all players look for partnerships to deploy mobile nfc

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All players look for partnerships todeploy mobile NFC payments, butsome need to more than others02 September 2011Guillermo Escofet

Key points

• Partnerships are key to the mobile-contactless-payment-deployment strategies ofmost market players.

• At the top of everyone’s list of companies they must partner with are banks and card-payment networks – since they are the ones that provide all of the necessary paymentsback-end.

• The card networks, and most banks, are happy to team up with whoever offers theirpayment services a route to mobile enablement – be that mobile operators, handsetmakers or over-the-top players.

• But they are also exploring bridging mobile NFC technologies, such as microSD cardsand smart stickers, to bypass partnerships and go down a handset- and operator-agnostic route to market.

• Mobile operators are seeking strength in numbers by creating cross-network alliancesand joint ventures to compete with the global reach of OTT players. At the same time,they are pursuing their own individual rollout plans focused on own-brand mobile-wallet and prepaid-cash products.

• Meanwhile, interesting alternatives to enabling mobile point-of-sale payments arecropping up, such as plug-in-card-reader-based Square and sound-wave-based Zoosh,which provide a more immediate solution than NFC.

Introduction

Competing ecosystems are being established to enable mobile contactless payments. Inan unusual spirit of fraternity, rival mobile operators are grouping together into alliancesand joint ventures in each territory to lay the foundations for NFC services secured by theonly piece of handset real estate over which they still have control: the SIM card. Handsetand operating-system makers are pulling in a different direction, looking to secure NFCpayments from chips embedded in phones for their native-application ecosystems. Banks andpayment providers, meanwhile, are playing along with both of the above, as well as exploringalternatives of their own, such as microSD-card-secured services.

It would seem that operators are the furthest ahead with their NFC-service-rollout plans. Afterall, they are the ones that have collectively dominated the mobile NFC headlines over the pastyear, with news of partnerships, trials and commercial launches across numerous countries.By comparison, most handset/OS players have remained cagey about their NFC plans – otherthan saying that they want to make NFC phones. The only one to fully show its hand hasbeen Google, which has launched its own NFC phone, the Nexus S; incorporated NFC into theAndroid OS SDK; and launched its own mobile wallet for contactless payments and coupons.Google Wallet will compete with operators’ m-wallet initiatives.

What all NFC m-wallet rollouts have in common is mobilizing credit- and debit-cardpayments. So the players that are common to most rollouts are the card networks, such asMasterCard and Visa, and the associated card-issuing banks. As key players in the paymentsvalue chain, they will by necessity also play a key role in the mobile-contactless-paymentsvalue chain. And they are taking a multipronged approach to playing that role.

Operators

For operators, contactless payments are part of their mobile-wallet strategies. And many arepaving the way for contactless payments and m-wallets with own-brand credit and prepaidcards and other financial products they have launched.

In the UK, for example, France Telecom-owned Orange introduced a contactless credit cardlast year and a contactless prepaid card this year. The carrier sees the prepaid card as a wayof getting users used to using an electronic wallet – one that it recently mobilized with thelaunch of mobile-NFC-payments service Quick Tap.


Rival carrier O2, owned by Spanish incumbent Telefonica, was earlier to market with a prepaidcard, O2 Money, which it launched in 2009. Although essentially a plastic-money productthat was not enabled for contactless payments, O2 launched it as a first step toward bringingcard payments and phones together. Its only mobile element were text alerts sent out afterevery transaction informing users of how much they had spent and their remaining balance.Orange’s cards offer a similar service.

In May, O2 announced the partners for an m-wallet service it plans to launch in 2H11, sayingthat, as well as contactless payments, the wallet would offer airtime top-ups and peer-to-peerpayments. The partners include card network Visa, e-payments company Wave Crest, bankingtechnology vendor FIS and digital-banking software provider Intelligent Environments.

At the same time, O2 has applied for an e-money license that will allow it to handle prepaidcash paid into the m-wallet by its customers.

Similarly, Orange is relying on the banking license of Quick Tap launch partner Barclaycard.As with O2’s upcoming m-wallet, Quick Tap works as a stored-value account, with userspaying in money from their Orange credit card, Barclaycard credit card or Barclays debit card(Barclaycard is the credit-card arm of Barclays bank). Users can store up to £150 at any onetime (see fig. 1).

Fig. 1: Quick Tap facts

Orange is one of the operators that have moved forward most aggressively with NFC. Atthe end of last year it appointed someone at group-board level to promote NFC internallyand gave January deadlines to its local-subsidiary CEOs to come up with an action plan forNFC. The carrier felt that for far too long NFC had been stuck with the technologists withinits organization, in a bottom-up approach, and that it needed a new top-down, business-ledapproach.

With stored-value wallets, operators are trying to target sectors of society that areunderserved by banks and other financial services – those who have no bank accounts orcredit cards, such as migrant workers and teenagers. Another target audience are those on atight budget, or just budget conscious, who want to put money aside for certain expenses andmake sure they don’t spend more than that amount. The text alerts are especially helpful forcustomers eager to keep a tight rein on their expenditure.


Strength in numbersIn parallel to these individual moves, all the major mobile-network operators in the UK –including O2 and Orange (under its new guise as Everything Everywhere, after its merger withT-Mobile) – have teamed up to form a mobile-commerce joint venture aimed at providingone-stop access to NFC m-wallet services. The only MNO not involved is Hutchison Whampoasubsidiary 3, whose network has about 10% market share in the UK. It has complained of beingdeliberately left out by the other carriers.

The JV is not a fait accompli – it is subject to competition clearance by regulators – and, with3 accusing it of being anticompetitive, its approval could run into trouble. Its three partners –Everything Everywhere, O2 and Vodafone – hope to have the JV up and running by year-endand have pledged to provide the necessary startup capital.

The JV will combine two strands – mobile marketing and mobile payments – connectingoffers, loyalty points and coupons delivered to m-wallet users with contactless payments atthe point of sale. During a teleconference on the day of the announcement, Ronan Dunne,CEO of O2, said that there is a “real appetite” in the market to bring both strands together, asdemonstrated by feedback from customers of the carrier’s O2 More mobile marketing service– to which 2.5 million O2 subscribers are opted in.

Operators are increasingly seeking strength in numbers in the face of the overwhelmingcompetition they have encountered in recent years from over-the-top players such as Appleand Google on the mobile services front. Ganging together enables them to compete moreeffectively against the global reach that platforms such as Apple’s App Store and Google’sAndroid Market offer developers and other third parties.

The proposed UK joint venture mirrors similar mobile NFC multilateral operator initiatives inother countries, including the Czech Republic, Denmark, France, Germany, the Netherlands,Spain and the US.

This newfound spirit of fraternity won’t stop each of the operators involved in these initiativesfrom offering their own NFC services in competition with their alliance or joint-venturepartners. But rather than expect third parties to go to each mobile network individually to rentslots on SIM cards for securing NFC apps, operators can make life much easier for third partiesthrough these alliances and JVs.

Aggregating connectionsBut the extent to which it will be possible to present third parties with a single, cross-networkoffering will depend on antitrust regulation in each territory. For example, it is unlikely thatin most territories operators will be able to offer third parties common SIM-slot-rental prices,because regulators would consider that to be collusion.

Mobile-network-connectivity aggregators operating in the fields of messaging and carrierbilling could provide a fix, though. One such company, Ericsson IPX, is extending into NFC,offering to aggregate access to the rental of SIM slots from all operators in each territory –in essence, playing a kind of trusted-service-manager (TSM) role (see fig. 2). As part of that, itwould offer one contract, with an aggregated price, covering all SIMs – in the same way thatit, and other aggregators like it, already do with messaging and billing.


Fig. 2: Ericsson IPX trusted-service-manager model

However, Ericsson IPX is so far the only mobile aggregator to try to extend to NFC. One of itscompetitors, mBlox, looked into the feasibility of doing so but concluded that there wasn’tmuch of a business in it. It didn’t see much of a long-term future for SIM-secured NFC servicesand not enough revenue in it, since in most cases operators won’t be getting per-transactionrevenue – unlike in the case of SMS and billing.

Initial JV focusThe speed at which each operator rolls out NFC services will, of course, vary, and that mighthave a knock-on effect on cross-network initiatives.

Operator sources close to the UK joint venture have told Informa that the initial focus of the JVwill be on mobile marketing rather than contactless payments, since all operators are alreadygeared up for the former via basic mobile technologies such as SMS and WAP. It is unlikely thatall JV partners will be geared up for NFC by the end of the year, the sources add.

And although contactless payments add the ultimate wow factor to m-wallets, they are notthe be-all and end-all. M-wallets can still serve a useful purpose without being able to docontactless payments. Online and other remote forms of payment are useful enough, thesources say.

As well as providing one-stop shops in each country, operators are also striving to makeservices interoperable across borders. In June, Orange claimed to be the first to introduce aninternational NFC-payment service, by ensuring that, starting this summer, users of its UKQuick Tap service will be able to use their phones to make payments in Nice, the launch padof France’s Cityzi NFC service, in which Orange is a leading protagonist.

Telefonica is also working toward offering the same cross-border experience. The phones thatwere used by Telefonica Spain in a trial alongside Visa and Spanish bank La Caixa in Sitges,Spain, last year use the same underlying technology as those used by O2 in UK contactless-payment trials at selected stores, for example.

In Asia Pacific, meanwhile, Japanese operator NTT DoCoMo and South Korean operator KTannounced plans in February to launch cross-border NFC services, including mobile payments,mass-transit ticketing and virtual coupons.

B2B forteA strong card that operators feel they have up their sleeve with regard to the OTT players istheir business-to-business relationship with enterprises in each country. The likes of Appleand Google might excel at enabling developers to link up directly to a global audience ofconsumers, but they don’t have local sales teams that have nurtured long-term relationshipswith organizations that are key to enabling mobile NFC services – such as retailers,transportation companies, banks, local authorities, centers of learning and carmakers, toname but a few.


In relation to retailers, for example, operators have a growing machine-to-machine businesssupplying SIMs for wireless POS terminals, which are increasingly relying on mobile-broadband connectivity. In Germany, meanwhile, most operators have an M2M relationshipwith automotive companies, which they could exploit for NFC. And firms for which operatorssupply work-force connectivity services are likely to turn to those same operators if they areinterested in equipping their employees with mobile-NFC-access controls.

Operators can also play an evangelist role, using their sales teams to spread the mobile NFCmessage to B2B customers, such as retailers.

That is not to say, however, that OTT players cannot rally businesses around their initiatives.Google, for example, has in the US attracted an impressive roster of big retailer brands to itsrecently unveiled Google Wallet service, something the Isis operator partners have yet to do,even though their joint venture was unveiled more than six months before Google Wallet.

For consumer-facing NFC services, some operators will be taking an if-you-can’t-beat-them-join-them approach and publishing NFC apps on the OTT platforms. For example, DeutscheTelekom-owned T-Mobile is planning to place its m-wallet in the Android Market.

SecurityAnother advantage operators feel they have over OTT players is consumer trust. They feel thatwith issues of security and data protection, users are more likely to trust them than online ordevice players. And securing NFC apps via the SIM card is what they see as their main or onlyrole in the mobile NFC market.

Mobile users are getting used to making credit- and debit-card-enabled payments on theirphones, primarily via online platforms such as iTunes and PayPal. But it will require a bigpsychological step for them to feel comfortable about turning their phones into wallets,loading them with their cards and magically tapping them in stores to buy goods. Althoughmobile contactless payments should be no riskier than their plastic equivalent if properlysecured, users are likely to need convincing of that.

Operators argue that they can offer the reassurance that users need. After all, it is to them thatmobile users first turn when something goes wrong, such as if the phone stops working oris lost or stolen, they say. And operators are far better set up for customer-support functionsthan most OTT players, employing call-center staff rather than expecting customers to makequeries via e-mail, for example. By placing the secure element in the SIM, they add, thecustomer-support responsibility will fall naturally on their shoulders. Not only will they beable to instantly disable NFC apps over the air in emergencies, but having the apps in the SIMwill mean that users will be able to take the apps with them if they want to change handsetto a different make or OS.

OTT players would argue that that is all very well as long as users don’t want to changeoperator. But maybe that is one problem that the cross-network NFC alliances being set up ineach country could address.

Some operators, such as T-Mobile, are looking at going beyond what is required by financialregulation and providing users with preferences to add extra safeguards around contactlesspayments. So, for example, although in the EU contactless payments don’t require keying ina PIN if the transaction totals €20 (US$28.45) or less, operators could provide the option ofkeying it in for lower amounts – down to €10, say – just for users’ peace of mind.

TSM roleKey to ensuring scalability when provisioning secure NFC services, for both operators andservice providers, such as banks, is the use of a trusted service manager (TSM). Althoughviews vary on the exact role of a TSM, it is essentially an intermediary, such as Gemalto, thatspecializes in digital security and takes care of managing the life cycle of secure elementsor applications, or both – depending on whether it is contracted by an operator or a serviceprovider or both.

The most likely arrangement will be a split-TSM model, in which one TSM acts on behalf ofthe secure-element issuer, or operator (in a SIM-based scenario), and another or several othersact on behalf of the service providers, such as banks and transportation companies (see fig. 3).This model has been “successfully” tested in trials such as the one in Nice.


Fig. 3: Split TSM architecture

All operators and banks interested in enabling mobile NFC payments agree on the need tohave a TSM. It is considered a must for ensuring bulletproof security. And the consensus isthat rather than develop a TSM capability in-house, most operators would prefer to outsourcethat role. However, Informa understands that some operators are installing TSM platforms in-house.

Operators don’t usually like to outsource UICC (SIM card) over-the-air platforms. But withthe complexities of NFC, most are considering outsourcing, at least initially, the extensionrequired to those platforms for issuing and managing NFC secure elements on SIM cards –separately from their legacy platforms. In the long term, however, they aim to eventually bringthis capability in-house.

Also, operator groups with a systems-integration arm, such as Deutsche Telekom’s T-Systems,could start offering TSM services via that arm.

Gemalto, which is a world-leading SIM and smart-card maker and a leading contender in themobile NFC TSM field, either offers trusted-service management as a hosted service or sells itas a licensed product. Its hosted-service business model is to be paid an annual fee per userfor every application activated on the SIM card – when acting as an operator TSM.

Banks and card networks

Plastic, not mobile, is the first step taken by banks wanting to offer contactless paymentsto customers. They issue NFC-compatible credit and debit cards enabled by the contactlesspayment systems set up by card-payment networks American Express, MasterCard andVisa. MasterCard was the earliest to market, with its PayPass system, which it launched inDecember 2002, and Visa launched PayWave in September 2007. American Express has hadits contactless-payments system, ExpressPay, up and running since June 2005.

But even though the first of these systems has been available for nearly a decade and the restfor at least five years, banks have been slow to issue NFC cards. Many have not done so in anysignificant scale – and some not at all.

For example, in the UK, which is the European country with the most NFC-enabled retailoutlets, Barclays Bank was left looking nervously over its shoulder to see if any other UK bankswould follow suit after its March 2009 blanket introduction of NFC chips on debit cards. It’staken about two years for some of the other banks to make a similarly bold move.

The banks’ focus is likely to remain on plastic for the foreseeable future, while the choice ofNFC handsets remains limited and NFC-handset penetration takes its time to build up enoughcritical mass.

For example, Spanish bank La Caixa is not using mobile in the follow-up to the Sitges trial,an NFC pilot that kicked off in the Balearic Islands in May, because there aren’t enough NFCphones available in the market. Instead, the bank has issued 120,000 NFC payment cards forthe pilot.


Banks and card-payment networks are taking an agnostic approach to how they enablecontactless payments on phones. As the payment enablers, they are the ones that everyoneelse needs to partner with to launch mobile contactless payments – unless these are enabledby online-payment platforms, such as PayPal or iTunes, or by carrier billing. And they aremaximizing their options by partnering or cooperating with anyone offering them a route tomarket – be that operators, handset makers or online players.

Bridging technologiesAt the same time, banks and card-payment networks have been the most enthusiasticexplorers of “bridging” mobile NFC technologies, such as stickers and microSD cards – not onlybecause these provide a shortcut to NFC-enabling the vast majority of handsets out there thatdo not incorporate NFC, but also because they can be deployed without needing to team upwith and share the limelight and revenues with anyone else. Also, bridging technologies areboth carrier- and handset-agnostic. In fact, microSD cards are the mobile-NFC-deploymentoption most favored by many banks.

Both the secure element and NFC chip can be embedded in a microSD card and insertedinto any microSD-compatible phone to instantly enable that phone for contactless payments.Or, alternatively, the microSD card can contain just the secure element and be inserted intoa phone that is already NFC-enabled – as Chinese card-payment network China UnionPayintends to do.

China UnionPay is placing its contactless-payments application onto microSD cards thatwill be used on the NFC Android phone made by HTC. The Taiwanese handset maker hasreportedly put a hardware connection between the NFC chip and the microSD card slot in thephone, which resembles a single-wire protocol connection.

MicroSD cards are a standardized technology that works with any phone with a microSD-cardslot. Its critics point out, however, that the NFC antennas that can be fitted inside them needto be especially small, making them hard to read, and that the applications loaded on themcannot be updated over the air.

Although Visa is a regular partner in SIM-based NFC trials with operators, it has also partneredwith mobile-NFC-technology vendor DeviceFidelity to have its PayWave application installedin microSD cards. It has done the same with iCarte, maker of an iPhone plug-in peripheral thatturns the Apple handset into an NFC device (see fig. 4).

Fig. 4: iPhone NFC plug in, iCarte


In June, Visa teamed up with BPCE, France’s second-largest banking group and owner ofBanque Populaire and Caisse d’Epargne, to trial NFC microSD cards supplied by Device Fidelityin the cities of Nice and Strasbourg later this year. The microSD cards will be tested on iPhone,Samsung Galaxy S and BlackBerry Bold 9700/9780 devices.

In Turkey, one of the country’s biggest banks, Akbank, sees microSD cards as its best optionand is piloting them for a potential commercial launch. Fellow Turkish bank Yapi Kredi,meanwhile, is offering the iCarte plug-in.

In Slovakia, UniCredit is using NFC stickers supplied by Gemalto for a commercial mobile-contactless-payments deployment (see fig. 5) – the country’s first. The stickers will be usedin conjunction with MasterCard PayPass readers, which are deployed in about 3,000 outletsaround Slovakia. UniCredit Slovakia is part of the much wider UniCredit Group, with 9,600branches in about 50 countries around the world.

Fig. 5: NFC sticker used in UniCredit Bank mobile-contactless-payments deployment, Slovakia

Native appsAnother route to market that no self-respecting bank can afford to ignore is the smartphoneapplication stores – primarily Apple’s App Store, Google’s Android Market and RIM’sBlackBerry App World. Nowadays, a bank is no longer seen as a credible contender if it hasno presence in these app stores – even though in the UK, for example, no bank is present onall three yet.

The mobile banking explosion in Europe and North America over the past two or three yearshas occurred largely because of the native-app phenomenon spearheaded by the iPhone.Figures released recently by market-research firm ComScore show that of the more than 20million Europeans who are regularly using mobile banking services, 70% are smartphoneusers. And those with iPhones are the most frequent users, accessing m-banking servicestwice as much as Android-device owners.

For example, Spanish bank Bankinter, a mobile banking pioneer in Spain that even has its ownMVNO, revealed in March that 53% of its m-banking traffic comes from iOS app users. Androidapp users accounted for another 12% of traffic. So, all and all, native apps are now dwarfingtraffic from the bank’s comprehensive range of SMS services, some of which it started offeringin 2000.

It is inevitable, then, that as native-app platforms such as Android and iOS add NFC tools fordevelopers – as has already happened in the case of Android, and will sooner or later happenin the case of iOS – contactless-payment capabilities will start to be added to the m-bankingofferings on those platforms. And, just as native apps now lead in m-banking traffic, there is ahigh probability that they will also lead in mobile-contactless-payment traffic. In that case, itwill be the handset-embedded secure element favored by native-app-platform providers thatwill become the main route to market for banks’ and other payment providers’ NFC services.


Working with operatorsThe likes of MasterCard and Visa and most banks are nevertheless eager to star in operator-led mobile-NFC ventures. Officially, most back the operator’s NFC agenda. Visa, for example,has publicly stated that it sees most mass-market potential in the SIM-based model, becauseof operators’ distribution and marketing muscle.

The relationship between operators and banks is growing closer as mobile phones becomemore and more important bearers of banking and payment services. For many people inemerging markets, mobile phones are the only bearers of such services, and operators inthose markets are increasingly taking on the role of banks as they launch mobile moneyservices geared toward people who don’t have bank accounts – either on their own, when theregulatory system allows, or by piggybacking on the banking license of a local bank.

In some developed markets, such as Japan and South Korea, operators have acquired banksand card-payment networks. It has also happened in Austria, where Mobilkom bought A1bank. And some banks, such as Bankinter in Spain and Rabobank in the Netherlands, havetaken on the role of operators by launching MVNOs. These banks will be following a SIM-basedapproach for any NFC services they launch through their MVNOs.

Recently, Orange and French bank BNP Paribas announced plans to launch a bundled servicein November for the bank’s customers in France, including a smartphone, unlimited data andm-payment and m-banking apps. Orange and BNP Paribas also formed part of a joint initiativeannounced in June by all three French mobile-network operators and four leading Frenchbanks to deploy an interoperable nationwide NFC-payments service in early 2012.

Most secure-element implementations have been on the SIM-based side, according to TSMssuch as Gemalto. Gemalto told Informa that a lot of operators are putting money on the tableto manage the UICC as a secure element (SE) platform. Relatively few handset vendors, onthe other hand, have approached Gemalto to supply them with SEs and TSM services forembedded implementations.

POS terminalsAnother key question in the NFC strategy of the banks and card-payment networks is whetherthey should try to accelerate market development by helping merchants foot the bill for NFC-enabling their point-of-sale infrastructure.

Some parties are putting pressure on payment providers to do just that. For example, EricSchmidt, Google’s executive chairman, was quoted in the press recently as saying: “Thatmoney [to convert terminals] is going to be spent not by Google and not by the phone guysbut by the credit-card companies, because the fraud rates are so much lower. Nobody knowshow quickly this will occur, but it’s in their interests to convert as fast as they humanly can.”

Visa, for example, has invested in seeding contactless POS terminals in key markets to get theball rolling among retailers. But the brunt of the cost going forward will inevitably be borneby retailers.

Alternatives for merchants

A wide array of new options has cropped up, largely through smartphone apps andperipherals, which offer alternatives to NFC for enabling mobile payments at the point of sale.And some look quite compelling – especially for small-business owners for whom investingin dedicated POS and checkout infrastructure is too much of a stretch.

US startup Square, for example, has developed a small card-reader device that plugs intosmartphones and reads the magnetic strip of credit and debit cards (see fig. 6). The device,combined with the Square app, turns an iPhone or iPad into a POS terminal incorporatingmany accounting and CRM functions. The company, which charges a 2.75% fee per purchase,has attracted major investment and in June added Larry Summers, former secretary of the USTreasury, to its board of directors.


Fig. 6: Square iPhone payments device and application

A similar product, called Pointofsale, is offered by Latvian company Erply, which last yearattracted US$2 million in venture capital. Its main market focus is in the UK and the US. Squareis available only in the US.

Another alternative is Zoosh, an application developed by Silicon Valley startup Naratte thatuses sound waves to make mobile payments and is compatible with any device with a speakerand microphone. UK restaurant chain Pizza Express, meanwhile, recently launched an iPhoneapp allowing customers to pay their restaurant bill with their mobile phone.

Mobile NFC phones can also provide an alternative to POS terminals – either in P2P mode orby accepting payments from a contactless card. But it doesn’t provide the immediate reachthat systems such as Square and Zoosh can.

all players look for partnerships to deploy mobile nfc

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