Add near-field communication, or NFC, to the list of great solutions that took a long time to catch on. Recent developments, however, have removed the major stumbling blocks for the mobile payments technology.
Mobile payments are in your future. Forrester predicts that U.S. mobile payments will reach $90 billion by 2017. Gartner forecasts that the global mobile payments market will be worth $721 billion by then, with more than 450 million users. Moreover, a dominant slice of those users—300 million in 2017, according to Juniper Research—will make those mobile payments using near-field communications (NFC) technology.
That’s great, because NFC has been the proverbial benchwarmer for almost a decade. Now, it’s about to make the starting team.
NFC is a short-range wireless technology that makes mobile payments possible. Hold two (or more) devices that have NFC hardware—typically either a tiny powered wireless chip or an unpowered tag—a few centimetres apart, and they can establish radio communication with each other, and securely pass information back and forth.
NFC first appeared in 2006, and various trials have been conducted over the years in Europe, Asia, and North America, with limited success. Except for a few bright spots, uptake has been lacklustre. There are six main reasons why:
1. Secure element
First and foremost, using NFC for payments requires use of a secure element in the mobile device to store personal and financial information—all the same kind of data that lives on the magnetic stripes and secure chips on credit cards. To make NFC payments work on a phone, the manufacturer, operator and payment service provider all need to cooperate and be in agreement about which one controls access to that secure element. So far, it’s been less like cooperation, and more like a tug-of-war.
2. Business model
Whenever you buy something with a credit card, four parties participate: you, your credit card issuer, the merchant, and the merchant’s payment processor. If your purchase costs $10, the merchant forfeits a part of every purchase (usually around 2-3%) to its payment processor in exchange for the service.
Buy something with NFC, and you involve at least two additional parties: the operator and your mobile payment provider. And both of them also want a piece of the payment. Instead of merchants dividing your $10 into two shares, they must divide it in four. Who gets how much? Either the merchant must pay a higher fee for each transaction (find a merchant who wants to ‘upgrade’ to that deal), or more parties must divide the same percentage into smaller bits between them. Neither is a popular option
3. Limited options
To participate in NFC trials, consumers must use a specific phone and a specific credit card, live in one of a few select cities, and patronize the few participating merchants.
4. Security concerns
Survey after survey has shown that consumers’ number-one concern about adopting mobile payments is security. If money becomes data, we must have a reliable method to keep it safe, one that is administered by a trusted party.
5. Merchant apathy
Unable to identify a clear benefit for themselves or their customers, merchants haven’t had a compelling reason to invest in new NFC merchant accounts or point-of-sale terminals. Especially when Square and other payment apps have been offering such great options for merchants.
6. So what?
Change is hard, so there must be a compelling reason to do it. From the consumer standpoint, paying with NFC hasn’t been easier, more convenient or better than cash and credit cards
With these challenges, it’s understandable that NFC has taken some time to catch on, but this year, the solutions have been arriving in a flurry.
NFC rising up: BlackBerry’s secure payments platform
Recently, BlackBerry (full disclosure: my employer) announced a new partnership with EnStream, a mobile payments joint venture between Canada’s three biggest mobile operators: Bell, Rogers Communications and Telus. (I blogged about it here.) BlackBerry will provide the security to support mobile payment transactions. This move signals a big shift for BlackBerry. Watch for more news in this area.
The partnership means that EnStream’s financial institution customers and mobile operators can now securely provision sensitive payment card data to any smartphone capable of NFC. EnStream COO Almis Ledas says he expects most major Canadian banks and mobile operators to connect through the platform. So, in Canada at least, we can strike stumbling block #3, above.
Long known for its enterprise security, BlackBerry is leveraging its core strength in a new way. By offering its communications platform for payments, the company will help payments providers lock down security in their own services, which in turn will help consumer confidence, stumbling block #4.
No more tug of war: host card emulation
Host card emulation, or HCE, enables software to do the job of presenting secure credit card or other payment information. It effectively removes the secure element conundrum, stumbling block #1.
BlackBerry OS supports HCE—and was the first mobile OS to do so. The feature gained even more momentum late last year when Google launched its Android 4.4 operating system, which includes HCE.
By allowing payments application developers to go around the secure element—and mobile operators—altogether, HCE also simplifies the business model complexities, stumbling block #2.
Beyond payment: offers and loyalty
NFC has to offer more than just payment to succeed. This is where promotions, loyalty, coupons, geo-targeting and other mobile technologies come in to sweeten the deal.
North American coffee chain Tim Hortons gets it. It’s new mobile payments service leverages HCE. Tim Hortons has linked its initiative with the chain’s pre-paid Tim Card, TimmyMe mobile app and established loyalty programme. Paying with NFC is suddenly more convenient (top up your account online) and more beneficial (get coupons and other deals) than other methods, knocking out stumbling block #6. Further, Tim Hortons is now collecting invaluable customer data with every transaction.
New merchant terminals in place: contactless credit cards
While it’s true that NFC adoption has been slow, there have been a few bright spots. One of them is contactless credit cards, or cards with NFC embedded in them.
Card issuers and merchant payment providers (i.e. banks) have been replacing old magnetic stripe cards with new smart chip (NFC) versions, and encouraging merchants to upgrade to compatible card readers as a way to enhance security (and thwart the next Target-esque hacker attack).
This report from Juniper Research establishes that the majority of point-of-sale terminals now are shipping with NFC capability, meaning many merchants are now ready for mobile payments. Through solving the magnetic stripe problem, banks and merchants have inadvertently also prepared for NFC-based mobile payments. And that addresses our last stumbling block, #5.
NFC’s years of not living up to its potential are about to end. Real stumbling blocks held it back, but BlackBerry’s partnership with Enstream, host card emulation in BlackBerry OS and Android 4.4, smart initiatives from merchants and contactless credit card rollouts are having the combined effect of removing them all. Granted, there are other competing and synergistic technologies (like beacons) gaining traction as well, and those may help or hinder NFC. Yet clearly, the pace of the mobile payments game is about to pick up, and NFC just stole the ball.