The prospect of a transforming new technology is oft accompanied by hyperbole, or grand statements of intent, particularly when investors are approaching the feeding frenzy peak of their ten year love-hate-love tech cycle. At times like this even unsexy industries, like payments, can be caught in the spotlight. All it takes is a magic, three-letter acronym to turn this boring, complacent sector, dominated by huge (some would say atrophied) organisations into the height of techsex. With NFC, venture firms, start-ups and more agile network giants are lured by the prospect of feasting on the banking sector’s fatty margins.
Does Near Field Communication (NFC) even deserve its new sexy status? With Google and soon Apple adding frisson to the debate, many say yes. But others, in the minority, are puzzled. While NFC is likely to become an important transaction-delivery technology, it’s hardly disruptive, possibly security-flawed and, even if it isn’t, most of us won’t experience using it for a year or two, or three.
NFC faces several major challenges before it gains anything more than limited adoption. How players address these challenges will determine roll-out, adoption, timeframe – and success.
In itself, NFC changes no business model, it just increases costs. So why all the attention? Perhaps it’s because NFC offers the opportunity for ‘outsiders’ to develop a winning, next-generation payment model that delivers a customer experience sufficiently compelling to change consumer behaviour. But NFC solutions will have to re-assure on security and offer more than the ease of contactless transactions, because RFID already securely delivers that today for millions of transit and payments transactions.
With no winning business model yet in evidence and a lot of powerful players jockeying for position, there’s much speculation around who the winners and losers might be. Network operators want to collaborate with Visa and Mastercard, but this strategy will simply increase transaction costs for low-value payments. If Visa’s ‘One Pulse’ and Mastercard’s ‘Pay Pass’ wave and pay cards have yet to make much of a mark with their current RFID models, it’s hard to see why network operators think they will succeed with NFC.
Unless someone is planning not to make money out of the transactions – as in the Google Wallet model – all that the network operators are doing is adding another layer of transaction cost to an already-expensive transaction model. De-laminated, the current model exposes at least three layers of cost: bank card issuers, merchant acquirers, Visa or Mastercard, plus other hangers-on and, now, network operators. Do we really want all these intermediaries to have a cut of our transactions.
We know that major retailers are resistant to existing debit/credit card fees for small transactions. So network operators can’t expect retailers to embrace even more expensive transactions, just so consumers can waive their mobile phones. Then there’s the expensive NFC readers they have to buy.
So let’s look at the options for implementing NFC. Apps are not going to make it without the security of a SIM or silicon, so players using that approach are unlikely to make the grade. Network operators believe passionately in the primacy of the SIM and, as the recent announcements prove, therefore believe they deserve a cut of the action. Handset manufacturers, on the other hand, want to use their own silicon for the same reason. Google Wallet recognizes this challenge and uses the silicon in the handset to establish a different model, offering its ‘chips’ for free, offset by generating attractive revenues from coupons and loyalty. Google has clearly recognized that data is the most valuable currency of next generation payments; knowing who spent what, where and when.
But no handset producer will ever achieve ubiquity on its own. And ubiquity is key, because that’s what retailers demand. Retail chains will only accept popular payment methods and won’t invest in new – or duplicate – EPOS terminals or readers unless the numbers stack up. Furthermore, as previously stated, they will not accept high transactions costs for low value purchases. So transaction volumes, transaction fees and EPOS costs will all be big factors determining the need and speed of NFC roll-out.
Meanwhile, with all the hype surrounding mobile commerce, everyone’s forgetting cards. Cards are increasingly used for transit, for loyalty and for payment. More than 10 million transactions a day in the UK and rising fast. Therefore, the quickest way to roll out NFC could be with cards, or ‘cards’ in the form of a sticker on a mobile, or inside a case, which don’t require the collaboration of the network operator.
Where does this all leave network operators? Well, they do have two advantages. They own a highly secure and suitable environment for payments in the form of the SIM and they already have billions of customers all over the world. If the network operators, en masse, adopted a sensible approach to sharing transaction margins, this could start to drive markets, but while they have two big advantages, they also have two big problems: conventional debit and credit card networks are unlikely to give up margin, so for the networks to make money they still have a retailer-unfriendly double-bubble model; plus, there just won’t be enough NFC smart phones around for the foreseeable future.
So where is the hidden gold in payments? Well, maybe not where most people are looking for it. Perhaps it’s not NFC as the delivery technology, which after all is just a set of contactless standards, but in the transaction itself. Small value payments, micropayments, all pre-paid, so you don’t need a bank to take the risk of the transaction. Transaction charges small enough to allow collaborators to share. If the network operators could agree on common low transaction fee, pre-pay wallet outside the greedy bank and EMV (Europay, MasterCard and Visa) networks, they would be in with a chance. And they would have all that valuable accompanying data.
What’s more, that’s a solution that won’t just work in the NFC’d world of the G8 economies, but in the emerging world where billions of people have never used a bank. That’s a sexy model that’s capable of changing the world of payments.
Nucleus Founder & CEO
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