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NFC Payments and the Point of Sale

Executive Summary
Theres a virtual gold rush under way as a horde of companies converge on NFC Near Field Communications, a short-range communications technology in hopes of gaining a leading stake in the next big thing in payments. With the next generation of mobile phones expected to be NFC-enabled, it is widely expected that mobile electronic wallet applications will encompass credit/debit card accounts, loyalty programs, You'd be able to use electronic couponing and other value-added applications. No longer will consumers have to flip through leather wallets and purses for plastic cards (or curse that they left at home the one card or coupon they need to pay a discounted purchase price); instead, theyll access the wallet app on their phone, wave it or tap it on a POS device and quickly and efficiently complete a transaction. In theory, it opens up new payment opportunities and opens the door for new entrants to a market that has long been dominated by a select handful of major card brands. The list of would-be participants is virtually endless: handset providers from Apple to Nokia; telecom service providers from AT&T to Sprint; Internet service companies from established giants like Google and PayPal, to emerging firms like Groupon and Foursquare.

your NFC-equipped phone only at stores (or even unmanned kiosks) that have a compatible point-ofsale terminal, which is provided by companies like VeriFone. The same way certain retailers only take MasterCard, Visa, or American Express, not every retailer will accept every NFC-equipped payment device. -- CNET, April 7, 2011

Often lost in the NFC discussion and speculation, is the role of that ubiquitous device that is needed to make it all possible the payment acceptance device sitting on a merchants counter. This primer examines NFC technology as it applies to payments, and the role that POS terminals and the merchant are likely to play in the development of this new frontier in electronic payments.

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Content
Executive Summary NFC Beyond Contactless Payment Whats Changed How NFC Works at the Point of Sale What Has to Change VeriFones Role in Enabling the NFC Point of Sale 2 4 6 8 10 12

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NFC Beyond Contactless Payment

NFC encompasses contactless payment technology, but it does much more than enable electronic transactions. Early implementations of contactless payment began well over a decade ago. A key advantage of implementing contactless solutions is that the technology can be readily adapted to current payment systems. Existing POS terminals can be easily modified with an interface to a contactless RF reader, giving retailers a future proofed solution to support full-scale contactless rollouts. MasterCard with PayPass and Visa with PayWave each tried to spur on card issuer and merchant adoption of contactless payments. American Express and Discover offered their own contactless technology and banks such as Citibank and JP Morgan Chase in the U.S. and Barclays in the U.K. began issuing cards to consumers. One of the earliest and most ambitious implementations of contactless payment was the Speedpass fob system rolled out by Mobil (now ExxonMobil) beginning in 1997. In following years, there were a few notable system wide implementations such as that of McDonalds in 2004; and Transport for Londons Oyster card proved contactless technology is highly effective for fare collection in mass transit environments. But consumers and retailers barely responded to the pitch that contactless would provide greater speed and convenience at the checkout counter and, for the most part, highly publicized pilots seemed to either wither on the vine or just never evolve to a full-scale implementation stage. Some proponents of contactless payment believe that the reason the technology failed to match expectations was that the promise of speedier checkout was not a sufficient incentive for either merchant or consumer. The difference between a contactless and a swipe payment are marginal to the average consumer and not sufficient to convince a merchant to upgrade his or her acceptance devices. NFC, however, builds on the speed and convenience factor of contactless by offering substantial incentives to both merchant and consumer. For the merchant, theres the prospect of combining brick & mortar checkout with online promotions and electronic coupons. For the consumer, there is the allure of electronic wallets stored
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conveniently on a mobile phone, and the opportunity to take advantage of easily cashing in rewards and discounts electronically and to leverage social media-oriented applications.

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Whats Changed
Contactless smartcardsalso known as proximity cardswere envisioned as the next generation beyond magnetic stripe or chip-based smartcards. Cardholders would possess a new credit or debit card with embedded electronic circuits that could store data and, when in contact or close proximity to a contactless reader, would process data to initiate a payment transaction. NFC uses the same radio transmission frequency (13.56 MHz) as contactless smartcards. But the smartcards are relatively passive objects that respond when in the presence of a contactless-equipped reader. NFC, on the other hand, is a more interactive, multi-use technology that makes it possible to integrate contactless payment with intelligence embodied in a smartphone or other device. NFC comes in two forms: one is a passive tag that operates very much like a traditional smartcard, responding to the signal from a contactless reader. The other form is as a reader and writer; 2-way communication that provides the ability to actively accept NFC transmissions such as information from an NFC-tagged poster or kiosk. While NFC has a wide range of potential applications, it is the use as reader/writer in a mobile phone that generates the most anticipation and excitement. The International Telecommunications Union forecasted in 2010 that by the end of that year there would be 5.7 billion mobile phone subscriptions worldwideequivalent to 77% of the worlds population. Market research firm IDG estimated that vendors sold more than 1.39 billion units in 2010 alone, and that growth in the coming years will be driven by sales of smartphones. Juniper Research predicts that one-in-five smartphones will be NFC-enabled by 2014. NFC chips embedded in mobile phones allow the phone to operate as either a card or a reader. So, while an NFCenabled phone can simply emulate an existing contactless card, it can also read tags embedded in other devices, such as an NFC poster or kiosk, and to engage in two-way communications with another NFC chip-enabled device. Because it can operate in a passive mode, the NFC-equipped phone is able to conserve battery power; but the user can easily access applications to turn the phone into NFC active mode.

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According to the NFC Forum, an industry group formed to develop the specifications and ensure interoperability of NFC, the technology has the power to bring new simplicity and convenience to many aspects of a typical person's daily life including such functions as: Interaction with an automobile, such as adjusting seat position, or paying a parking meter Getting information at a bus station or airport kiosk, and paying for a fare Logging into computers and copier machines Checking usage history Downloading and personalizing applications Furthermore, NFC offers security mechanisms that plastic cards lack. Because mobile devices will use contactless technology in the form of an embedded computer chip, the mobile phone will be a much more secure payment device than the plastic cards we use today, wrote Cindy Merritt, assistant director of the Retail Payments Risk Forum, an organization housed at the Federal Bank of Atlanta1. She said that current card payments technologies are becoming increasingly obsolete and vulnerable to fraud.

http://portalsandrails.frbatlanta.org/2011/04/dispelling-myths-about-mobile-banking-and-payments.html

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How NFC Works at the Point of Sale

NFC-enabled smart phones are about to change everything. From mobile payment and electronic ticketing to in-store couponing and loyalty programsNFC technology is here now and ready to transform how we live, work and play. On the countertop or at some other point of service, NFC-capable POS devices and PIN pads will let the merchant connect more closely with customers and profit from this re-imagined way of life. First, the consumer has to payment-enable an NFC-equipped phone. Heres how that process works: Consumer purchases an NFC-enabled smart phone and sets up his or her card subscriptions The credit card issuer transfers data to a Trusted Service Manager (TSM) The TSM pushes credit card data onto the consumers smart phone. A mobile operator such as Verizon or AT&T manages a payment application and issues NFC-secure components to make the consumers phone payment capable Consumer taps their NFC phone on an NFC capable VeriFone acceptance device to make payment via NFC The transaction is routed through VeriFones secure payment gateway to the card provider for authorization and processing, and to service providers who may be providing couponing or loyalty rewards and discounts

NFC is not just another technology for payment. It is a two-way, real-time communication between the merchant and the consumer that can enhance the payment process. With NFC, merchants and retailers of all kinds can turn their point-of-sale into a much more valuable point of interaction that provide customers with intelligent checkout capabilities. Some of the NFC-enabled functions at the point-of-sale include: Increasing sales by making it easier for consumers to use virtual e-gift cards, participate in loyalty programs and earn rewards at the POS
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 Two way communication (peer-to-peer) between the handset and POS device to transmit coupons, loyalty rewards, payment and promotional messages Providing links and unsurpassed payment convenience for social media fan favorites and group discount offers Gathering customer data efficiently through NFC-enabled devices for improved consumer analytics Enabling alternative payments such as peer to peer With NFC, new media technology is converging with new payment solutions. This shift is much more than just payment converging with media-it's really a whole new category that's all about engaging the customer at the POS and seamlessly bridging the online and offline worlds. This "new" media is at the point of sale with every electronic transaction consumers make-it's the convergence of offline and online marketing and promotions. In addition to payment capabilities, NFC provides presence which connects locationbased social media online services and capabilities to the store, the lane, and the checkout. Tapping the NFC phone in one simple step locates the presence of the consumer and automates their intention. It is this capability that will enable online discount providers to integrate electronic coupons, promotions, discounts and loyalty rewards with the consumers physical checkout transaction, so theres no need to fumble for printed coupons.

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What Has to Change

In March 2011, the Federal Reserve Banks of Boston and Atlanta released a report, Mobile Payments in the United States: Mapping Out the Road Ahead that sets out a vision for mobile payments. However, the report notes that this vision is built upon the recognition that the current environment faces many challenges and that success will require extensive collaboration between participants to ensure that consumers see a homogenous solution as they do today in other payment channels such as checks, ACH, and cards. To create that homogenous solution, the Fed report says, requires agreed upon standards, rules, and practices that ensure seamless interoperability regardless of the handset, mobile carrier, financial institution, payment network, or merchant location involved in any individuals desired transaction. Getting card brands, issuing banks, wireless operators and handset manufacturers all to agree is no easy task. Nonetheless, during 2010 and 2011, companies such as AT&T and Verizon Wireless, MasterCard, Apple, Google, and other substantive firms announced or were rumored to be working on collaborative efforts aimed at making NFC payment applications a reality. These collaborations all aim at enabling NFC payment transactions and other capabilities at the physical point of sale. But the point of sale is far from ready: In the U.S. today, most estimates peg the number of installed contactless readers at less than 200,000, which is just a smidgen of the total number of payment acceptance devices that merchants and consumers rely on for credit/debit transactions. That means that millions of payment devices in the field need to either be retrofitted or replaced with NFC capabilities. VeriFone CEO Doug Bergeron early in 2011 urged would-be NFC service providers not to be complacent about the challenge. This isnt just an issue of adding an NFC reader, it requires deep software richness at the point-of-sale to interact with the smartphone and manage a services-based model encompassing new applications and deployments without disrupting operation of existing card systems, Bergeron said. Bergeron outlined six key rules that VeriFone believes will dictate the successful rollout of NFC payment at the point of sale: Rule #1: Deployment and management of complex NFC technologies will require significant ongoing services from the retailers payment systems provider. Until retailers are assured of receiving real value from mobile commerce, service providers who stand to gain from either carrier fees, advertising revenue or transaction charges must be willing to bear the costs of this highly disruptive paradigm shift.
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Rule #2: Mobile commerce must add value to the consumer. Tapping a phone is a gimmick, no different from tapping a card or fob. In addition to providing the ability to pay for stuff by phone, service providers and retailers need to provide real additional value - such as coupons, loyalty rewards and discounts -- for consumers to leave their wallets at home. Rule #3: Mobile commerce must be streamlined with existing POS services and managed well for the retailer. Retailers wont tolerate the need for multiple methods of acceptance to accommodate what will become a wide array of mobile commerce schemes. All ideas, regardless of where or who generates them, must converge at a unified point-of-sale. Rule #4: Mobile commerce must go from zero to 90 mph in five seconds. Consumers will not embrace mobile commerce without the confidence that it is being widely accepted. If it only works at a few select retailers, it dies a quick death. Ten percent acceptance is not sustainable. Rule #5: Mobile commerce must be integrated with other forms of payment. Mobile commerce wont lead to the quick death of plastic cards and must work with existing payment systems that are certified by all major processors and installed in the vast majority of large and small retailers. Rule #6: Mobile commerce must be ironclad secure. Security, both real and perceived, is imperative to the adoption and sustainability of mobile commerce. Even minor setbacks in security could compromise consumer adoption and stop the movement in its tracks.

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VeriFones Role in Enabling the NFC Point of Sale

Enabling NFC payments and non-payment applications requires acceptance devices for a wide variety of environments, a secure gateway service that provides integration of payment with value added online services, and a vision of how to ensure merchantsfrom the largest to the smallestcan easily migrate to this new era with the confidence that their investments today will be viable as new capabilities and payment services come on-stream. VeriFone is the recognized leader in payments with millions of systems deployed globally and the software and infrastructure required to leverage NFC payment capabilities into a new intelligent checkout that supports retail payments and online services at the point of sale. With VeriFone devices on a majority of merchant countertops and in checkout lanes of multilane retailers, the company is at the epicenter of the NFC ecosystem and is investing heavily to provide the infrastructure required to make NFC a reality at the point of sale. VeriFone is the one-stop solution with the services and expertise to guide you into this new landscape of the POS experience. By bringing together end-to-end, PCIcompliant payment security with media content delivered digitally at the POS, VeriFone enables merchants and acquirers to engage consumers while generating new streams of revenue from digital content, eye-catching coupons and loyalty offers. For more information visit www.mobilewaytopay.com.

Copyright 2011 VeriFone. All rights reserved. No portion of this document may be reproduced or distributed in any form or by any means without the prior written permission of said company. All trademarks are the property of their respective owners.

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