NFC is inching its way into the cellular world with its promise to turn mobile phones into intelligent payment devices for everyday commercial transactions. But NFC-based mobile payments still need a business case that benefits all stakeholders with often competing interests
Near field communication (NFC) is gaining traction in the wireless world as interests in mobile payments, including the potential for using handsets as payment devices at the point-of-sales, continues to gain momentum in many markets.
Evolving from a combination of RFID and interconnection technologies, NFC is a short-range wireless connectivity technology standard designed for intuitive, simple and safe communication between mobile phones, PCs and electronic devices. The technology operates in the 13.56-MHz frequency range and can establish connections between devices at a range of about 10 cm and delivers throughputs of 424 kbps.
A key advantage of incorporating NFC into handset is that it can turn a mobile phone into a cashless wallet, enabling users to buy train or bus tickets, purchase good and service at point-of-sales, and acquire entertainment downloads or new services with a wave of the handset.
Patrick Henzen, senior manager of NFC and identification development at NXP, formerly known as Philips Semiconductors, says NFC can do a lot more than contactless payment. For example, as well as buy a train ride, a mobile user can check his previous transaction records and download a train schedule with an NFC enabled handset. Other applications could involve service discovery, such as picking up a URL or other information from a billboard or a magazine.
Ready for launch
Although NFC has emerged quite recently, jointly developed by Philips and Sony in 2002, some progress has made in the past 12 months to accelerate commercial deployment of NFC in the mobile payment space, due to the push by Nokia and NXP as well as increased interests from both mobile operators and transaction firms.
Nokia, a key supporter behind the standard, already rolled out the world's first NFC handset, the 3220, and debuted the first commercial NFC-enabled mobile payment service in Hanau, Germany, with Vodafone. A series of NFC trials is also going on in Malaysia, South Korea, Thailand, the Philippines and China as industry players push NFC deployment in Asia.
A trial in Xiamen, for instance, is the first of its kind in China. It is jointly conducted by Nokia, NXP, Xiamen Mobile and e-Tong. Under the trial, which started in June, about 100 China Mobile subscribers are able to conduct secure mobile payment services in around 4,500 places, including restaurant, transportation systems, movie theaters and convenience stores via a Nokia 3220. As well as purchasing, the participants are also able to check the balance and up to 20 transaction records.
In the next step, the trial will allow mobile users to top up over the air, according to Joseph Zheng, director of NFC consumer business, Nokia Ventures Organization Asia (NVO Asia), the handset maker's corporate venturing arm in Asia.
In addition, SK Telecom in May announced a cooperation with NXP in the development and deployment of NFC technology. The two, along with local partners, are conducting a field trial within SKT office buildings, providing 400 SKT employees and visitors with NFC-enabled mobile phones that will give them access to services and applications such as payment, ticketing, content downloads and access control.
Despite a wide range of applications, NFC's biggest potential is expected in proximity mobile payment services, as it extends the popularity of contactless cards.
One of the key drivers, obviously, is due to the fact that NFC is compatible with some contactless smart card systems, including Sony's FeliCa and Philip's MiFare, which are widely used across Asia, as well as those developed by leading credit card companies. In China, for instance, public transportation systems in over 100 cities support MiFare smart cards.
Meanwhile, leading credit card issuers like Visa, MasterCard and AMEX are also driving schemes that aim to get consumers to use contactless solutions for low-value cash payments. Such a move, according to the Yankee Group, will increase merchant acceptance and thereby lay the groundwork for more widespread use of mobile phones with contactless capabilities in point-of-sale transactions.
In addition to Nokia, Samsung and BenQ have also announced plans to incorporate NFC into handsets. Samsung introduced a prototype NFC handset (the SGH-X700) at 3GSM in February and started test programs with domestic telecom service providers in South Korea and France. Last month BenQ announced plans to introduce its first NFC-compliant handset in the first half of 2007. BenQ says its first NFC handset sample will be available in the first quarter of 2007 with volume production to follow by the middle of the year. The company will also be testing the functionality of external microSD card and USIM (universal subscriber identity module) applications in Taiwan with Chunghwa Telecom and Taipei Smart Card Corporation (TSCC).
With mobile phones becoming increasingly powerful and consumers' widespread use of electronic payments for more transactions, market watchers are upbeat on the market outlook of mobile payments.
The Yankee Group predicts that global revenue for off-deck mobile payment transactions will rise dramatically during the next few years, increasing from nearly $500 million last year to $1.7 billion in 2009, with the user base expanding from 65.5 million to 178.8 million during the same period.
Another research firm, Strategy Analytics, is more bullish on the market outlook, reckoning that mobile contactless payments will facilitate over $36 billion of worldwide consumer spending by 2011, thanks to the push by leading credit card issuers and handset makers.
Conflict of interest
While the technology and infrastructure are in already in place to make it a reality and a few commercial NFC deployments are expected to launch in the next year, industry players say the most crucial and complex issue around the commercial deployment of NFC mobile payment services is creating a business model that is mutually beneficial to all stakeholders within the NFC ecosystem and appealing to consumers.
Getting all parties to work together is a major challenge because the stakeholders, particularly mobile operators and banking organizations, represent different markets with competing interests, analysts say.
Stuart Carlaw, principal analyst with ABI Research, says mobile operators are still cautious about brining NFC into handsets, partly due to concerns over their control in the new ecosystem and their customers.
'Mobile operators like to control the whole cellular service ecosystem, but contactless payment revenues fall outside that value chain,' he says.
The fact that current SIM designs are not able to support the stringent levels of security required for contactless payments is bringing mobile operators into direct conflict with banking organizations, is areas like revenue sharing, he explained.
'It's just a matter of all parties throughout the ecosystem getting a share of the revenue streams and still remaining profitable.'
Control issues aside, mobile operators are also struggling to see viable methods of extracting value from the provision of contactless payment services. While the use of NFC in cellular handsets for contactless payment schemes shows great potential from a customer and transaction provider perspective, the business model for taking a share of revenue from NFC-based mobile payments is complicated from an operator's perspective. For one thing, it is not likely that NFC would generate much traffic and revenues over cellular networks through the provision of simply payment services.
Revenue beyond payment
Philippe Staib, founder and executive chairman of Payzy Corp, a Bangkok-based developer of mobile payment products and services, points out that 'straight payment is not sexy.'
He says the industry needs to create a business case that can extract revenues to accommodate existing payment margins and an additional one for the operators.
'If you cannot create an application and extract income above payment, then things will not start.'
Carlaw, however, says that cellcos' view that they need to recoup the cost of adding NFC to phones through the provision of contactless payment service alone is short-sighted. He says significant revenues will be generated from services such as ticketing, access control, online mobile banking, service discovery and connection enablement, all of which build upon the core characteristics of NFC.
That said, he noted that cellcos must be careful not to try to extract too much out of the transaction value chain, and should look instead to generate revenues from hosting applications and from the traffic generated by application downloads and associated banking services.
While many suggest cellcos play a vital role in pushing NFC into commercial use and in dictating the production of the volume of NFC handsets, others say support from the merchants and retails like 7-Eleven and Walmart is equally important to make NFC mobile payment services a success.
'Payment is about merchants and retailers. It's not the brand of the operators or the banks,' Staib says. 'They are the one that are going to push it and the one that would have physical contact with customers.'
But to create momentum from retailers, the industry needs to add value or create a business case for retailers, in the same way one is required to convince cellcos to move toward NFC deployment, he says.
'The retailers would like to set this type of payment if you could bring them something, not only a lower cost, but additional services into their marketing research, or anything that will increase their turnover and customers.'