes more difficult as their condition deteriorates and doesnt happen frequently enough to pick up on deteriorating symptoms and provide swift treatment. Existing remote health-monitoring methods, such as filling in online or SMS questionnaires, do not offer a valid alternative to face-to-face visits, because of the impaired motor skills brought about by the disease, which makes it difficult, if not impossible, for patients to use normal data-input methods, such as keypads and speech-recognition software. So Kassel University researchers developed a system using an NFC smart poster with multiple-choice questions. Once a week, patients were asked to answer the same 12 questions, choosing from five possible answers each. Using an NFC phone they would tap on the tag next to each question and then on one of five numbered tags at the bottom of the poster, to choose their answer. The answers chosen were displayed on the phone screen as they went along. Once finished, patients tapped on another tag marked with an e-mail symbol for the answers to be sent back to the doctor. According to the researchers, there was a high acceptance rate among trialists and only a 3% error rate. The trial was conducted using a Nokia feature phone, the 2265, and a second phase is planned with NFC-enabled iPhones and iPads.
Antipiracy

A much more mass-market implementation of NFC tags could be in the area of pharmaceuticals, where counterfeit drugs incur tens of billions of dollars a year in lost sales to pharmaceutical companies and health complications for those taking them. NFC tags can be incorporated into packaging, such as a pill-bottle top, so that they can be tapped by pharmacists or patients with NFC phones to connect to a website where the medicine in question can be authenticated. Some NFC-tag makers are seeing strong interest from drug companies and other manufacturers for tags that can be used for authentication purposes. Verayo, for example, is talking to one manufacturer that is interested in ordering a billion tags. According to the European Alliance for Safe Medicines, fake drugs cost the EU around 50 billion (US$71.5 billion) in 2007 alone in lost sales and medical treatment for the damage to health caused by these drugs.
Municipal uses

NFC tagging could also be used by municipal authorities to garner public opinion, receive reports of faults and other incidents, and monitor service compliance and performance, such as in the case of waste management. For example, refuse collectors could use the technology to report which households leave out recycling waste, allowing authorities to reward or penalize citizens, depending on their level of participation. An NFC phone could be tapped on a tag mounted in each street and would display a list of house numbers on the screen. The truck driver would then click on the numbers of the houses where no recycling waste was left out. In October 2010, carrier Orange and consulting company Everis launched a three-month mobile NFC trial in a Madrid suburb to monitor the performance of a waste-recycling program. Municipal waste collectors used NFC handsets to tap smart labels fixed to recycling containers to instantly send data about the exact location, content volumes, date and time of collection. NFC tagging could also offer an alternative way of recording and monitoring the arrival and departure of infants at nurseries or pupil attendance at schools. A smart poster with tags for each class member, displaying the childs name and photo, could be used in conjunction with an NFC phone to check children in and out or take the register. It would be one way of digitizing a process that is still largely paper based. Another use that is being suggested for NFC tags is in the residential environment, to register the arrival and departure of domestic workers, such as cleaners, gardeners and babysitters, and avoid pay disputes in cases when the heads of the household are at work or absent for other reasons. Workers would check in and out, leaving a precise record of the number of hours worked. Access controls Although door-key-type applications are sometimes placed under the card-emulation category, they operate in the reader/writer mode. Industry association the NFC Forum, for example, classifies them as tagging applications.
www.informatm.com 2011 Informa Telecoms & Media 66

Smart cards and RFID/NFC readers are already widely used as a means of entry into office buildings and onto public transportation (see fig. 6). They are also gaining traction in sport venues, having become a standard feature in newly built soccer stadiums, for example. And they are beginning to replace legacy magnetic-stripe cards at hotel chains, such as Best Western. Fig. 6: Contactless workplace access

Cost and time savings and improved customer-relationship management are the main reasons for deploying smart-card entry systems. And replacing plastic cards with mobile phones adds to the cost savings, by cutting out card-production and -distribution costs, and to the CRM benefits, by giving users more self-service options.
Hotels

Mobile makes a significant difference in the case of hotels, for example. Rather than queue at the front desk to pick up the room card, guests can have the electronic key sent over the air to their NFC phone before they arrive at the hotel and can walk straight to their room. The same is true when checking out. Not only is that convenient for guests, but it also helps hotels cut back on reception-desk-staff costs. A mobile NFC hotel-room-key trial was recently completed at the Clarion Hotel in Stockholm, Sweden, with the participation of hotel chain Nordic Choice Hotels, smart-card provider Giesecke & Devrient, mobile operator TeliaSonera and electronic-security-systems provider VingCard Elsafe. All participants in the eight-month trial highly appreciated the convenience afforded by the service. But with most hotels using magnetic-stripe cards as door keys, the size of the opportunity presented by the hospitality industry will initially be relatively small for NFC. Thats because the reader infrastructure in place is not NFC compatible. Companies such as VingCard, which specializes in the hospitality sector, are trying to reduce legacy-system-replacement costs for hotels, however. In March 2010, VingCard finished upgrading the electronic-key system at a Best Western hotel in France to contactless technology, leaving most of the door locks intact and replacing only the bezel card readers.
Stadiums

In sports stadiums, NFC technologies are often the first ticketless systems to be introduced. But some stadiums have gone down the route of issuing club members magnetic-stripe or barcode cards instead. Contactless entry systems are either installed alongside traditional paperticket turnstiles or integrated with them. The use case for extending the technology to mobile is not as strong as for hotels, however. Fans with NFC club cards are already able to avoid queuing at the ticket office when purchasing tickets beforehand on the Web or their phone, because the card reader at the stadium entrance is often connected to a back-end server where the ticketing information is held. In mobile implementations, ticketing and other information could be held on the card loaded in the phone, giving fans more immediate access to it. For example, in the case of clubs that award loyalty points on ticket purchases, fans could use the mobile screen to quickly view the number of points earned or spent. Beyond reducing queues and ticket-office overheads, contactless ticketing also offers clubs CRM and security advantages. The loyalty points earned can encourage fans to spend money at food and retail facilities in the stadium. They can also provide a wealth of customer information, such as who is attending games, how often they attend them and what they buy
www.informatm.com 2011 Informa Telecoms & Media 67

when they are there. With this information, clubs can adapt their merchandise, promotions and other offerings. NFC also offers greater security. The microchips in cards make them difficult to forge, and lost or stolen cards can be blocked and replaced with new ones. NFC ticketing also helps cut back on illegal reselling by scalpers. Battling scalpers is also a major reason for introducing ticketless entry to pop and rock concerts. Artists and concert-tour organizers are eager to protect fans from getting ripped off by ticket touts who buy tickets in bulk and resell them at extortionate rates. But the solution that has been mostly pursued for concertgoers is to get them to book online with a credit or debit card and then gain entry at the venue by showing their ID and swiping their card. There arent many examples of contactless technology being introduced in this context.
The workplace

Workplace access is low-hanging fruit for mobile NFC access-control services, because of the widespread deployment of contactless cards and fobs among office workers and other employees. Mobile offers a couple of advantages over plastic passes: It cuts out the cost of issuing and physically delivering such passes, and offers real-time traceability of employee movements as they tap in and out of access points. Because phones are connected devices, a staff members entry or exit can be reported back to an access-control center even when the door in question has an offline NFC reader. Mobile also enables enterprise security managers to tweak access parameters for each employee, providing, for example, temporary, task-based access to specific premises, and enables them to instantly deliver these over the air. However, workplace-access-control deployments are led by enterprises, not end-users, and therefore depend on IT managers and CFOs signing off on them. And unless the enterprise in question equips its employees with mobile phones, it is unlikely to mobilize its contactlessentry system in a hurry when only a handful of employees are walking around with the first NFC phones on the market. BlackBerry maker RIM is interested in pursuing opportunities in the mobile NFC enterprise market. It is reportedly planning to offer employee-ID keys through embedded secure elements in NFC BlackBerry phones keys that could be used to gain access to corporate buildings or corporate applications. Peer-to-peer In P2P mode, NFC handsets can instantly pair with each other and exchange data. It is important to understand that what defines mobile NFC services as P2P is whether they involve device pairing, not whether they involve social interaction between users though the latter is usually the case. Many peer-to-peer services make use of NFC, but without involving device pairing and these are not classified as P2P, but rather as tagging. Networking Much of the focus of P2P mobile NFC services is centered on the exchange of contact information in a social-networking and business context, as well as on gaming and content sharing (see fig. 7). But many other uses will probably come to light once the technology is widespread and users have had the chance to play around with it.

www.informatm.com

2011 Informa Telecoms & Media

68

Fig. 7: Uses, drivers and barriers for mobile NFC P2P-mode services

P2P could be used in conjunction with a Facebook app, say, to enable users to tap phones and instantly add each other as friends on the social network. Or it could be used in more-formal circumstances to enable users to exchange virtual business cards, together with other workrelated information, such as resumes. A pioneer in this sector is Poken, which in the absence of NFC phones a few years ago designed its own contactless devices, called Pokens, in which users can store their personal information and exchange it with other Poken users with a simple tap as well as collect digital information on things and places. The company targets its service at both consumers and business users. Italian fashion brand Angel Devil, for example, has brought out a collection of jeans with Poken tags sown to the hip that users can hit together to connect digitally. Although the information from Poken devices is visualized on a PC screen through a USB connection, Poken will act as just another P2P app on NFC phones, with direct access on the mobile screen to the information collected via the app. In South Korea, meanwhile, manufacturer Hicel has launched physical business cards containing an NFC chip, which can store far more information than can be printed on the card, such as the individuals resume, links to websites and social-network profiles (see fig. 8). That information could be extracted by NFC phones when tapped on the card. But this is, of course, an example of tagging, not P2P, since the business card effectively acts as a tag from which information is extracted. Fig. 8: Business card incorporating NFC chip

Games Gaming is another area in which there is great potential for P2P NFC. The business models around it have yet to be worked out, and a lot of the work that has been done on this front is confined to academia and research-and-development labs. It involves two main strands:

www.informatm.com

multiplayer gaming, based on device pairing, and

2011 Informa Telecoms & Media

69

social gaming, which is P2P because it involves interaction with other people, but not necessarily in an NFC sense, since a lot of it involves interaction with tags in read/write mode, not P2P mode though the latter also features.

Lancaster University in the UK, for example, has developed several P2P NFC games, including a pass-the-bomb game, in which two or more players holding NFC phones pass each other a ticking time bomb by tapping phones, and the loser is the one during whose turn the bomb explodes. Nokia has been experimenting with NFC games too, ever since it brought out its first NFC phone in 2004. Most involve games played in read/write mode, as described earlier. But some also are P2P-mode-based, such as collectible card games in which users can swap repeated cards with those they dont have yet. Dr. Reuben Edwards, a lecturer at Lancaster Universitys School of Computing and Communications, sees NFC as a means of providing a healthier environment for multiplayer digital games, via face-to-face interaction, rather than remote interaction via the Internet. He has coined the term near-physical interaction to describe the phone tapping that occurs in P2P mode-based games. Despite developing an NFC version of Angry Birds, Rovio has no monetization model for NFC yet. It wanted to be early to market with NFC because it thinks its a cool technology that can add to the entertainment value of its games. But applicability of NFC to Angry Birds is limited, because it is videogame in style and singleplayer. The company is looking to turn Angry Birds into a multiplayer game but hasnt found the right formula yet. At the moment, the NFC element in Angry Birds Magic is confined to enabling users to unlock extra game levels by tapping phones with another player. Rovio is also thinking of letting players exchange scores in the same way. Card emulation Card emulation is where the greatest interest in mobile NFC is focused. Thats because it is essentially about payments, though it is often divided between retail payments and publictransportation payments (see fig. 9).

Fig. 9: Uses, drivers and barriers for mobile NFC card-emulation services

For an in-depth analysis of payments, click here.

www.informatm.com

2011 Informa Telecoms & Media

70

Transportation Many city public-transportation systems around the world are already NFC-enabled. Informa estimates that about 930 cities in at least 50 countries have introduced RFID- or NFC-based ticketing systems on subways, buses and other transportation. That makes transportation the biggest readily available opportunity for mobile NFC. But each NFC ticketing implementation has its own variations. Globe-trotting mobile users wont be able to pay for transportation anywhere in the world where there are NFC-enabled ticket barriers, not least because they will need to first sign up for whichever travel-card program is in place in each city or transportation network. The opportunity will be fragmented into hundreds of localized programs. Nevertheless, if aggregated, it adds up to a big global audience. According to some estimates, the global public-transportation market is worth about US$100 billion a year. Efforts toward interoperability will be helped by the fact that the chipset technology used by the worlds contactless-ticketing programs is mostly derived from two sources: NXPs proprietary Mifare chips and the Calypso-chip standard introduced by transportation operators and managed by the Calypso Association. Fragmentation is mainly caused by the proprietary RF technologies used in conjunction with the chips, as well as the different card programs. NXP estimates that Mifare is used by 70% of all cities that have deployed NFC ticketing, containing 1.2 billion of the worlds people. There are two variants of Mifare: Mifare Classic, which is the most widely deployed, and the newer Mifare Desfire, which a lot of transportation systems are migrating to after Mifare Classic fell victim of well-publicized hacking attacks in 2008.
Enabling direct card payments

But what would really help open up local contactless ticketing systems and bring about global interoperability is if all transportation authorities were to follow Transport for Londons example and allow passengers to pass through ticket barriers using their credit or debit card. As well as the prepaid contactless Oyster cards that London commuters regularly use to pay for and gain entry to the tube and buses, they will now also be able to pay directly at the ticket barrier with their contactless Visa, MasterCard or American Express cards or NFC-payment enabled phones. And more to the point, those visiting London from other parts of the country or abroad will be able to do the same, just in time for the 2012 Olympics, when London will be opening its doors to the world. Another motivation for TfL to enable card payments at ticket barriers is to reduce cash, prepaid-credit and Oyster-card handling costs something that all transportation authorities are eager to do. Also, the more passengers who walk straight through to the ticket barriers with their credit and debit cards, the less need there will be for ticket machines/offices, eventually allowing for cutbacks to be made on these. TfL told Informa that direct credit/debit-card payments will reduce commissions and processing costs and enable TfL to reduce the number of Oyster cards produced and issued. The cost of introducing the change is mostly limited to upgrading the software in all Oystercard readers across Londons transportation network a job that is currently under way. It doesnt involve upgrading or replacing hardware. Other cities are looking to do the same. In New York, for example, the local transportation authority is trialing direct contactless-card payments with MasterCard.
Mobile advantages

Mobile offers several advantages over mere plastic cards. It offers a portable screen on which passengers can see how much theyve been charged after walking through the ticket barriers and how much prepaid credit they have left with the option to remotely top up if need be. With cards, users have to line up at ticket vending machines or ticket offices to check their balance and top up potentially saving transportation authorities money on ticketing facilities and staff. These are clear advantages over prepaid contactless travel cards, such as Oyster. But the argument is not quite as compelling in relation to contactless credit and debit cards, should these be enabled for use at ticket barriers, because unless the card in question is for a prepaid
www.informatm.com 2011 Informa Telecoms & Media 71

account, there isnt as much of a need to keep checking ones balance and topping up. Knowing how much one has just been charged when walking past a ticket barrier is still useful, though. Germanys national transportation authority, Deutsche Bahn, is one of the first in the world to fully embrace mobile NFC. Gambling on the idea that NFC phones will sooner or later become ubiquitous, it is deploying a nationwide contactless ticketing system for rail passengers that will rely on mobile connectivity to communicate with the ticketing back end. The NFC readers at ticket barriers will merely be passive tags covered by a protective case. Usually in NFC-transportation ticketing, communication with the back end happens via the reader and the card-account information is held in a central database. In the case of Deutsche Bahn passengers, account-balance information will be held in the phone and synced with the back end. Germany has a highly fragmented rail system divided among 75 local transportation authorities, which has led to a highly complex pricing system. So, one of the reasons for deploying the mobile NFC system is to simplify matters for passengers. Instead of navigating a complex menu on ticket machines to pay the exact fare before they travel, passengers can effortlessly tap in and out of stations and let the fare be worked out for them. Beyond ticketing, Deutsche Bahn is looking to also use mobile NFC to enable passengers to access information, such as timetables and local maps/points of interest; rent bikes or cars and purchase goods from vending machines; and gain access to places such as VIP lounges, parking areas and hotel rooms. It is also looking into the possibility of integrating its mobile NFC service with Germanys new NFC national ID cards. In a pilot Deutsche Bahn conducted to test the contactless ticket barriers, it got a satisfaction rating of only 67% from trialists, because many found that they had to tap more than once on the readers to get them to work. As a result, Deutsche Bahn decided to make the RF used less pinpointed and reduce the amount of encryption in the data exchanged between phone and tag, to make its transfer faster. Although the system is now less secure, its usability has been enhanced.
Alternatives to NFC

The use of mobile for transportation ticketing is nothing new. SMS has long been used by rail and bus companies as a paperless alternative, allowing passengers to remotely purchase tickets without the need to queue at ticket machines/offices. This competes with online booking systems, in which users print tickets bearing a bar or QR code that is scanned before or after boarding a system that has become the most common form of ticketing in air travel but has not made many inroads into rail or other public transportation. The problem with codes is that ticket barriers and inspectors need the right equipment to scan them. With SMS, users display their mobile screen the way they would a paper ticket. But although SMS ticketing has been around for years, it has yet to become commonplace in most countries. One country where it has taken root successfully is Sweden, where long-haul rail operator SJ delivers about 45% of its tickets by SMS. In fact, the business case for NFC is not that strong for long-haul train and bus services, because, unlike with commuter services, passenger traffic tends to be spread across a greater number of stations, many of them in relatively sleepy rural settings. With SMS ticketing, passengers are billed through their mobile operators, giving carriers a cut of the revenue made by transportation companies. Operators want that concept to be extended to mobile NFC also. For example, in the Cityzi mobile NFC trial in Nice, tram and bus fares of 10 or less were paid via carrier billing, and those above 10 were paid via Visa or MasterCard apps on phones.

www.informatm.com

2011 Informa Telecoms & Media

72

Mobile NFC market forecasts, 2010-2015


13 September 2011 Shailendra Pandey
Key points

Total NFC handset shipments are expected to grow from almost 44 million in 2011 to over 630 million in 2015 assuming Apple releases an NFC-enabled iPhone in 2012. Android will account for the largest number of NFC handset shipments from 2012 onwards and over 75% of NFC handsets are anticipated to be smartphones by 2015. The global total of mobile NFC active service users is expected to grow from around 16.7 million in 2011 to over 250 million by 2015. Currently over 95% of the users are in Asia Pacific (Japan, South Korea) but this will drop to less than 70% by 2015 as the number of users in other regions increases. Not all NFC handsets shipped will be actively used for NFC services; therefore, during the forecast period, the number of active users of mobile NFC service is expected to be much lower than actual shipments of NFC handsets. The total value of the transactions from mobile NFC payments is expected to grow from around US$2.4 billion in 2011 to over US$71 billion by 2015. Currently over 90% is generated in Asia Pacific (mostly Japan and South Korea) but this share will drop to around 40% by 2015 as Western Europe and North America start to see strong adoption of mobile NFC services. The usage of mobile NFC services will depend on the breadth of the acceptance network (i.e., the number and range of merchants with NFC-enabled POS terminals). Consequently, usage will be highest in markets where POS infrastructure is already widespread (Japan and South Korea) or is expected to be rolled out quickly (major urban areas in Western Europe and North America).

Forecast methodology The forecast methodology used has been developed to enable the maximum input from a variety of sources. Informa Telecoms & Media believes that forecasts should be prepared as part of a collaborative, integrated process involving both quantitative and qualitative analysis. Definitions Before explaining the forecast methodology for the mobile NFC services market, it is important to clearly define the key forecast terms.
NFC handset

A mobile phone that can access a cellular network and typically has a screen size of less than 7
Mobile NFC service user

An individual actively using a mobile NFC service at least once a month


Mobile NFC transaction

A transaction made by using a NFC handset at a contactless POS terminal or reader. Transactions between two NFC handsets are not included in these forecasts. Inputs to the forecasts The inputs for the mobile NFC forecasts are derived from:

Industry interviews with the major stakeholders Original research of the public domain Views of Informa Telecoms & Media analysts Informa Telecoms & Medias existing research and market data

In particular, information contained in Informa Telecoms & Medias following products and services are used as forecast inputs:


www.informatm.com

Mobile Content and Services Interactive Forecast Tool M-Commerce Market Forecasts
73

2011 Informa Telecoms & Media

Smartphone and OS forecasts

Forecast stages The forecast methodology can be split into four distinct stages:

1. 2. 3. 4.

Handsets Users Usage Transaction value

The output from each of these stages becomes the main input into the next stage (e.g., traffic generated from usage is used in the calculation of transaction value). Forecast assumptions The key forecast assumptions are:

Apple will release an NFC-enabled iPhone in 2012. RIM will launch two NFC handsets in 2011. From 2012 onwards, most handsets from RIM will be NFC-enabled but a couple of models may remain without NFC. MeeGo is a high-end platform so once other handset vendors start carrying the platform, they are likely to do so with NFC technology. It is assumed that by 2015 all MeeGo devices will have NFC. Replacement rates of NFC handsets are expected to be lower than non-NFC phones because initially only a limited number of NFC handsets will be available in the market. Also, mobile NFC services and applications installed on the handset, including the mobile wallet with the users credentials, will create more user-stickiness to the NFC handset resulting in lower replacement rates than non-NFC phones. It is assumed that only a proportion of users with NFC handsets will be active mobile NFC service users. This proportion/share will increase over the forecast period as more mobile NFC services and contactless POS infrastructure are deployed over the coming years. Mobile NFC payments will largely be for low-value transactions; it is assumed that, during the forecast period, the typical transaction value will range from US$3 to US$10.

Validation The final part of the forecast methodology was to validate the figures. Validation was done through both internal and external benchmarking. Informa Telecoms & Media validates the forecast output via discussions with industry experts and regional and topic analysts. If necessary, amendments are made to the forecasts by changing the modelling parameters. Forecasts Informa Telecoms & Media expects a modest growth of the mobile NFC market for the next two years. From 2013 onwards, growth will start to accelerate with the availability of good range of mobile NFC handsets and widely-deployed contactless POS infrastructure. In addition, growth will be driven by the various user-cases for mobile NFC (e.g., tagging/sharing, access controls, coupons, loyalty cards, information, ticketing and local payments). NFC handset shipments The addressable market of mobile NFC services will be limited to users with NFC handsets. Only handsets with embedded NFC technology are considered for these forecasts, handsets with NFC stickers are not included. NFC handset shipments were forecasted by examining historical shipments in different regions of the world, and the expected growth in NFC handset shipments in the next five years. Informa Telecoms & Media believes that around 43.9 million NFC handsets will be shipped in 2011. From 2012 onwards, shipments of NFC-enabled devices are expected to accelerate and over 633 million NFC-enabled handset shipments are forecast for 2015 (see fig. 1). These forecasts are based on the assumption that Apple will introduce an NFC-enabled iPhone in 2012.

www.informatm.com

2011 Informa Telecoms & Media

74

Fig. 1: Global, NFC handset shipments, 2010-2015

The penetration of NFC technology in all mobile phone shipments is currently only around 3.5% but this is expected to grow to over 40% by 2015 (see fig. 2), based on the assumption that most leading handset vendors will start shipping NFC handsets from 2012. Also, at present most NFC handsets announced are smartphones therefore the penetration of NFC in smartphones is higher (around 5.9% currently) and is estimated to increase to around 63.8% by 2015.

Fig. 2: Global, NFC penetration in handsets, 2010-2015

NFC handset shipments by OS

In terms of different OS platforms, Informa Telecoms & Media believes that Android will account for the largest number of NFC handset shipments from 2012 onwards. In 2011, most of the NFC handset sales for Android will be driven by Galaxy S II and from sales of the Nexus S handset. By 2015, Android is expected to account for over 25% of all NFC handset shipments (see fig. 3).

www.informatm.com

2011 Informa Telecoms & Media

75

Fig. 3: Global, NFC handset shipments, by OS, 2010-2015

Informa Telecoms & Media forecasts that over 75% of all NFC handset shipments will be smartphones in 2015. This is again based on the assumption that Apple will start shipping an NFC-enabled iPhone from 2012 onwards.
NFC handset shipments by region

Currently most NFC handset shipments are in the Asia Pacific region most are being sold in Japan and South Korea. However, strong growth in NFC handset shipments is expected in other regions from 2012 onwards, particularly in North America and Western Europe. Informa Telecoms & Media expects combined NFC handset shipments in North America and Europe to surpass NFC handset shipments in Asia Pacific in 2012 (see fig. 4).

Fig. 4: Global, NFC handset shipments, by region, 2010-2015

www.informatm.com

2011 Informa Telecoms & Media

76

Mobile NFC service users Informa Telecoms & Media forecasts that, by the end of 2015, over 250 million people will be actively using mobile NFC services. In 2011, over 90% of mobile NFC service users are people with FeliCa phones in Japan and South Korea. However, by 2015, Asia Pacific region will account for less than 70% of the total number of mobile NFC service users (see fig. 5). Nevertheless, markets like China will continue to drive rapid growth of users of mobile NFC services in the Asia Pacific region so it will maintain its leading position in the NFC market.

Fig. 5: Global, mobile NFC service users, by region, 2010-2015

Outside Asia Pacific, the largest growth in the mobile NFC service user base will come from Western Europe and North America; by the end of 2015, these regions will have 27.5 million and 17.4 million mobile NFC service users, respectively. Mobile NFC transactions Due to the nature of mobile NFC payments, the number of transactions per user is expected to be far greater than for remote payments. Common applications will be in replacing cash for micropayments for purchasing low-value goods and services in places like coffee shops and convenience stores and in transport applications, such as bus and tube journey tickets. Informa Telecoms & Media believes that total number of mobile NFC transactions will grow from around 700 million in 2011 to over 18.4 billion in 2015 (see fig. 6).

www.informatm.com

2011 Informa Telecoms & Media

77

Fig. 6: Global, mobile NFC transactions, by region, 2010-2015

The average number of transactions per user per month will be low initially but, in the longer term, it is anticipated that 20-30 transactions per user per month is possible for mobile NFC services in certain markets. For example, a commuter may use an NFC-enabled phone to pay for the journey to/from work on the train, bus or metro and purchase a coffee every weekday. Mobile NFC transaction value Informa Telecoms & Media forecasts that the total value of mobile NFC payments will grow from US$2.4 billion in 2011 to over US$71.8 billion in 2015 (see fig. 7). Mobile NFC payments will largely be for low-value transactions; it is estimated that the typical transaction value will range from US$3 to US$10, with an assumed average of about US$5 during the forecast period.

Fig. 7: Global, mobile NFC total transaction value, by region, 2010-2015

www.informatm.com

2011 Informa Telecoms & Media

78

In 2011, over 90% of total mobile NFC transaction value will be generated in Asia Pacific (mostly Japan and South Korea) but this share will drop to around 40% by 2015 as Western Europe and North America start to see strong adoption of NFC services. Informa viewpoint The deployment of NFC-enabled payment infrastructure has already begun in major cities throughout the world, driven by the major payment networks such as Visa and MasterCard. However, even in the most developed and innovative markets in Western Europe, North America and Asia Pacific, Informa Telecoms & Media expects it to take at least another two to three years before NFC-enabled infrastructure is ubiquitous (i.e., that it has extended beyond the largest cities in those markets). The potential for the mobile phone to take on the role of a wallet, as well as a communications and entertainment device, and enable local, point of sale (POS) payments will only be fully realized once NFC technology is integrated into mass-market mobile phones and POS terminals. The availability of NFC handsets will depend on the speed of deployment of NFC-enabled POS infrastructure and the handset vendors perception of the scale of the commitment to the market from the mobile operators, and the financial services and retail sectors. Based on the feedback from handset vendors and mobile operators, Informa Telecoms & Media has concluded that widespread availability of a broad range of NFC handsets from the top vendors will not occur until late 2012/early 2013.

www.informatm.com

2011 Informa Telecoms & Media

79

Contact us:
Informa Telecoms & Media Mortimer House 37-41 Mortimer House London, W1T 3JH UK Phone: +44 (0) 207 017 4994 Fax: +44 (0) 207 017 4783 Email: telecoms.enquiries@informa.com

www.informatm.com

2011 Informa Telecoms & Media

You might also like