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Mobile NFC ecosystem and value chain

07 September 2011 Shailendra Pandey

Key points

Mobile NFC is gradually progressing from the trial stage to the commercial rollout of services. The mobile NFC value chain players are forming alliances with other stakeholders to ensure the successful deployment of services for a large user base. It is likely that many mobile operators will continue to pursue their individual mobile NFC plans, while at the same time collaborate with other operators and form joint ventures to compete with the OTT players. By grouping together, operators can offer nationwide coverage to service providers and big-volume orders to handset makers. But antitrust laws limit how much the operators can integrate services; for example, in most jurisdictions, they cannot offer service providers a commonly-agreed rate for renting space on the SIM. Both mobile operators and handset vendors will deploy NFC services in the coming years and the existence of different smartphone OSs and competing mobile app stores means that there is bound to be much fragmentation in the mobile NFC market. The success of the mobile app stores indicates that many of the mobile NFC services will be offered as applications via these stores. The mobile NFC value chain players need to work together to ensure that NFC solutions and, in particular, handsets can be certified to ensure all parties are satisfied with security and technical compatibility. Backwards-compatibility is also necessary to ensure that future mobile NFC implementations can use existing NFC infrastructures where possible. The tussle for dominance among players for the control of the SE (secure element) has resulted in different solutions and deployment approaches: Smartphone and OS vendors want to bypass the mobile operators; banks also see mobile operators as potential competitors; while credit card companies want greater control for certifying NFC readers and devices. Operators in emerging markets have a stronger position because of their extensive distribution networks and existing relationships with the merchants and retailers. In most cases, operators also have a stronger brand and good government support. Therefore, the other players are more likely to partner with the operators for NFC rollout in emerging markets.

Overview There are many players in the mobile NFC ecosystem, and it continues to expand further with the entry of new players in the market. As of now, the mobile NFC market is highly fragmented and it is expected that the collaboration and coordination between value-chain players will initially be complex. In order to understand the complexity of the ecosystem and the challenges and opportunities for players involved it is necessary to consider the role and motivations of each of the key players in the value chain. The mobile NFC value chain (see fig. 1) comprises of many stakeholders including the mobile operators, banks and financial institutions, merchants and retailers, handset and OS vendors, payment network providers, chipset manufacturers, trusted service managers (TSMs), NFC hardware and component manufacturers, payment service providers, and NFC application service providers and software vendors.

2011 Informa Telecoms & Media

Fig. 1: Mobile NFC value chain

The results from various trials over the last two to three years have indicated a positive response from consumers to the use of mobile NFC as an alternative to cash for small-value, frequent exact-change transactions such as purchasing public transport tickets, snacks and drinks. These findings have attracted more companies to become part of the mobile NFC ecosystem to get a share of its potential revenues. In the last 12-18 months, following Googles backing of NFC technology and also the fear of Apples entry into the market the mobile NFC market has regained the momentum it lost. This has resulted in a rush from a number of mobile operators in Europe and other parts of the world to launch their NFC services. Mobile operators Mobile operators see NFC as an enabler technology for payments made via the m-wallet. The place in the NFC value chain that operators are hoping to fill is managing the SE (secure element) and renting out space on the SIM card to NFC service providers. Operators are keen to keep hold of the SE which provides authentication for service access, stores customer data and provides security. In Japan, NTT DoCoMo has been providing the Osaifu-Keitai (mobile wallet) services on mobile phones equipped with contactless smart card applications since 2003, using the proprietary NFC technology FeliCa from Sony. Following DoCoMos lead, other mobile operators and businesses in Japan have launched numerous related services, including DCMX, Mobile Suica, Kesaka, Edy and Nanaco, which allow FeliCa-enabled mobile phones to be used as electronic money, credit cards, electronic tickets, membership cards and airline tickets. Meanwhile, in South Korea, all three mobile operators have offered a similar range of services using FeliCaenabled phones. In February 2011, NTT DoCoMo and KT, South Koreas second-largest mobile operator, announced that they will work together to develop new cross-border mobile NFC services including mobile payments, mass-transit ticket and promotional virtual coupons. Both operators are presently jointly determining common NFC specifications that will be built into their devices, networks and billing platforms in order to enable them to deliver a seamless service to customers travelling between Japan and South Korea. In preparation for the service launch, both companies will accelerate the development of their existing infrastructures and start conversations with NFC-based service providers in different industries to encourage their participation in the project.

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However, outside Japan and South Korea, the deployment of mobile NFC services thus far has mainly been limited to market trials. The results of most of these trials have been positive with clear evidence that there is a latent demand for these types of proximity payment services. In Poland, Orange is running an NFC payment service trial in partnership with the Polish bank Zachodni WBK, Mastercard and Gemalto. Around two million Orange mobile subscribers are expected use the pilot service, which will allow them to pay for goods and services using their mobile phones; payments of US$50 or more will require a PIN to be entered into the users handset to enable the transaction. In the UK, Everything Everywhere, owned by France Telecom and Deutsche Telekom, along with O2 and Vodafone have recently formed a stand-alone JV to define m-commerce standards and accelerate uptake of services. This move closely echoes the one announced in Spain in March 2011, which, saw the countrys major network operators Telefonica, Vodafone and Orange coming together to jointly develop NFC payments. Similarly, in France, operators have been working closely together on a city-by-city basis to define the NFC ecosystem and lay the foundations for mass-market uptake based on operator-led common standards and approaches. The UK mobile operators are looking towards a key target date of 2012 for mass market availability of mobile NFC services. This is driven mainly by the desire to make the London Olympics a cashless event a laudable objective as this would give considerable visibility and credence to the mobile NFC business. It seems a reasonable assumption that by 2012 a number of NFC handset models will be available in large volumes from multiple vendors, and that contactless point-of-sale (POS) infrastructure should be widespread at least in the heart of London. In the US, Verizon Wireless, AT&T Mobility and T-Mobile have formed the Isis alliance, a mobile commerce joint venture that has partnered with the four major payment networks Visa, MasterCard, Discover and American Express to drive the mobile payments market. Isis plans to operate as a TSM for mobile NFC services. The initial Isis launches will be in Salt Lake City in Utah and Austin in Texas, mobile NFC services will be rolled out in these cities in the first half of 2012. It is believed that Isis is also in talks with Google to form an agreement and establish an m-commerce solution that will allow users to keep the same mobile wallet, while switching from one operator to the other. In Germany, T-Mobile, Vodafone and Telefonica O2 aim to extend their mPass payments service to NFC. T-Mobile plans to introduce an NFC-enabled m-wallet service in Germany and Poland in 2011, and further rollouts are planned in Holland and Czech Republic in 2012. In Germany, 60% of retail purchases are still made in cash and T-Mobile believes there are opportunities in offering mobile NFC services as a cash replacement tool. In addition to Western Europe and the US, operators have also started rolling out mobile NFC services in other regions. In Turkey, Turkcell, in collaboration with SmartSoft and Plastkart, has launched a MasterCardapproved TSM solution. The operators subsidiary Turkcell Technology has developed an NFC gateway that can support multiple applications over one SIM card, and OTA platforms. Turkcell claims this will allow it to offer an end-to-end solution for mobile NFC transactions to service providers. Turkcells NFC-enabled mobile wallet service is called "Turkcell Cep-T Cuzdan"; NFC-enabled handsets can be used to perform credit-card and toll-pass-card functions. Gemalto is supplying Turkcell with NFC-enabled SIM cards that can connect to the NFC chips in phones via the single-wire protocol. For its subscribers without NFC handsets, Turkcell is offering two antenna devices which subscribers can purchase and use to equip their handsets with NFC payment capability. In Tanzania, Etisalat Group has launched the first commercial NFC payment service in the country through its subsidiary, Zantel. The service, called Touch and Go, was developed by Etisalat in partnership with Oberthur Technologies and MasterCard and will enhance Zantels mobile money transfer service, ZPESA. Etisalat plans to roll out mobile financial services using NFC technology across its 18 markets in the Middle East, Africa and Asia.

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Key findings Mobile operators are pushing to deploy NFC services to prevent over-the-top (OTT) giants like Apple and Google from taking the lead in this market. In addition to their own initiatives, operators have also joined forces in a number of markets to push for the rollout of NFC handsets and services. To avoid losing out to the OTT players, mobile operators have formed joint ventures and alliances in a number of countries, including France, Germany, Netherlands, Spain, the UK and the US, to drive uptake of operator-deployed services. By working together, operators can offer nationwide coverage to service providers and big-volume orders to handset makers but they need to find a way of doing this while adhering to the antitrust laws. For example, in most jurisdictions, operators cannot offer service providers a commonly-agreed rate for renting space on the SIM. Mobile operators argue that the SE should be embedded in the SIM card and claim that this is preferable because SIM cards can be swapped, changed or upgraded if there are any security issues (i.e., operators can disable services over the air if a phone has been lost or stolen). However, NFC has many use cases which are unrelated to the mobile subscription so, in the longer term, mobile operators may lose the battle of having the SE in the SIM card. As the real estate on the SIM is limited, it has real value that banks or other PSPs (payment service providers) may be willing to pay for. This could be a relatively straightforward way for the mobile operator to extract value from mobile NFC services; each issuing bank or PSP would be charged a monthly fee per payment application. Many mobile operators see the business-to-business sector as their greatest opportunity in NFC, realizing that they have an uphill struggle to compete with OTT players on the consumer front. Operators have existing relationships with many enterprises as communication service providers and should look for opportunities to also offer NFC-based workplace access service to those organizations. For mobile operators, the business case for NFC may be stronger in some of the developing markets. The low penetration of the fixed Internet as well as banking and credit/debit cards in these markets means that operators have an edge over the likes of Apple, Google and the banks there. Handset and OS vendors It has been predicted that, over the coming years, mobile phones will gradually replace the physical wallet and credit/debit cards and function as a depository for virtual or eCards from different issuers for different applications (e.g., payments, loyalty and access control). This trend will be driven by the use of NFC technology in mobile phones as the means of communicating with the payment infrastructure. NFC-enabled mobile phones can interact with the present ISO 14443 contactless cards and readers, allowing users to authorize payments, access services and information, and use on existing contactless infrastructure on public transport systems. An NFC-enabled mobile handset adds the advantage of user interaction via a display and keypad, as well as an Internet connection, which enables the use of applications like payments, ticket services, access control and loyalty programs on mobile phones. A fundamental barrier to mobile NFC services, however, is the lack of handset choice. Only a handful of NFC-enabled mobile phone models from Nokia, Mobiwire (Sagem) and Samsung, plus Googles Nexus S, are on sale outside Japan and South Korea. More handsets from RIM, LG and Samsung are set to ship in the near future but initially are expected to only be introduced in selected markets. Hewlett-Packard has announced that it will add NFC to its WebOS smartphones and tablets. Motorola, Sony Ericsson and HTC also have NFC in their roadmaps but are not expected to deliver NFC mobile phones before 1Q12. Mobile operators want handset vendors to ramp up production of NFC-enabled mobile phones but vendors are still reluctant to commit to anything beyond the availability of a couple of models in 2011. Most handset vendors want to see a widely-deployed NFC POS infrastructure in place before they start shipping more NFC-enabled devices. Another key reason why handset vendors have been slow to introduce NFC devices is the disagreement between value chain players on how the SE will be implemented in the mobile phones. Handset vendors prefer devices with embedded secure elements (eSEs) but, considering that most mobile NFC service announcements so far have been from the operators, it is likely that many handset vendors, at least initially, will come out with NFC devices with an eSE that also provides a link between the NFC chip in the handset and a secure

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element in the SIM card, a system referred to as single-wire protocol (SWP). For example, the Nexus S has an eSE managed by Google that also supports SWP. In the longer term, Google, Apple and other handset vendors with mobile app stores would prefer to ship devices with eSEs and be the ones to provision security for developers making NFC applications for their devices and platforms. If the SE is embedded in the handset, mobile NFC services and applications can be used by any user with the device, and not be limited to specific mobile networks. Initially, the majority of the NFC-enabled handsets launched will be high-end smartphones. However, announcements from some vendors indicate that mid-range NFC handsets will also become available soon. ZTE has reported its willingness to ship NFC devices for operators; it has signed a deal with NXP Semiconductors and will build NXPs PN544 chip into its feature phones and smartphones. Fly Mobile has already launched an NFC-enabled touchscreen feature phone. Fly Mobile was established in 2003 and has offices in the UK, France, Germany, India, Russia, Ukraine and Nigeria; Eastern European markets and India account for most of its handset sales. A concern raised about NFC-enabled mobile phones is the possibility of the screen cracking or breaking with the frequent use of the device to tap on readers and POS hardware. The possibility of this happening is greater in touch-screen devices, most of which happen to be high-end smartphones. For NFC, handset vendors may have to consider developing devices with a stronger screen and outer body. However, this will have an impact on the costs, production cycle and shipments of these devices. And, more importantly, it's unlikely that users of devices such as the iPhone or Nexus S will be willing to switch to the speciallymanufactured NFC handsets. Google Many industry experts believe that Google will emerge as the strongest player in the mobile NFC ecosystem. In just over six months, Google has added NFC to the Android OS, announced its Wallet and Offers services, and announced plans to acquire Motorola Mobility. It has also launched the Nexus S NFC phone and signed agreements with MasterCard and a number of retailers including Subway, Macy's, American Eagle and RadioShack. Googles approach to drive the mobile NFC market is to get the NFC hardware embedded in a large number of Android devices. The Google Wallet is essentially an Android app which can store virtual credit cards, coupons, vouchers, gift-cards, etc. users can make transactions at contactless terminals simply by running the app on an NFC-enabled handset such as the Nexus S. Googles business is advertising and NFC provides it with an opportunity to link the ads and offers that it serves in the virtual world with purchases in the physical world. With the growing preference for CPA (cost-per-action) based pricing for Internet advertising, NFC can enable Google to prove to advertisers that the page impressions, or click-throughs, theyve paid for have translated into the desired customer action and/or sales at shop tills. In addition, Google has developed Google Offers, a service that will present users with discount coupons and offers in Googles search results. Users will be able to get deals by e-mail and collect offers from NFC tags; NFC-enabled mobile phones can then be used to redeem the discounts and offers at NFC POS terminals. The big challenge for Google will be to ensure the security of transactions. The open nature of the Android OS means greater risks from hackers attempting to break into the software and misuse the wallet app. To enhance security, Google is considering putting a system of three PIN codes in place before a user is able to carry out a payment on the mobile phone: The first PIN to unlock the phone; the second PIN to access the m-wallet; and the 3rd PIN to finally pay. This will no doubt be good for security but wont make mobile payments any faster than using plastic cards. Nokia Nokia has been talking in support of NFC for several years but currently only distributes two NFC-enabled devices the C7 and the N9. A year ago, Nokia had plans to have NFC in all its smartphones that shipped in 2011 but none of the smartphones it announced by July 2011 included NFC.

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Nokias C7 handset is enabled for SWP only and doesnt have an eSE. However, considering that Nokia is working with Microsoft for its smartphone roadmap, it is likely that both companies will choose the eSE option for many, if not all, of their devices in the future. Recently, Nokia launched NFC Hub, an online service it claims will help businesses to adopt NFC tag-reading solutions; it believes that initially there will be greater opportunities with NFC tags than mobile NFC payments. Nokias NFC Hub service will allow companies and businesses to buy generic NFC-tagged posters, aimed at directing people to websites or to get more information. Nokia will also provide account management service for larger businesses. NFC Hub will also allow the URLs to which the tags are pointing to be changed, enabling businesses to update their campaigns without having to change the tags and posters. RIM RIM had stated that many of its new BlackBerry handsets in 2011 would be NFC-enabled but by July 2011 had only announced two devices, the BlackBerry Bold 9900 and 9930, which are expected to start shipping in 3Q11. These devices will incorporate the BlackBerry 7 OS which supports NFC and includes an API and tag-reader tools to allow developers to build NFC applications. In the US, RIM is at odds with the operators over the issue of which company controls the SE or the users mobile payment credentials. The US operators want this data stored on the SIM cards, while RIM wants it embedded in its BlackBerry devices. As a result, RIM and the operators are working separately on mobile payments. RIM has partnered with MasterCard and Bank of America for a mobile payments trial, while Verizon Wireless, AT&T Mobility, and T-Mobile have formed the joint venture Isis to sign deals with the merchants. Samsung Of the top five handset vendors, Samsung has the largest number of NFC devices available in the market as of August 2011. In contrast with other vendors, Samsung seems willing to let the operators have control over the SE and is happy to provide them with NFC devices. In Europe, Orange is selling Samsungs Wave 578 NFC handset while Samsungs Nexus S NFC mobile phone is being offered by AT&T, T-Mobile and Sprint in the US. Samsung has also developed an entry-level NFC smartphone, Player City, available in France and the NFC version of Samsung Galaxy S2 is also expected to start shipping in the UK in 3Q11. Apple Apple could make the biggest impact on the mobile NFC market with the launch of an NFCenabled iPhone. It had been expected that the new iPhone in 2011 would include NFC but recent reports indicate that Apple may choose to wait until 2012 to launch the NFC version of the iPhone. It is believed that one of the factors holding Apple back from including NFC in the iPhone is concerns that repeated tapping on NFC tags and readers could cause iPhone screens to crack. Unlike Googles focus on advertising revenues, Apples business model is selling devices linked to compelling content and applications on iTunes and the App Store. It sells a broad range of devices including desktops, laptops, tablets, smartphones, portable media players and TV sets and the use of NFC technology will provide a way of sharing content and apps across all of its devices. Apples strength in being able to offer an end-to-end ecosystem for NFC services makes it a big threat for competitors. The vendor has complete control of the software and hardware that goes into the iPhone and it has the most successful mobile app store. To have an iPhone app has become a priority for many brands, retailers, merchants and banks. Furthermore, Apple already has a well-established payment platform in the form of iTunes. Key findings The tussle among mobile operators, handset/OS vendors and service providers over the control of the SE continues to delay the shipments of NFC handsets. Handset vendors argue in favor of embedding the SE in the device and claim that most service providers will also prefer not having to pay the operators for renting space on the SIM card. It will take a couple of years before NFC-enabled handsets will be shipped in significant volumes, and with sufficient choice, for them to satisfy the expected demand from consumers. Consensus in the industry is that market penetration of handsets of at least 20% is necessary before the mobile NFC market really starts to reach its potential. Smartphones allow users to download any applications and software which also means that there are risks of viruses and malware. Handset vendors will need to 2011 Informa Telecoms & Media 6

ensure security from such threats, while at the same time continuing to provide an open ecosystem to developers to enable them to build attractive NFC applications. Googles main interest in NFC is not payments but the activity leading up to payments, such as search, advertising and special offers. It sees NFC as an extension of its advertising business model. The acquisition of Motorola will take Google closer to having an Apple-like end-toend ecosystem for mobile devices and services; so far, this has been Apples key differentiating strength. Apple has complete control of the software and hardware that goes into the iPhone and, with the Motorola acquisition, Google will also have similar control over devices manufactured by Motorola Mobility. Even if it is considered likely that 40% of handsets shipped will be NFC-enabled by 2015, the penetration of users with NFC mobile phones wont reach more than 20-25%. So it's unlikely that more than 15-20% of global mobile subscribers will be active users of mobile NFC services by 2015.

Banks The current economic woes caused by the credit crunch mean that banks and other financial institutions face significant challenges as their payment revenues decline rapidly because of initiatives like the SEPA (Single Euro Payments Area) which aims to reduce the cost of crossborder electronic money and payments transactions in Europe and increasingly more onerous regulation in the financial services sector around the world. Mobile NFC services can provide a means for the banks to stimulate greater use of their services especially for card payments, encourage customer loyalty by taking advantage of the value-added benefits of mobility, and help in reducing fraud. In the context of card payments, two entities are involved: the card issuing banks (CIBs) and the merchant acquiring banks (MABs):

CIBs maintain cardholders accounts; they issue the cards, extend credit to cardholders (in the case of credit cards) and bill cardholders for purchases against their card. The CIB is typically responsible for customer care and handling the cardholders personal data, although this may be provided by third-party processors or card program managers. The CIB is responsible for transferring payment to the relevant merchants accounts (via the payments network and merchant acquirer) for the cardholders purchases. MABs maintain the merchants accounts that allow them to accept credit and debit transactions. The merchant acquirers provide the means to authorize valid card transactions via the interface to the appropriate payment network and facilitate the clearing and settlement of the transactions through the payment network. The acquiring bank receives funds from a cardholder when a credit card transaction is completed, and deposits the payment amount, less any fees, into the merchant's account and from there into its business checking account.

Historically, a single bank would have performed both functions in well-defined geographic markets but, thanks to the globalization of retailing and banking and advances in technology, the industry is now dominated by large-scale, specialist organizations and the issuing and acquiring functions are typically offered by independent entities, some of which are not banks. Investing in mobile NFC could result in the following benefits for banks:

Reduced costs of handling cash and checks. Reduced costs of plastic card issuing and management. Incremental revenues from consumers and/or merchants driven by the greater volume of transactions, and perhaps also higher payment fees for the greater convenience and security offered by mobile NFC payments. Gaining or protecting market share the early adoption of mobile NFC can help banks differentiate and could also provide opportunities to offer more interactive services to their customers. Access to new markets and to reach and serve new customer segments previously inaccessible to them (i.e., the unbanked or the under-banked user segments). Increased usage of contactless infrastructure that has already been deployed, leading to faster pay-back and higher ROI.

In France, BNP Paribas, Credit Mutuel, CIC and Credit Agricole, together with mobile operators France Telecom, SFR, Bouygues Telecom and NRJ Mobile, have plans to deploy nationwide interoperable NFC-enabled payment services in early 2012. 2011 Informa Telecoms & Media 7

The Slovakian bank UniCredit is using NFC stickers supplied by Gemalto for a commercial mobile NFC deployment. The stickers will be used in conjunction with MasterCard PayPass readers, which are deployed in about 3,000 outlets around Slovakia. UniCredit Slovakia is part of the much wider UniCredit Group, which has 9,600 branches in about 50 countries around the world. Despite the benefits of mobile NFC, there are a number of gaps or uncertainties in the business case that is causing some banks to pause and look very hard at the mobile NFC opportunity before offering their full commitment. Mobile NFC is unlikely to reduce cash-handling costs any more than contactless cards do and the potential to increase revenues from increased transactions can also be attributed to contactless cards. In addition, the potential threat from mobile operators eventually offering competitive financial services is also a concern for the banks. Key findings Partnerships with mobile operators to deliver mobile NFC payments will allow banks to reach and serve new customer segments previously inaccessible to them (i.e., the unbanked or under-banked) and grow their revenues. Mobile NFC will lead to an increase in the use of the existing contactless infrastructure that several banks have deployed, generating additional payment traffic on already deployed or planned contactless infrastructure, which will accelerate the pay-back on existing or planned investments. Some banks have concerns about potential conflict or competition between the standard contactless cards, to which many banks are already committed, and NFCenabled mobile phones. Many banks are in favor of having NFC functionality embedded in microSD cards, rather than in the SIM card or the mobile phone. For banks, having NFC in microSD cards means they can offer a service which is both operator- and handset-agnostic, allowing them to reach a large customer base without having to partner with an operator or handset vendor. Payment network providers The providers of the payment networks, such as Visa, MasterCard, American Express and Discover Network, are the companies behind the credit and some debit and prepaid cards. They maintain the infrastructure and provide services, such as approval and certification, to CIBs as well as defining their own brand requirements for different payment form factors. They also define payment specifications and provide transaction-processing services to support them (see fig. 2). Although critical to many mobile payment services, such as creditcard-linked remote payments and NFC payments, there are unlikely to be major changes in the way these payment networks operate. Mobile NFC will potentially just reduce the lifecycle management costs of existing card payment systems. Fig. 2: Credit card value chain

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NFC POS infrastructure is being deployed in countries all over the world, driven primarily by the payment network providers Visa and MasterCard, which are aggressively promoting their respective contactless card schemes payWave and PayPass. EMV Europay, MasterCard and Visa formed EMV (Europay, MasterCard and Visa) in 1999 to manage, maintain and enhance the EMV integrated circuit (smart) card specifications for payment systems. MasterCard acquired Europay in 2002 and the Japanese card company (JCB) joined the organization in 2004 so EMV is currently operated by JCB, MasterCard and Visa. The companys primary role now is to manage, maintain and enhance the EMV integrated circuit card specifications to ensure interoperability and acceptance of payment system integrated circuit cards on a worldwide basis. Visa, MasterCard and other payment networks have adopted a visual symbol to indicate contactless payment functionality on cards and terminals. The symbol must be shown on the front of the card and on the reader at the POS. Visa payWave Visa payWave is an EMV-compatible payment platform based on the ISO 14443 specifications. The payWave cards are issued with both the conventional chip or magnetic strip for contact transactions and the embedded chip with payWave technology. Financial institutions offering Visa payWave cards include Amegy Bank, Arvest Bank, Barclaycard US, BB&T, Chase, First Internet Bank of Indiana, INOVA FCU, PNC Bank, SunTrust, Wells Fargo and Zions Bank. Visa is migrating to an enhanced global contactless payment specification, Visa Contactless 2.0, which will ensure that Visa cardholders can use their contactless cards worldwide while still providing issuers with the flexibility to customize programs to meet local market needs. The specification provides additional security options and enhanced performance for faster transaction processing. Another major feature of the specification is that communications between the card and terminal have been streamlined to provide faster transaction processing. This makes Visa payWave ideal for environments where speed is of the essence, such as car parks, mass transit systems, fast food restaurants and convenience stores. Mastercard PayPass MasterCard PayPass is also an EMV-compatible, contactless payment platform based on ISO 14443. MasterCard began trialing PayPass in 2003. Its first market trial was in the US, in Orlando, Florida, with JPMorgan Chase, Citibank and MBNA; more than 16,000 cardholders and 60 retail locations participated in the market trial. A 2007 MasterCard PayPass Benchmark Study found that about 90% of respondents that use PayPass were satisfied with their experience, and 71% of these PayPass consumers said they use PayPass as their primary card for everyday purchases. Since 2005, MasterCard has rolled out commercial PayPass services in a number of markets outside the US including Canada, the UK, Germany, Poland, Australia, Turkey, the Philippines, Malaysia and South Korea. MasterCard has worked with Nokia, AT&T Wireless and JPMorgan Chase to incorporate MasterCard PayPass into mobile phones using NFC technology, trialing it in Dallas, Texas. American Express ExpressPay ExpressPay, which comes embedded in a card or in other separate forms such as a key fob, is also EMV-compatible and based on ISO 14443. In June 2005, American Express became the first card issuer in the US to launch a contactless-enabled credit card; it was called Blue and had the ExpressPay feature. American Express claims that pilot tests in Phoenix and New York demonstrated the significant merchant benefits of ExpressPay in the form of time savings and increases in spend. Based on a three-day sample, customers got through the queue 53% faster with ExpressPay than with magnetic strip transactions, and 63% faster than with cash. Discover Financial Services Discover Financial Services runs the POS network that Isis is connected to; it is the fourthlargest in the US. The company operates the Discover card and its payment businesses include the Discover Network with millions of merchants and cash access locations, the PULSE ATM/

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debit networks, and the Diners Club International global payments network which is accepted in over 185 countries. Discovers Zip contactless application is accepted in over 100,000 merchant locations in the US but there are not many users because the company only introduced contactless stickers and cards in November 2010 and issued these only to selected customers. The company is working to enable Zip payment from mobile phones and claims that Zip will be accepted at around 90% of the locations that take PayPass or payWave in the US. Key findings The business case for payment network providers to invest in mobile NFC is to displace cash payments by growing the number of users of mobile NFC payments. Adoption of mobile NFC can also lead to strong growth in cashless transactions in emerging markets, which tend to have a low credit/debit card penetration, thereby increasing revenues for payment network providers. According to American Express, contactless transactions can be 63% faster than cash and 53% faster than using credit cards. MasterCard found that the most significant time savings are realized in a drive-through environment where using contactless payments can save 12-18 seconds per transaction as compared with cash payments. To accelerate the growth of mobile NFC transactions, payment network providers should also promote the use of NFC stickers to complement contactless cards in developed markets. NFC stickers will also help in driving the adoption of mobile NFC payments in emerging markets without the need for huge upfront investment. Payment network providers should also explore opportunities of developing a fully fledged secure m-commerce platform which they can customize and market to merchants and banks, as well as Internet and media companies. In addition to revenue growth, investing in mobile NFC is also important for payment network providers to ensure that they dont lose out to payment platforms like PayPal and iTunes, to which users can directly link their bank accounts and bypass the payment network providers. In the coming years, the payment network providers are likely to face more competition from Google and Apple, which already have and will continue to grow their direct customer connections. Merchants and retailers Mobile NFC has a significant relevance for certain types of merchants. For example, transport operators are already using contactless cards for ticketing, especially in mass-transit applications, to increase throughput and increase customer satisfaction. Similar benefits will be experienced by ticket vendors for live events, museums, cinemas and theaters where purchasers can be fast-tracked into the venue. Currently, NFC readers are most widely deployed by public transportation systems. Informa Telecoms & Media estimates that, by July 2011, about 930 cities in at least 50 countries had introduced NFC-based ticketing in public transportation systems. In Japan, around 60% of the handsets sold now are NFC-enabled and about 20% of people with such phones have reportedly activated them for use on public transportation. Only a small minority of retailers outside Japan and South Korea have NFC-enabled POS terminals in their stores. In January 2011, Starbucks announced that all of its US stores are now accepting NFC payments via mobile phones. Retailers in the US and the UK have started deploying contactless POS terminals but currently only about 3% of POS infrastructure in the US is enabled for contactless payments. In the UK, it has been reported that the Post Office is planning to deploy new POS terminals with contactless payment facility in 12,000 of its branches in early 2012. By October 2012, it expects to have contactless POS terminals in all of its branches, around 30,000-35,000 terminals, making it largest merchant accepting contactless payments in the UK. The London Transit Authority expects to install around 20,000 contactless POS terminals during 2012, while it is believed that, as of July 2011, there were around 60,000 contactless POS terminals installed at merchant locations in the UK and about 15 million contactless bank cards have been issued. Mobile NFC payments offer merchants and retailers the opportunity to improve their customers experience of purchasing, through improved ease of use, convenience and transaction speed, and potentially greater security. For merchants and retailers, mobile NFC offers the following key benefits: 2011 Informa Telecoms & Media 10

Increasing throughput by reducing transaction times. Potentially generating more transactions, especially for micro-payments. Exploiting impulse purchasing behavior more effectively. Reducing cash handling costs and risks. Running marketing campaigns offering coupons and vouchers to increase customer loyalty.

Mobile NFC offers more opportunities to run loyalty programs, enabling merchants and retailers to exploit e-vouchers and advertising delivered either via the cellular network or locally via NFC (e.g., using smart posters) and stored on the handset. Key findings The adoption of mobile NFC transactions is likely to be fastest in the public transport sector, especially in places where a good deal of contactless POS infrastructure is already in place. The resulting cost savings in ticket issuing and cash handling will strengthen the business case. Merchants and retailers will be interested in NFC if it helps to reduce costs, increase sales and provide better protection against fraud. They arent likely to mind whether a user pays with a contactless plastic card or an NFC-enabled mobile phone; in fact, in some cases, they might prefer payments via contactless plastic cards if its faster than paying by mobile phones. An important incentive for retailers is the potential of using NFC for their own mobile wallet services, such as store-payment cards, loyalty cards and coupons and vouchers. A reduced cash-handling cost is cited as one of the key benefits for merchants and retailers to enable NFC payments but it also means that retailers will have to pay more for card-payment fees with the increase in cashless transactions. In addition to the potential cost of new hardware and potentially higher fees, there is still some resistance to mobile NFC from merchants and retailers due to security concerns and the need for additional training of staff. Trusted service managers The role of a trusted service manager (TSM) is to distribute, provision, and manage mobile payment applications on behalf of the application owners. A number of independent companies are establishing themselves as TSMs including Atos Worldwide, Cassis, SmartTrust, Giesecke & Devrient (G&D), First Data, Gemalto and Ericsson IPX. TSMs provide the link between the mobile operators and the issuing banks or other application owners such as transportation service providers. For example, First Data is playing the role of TSM, delivering and managing payment applications over the air to the embedded SE in the Nexus S, Google Wallets launch device. The role of the TSM is clearly a vital one in the ecosystem and carries significant responsibility. The TSM will hold the master key to the SE and manage downloads to it; it would also be responsible for invoicing and supporting the application owners. Therefore, a TSM must be a trusted party. As the owner of the SIM, it would appear that the mobile operator would be the best candidate to act as the TSM but many in the industry argue in favor of an independent third party to be the TSM. Key findings It has been proposed that a TSM will be required to distribute, provision and manage mobile payment applications on behalf of the application owners but there are uncertainties about whether the TSM should be independent or not. It seems the most efficient and transparent approach would be to use a third party as TSM, which could act as a single point of contact for application owners and mobile operators. Although TSMs are meant to be facilitators, they nevertheless add an extra layer of complexity and count as one more party taking a slice of the mobile NFC service revenues. NFC hardware and component vendors Smartcard manufacturers The term smartcard can be used to refer to a memory card, a microprocessor card, or a contactless card. Memory cards provide more data storage space than a magnetic strip but cant process the data. In comparison, microprocessor cards (or microcontrollers) have the capacity to process data and the applications on these cards can be customized or processed via an OS. Contactless cards are based on radio-frequency communication technologies and 2011 Informa Telecoms & Media 11

can interact and exchange data with readers via an electromagnetic field, without the need for any physical or electrical connections. Smartcard manufacturers include Gemalto, Oberthur Technologies, Sony, Morpho and Giesecke & Devrient; these four companies account for over 80% of the global smartcard market. In addition, there are a few Chinese smartcard manufactures, such as Watchdata, Datang and Eastcompeace, but these companies mostly only cater to the domestic Chinese market. Bell ID, the smartcard and NFC software provider, ViVOtech, the NFC software developer, and PPC Card, the credit/debit-card manufacturer are working together to enable the mass-market rollout of mobile NFC services in Europe. As NFC is compatible with Philips' MIFARE and Sony's FeliCa contactless smartcard platforms, NFC devices can read information from these cards. NFC devices can also operate like a contactless card, even when switched off, making them compatible with the huge installed infrastructure of MIFARE and FeliCa systems. It is believed that Google will subsidize contactless POS terminals to accelerate their deployment by retailers and merchants. The replacement cycle for POS infrastructure is usually five to seven years for most retailers. Therefore, to accelerate the growth of NFC payments, it is important to encourage more retailers to deploy contactless POS systems and providing terminals at subsidized rates will help to drive this. NFC POS terminal and reader manufacturers The POS terminal and reader vendors are vital players in the mobile NFC value chain as they provide the NFC-enabled terminals and readers to the merchants and acquirers. The big vendors in this field are Ingenico, Verifone, Hypercom and Vivotech; other players, including IBM, Micros and Radiant Systems, also provide contactless POS systems. Most terminals and readers for mobile NFC transactions tend to be the same as those that can be used, or are already in use, for transactions with contactless payment cards. Contactless card readers are provided by companies such as OTI (On Track Innovations) and ROAM Data. Some interim solutions have also been proposed to drive the NFC market. One example is the iCarte 110 NFC reader and contactless payment adaptor manufactured by Wireless Dynamics Inc. and designed for the iPhone 3G/3GS; the readers dimensions are 62 x 26.5 x 12.3 mm and it can be attached at the bottom of the iPhone. The iCarte 110 NFC reader has an embedded chip which can be configured as credit/ debit cards, prepaid cards and loyalty cards for contactless payments and transactions, and communicated by the attached iPhone. It can also read NFC coupons, smart-posters, etc., as well as used for enterprise applications including access control and asset tracking. The iCarte 110 NFC reader is currently only available for payment with Visa contactless protocol and the SDK is available for purchases exceeding 1,000 units. Wireless Dynamics Inc. has also developed NFC readers such as the SDiD 1010 in SD format which can be inserted in devices with an SD card slot. Payment and transaction information can be processed via the cellular network as well as using Wi-Fi and Bluetooth. Chipset manufacturers For chipset manufacturers, the mobile NFC market offers a new value-add by providing them with the opportunity to sell more chips, and at a higher premium. There are three types of relevant chipset vendors:

The UICC vendor: The universal integrated circuit card (UICC), more commonly known as the SIM card, is the key element in mobile NFC payment systems as the UICC is where one or more of the security domains are provisioned. IC chip vendor: Typically the manufacturers of chips used in EMV credit and debit cards are the same as those supplying the UICC manufacturers for the mobile industry, providing valuable cross-sector expertise. NFC chip vendor: The role of this value chain member is to supply the standardsconforming NFC chip to the handset manufacturer for integration with the handset.

Although they are not directly involved in mobile payments, the chipset manufacturers are critical to the mobile NFC market as they provide the chipsets to handset manufacturers to enable them to produce NFC devices. Furthermore, the chipset manufacturers work to bring the technology improvement and innovation which then lowers the costs of NFC chips and 2011 Informa Telecoms & Media 12

therefore the BOM (bill-of-material) cost of NFC handsets will initially be only slightly more than for non-NFC phones. In a couple of years, it can be expected that handset vendors will be able to provide NFC-enabled devices that are in the same price range as non-NFC devices. Inside Contactless and NXP are two leading NFC chipset suppliers. Broadcom and Qualcomm are also developing NFC chipsets. Inside Contactless, in partnership with Infineon and Giesecke & Devrient, has developed the SecuRead system-in-package (SIP) NFC solution to provide handset manufacturers with a single package that includes both an NFC controller and an embedded secure element (SE). The solution comprises the MicroRead NFC controller, Inside Contactless' open NFC protocol stack for Android, Windows Mobile, Linux and Java devices and an embedded SE manufactured by Infineon Technologies; it runs a GlobalPlatform-compliant Java Card operating system supplied by Giesecke & Devrient. The solution will make it easier for device manufacturers to embed NFC technology in their products. NXP Semiconductors has reported that its NFC chipsets have been integrated in over 60 mobile phones currently being developed by handset vendors. NXP's NFC software is open source on the Android platform and enables the Google Wallet application. Gemalto has contracted NXP to incorporate the companys MIFARE contactless-payment technology into its UICC cards; Gemalto has been chosen by KDDI to provide User Identity Module cards and Trusted Service Management for its NFC program. Another company, Watchdata, provides the SIMpass SIM card-based mobile NFC solution. China Telecom has deployed the SIMpass solution in over 20 provinces and has over half a million users of the mobile NFC service. Similarly, Watchdata claims to have shipped over 100,000 SIMpass cards to the Thai mobile operator True for its True Money Service, which allows users to make mobile NFC payments at McDonalds and other retailers. Memory card manufacturers Memory card manufacturers argue in favor of embedding the SE (secure element) in the memory card, rather than in the SIM or the mobile phone. They claim that having the SE in a memory card is better than having it on the SIM which has storage limitations. Having the SE on a memory card also means that users are not tied to a particular operator or mobile phone and can take out and plug the memory card in other handsets to use NFC services (see fig. 3). Fig. 3: Options for location of secure element in mobile NFC handsets

In Dec 2010, In2Pay microSD, developed by DeviceFidelity, became the first NFC solution certified by Visa for commercial deployment. Another company, Tyfone, has developed the SideTap memory-card solution to enable NFC services in a large number of mobile phones. The solution consists of a Micro SD card with integrated SE and NFC antenna and allows users to make their handsets NFC-capable by simply using the Micro SD card in their handsets. Tyfone claims that the solution will allow users to remove their confidential information from the handset when switching to a new device.

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Key findings The migration of the banking and payments industry towards EMV standards, the growth of contactless payments and the opportunities in emerging markets are acting as key drivers for revenue growth for the POS terminal and reader vendors. However, these manufacturers are facing increasing price competition, in particular from Chinese manufacturers, and, as a result, their profit margins have fallen. To grow their revenues, the manufacturers are evolving their business to also offer the management of payments and related services. This includes ensuring the proper running of the terminals, providing the necessary software for the terminals and readers, managing the different payment methods, and ensuring adequate security and protection against fraud in collaboration with banks. Many vendors are developing and launching a variety of interim NFC solutions such as stickers, and NFC functionality embedded in microSD and SD cards to enable NFC services on existing mobile phones. NFC readers that can be attached to mobile phones, such as the iCarte 110 reader for the iPhone, are good interim solutions but unlikely to get mass-market adoption. Most users wont want to extend the size of their mobile phones with additional hardware and also wont want to pay extra for it. A key challenge for the POS terminal and reader manufacturers is to ensure adequate protection against the growing malware and security attacks on contactless and mobile terminals. To accelerate the market growth of NFC payments, it is important for the vendors to encourage new retailers to deploy contactless POS systems. Providing NFC POS terminals at subsidized rates will encourage more retailers to deploy contactless infrastructure. Payment service providers Payment services that are currently largely confined to the digital and online worlds, such as ecommerce payment platforms (e.g., PayPal, Amazon), digital-content platforms (e.g., iTunes), carrier billing, and even social media and gaming virtual currencies (e.g., Facebook Credits, World of Warcraft Gold, Angry Birds Bad Piggy Bank), could use mobile NFC to extend their reach to physical-world purchases. Paypal PayPal is well-established as a payment service for online purchases; it allows users the option of making payments directly from their bank account without needing to have a credit or debit card. Mobile NFC offers further growth opportunities for PayPal because retailers may prefer their customers to pay by PayPal if that means transaction fees that are lower than using the payment networks of credit card companies. Mass adoption of PayPal will therefore be a big threat to the likes of Visa, MasterCard and other credit card companies. iTunes iTunes is now one of the worlds biggest online payment platforms with more than 200 million people registered with an iTunes account. This also makes iTunes possibly the biggest creditcard hub on the Web, since users must register their credit/debit card details to open an iTunes account and start making purchases. It remains to be seen whether Apple will introduce an NFC-enabled iPhone in 2012 and extend iTunes payments beyond the realm of digital goods into the physical world. Informa Telecoms & Media expects Apple to do that in a couple of years as adoption of NFC services starts to grow. Key findings Mobile NFC offers the opportunity to online-payment platforms such as PayPal, Amazon and iTunes to extend their reach to local payments in the physical world. It also provides an opportunity for virtual currencies, for example Facebook Credits, to be used for purchasing physical goods. Retailers may prefer customers to use services such as PayPal for NFC payments if it incurs lower transaction fees than those charged by the credit card brands. Security concerns may inhibit customers from using the online payment service providers for making NFC-based local payments. To grow their business in the mobile NFC market, these companies will have to ensure that people trust them as much they trust the credit card brands. Application service providers and software vendors The mobile NFC market represents a significant opportunity for application service providers and software vendors many of whom are relatively small, entrepreneurial technology companies. There are companies that provide solutions, such as coding, programming, 2011 Informa Telecoms & Media 14

hardware implementation, etc., to integrate NFC in new and existing products companies like DeviceFidelity, Inside Secure, Monitise, Proxama, Airtag, Tyfone, Zenius, United Tectsa, Schreiner ProSecure, ISS and Near Field Solutions a few examples include:

DeviceFidelity has developed solutions to enable NFC services on mobile phones. Recently, it was granted a patent for the implementation of NFC in mobile devices to enable them to function like mobile wallets capable of conducting contactless payments and transactions using credentials issued by multiple different enterprises at POS terminals. Inside Secure will provide ZTE's GSM and TD-SCDMA handsets with its NFC solutions, allowing users of the devices to access NFC services including payments, loyalty, ticketing, and access control. In April 2011, Proxama, the NFC software development company, announced the launch of NFC services in South Africa that enable users to make contactless payments on transport networks.

The mobile NFC market also presents opportunities to e-commerce and m-commerce companies to extend their presence to local mobile payments. Some of these companies for example Monetise, Fundamo, Vesta, PayBox, and Bango have developed business-tobusiness (B2B) service solutions that are used by mobile operators or banks which brand and retail the mobile payment service themselves. These solutions are often provided on a managed services basis, where the technology platform and associated infrastructure is deployed outside the mobile operators or banks networks. Other mobile application service providers, such as OboPay, Luup and Crandy, have built business-to-consumer (B2C) service solutions and have established their own independent consumer brands, selling services directly to the mobile consumer. Mobile NFC services will also allow these players to exploit transaction data for location-based marketing services. Industry forums and associations Many industry forums and associations, including the GSMA, NFC Forum, Mobey Forum and the Contactless Payments Council, have been instrumental in driving the development of NFC standards and specifications, as well as encouraging market trials and commercial rollouts of mobile NFC services. GSMA NFC technology has the backing of the GSMAs Pay-Buy-Mobile (PBM) initiative and 52 mobile operators were supporting the initiative as of August 2011 (see fig. 4). A number of these operators are already conducting trials of mobile NFC services as part of the PBM initiative.

Fig. 4: Mobile operators supporting the Pay-Buy-Mobile initiative, Aug-11

2011 Informa Telecoms & Media


In addition to the mobile operators, banks and credit card companies, a number of other important mobile NFC value-chain players are involved in the PBM initiative including: handset vendors, such as LG, Nokia, Samsung and Mobiwire (Sagem); UICC card suppliers, such as Gemalto, G&D and KEBT; and NFC reader manufacturers, such as Vivotech and Harex. NFC Forum Formed in 2004, the NFC Forum now has over 150 members. It was formed to advance the use of NFC technology by developing specifications and ensuring interoperability among devices and services. The main goals of the NFC Forum include developing standards-based NFC specifications, encouraging products based on those specifications, and driving awareness of NFC technology among consumers and enterprises. The NFC Forum has released 15 specifications to date, which provide a roadmap to ecosystem players for developing NFC-based products and solutions. Mobey Forum The Mobey Forum, established in May 2000 is a non-profit organization; its mission is to encourage the use of mobile technology in financial services. The forum has over 50 members including banks, handset manufacturers, credit card companies, technology vendors and a few mobile operators. The Mobey Forum has published a number of white papers on best practice for mobile payments and documentation on the recommended architecture for a wide range of mobile financial services. To support its recommendations, the forum has completed demonstrations and trials based on its recommendations and principles and it is supporting members implementations. Informa viewpoint Informa Telecoms & Media recommends that mobile operators and other value-chain players must look more carefully before investing in NFC services because the technology will require a large upfront investment and take at least three to four years to reach a critical mass of users and transactions. Mobile operators are hoping that the SIM will become the default method of securing NFC applications, but it is more likely especially in the developed markets that security embedded in the handset will eventually prevail. Without the presence of a broad network of retailers and service providers that will accept NFC payments, the opportunity for mobile NFC will be very limited. There are few markets where anyone other than the banks and payment network providers has the dominance to make this happen. It is unlikely that the pure operator-driven model that NTT DoCoMo adopted will be repeated elsewhere. It will take a couple of years before NFC-enabled handsets will be shipped in significant volumes. The consensus in the industry is that a market penetration of handsets of at least 20% is necessary before the mobile NFC market really starts to reach its potential. Google has implemented the necessary NFC software in its Android OS Gingerbread and wants to get the NFC hardware embedded in large number of Android devices. Its acquisition of Motorolas handset business means that Google will be in a position to drive NFC device shipments. However, there is a high degree of fragmentation in the mobile NFC market and this will continue to restrict the rollout of commercial services for the next two to three years. Mobile NFC services can generate significant revenues for value-chain players provided all stakeholders take a pragmatic approach and recognize and accept the contribution and importance of each to the overall NFC business. The need for collaboration is clear. Revenue sharing as well as risk and investment sharing will be necessary, especially where there is no pre-existing contactless infrastructure.

2011 Informa Telecoms & Media