Mobile payments and the potential of NFC in 2011: A story about the Android that wanted to share, the BlackBerry that didn’t and the Apple that could take a bite out of anybody07/04/2011 08:47 by Nick Peppiatt
NFC technology has the ability to transform smartphones into virtual wallets, where users pay for transactions simply by waving their phone at an appropriate receiver terminal. However, it also has much wider applications, allowing for synchronised content and services across the mobile ecosystem . The reward for owning this relationship in the mobile space is enormous, and as a result everyone, from mobile operators to device manufacturers, is fighting for a share.
The industry message seems clear; mobile payments will be big over the next five years – big news and big profits. The technology has been around in various forms for years and, now that leading names such as Apple, Google and RIM are designing and manufacturing NFC-equipped devices, many commentators predict that mobile payments will skyrocket .
However, while this will undoubtedly be a major growth area for the future, such reports seldom address the fact that the journey to full consumer adoption is not without its pitfalls.
Only a few weeks ago, Apple declared themselves out of the running for iPhone 5 – choosing instead to concentrate on iPhone 6 for NFC capabilities  – while RIM are experiencing difficulties reaching an agreement with network operators . Even when a working payments system is eventually in place, what guarantees are there that it will provide the benefits, security and practicality to ensure consumers actually use it?
To explore these challenges, let’s break down the mobile payments structure to its core elements.
It’s all very well having a shiny new technology offer, but, if no-one has access to it, then its days are numbered. It’s also important to remember that industry buzz does not necessarily correspond with actual consumer uptake.
As I write, only a handful of smartphones on the market come NFC-equipped as standard. The Google-branded Nexus S is the most well-known, but this feature is dormant in any practical sense until an overarching payments structure is in place. Of course, more handsets with NFC capabilities will appear throughout the year, so the potential user base will increase. Nevertheless, at the end of 2010, smartphone ownership among the GB adult population was 22% (increasing to 37% among males under 35) , so, while already substantial and continually on the rise, access to mobile payments technology cannot be assumed universal for some time yet.
Moreover, handsets are only a part of the story, since they all require an operator network to fully function – and throwing operators into the mix adds to the complexity of the structure. The reason is simple: if handset manufacturers need the operators to make mobile payments a reality, then the operators will expect a cut of the revenue made. This would be a moot point if manufacturers and operators agreed on how best to implement the technology but, tellingly, they don’t.
To SIM or not to SIM
And there’s the rub: currently, no industry standard exists.
Manufacturers such as RIM are arguing in favour of handset-based NFC chips, allowing them to deliver a tailored payment service to BlackBerry customers which could act as a unique selling point for the brand. Obviously, the operators don’t see this as such an advantage, since it renders them merely a conduit for the handset brand, rather than an active player in the mobile payments system. Instead, operators want to see SIM-based technology, pointing to the fact that this allows greater freedom for consumers to move between different handsets, manufacturers and operating systems. In effect, the handset would become a vessel for the technology and would not dictate its use.
Undoubtedly, the consumer argument is valid. Having standardised technology across all systems would make purchase choices far easier, and a similar case can be put forward for the merchants and vendors who fit the NFC terminals in their stores, since they won’t have multiple systems to contend with.
In this context, Apple’s decision to rein in on NFC in the short term speaks volumes. Their concern over the lack of an industry standard suggests that they have chosen to take a step back and observe how the technology debate evolves, in order to back the most successful approach when a likely winner emerges. In itself, this isn’t necessarily surprising; the implementation of a new technology can be an energy and resource-sapping ordeal for any company. However, it becomes more intriguing when you consider that Apple have a secret weapon up their sleeve.
Show me the money
Which brings us to the next level of the structure – the financial partners.
When paying for products, customers will need a credit source, most likely a pre-paid account topped up from the customer’s bank account or credit card. So, with the right partner, an operator could have a wide financial reach. In the UK, Everything Everywhere (Orange + T-Mobile) and Barclaycard announced their partnership early on, while RIM and Bank of America have linked up Stateside. Powerful combinations, no doubt, and these partnerships also carry other advantages, releasing operators and manufacturers alike from dealing with the quagmire of payment approval, resolution and fraud.
The elephant in the room is Apple, because they already have a fantastically popular global payments system in place – the iTunes Store. With millions of customers already buying media through digital wallets, Apple could take a big chunk of the mobile payments market all by themselves. An NFC-equipped iPhone would, most likely, function in a similar way to other devices, but the key difference is that iPhone users are already familiar with using their phone to buy digital products. It would only be a short step to encourage them to do the same through NFC terminals.
At first glance Apple seem to have a winning formula on their hands, so do the competition stand a chance?
In markets like the UK and the US, at least, the answer is a definite yes. By partnering with Barclaycard, Orange is able to draw on a wealth of experience in the contactless cards market. In a similar way to NFC-equipped mobiles, contactless cards enable shoppers to pay for products simply by tapping their bank card against a reader terminal at the checkout. While actual take-up is still low, it does mean that Barclaycard now have 42,000 working terminals installed countrywide, in shops such as Pret a Manger, Little Chef and the Co-Op . Crucially, this payment system will be fully compatible with the NFC technology in upcoming smartphones.
Apple simply don’t have the same level of experience with this size of physical infrastructure, and, when you consider the company’s fondness for proprietary systems, it becomes clear that any solution they deliver will need to be carefully managed. After all, the iPhone operating system is limited to iPhone users only. Android, meanwhile, can develop payment apps that have the potential to reach a larger customer base across multiple handset brands. Apple could have a game-changing hand, but they have to play it in the right way, at the right time; as smartphone ownership increases, they run the risk of becoming too niche, despite the iTunes influence.
NFC + App = Infinite Possibilities
The reason operating systems are so important is because they will play a key role in determining how NFC payment actually benefits consumers.
Simply put, just because this technology is in your phone, doesn’t mean you will actually use it. At the checkout, if paying with your mobile is no easier, faster or beneficial than paying by cash or with chip and PIN, then why would you? After all, reaching for your phone is not going to be any quicker than reaching for your wallet.
In many ways, the typical shop checkout scenario that habitually accompanies NFC articles is a bit of a red herring. It is a valid scenario but, really, it only describes a small part of what mobile payments can do – it’s just an easy way for commentators to say “NFC is a bit abstract right now, but here’s something you can relate to!” The real benefits of NFC come about when it is linked up to the wider mobile ecosystem, and that’s where companies such as Apple and Google can really stake their claim.
For example, instead of just paying for items at the checkout, your mobile payment app could be synchronised with your purchase history, your preferences and even your location. With all this information, the app can then start generating bespoke offers and deals for you before you even enter the shop. When in-store, this information will inform any recommendations you receive as you browse and it can link up to your social network so that you can broadcast your verdict on the items you purchase.
The real benefits and convenience for the consumer lie in this integrated system, because it goes far beyond what has been available in the past.
The price of convenience
And these benefits will be important because, around the energetic coverage of NFC technology, sceptical voices can be heard, many with valid concerns.
Security is the big issue, and one that we have highlighted in previous TechTalk articles . NFC technology has the potential to transform smartphones into incredible multi-use devices that not only pay for your weekly shop, but also act as your house keys, as well as enabling users to transfer content, information and even money simply by bumping their phones together.
So what happens if your phone is hacked or stolen?
There isn’t an easy answer on that one, but the key players are keen to get some reassuring messages out there. Barclaycard, for example, have announced that, since their system will involve a pre-paid account topped up by credit card, it will confer the same insurance and fraud protection as a credit card itself . Of course, even if illegal activities are put to one side, there are still concerns about the quantity of information that mobile companies will have access to through NFC developments. Information on purchase behaviour will undoubtedly be used to inform customer marketing and segmentation, and the sheer quantity of data to be shared with a single party, legally or illegally, is potentially troubling.
Mobile payments will be big news over the next few years – that much seems certain. However, in witnessing the mobile industry gearing up to push NFC technology into the mainstream, it would be wise for onlookers to consider that consumer adoption could be considerably slower than predicted. To function, a mobile payments network requires agreement and co-ordination between a number of parties, each with slightly different motivations and priorities. Manufacturers, operators and their financial partners will all need to negotiate with each other in order to produce a single integrated offer. Once achieved, they will then need to promote that offer effectively to their customers, providing a convincing argument for how this will benefit them in their daily lives.
The real advantages of NFC are the integrated solutions it can offer – bringing together numerous applications all in one device to empower the user. However, it is this very integration that leads to greater personal risks, and if we are going to shout about the benefits, then we can’t ignore the dangers. As mobile payments technology develops, brand trust will become extremely important, because personal information will be pushed further and further away from its traditional domain. Instead of the big financial institutions calling the shots, it could instead be O2, Orange, Google and Apple. Right now it’s not clear who will emerge as leaders and who will be the also-rans
TechTalk will be exploring these issues as the mobile payments world continues to develop.
For an explanation of what NFC technology is all about, here is one of our earlier TechTalk articles: http://www.gfktechtalk.com/2010/11/22/will-2011-be-the-year-nfc-finally-takes-off/
http://www.theregister.co.uk/2011/01/27/nfc_ee/ An important move considering that customers have historically been fully liable for any illegal use of their phone. The current purchase limit of £15 on any NFC purchases will also offer some protection, although it is likely that this will increase in the future.
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Tags: Android, Apple, Apps, Barclaycard, Blackberry, consumers, Contactless Payments, Customer, Future, Google, Handsets, Internet, iPhone, iPhone 5, iTunes, Market Research, Mobile Apps, Mobile Ecosystems, Mobile OS, Mobile Pay App, Mobile Payments, Mobile Research, Mobile Wallet, Near Field Communication, Network Operators, NFC, Orange, Smartphones, T-mobile