If you tried to judge whether NFC mobile payments are ready for prime time - based on the amount of chatter you hear in your newsfeed - you'd think the contactless technology was on the brink of ubiquitous adoption.
Nothing could be further from the truth.
While it's true there are other applications for NFC (data collection, advertising, check in, etc), according to Forrester, even those methods are still in "trial and discovery" mode. But those concepts are not what I'm talking about here anyway. I'm talking about NFC chips in mobile phones being used for mobile payments.
In fact, there are documented sources out there citing that we are four, five, maybe even ten years away from a realistic and entrenched infrastructure that would allow the masses to make face-to-face payments using secure elements embedded in smart cards and mobile phones.
Five years. Just think about where you were five years ago. What kind of phone did you have? Where did you work? How did you communicate with others in these days of yore? Seriously, what has changed for you in that time? What has changed in your environment in that time?
Sure, Apple figures into the NFC payments equation as they could stand to uniformly connect the dots for however many new NFC enabled iPhones (and attached iTunes accounts) they might potentially pump out in 2012. That might flood the market more quickly with capable handsets and increase consumer demand for this payment capability - I am not disputing that.
But the solution here is more complicated than just dumping a bunch of NFC capable phones into the market. It's all about the merchant infrastructure. It's in their hands. It doesn't matter how many cars you have if there is no highway.
For a long time there has been this chicken/egg standoff with regard to payments via NFC capable phones. Will it take a tipping point of NFC chip-laden devices to drive merchants to get terminals (and support payments)…or will there need to be enough terminals first before manufacturers go through the hassle and expense of integrating NFC chips into their phones?
It's certainly going to get cheaper and easier for manufactures to get NFC chips into the phones, that is for certain. Technologies like Texas Instruments WiLink 8, among others, stand to make it an easier process for manufacturers.
But I think it's still going to take something bigger to force the highway to be built. Back in the day in Japan and Korea, that "thing" that happened was generous government backing (see pg. 40 – 42 of ITIF report) coupled with less carrier competition.
For merchants in the west, they won't be as lucky. Plus, there is a force that may have emerged that could require the NFC highway to be built and it's not going to be a happy ending for merchants because they could be footing the bill for terminals whether they like it or not.
We'll come back to that.
I've been thinking about this for a long time and there is another question to consider before even contemplating all the hoopla over who will jump first. The question is this: do we even need NFC?
Contemplating this 5ish year timeframe along with all the other things involved to get this whole new ecosystem off the ground (merchant purchases of 8 million NFC capable terminals, a fleet of NFC ready phones) makes me wonder less about utility and more about if there is even enough time for NFC to become instantiated in the U.S.A. before other disruptive payments methods and technologies supplant it during its ramp up?
The entrenched stakeholders (the card networks and and mobile carriers) would like you to believe that NFC capable phones for payments is an inevitability and a necessity - the evolution of modern payments. The truth? According to Richard Crone, CEO of Crone Consulting LLC, the truth is that NFC payments are actually an outmoded concept that really isn't needed. A remnant of our "offline" past when storing actual card data, in secure element hardware, was actually necessary. It can all happen in the cloud these days.
"The thing to keep in mind here" says Crone, "is that NFC was developed more than 20 years ago. It was first deployed 10 years ago. 10 years ago, we didn't have ubiquitous access to data plans. We didn't have more smartphones in circulation than feature phones and we had to depend on an ‘offline' connection for processing payments. But now, there are 124 million households that have more than one device connected to the internet. Typically, that's a smartphone, but very quickly it's becoming a tablet."
Payments methods like Square's Card Case, PayPal, Dwolla, Modo Payments, Paydiant, DigiMo and even the Apple Store, to name a few, all store payment credentials in the cloud instead of in hardware. These disruptive systems are essentially trying to change the traditional paradigm for Point Of Sale purchases. You are the POS.
But payments via NFC (and payments is the key word here) prolongs the payment card metaphor and attempts to give the incumbents another method to keep control of the current ecosystem. As fast as these incumbents are trying to move, time is not on their side as new innovations pop up all around. These other companies - some big like PayPal and some lean startups, like DigiMo - are attempting to get in place ahead of the NFC highway.
Before I start to sound like some kind of anti-NFC extremist, I am aware that some of these services are actually piloting NFC options along side their cloud offerings and many have worked NFC into their strategies as both a preference or a contingency. This is known and I don't blame them. It's not a bad idea from a business perspective as it's still early in this payments future.
In any event, I reached out to some experts and posed some questions to each of them. Here are the two questions and here is what they said:
(per Mr. Crone's revelation) Storing card credentials in the secure element and using NFC as a transaction method FOR PAYMENTS seems like a figment from the offline past of big card networks. Is NFC really necessary in a cloud model for mobile payments? Why or why not?
If it really takes 5 years (or more) for NFC to reach ubiquity (as many analysts have predicted – even some within the card networks), will it be supplanted by other innovations in that amount of time?
Richard Crone – CEO Crone Consulting LLC
"[For question 2] The answer is yes. Here's why. First off, the single largest market for Near Field Communication (NFC) is payments. All the others [markets] are just not big enough to sustain even a couple. Chip manufacturers are all interested in payments. Every NFC deployment of substance to this point in North America, has been subsidized by the Card Associations. For one basic reason; in order to create a walled garden to protect their existing infrastructure and network for processing payments.”
“You have to remember, all new payment types start with merchant acceptance. Its a two party market: an issuing side and an acquiring side. Nothing will get started unless the merchants decide they are going to accept. And up to this point, merchants have been loath to accept NFC because it goes first and foremost to a higher ‘card not present' rate. Secondly, they're not allowed to do pin processing. Thirdly, they can't do "least cost" routing of those transactions toward the lower cost pin/debit networks. And fourth and most importantly, they can't see spending 300 – 500 dollars per lane to upgrade their point of sale for a more expensive tender type.”
George Peabody – Director, Emerging Technologies at Mercator Advisory Group
"My personal belief - and this isn't me just waffling - is that there is going to be room for both. You're absolutely right that between now and when NFC starts reaching a true critical mass (looks like 4 or 5 years) that there will be an opportunity for a number of alternative transaction origination methods or even payment methods to come forward.”
“Potentially companies like Square, PayPal and Paydiant. Now, suggesting that Square Card Case is going to work for Walmart or something like it…probably not. That's not going to be the case. In fact in the payments ecosystem, there's another major current that's just really getting going and will probably reach scale about the same time NFC does and that's called EMV.”
“It's a card security standard that's been and being deployed in most other major card markets in the world. You might have heard of Chip and Pin before? That's based on EMV. It's a smart card that authenticates itself to the payment terminal. Last August, Visa announced that the U.S., which is the largest card market, needs to adopt this standard. What that means Jay, is that every payment terminal - 8 million plus - in the U.S. is going to need to be replaced.”
“They're targeting October 2015 right now. And they are also suggesting that if you are going to replace the terminal anyway then make sure it has a contactless interface to support NFC. So in the next 3 to 5 to 7 year timeframe, we're going to be switching over to smart cards because they are really hard to counterfeit compared to mag stripe. And of course that lays the ground work for smartphone/tablet mediated NFC transactions.”
(I had a few additional questions I asked George, for clarification)
JD – “Where does the burden lie with replacing existing terminals?”
GP – “That's the merchant's burden. Large retailers, the typical replacement cycle is in the 7 year range. Mom and Pop stores can go 10 years or longer.”
JD – “Will these EMV cards even have a mag stripe?”
GP – “Yes. They will still have mag stripe and even embossing.”
JD – “Is the new EMV terminal adoption a mandate or a recommendation?”
GP – “It is not a mandate yet, but there will be liability shift for transactions generated via mag stripe card or from a mag stripe only terminal.”
JD – “So merchants will be responsible for chargebacks if they don't update their terminals?”
GP – “So that's the incentive versus a ‘mandate'. It's a stick, not a carrot.”
JD – “Sounds like forcing merchants to me.”
"We believe NFC is a proven open standard for fast and secure exchange information. And one of the benefits for us, is that NFC is an established and growing platform we can build on to offer new ways for people to pay and save with Google Wallet. Having said that, you are right, it is still early days for NFC payments and it will take some time for the ecosystem to grow. That's why we see NFC as an important tool that we'll use to usher in the next generation of payments. But, it's not the only tool…as you mentioned there's a lot of innovation happening in cloud based solutions for mobile payments and so on."
"It's hard to predict the future, but we feel that NFC is off to a great start and we're seeing studies from some analyst firms such as Juniper predicting 750 million phones by 2016. Either way, we believe NFC is a robust standard that will stand the test of time. And while it may not be the only option for payment, we feel that it will certainly will be one of options consumers can choose as they move beyond plastic cards and towards digital payments with their mobile phones."
David Marcus – President of PayPal
THE WINNERS AND THE LOSERS
I think all these experts are painting the correct picture. Richard Crone and David Marcus are illuminating the fact that (in Western countries anyway) there really isn't any need for NFC. It's an old paradigm and new cloud methods actually have advantages. At the same time, George Peabody is clarifying that Cloud and NFC payments are not mutually exclusive. They can live together in different markets and each could support a different kind of merchant. Google is saying, for whatever reasons, they think NFC still will be viable and therefore plan to continue including it in their payments strategy.
But George Peabody revealed the key information in our discussion that got me thinking that whether or not NFC is better or worse or faster or slower or needed or not needed or whatever…it doesn't really matter. The truth is that the big card networks could, by way of liability shift, force NFC into use. They could do this by "unofficially" mandating EMV/Chip and Pin card acceptance and therefore require POS terminal upgrades by merchants (at merchant cost) or otherwise face responsibility for fraudulent charges and chargebacks.
NFC could be baked into the equation at this time during that POS upgrade. At last, the chicken/egg scenario for "who is going to pay for the terminals" would be answered and once again the merchants will eat that cost.
In this possible future, there are distinct winners and losers.
The winners, luckily for you, are consumers. Also, emerging payments companies and the big card networks stand to benefit. When you shop at big merchants in the future, you'll use your NFC phone to pay and you'll like it. When you shop at small merchants you'll get to use your cloud payment app and you'll like it. Either way, you're going to like it.
The losers, obviously, would be merchants because of the costs they could incur. And to be clear, for some merchants, we're talking about millions of dollars in potential terminal upgrade costs. After their initial investment is recouped, I suppose they'll like mobile phones with NFC chips in them as much as any other payment source. I'm not sure it matters to them. But in the short term, it's gonna hurt.
This scenario sounds grim for merchants big and small, but it may not be all doom and gloom.
Scott Gamble, VP of Digital Solutions at Alliance Data noted to me that merchants have been able to band together to prevent de facto mandates like this before. "Don't consider NFC adoption by merchants a fait accompli” he says. “Until there is a clear value proposition for retailers to make this significant investment, they won't. I also wouldn't necessarily consider a de facto EMV mandate by the payment networks a strong enough motivator. The retail industry is a very strong community that has demonstrated no compunction in protecting their rights through the legal system when faced with unilateral demands by the payments industry. While this all shakes out there is ample time for NFC to be supplanted by alternate technologies."