IDC Financial Insights held a webinar to address the impacts of a possible joint venture between Verizon Wireless, AT&T and T-Mobile USA, supported by Barclays PLC and Discover Financial Services, to test a smart phone program in the United States that enables near field communication (NFC) payments at the POS (see "Have NFC payments reached tipping point?" The Green Sheet, Aug. 23, 2010, issue 10:08:02).
"Mobile Payments Coffee Break" presenter Aaron McPherson, IDC Practice Director, Payments and Security, cited findings from an IDC study, Best Practices: Mobile Payments Action - Five Case Studies from Around the World, that revealed most successful mobile payment schemes across the globe effectively combine financial institution and telephone company assets into viable solutions, but in the United States no single carrier or bank dominates, which creates challenges.
"What the carrier provides, specifically, is distribution," McPherson stated. "They provide access to handsets, the conduit on which to preload a payment application." He said that while many startups offer carrier-independent solutions, what has worked well in Japan and South Korea is either a telephone company buying a bank or a joint venture relationship.
He pointed out that what financial institutions have that carriers lack is direct access to the source of funds, be it a credit line or a deposit account. And he believes the knowledge banks have about consumer purchasing habits is a powerful leveraging tool, making them indispensable in the evolution of mobile payments. And since carriers tend not to want to hold deposits or take on credit risks, he said brick-and-mortar purchases are likely to remain the provenance of banks.
"I think there is a lot banks can do in terms of making funds transfers much easier and more affordable through their mobile apps," McPherson said. "And then I think pushing to be included in the joint venture and being flexible about the terms, in other words working on rewards platforms that are merchant-funded and merchant-specific, are important." He said platforms that work with debit and credit cards are critical to the mobile payment process.
"The most important thing about NFC is that it is a two-way communication protocol, kind of like Bluetooth really, in that it can send as well as receive," McPherson said. "The difference versus PayPass or Visa payWave is the basic contactless that's found in cards, stickers and key fobs today in the United States is a passive technology. It requires a power breeder at the POS to bring the chip online so that it can deliver the payment information."
NFC can create a pop-up that is activated when the phone receives the appropriate signal. It can also act as a contactless terminal. In its passive mode, where it emulates a contactless chip, users wave the phone in front of a contactless POS reader. NFC-enabled devices can store coupons and value, and according to McPherson, they're more user friendly than short message service-, app- or browser-based systems that require users to open a site, begin a chat and initiate a message.
McPherson said a critical component in NFC-enabled phones is the active connection to a carrier and network. The technology permits merchants to amplify spending by delivering targeted offers directly to individual devices while customers shop, creating true one-to-one marketing. He believes merchant-centered NFC rewards and loyalty programs could eventually supplant less targeted mass-market promotions.
As to whether NFC mobile payments will render plastic cards obsolete, displacing Visa Inc. and MasterCard Worldwide, McPherson said, "In my opinion, you don't get any benefit from a carrier perspective by excluding them. All you do is retard your own growth. One of the advantages that Discover has is that they're both the issuer and acquirer, so they can just make a deal. Visa and MasterCard have to think about all these competing interests.
"I could see some kind of disintermediation attempt where they essentially emulated Visa or MasterCard with a source of funds or something else like bank accounts or the decoupled debit formula. Real-time ACH would make that more possible." But he pointed out that Visa and MasterCard wouldn't see any real change because they would continue to collect switch fees; card issuers would receive transactions via automated clearing house instead of debit or credit cards.
Of the estimated 4 to 5 million terminals deployed in the United States for Visa and MasterCard usage, roughly 140,000 are contactless devices located in high-traffic establishments. McPherson said adoption of tap-and-go cards a few years ago was stymied by lack of consumer awareness, a marginal difference in transaction speed and the timing of the rollout, which coincided with the economic downturn.
McPherson suggested NFC mobile payments will initially focus on niche applications like mass transit, where contactless cards for ticketing already exists in most major metropolitan areas. He believes further regulations and interoperability will be necessary in dealing with mobile payments security and usage in the United States, where multiple carriers and bank systems co-exist.
Managing digital certificates, the keys that authenticate people into the system for identity verification at the point of transaction, will be a key determinant in whether new mobile payment methods are widely used and accep
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