By Barry Mosteller
CPI Card Group
Unless you don't own a cell phone or are someone who avoids technology, you have likely heard of near field communication (NFC) and understand it is either already on your cell phone or will appear on it in the near future. What does this mean?
It means you have or will soon have the ability make payments from your cell phone at a contactless POS terminal. Instead of getting out your contactless RF card (radio frequency with an integrated circuit and antenna) and waving it in front of a POS terminal, you can just wave your phone. The popularity of contactless, which started out growing like wildfire, has in the past few years been stagnating in the United States. Today, only 10 percent of POS terminals have contactless capability.
This brings up some questions. Why would contactless capability on a cell phone drive contactless POS growth? Why would people care more about NFC than they have about contactless cards? How does NFC differ from contactless?
From a pure contactless point of view, there are differences that can be viewed as advantageous. Issuers could avoid the expense of putting large quantities of contactless cards into the marketplace.
Only 15 percent of cardholders using contactless cards change their spending habits and thereby generate higher income for issuers.
Phones will have contactless capability installed by the handset manufacturer. Only those interested in contactless spending will request issuers to activate their phones and connect them to their accounts at financial institutions. They will be able to do this over the air just as communication to and from devices occurs over the air.
This means issuers will need to spend only on those parties who will most likely use the contactless capability and increase their spending in the process. In turn, this could pay for the expense of activating their cell phones and result in higher profits to the issuers.
It is also a generational thing. As a person who has been around for more than half a century, my alarm clock gets me up in the morning, I listen to music on my MP3 player, communicate by email, read the news from a paper or on my PC, watch TV, and use my cell phone to call someone when I am not at my desk or in my house.
In contrast, my son uses his cell phone to do everything from wake up, listen to music, watch movies and communicate with friends. When he is able to pay with his cell phone he will not have a wallet or use cash ever again.
What else can a cell phone with NFC capability do? Let's look at transit. Many of the transit systems in larger cities are either already contactless enabled, or have a plan to become contactless payment capable.
Why? NFC provides ease of use for riders, less handling of cash and coins, more usage of their systems (as riders need not line up at kiosks) and no need for agents to buy closed-loop cards or tickets.
Most of these contactless transit systems, which initially started as closed-loop and contactless (proprietary to the transit systems), are now converting to open loop or will start as open-loop capable from the beginning.
This means that not only will the transit systems' contactless cards work, but Visa Inc., MasterCard Worldwide, American Express Co. and Discover Financial Services contactless cards also work.
An NFC-capable cell phone can provide an enhanced (or scary, depending on your point of view) retail experience. Some interesting things can happen with an NFC-capable phone. Cell phones today, with their global positioning systems, can provide you with your exact location, and provide that location to whomever you allow.
It could be possible for merchants having agreements with your NFC account issuer, cell phone carrier (MNO), or issuer partner merchant to know when you are in or near their establishments.
This in turn could trigger a targeted text message to alert you about special offers or unique items. Since the issuer will also have your spending history, it can even provide the merchant with knowledge that you buy a lot of Blu-ray movies, for example, and a text message about a new Blu-ray movie release can be generated. Imagine being on vacation and seeing a beautiful fountain in the square. You place your NFC phone near a smart plaque or poster with an embedded chip and antenna, and your browser is launched, taking you to a web page that tells you all about the fountain and recommending a restaurant that overlooks the fountain. (The restaurant just happens to be the sponsor of the Internet page and smart poster.)
Or, the wall of your city transit system could have a poster of your favorite singer. Placing your NFC-enabled phone near the poster could take you to a web page with concert details. A link could take you to a second page where you could order tickets for the concert at a discount. This same type of marketing experience could be worked into many scenarios. The possibilities are endless.
NFC can be the true equalizer. An NFC-capable cell is a smart phone, and who is on the other end of that smart phone? In the past, an average user might have been someone with extra cash who would be able to pay for the contract needed to have that phone.
However, today it is also likely the owner of that phone could be someone without extra cash, someone just making ends meet.
Perhaps the individual does not own a personal computer or a laptop and cannot afford to pay for monthly Internet service. Perhaps he or she does not own a camera, Blu-ray or MP3 player, or pay for cable TV.
Such a person, who may be unbanked, could replace all those items and services, along with the associated costs, with a smart phone.
The individual might be working hard to collect a paycheck and living on cash. There are many more of these people than you might suspect. Could NFC-capable phones be a path to get this demographic to join the ranks of the banked? Perhaps.
Is there a secret side to NFC we don't know about? What are the big technology companies doing with NFC? Now that you can pay with your NFC phone, will companies like PayPal Inc. get involved? I would bet that all the big tech companies are looking, planning and moving toward this goal.
Has the delay in not having NFC onboard in the last iPhone release been due to lack of interest? My bet is it has more to do with how Apple Inc. is going to approach NFC rather than if it will. You can be sure that it will be done Apple's way, and that way will be different than the norm.
Stories are floating around on the Internet regarding Apple exploring embedded secure elements (the security technology of NFC), which is the technology being used in machine-to-machine communication systems, and while it is not the way most are approaching NFC, it is a possibility.
Can NFC be trusted? Is it secure? Yes, if done correctly, NFC can be as secure as Europay/MasterCard/Visa, which is an integrated chip security system used on most secure financial cards globally.
The ability to deploy one-time-use passwords (OTPs) with NFC-capable phones bolsters the argument that NFC is more secure, since OTPs can be used to protect card-not-present transactions (that is, Internet purchases).
The answer might be no, however, if in a rush to gain marketing riches and NFC transaction profits, the technology is not employed correctly.
The standards for NFC are still in development; no clear winner has emerged for how it will be handled - subscriber identity module, embedded element, Secure Digital card, revenue model, and many other variations are under consideration.
In this environment, a rush to market could be bad from a security standpoint if not properly implemented. The slow movement and progress to NFC gives me encouragement that it will happen in a secure and solid way.
Barry Mosteller is the Director of Research and Development at CPI Card Group. During his 20-year career in card manufacturing, smart cards, research and development, project management, and marketing, Mosteller has led the development of many significant innovations in card technologies and materials and authored or co-authored five card related patents. Mosteller is ACE accredited by the International Card Manufacturers Association and chairs the ICMA's Greening of the Factory Committee. He is also CISCP certified by the Smart Card Alliance. He can be reached at firstname.lastname@example.org.
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