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Analyzing the business case for contactless payments

05 September 2011 Guillermo Escofet
Key points

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For banks and retailers, there are cost-saving opportunities in replacing cash payments with contactless payments. Potential savings can also be made by banks and operators from decreased customer churn. Another factor driving bank and operator enthusiasm for mobile contactless payments is their common fear of becoming dumb pipes as online players use NFC to extend their reach to the physical world. All would-be market players also share a common interest in promoting their respective payment products via mobile NFC, such as store cards in the case of retailers and carrier billing and own-brand cards in the case of operators. The main revenue-making opportunities lie in the additional fees that would be earned by banks and card-network providers through a greater number of cashless transactions and newly-enabled P2P payments. For retailers, there is the potential for greater turnover through the faster throughput of customers at the point of sale. It is unlikely, however, that mobile users will pay more for the privilege of making contactless payments on their phones – other than in emerging markets. There will be little or no additional revenue to share with new value-chain members, such as operators and other mobile providers, especially as regulators are increasingly squeezing margins by placing strict caps on card-payment fees. There is a big cash-replacement opportunity for NFC payments, even in developed markets. But it will be in those markets where card payments are most rooted, and where plastic-NFC infrastructure is most deployed, that mobile contactless payments have the most immediate opportunity. Evidence from trials, polls and NFC-card deployments shows that contactless payments do have the potential to eat into cash payments. But adoption of both plastic and mobile NFC payments can be slow, as evidenced in the US, UK and Japan.

Business case The main business case for NFC payments is replacing cash transactions. Substituting cash with electronic payments represents a cost saving for banks and increased revenue for credit card companies and their issuers (again, the banks), as they earn commission on the greater volume of transactions processed through them. There is also a cost saving for retailers, which, according to research, can lose more than 2% of their cash turnover from theft, cash handling and accounting errors. However, what retailers can save on cash-handling costs is probably more than offset by the commission they have to pay on credit/debit card payments. A bigger selling point for retailers is the potential of contactless payments to speed up customer throughput at the checkout and increase turnover. Mobile wallets and NFC also provide retailers with the chance to make their “closed-loop” store payment cards more prominent, against the increasing dominance of the open-loop card networks belonging to Visa and MasterCard. Extending the reach, or defending the current position, of their respective payment services is the most common driver for the players that are likely to battle it out in the mobile contactless payments space (see fig. 1).

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And they are likely to get even tighter as both retailers and regulators place increasing pressure on card-payment networks and cardissuing banks to reduce payment-processing fees. making mobile NFC payments are nice-to-have rather than a must-have. Nor will © 2011 Informa Telecoms & Media 2 . argue advocates. So there won’t be any more revenue to share with additional value-chain members than that already made from existing cashless payments. In fact. Not that the revenue opportunity for mobile players looks that good either. provide the opportunity for an additional revenue stream for cardpayment providers: peer-to-peer payments. such as PayPal. Mobile NFC does. sub-€20 (or US$25) transactions. say. Contactless payments are meant to be twice as fast as other cashless payments. lifecycle management and personalization – rather than a per-transaction share of revenue. where a card doesn’t need to be inserted into a payment terminal or a personal identification number (PIN) keyed in.informatm. In fact. The idea is that someone could pay back money to a friend or contribute to a whip-round. What’s more. the providers’ share of revenue might be diminished if they need to pay part of it to the mobile specialists providing the technology and systems needed to enable contactless payments on phones. And. however. 1: Main drivers for market players' involvement in mobile NFC payments The tap-and-go nature of NFC payments. one of the bigger advantages that mobile offers over mere plastic is that it makes it easier to extend NFC transactions beyond the micropayment threshold to which they are normally subject. mobile NFC provides an opportunity for online payment providers. they are also capable of cannibalizing existing chip-and-PIN card payments. There is plenty of cashless-payment options already available to users in developed countries.Fig. means that these payments have a good chance of extending into the realm of cash-dominated. But NFC phone penetration needs to be pretty high for people to commonly find themselves in a situation where they can pay friends and acquaintances in this way. just as contactless payments have the capability of substituting cash. Users in developed countries won’t want to pay a higher commission for such payments. alongside cardwww. the jury is still out on how effective they are at replacing cash. There won’t be any additional revenue for existing payment providers in instances where NFC payments simply substitute existing card payments. The revenue opportunity for mobile providers will be mostly limited to fixed monthly or annual service charges per user around the provisioning of mobile-payment apps – including rental of space on the secure element. by tapping phones with the recipient – as long as both he and the recipient are equipped with NFC phones. Such face-to-face transactions are usually made with cash. so NFC would again be playing a cash-replacement role. by enabling users to key in a PIN on their phone screen to authenticate higher-value transactions – although this is also possible with NFC cards used on NFC point-of-sale terminals incorporating a chip-and-PIN interface. Also. Amazon and iTunes. However. to extend their reach to physical-world purchases. margins are tight in cashless payments.

com © 2011 Informa Telecoms & Media 3 . Europe’s largest economy. have made big strides in recent years. share of payment instruments by turnover and number of transactions. one of Europe’s four biggest economies. cash accounted for just over 82% of transactions and 58% of turnover in 2009. less than half the European Union average. Deutsche Bundesbank (see fig. In a recent press conference. Cash is still king Despite the widespread availability of plastic money. By contrast. 3). And in emerging countries cash is unquestionably king. beyond bartering. it being most people’s only payment option. according to a survey commissioned by the country’s national bank. cash still makes up the bulk of transactions in many developed countries. “With smartphones. And in Germany. Yet. if it were to happen. but. is also predominantly cash driven. 2). Banca d’Italia (see fig. cash payments still made up 66% of transactions in the UK. Its paymentcard usage is. said that e-commerce accounts for only 8% of total retail. together with Germany’s. How this might be enabled has not yet been properly worked out. where we bring online and offline together. it could increase the online mobile payments opportunity for card-payment providers. www. debit/credit cards accounted for 13.4% of transactions and 29% of turnover. 2009 Italy. such as Boku and Zong.” she said. Stephanie Tilenius. we're about to embark on a new era of commerce. cash and checks still underpin 60% of economic activity. vice president of commerce at Google.payment networks.” Another possibility that has been mooted by payment providers is that of enabling one-click payments on websites through cards loaded on phones for contactless-payment purposes. And 38% of cash payments were for purchases of more than £5. “This means 92% happens in the physical world. The highest usage in the EU is in the Netherlands and the UK. And it could encroach on territory where carrier-billing services. for example. store cards and others.informatm. in 2009. Fig. according to statistics collected by Italy’s national bank. geolocation and NFC technology. 2: Germany. In the US.

2008 Generally © 2011 Informa Telecoms & Media 4 . as well as Germany. A lot of companies pay their employees in cash and a lot of merchants and service providers demand to be paid in cash so as to not to have to declare such transactions to the taxman. In Western Europe. Credit-card usage is very low in Germany and Italy because people there are less comfortable about taking on debt and are big savers. and their transportation. www. it has a big underground economy. A big reason for the adherence to cash is tax evasion. So. from one location to another. where card payments are accepted. there are less options to pay by card in these countries and. Cash-handling costs are estimated to amount to €10 billion a year in Italy – for both banks and retailers – largely in terms of increased security and labor. accounting for 22% of GDP. Although cash-handling costs are more or less equal to the money charged to retailers in card-payment fees – now that the EU has capped such fees – they are more hidden and are something that merchants have been living with for centuries. But in most cases there are strong cultural reasons for these economies’ adherence to cash. as in other southern European countries. all and all. Merchants also resent paying the commission on card payments. Much cash handling is labor-intensive – involving counting and double-counting of coins and bills.Fig. southern European economies tend to be more cash-driven than northern ones. It will therefore be in those markets where contactlesspayment cards – and the accompanying reader infrastructure – are most widespread that mobile contactless payments will find the most fertile ground. the cost is more than US$70 billion a year. £1. for example. it’s calculated at US$300 billion. 3: EU. for example. annual per-capita transactions by payment instrument. And globally.informatm. under heavy security. customers usually get saddled with a surcharge as merchants pass on interchange-fee costs. The Italian government. There also tend to be more conservative attitudes to personal finance in many southern European countries. Italy has the EU’s least indebted consumers. So the biggest opportunity for mobile NFC payments is likely to be in markets where cashless payments are most dominant. In fact. Cash replacement It would be tempting to see the more cash-driven economies as a greater opportunity for contactless payments. these economies have no shortage of people with bank accounts or of card-issuing banks – yet credit cards are relatively rare and cash remains the preferred method of payment for many. mobile NFC payments will follow on the heels of plastic NFC payments – at least initially.5 billion a year is lost by UK retailers through internal and external theft and handling errors at till points and during cashing up. Cash’s manual nature also exposes it to loss or theft through human error or design. loses about €100 billion a year from untaxed transactions. with the notable exception of Germany. According to recent surveys. In the US.

drug-store and gasstation chains. reports fast growth in contactless-card shipments. according to a survey by pollster YouGov published in June (see figs. the range of retailers that will be supporting NFC payments in stores has been significantly broadened to include: toy store Toys ‘R’ Us. 428 German savings banks belonging to the German Savings Banks and Giro Association (DSGV) announced their intention to convert their customers’ debit cards into contactless payment cards. mostly in fast-food. accounting for about half of debit cards issued in Germany. There are around 80 million US consumers walking around with NFC payment cards. It doesn’t foresee converting all cards to NFC until 2015. Wolfgang Adamiok. Foot Locker and Guess. was quoted in the German press as saying that NFC-based payments will be introduced “no later than 2014. Poland. the UK is also the European country with the greatest number of NFCenabled payment terminals. cinemas and supermarkets. Around 90% of respondents to the YouGov poll said they had never heard of NFC and 70% had never heard of a mobile wallet. Google’s executive chairman Eric Schmidt was recently quoted as saying that a third of check-out terminals in retail stores and restaurants will be upgraded to NFC within the next year. meanwhile. Visa is seeing the fastest growth in issued NFC cards in Poland and Turkey. In the UK. meanwhile. considering that only around 3% of POS terminals in the US are currently NFC enabled. Orange Group’s affiliate carrier. A fair amount of cards are also appearing in France and Spain. Moves are afoot to introduce NFC cards in Germany too. department stores Macy’s and Bloomingdale’s. meanwhile. hamburger giant McDonalds is one. With the launch of Google Wallet in May. clothing merchants American Eagle Outfitters. and NFC payment terminals have been available for years. involving several thousand users. around 13-14 million were in the UK. The association’s head of payments.000 at the beginning of the year) and double that number will have been deployed by the end of the following © 2011 Informa Telecoms & Media 5 . www. Out of the roughly 18 million Visa NFC cards that had been issued in Europe by 1Q11.000 NFC POS terminals. more than 90% of the US consumers with NFC cards are not engaging in contactless payments – most are not even aware that they have the capability to do so. It also expects most of the payments that will be made on these terminals over the next year and a half to be plastic based. Meanwhile.000 of these terminals will have been deployed by UK retailers by the end of 2011 (there were around 40. Wolfsburg and Hanover. Not surprisingly. In late June. As in the US. led by the Czech Republic. Visa expects that 60. The cards won’t be introduced immediately. The DSGV’s member banks have 45 million debit cards in circulation.000 cards in early 2012 in Braunschweig. and electronics store RadioShack. Reportedly.informatm. reports Visa. which contains the vast majority of the contactless-payment cards issued in the region. just below 70% of people with NFC-enabled credit or debit cards have never made a contactless payment. that means first and foremost the UK. The terminals will be used for a mobile contactless payments trial announced in June by PTK Centertel. 4 and 5). The DSGV will begin with a pilot project involving 900. a lack of awareness seems to be an issue. however. But Europe is dwarfed by the US in terms of both cards and terminals for contactless payments.” Digital-security vendor Gemalto. as well as in some Eastern European markets. Low take-up Uptake of contactless payments has been disappointing so far. That sounds a tad optimistic. notably in fast food restaurants.Most fertile ground In Europe. has approximately 35.

which POS staff often ignore unless customers make a special point of wanting to use it. Informa has learned from staff at NFC-enabled outlets in London that there is demand from customers to use the readers but that the readers can be temperamental. In current deployments. often requiring several taps from customers before they register a payment. NFC at the point of sale tends to be a stand-alone reader separate from the main payment terminal. thinking that the contactless payment hasn’t registered and then paying with the chip-and-PIN machine www.Fig. retail staff have been slow to warm to the technology. Also. Jun-11 Fig. 4: Results of poll into UK consumers’ attitudes to mobile NFC payments. Jun-11 Informa has learnt from talking to UK bank staff that. The low take-up and confusion can be largely put down to poor marketing by banks and retailers. YouGov.informatm. 5: Results of poll into UK consumers’ attitudes to mobile NFC payments. say bank staff. it is often accompanied by confusion. Many customers who have been upgraded to NFC-enabled cards panic and contact their bank branch asking to replace their new card with an old-style one. YouGov. There have been instances of people being double charged. when there is © 2011 Informa Telecoms & Media 6 . That’s because they think the card is only enabled for payments of up to £15 (the ceiling in the UK for contactless payments) without realizing that it can also be used as a normal chip-and-PIN card. and that they sometimes don’t work at all.

leading to double counting. Also. the number of mobile-contactless-payment accounts was 13. adoption is not a given. However. the low take-up shows that. issued by convenience-store chain 7-Eleven and accepted only in 7-Eleven stores. 6). 2010 The proportion is in reality probably bigger. only to find later that they have been billed twice – although these cases are more the exception than the rule. Europe’s most high-profile trial. a subsidiary of carrier NTT DoCoMo and media and technology giant Sony that runs © 2011 Informa Telecoms & Media 7 . meanwhile. the number would account for around 20% of FeliCa handset owners – based on a count of 66 million in March 2010. as well as vending machines and websites. it is impossible to work out the percentage of FeliCa phone owners who are using their phone to make contactless payments. which is based on a different RFID standard to that arrived at in the West for NFC. Plastic NFC brings it down a peg and mobile NFC brings it down a little further. take up of FeliCa payment services. Another 1.000 in Japan. but www. a prepaid card issued by rail company JR East that is mainly used for ticketing but can also be used as electronic money at around 100. however. According to research by MasterCard. in the YouGov poll conducted recently in the UK. hard numbers on mobilepayment usage are difficult to come by. since the total of 13. The lion’s share of payment users (10 million) on Mobile FeliCa are signed up to prepaid card Edy. Informa requested to see some. primarily within train stations. 23% of respondents said that they were interested in paying for items using their mobile phone.5 million equals just a tenth of the number of contactless payment cards issued in Japan. 6: Japan. NFC does seem to bring down the threshold for cashless payments to a lower transaction value. instead of cash. That’s within six years of Mobile FeliCa launching in 2004. the Cityzi project in Nice. Also. this total of 13. another prepaid card. just because the technology is made available to consumers.5 million as of August last year – based on data presented by FeliCa Networks (see fig.instead. It adds up users of three different contactless-payment services and it is possible that some users might have more than one of these services in their FeliCa mobile wallet. For example. if we ignore that.000 participating stores. Fig. Whatever the reasons. of which there are more than 60.3 million use Nanaco.informatm.2 million signed up to Suica. since in the information presented by FeliCa Networks there were no user numbers for four of the seven contactless payment cards available as Mobile FeliCa apps – although that might be because the numbers were not impressive enough for publication. which has the world’s highest penetration of contactless-enabled cards and phones. which totaled 135 million in May 2010.000 stores and kiosks. Japan numbers In Japan. Although countless mobile NFC trials have been conducted.5 million does not necessarily refer to unique users. Cash replacement But how far does NFC eat into cash payments? From what has been observed so far in both mobile NFC trials and plastic NFC deployments. France – which drew the participation of the country’s main operators and banks – hasn’t published any stats on mobile payments. PayPass contactless-card holders increased their spending by 19% and usage by 29% compared with traditional card holders. Marketing and end-user/POS staff education are also necessary. However. the mobile version of Sony’s contactless technology. Then follow the 2. issued by electronic payments firm bitWallet and accepted at more than 220.

the merchant’s bank (referred to as the “acquiring bank”) and the card-payment network (for example. The lion’s share is kept by the issuing © 2011 Informa Telecoms & Media 8 . The most compelling evidence so far perhaps comes from a mobile NFC payments trial conducted last year in Sitges. Participants on average carried out 30% more transactions using the Visa card stored in their NFC phones than they had previously with traditional plastic cards. requiring the PIN to be keyed in on devices connected to that system and not locally on the phone. interchange fees tend to be higher for credit cards than debit cards. 7). May-Oct 2010 During the trial. These fees can vary a lot from country to country. In the US. bank La Caixa and card-payment network Visa. the second-largest share by the payment network. which used a virtual Visa card loaded on Telefonica’s m-wallet Cartera Movistar. 40% of the payments made required entering a PIN and were therefore little different from chip-and-PIN transactions (other than they were conducted via phones) – especially since in Sitges users had to key in the number on the POS terminal. were already predisposed to trying out the service. 7: Sitges mobile contactless payment trial results. and on the kind of card or transaction. and 80% of merchants received mobile NFC payments. been officially described as a success. During the six-month trial. where the card is physically present during the transaction. That translated to an average of 23% more spending per user on cashless transactions. Most of the participants (90%) made at least one purchase with their mobile phone during the trial. is lower than for ordinary card payments – although he didn’t specify how much lower. also for remote payments rather than local payments. head of mobile payments at La Caixa. trials rarely mirror real-life conditions accurately. were high. which.7 out of 10. The trial has. by the very nature of being volunteers. for example. the www. however.informatm. or on the size of the retailer and its bargaining power. averaging a rating of 7. It must be added that its focus was not just on payments but a whole plethora of mobile NFC services. according to Jordi Guaus.500 users and 500 merchants participated in the trial. However. Some sources close to the trial have told Informa that take-up of mobile payments during the trial was low and that not all merchants were happy with the way the technology worked. the average per transaction was €9. where interchange fees average out to roughly 2% of credit-card transactions. The fees are split between the cardholder’s bank (referred to as the “issuing bank”). 60% of the transactions made were less than or equal to €20 – the ceiling placed on PIN-less NFC transactions in the Euro zone – 35% were for less than or equal to €6 (see fig. Spain by operator Telefonica.the query came to nought. 1. For example. not the phone. and the remainder by the acquiring bank. Declining margins Regulatory moves in different parts of the world are forcing banks and payment networks to reduce the amount they charge retailers for handling card payments – what are technically referred to as interchange fees. Satisfaction levels with the mobile contactless service. Visa and MasterCard). That’s because in Spain banks are all linked to an online payments system. In the ≤€20 bracket. And each one attended a one-hour training session and received a user guide explaining how to use the technology. The participants were volunteers who. Fig.

In the US. Food and drink chains such as fast-food joints.75 by the issuing bank. In the Sitges contactless payments trial. largely due to regulatory pressure. which currently make around US$16 billion a year in the US from interchange fees.2% per transaction. often in the form of antitrust investigations. a law capping debit-card interchange fees to US$0. as part of a deal struck in December to end an antitrust probe by the European Commission.3%.informatm. 8: Breakdown of interconnect fees taken from US$100 transaction in the US There has been a steady rise in interchange fees throughout much of the past decade.18 by the payment network. Meanwhile. and US$0. US $ © 2011 Informa Telecoms & Media 9 . 9). These fees currently average US$0.2% and credit-card fees to 0.07 by the acquiring bank (see fig. Proving the case for retailers Merchant resistance to deploying NFC point-of-sale terminals is arguably the biggest barrier to contactless payments. and most of their sales are for less than €20 or US$25. But the tide is turning.12 per transaction goes into effect on July 21. MasterCard came to a similar settlement with the Commission last year. in the EU. With NFC credit and debit cards still the exception rather than the rule in most countries and rarely any offers from other parties to help pay the cost of upgrading POS infrastructure. The retailers for whom contactless payments make most sense are those that handle a large volume of low-value transactions every day and for whom speed at the checkout is essential to ensure time-poor customers don’t walk out without making a purchase. Fig. www. It is no coincidence then that they tend to be among the first to embrace NFC.44 per transaction in the US – so the cap will represent a big drop in earnings for payment providers.cut taken by each party from a US$100 transaction would be: US$1. within the limit for contactless payments not requiring a PIN. These outlets are exposed to frenetic peaks of activity at meal times. supermarkets accounted for the majority of transactions (see fig. sandwich bars and coffee shops fit this profile. Supermarkets and convenience stores are also likely candidates. Visa Europe is reducing debit-card fees to 0. 8). most retailers are in no hurry to enable contactless payments at their stores. also reducing debitcard transaction fees to 0.

Therefore. has been seen primarily in London. where a mobile screen adds a useful dimension for checking how much credit a ticket-barrier has just debited from a card. Fig. 10). 10: Stand-alone vs. in some cases subsidized by card-payment networks and banks. And that. such as cash and © 2011 Informa Telecoms & Media 10 . Visa told Informa that it has contributed to the cost of early deployments as a way of kick-starting the market. are already fast enough for most customers.informatm. www. there is no such need in retail payments. But retail chains don’t like deploying multiple kinds of terminals across their footprint. unlike a prepaid card for transport ticketing. Stand-alone readers have been typically deployed by early-to-market retailers.Fig. There are already plenty of ways for users to check on their bank balance on their phone. whether that may be via SMS or a downloaded app. for example. It is most likely to be an all or nothing decision – unless what is being deployed is stand-alone NFC readers that sit alongside the main POS terminals (see fig. Security is also a concern for retailers. who fear that contactless payments might expose them to fraud from hackers. for example. They like to deploy the same terminals and accompanying infrastructure in every store. The initial crop of NFC POS terminals in the UK. because by law shoppers have to be offered a paper receipt for each purchase anyway. distribution of purchases by merchant type Also. retailers in busy urban centers are more likely to want NFC than those in sleepier suburbs or provincial towns. to cut down on complexity and maintenance costs. They say that existing payment options. and how much is left. it is unlikely that big chains will choose to focus NFC-enabled POS terminal deployments on their busiest stores only. integrated NFC point-of-sale terminal Some retailers Informa has spoken to question the use case of mobile NFC payments. 9: Sitges mobile contactless payments trial.

there is a greater chance of influencing the kind of POS technology deployed by retailers. According to VeriFone. POS replacement Rather than adding to the POS infrastructure bill. And the difference will become more and more negligible as NFC chips are produced in higher volumes and their cost decreases. first. which comes with NFC as optional. where POS-terminal use can be intense. the price difference is “negligible. Retailers invest in these only once a decade on average. Large retailers with big chains tend to buy and install their own terminals and integrate them into their own IT systems. to that end.” It says that its new VX 820 terminal. the replacement cycle can be as short as two years. but they can be as long as seven years. and then sufficient education and encouragement for these customers to download the app. Banks that are issuing NFC-enabled payment cards are also likely push NFC-enabled POS terminals to their business clients. This would dispense with the need of a counter altogether. it adds. the next question is when is it next due to replace its terminals – POS-terminal replacement cycles vary from retailer to retailer. Smaller retailers tend to rent terminals from banks. In the latter model.” In March. With NFC. There are two main models for deploying POS terminals in retail outlets: one is followed primarily by large retailers and the other primarily by small-to-medium-sized retailers. Just as it’s possible to enable P2P payments by tapping one NFC phone with another. before a retailer could start reducing the number of checkouts. There would have to be a certain critical mass of customers walking around with NFC phones first. On the way out of the store. including as it does not only the expense of buying and installing new hardware.informatm. The replacement cycle for POS systems is even © 2011 Informa Telecoms & Media 11 .Upgrading retail infrastructure Assuming that a retail chain decides to deploy NFC across its entire POS infrastructure. Retailers are keen to reduce POS staffing costs and. so it is possible for a small retailer or service provider to use his NFC phone to accept www. Another way in which mobile phones might dispense with the need for dedicated payment machines is by getting NFC-enabled phones to act as POS terminals – something that is already possible. It will be interesting to see how long it will be before other POSterminal makers follow suit and make NFC a standard feature on all their products. second. VeriFone announced that it would include NFC in all its future POS terminals. POS terminals that incorporate contactless-payment capabilities are not necessarily much more expensive than standard ones. NFC could potentially reduce it by obviating the need for checkout counters. third. “The bigger concerns for retailers are. one of the world’s biggest POS-terminal makers. it is more typically around five years. development and integration time for NFC applications. In the case of supermarkets. so would there still be a need for a minimum number of checkouts of both descriptions in stores even where a majority of customers were checking out items through their phones.” a VeriFone spokeswoman told Informa. all they would need to do is wave their phone in front of an NFC reader to pay for the scanned items. So anything that might add to that expense is likely to be closely scrutinized by retailer IT heads. consumer awareness of what NFC is and how to use it. Upgrading POS infrastructure is the highest cost component of a retailer’s IT investment. However. That should make it easier for retailers to decide whether or not to specify the technology when ordering their next batch of terminals from VeriFone. they could go a step further by getting customers to download a checkout application to their NFC phones with which to “scan” items as they place them in their basket or cart. even though they will be able to opt out of that option if they so wish. “The price of terminals is not an issue. Of course. Only a wall-mounted reader would be needed. And just as there remains a need for manned checkouts at stores where self-service checkouts are now the norm. introducing such an app would not provide an instant replacement for checkout counters. where checkout traffic tends to be less heavy. are introducing self-service checkout counters. is only a “bit more” expensive than its non-NFC-enabled predecessor the VX 810 – without specifying how much exactly. but in the case of department stores. This is especially true of supermarkets. having to make changes to their existing POS systems to accommodate NFC and. but also of buying and installing new software and training store staff to use the new terminals and systems.

since what retailers can save in cash-handling costs they can more than end up paying in card-payment fees. could use mobile NFC to extend their reach to physical-world purchases. World of Warcraft Gold. just as operators risk becoming the “bit pipes” of the communications industry. at last month’s GSMA’s Mobile Money Summit in Singapore. such as store-payment cards. for example. such as ecommerce payment platforms (e. Facebook Credits.payments from customers who also have NFC phones. PayPal.g. Amazon). and even social media and gaming virtual currencies (e. The “dumb-pipe fear” shared by both banks and operators was starkly expressed by Peter Van Leeuwen. “Once a retailer-preferred payment card is issued to a customer's NFC-enabled mobile phone. “We need to own the market space and prevent market differentiation before any other party enters the market with enough money. Retailers have long sought to reduce the fees they pay on card payments by issuing their own store cards and offering customers discounts and other incentives to pay with these instead of their bank cards. saying that. Store cards come in various forms. so banks risk becoming the bit pipes of the financial © 2011 Informa Telecoms & Media 12 . bypassing credit and debit cards – and the rich pickings that the banks and card networks make from these cards.” www. In the YouGov poll conducted recently in the UK.g. PIN debit cards. as they have seen themselves gradually disintermediated by online players in many mobile services. digital-content platforms (e. prepaid or gift cards.” he told delegates. be overcome by digitizing cards and placing them in mobile wallets. Van Leeuwen made common cause with the banks. But these closed-loop cards – so called because they are only accepted at the issuing-retailer’s stores – have been fighting a losing battle over the past two decades against open-loop bank cards that can be used in all stores. A greater incentive for retailers is the potential of using NFC for their own mobile-wallet services.informatm. so it can leave the door wide open to other payment options. loyalty cards and coupons and vouchers. Store-card fight back Beyond quicker transactions. such as coupons.” Retailers could also use NFC and mobile wallets to integrate store cards with loyalty points and offers. “By working together. entering the mobile NFC space is not just about pursuing cash-replacement and new-revenue-stream opportunities – it is also a defensive move to ensure that their brands are prominently in that space before others start muscling in. Their biggest nightmare is a “dumb-pipe” scenario where users on platforms such as PayPal and iTunes link their bank accounts directly to those platforms.” says a report published on the subject by the US National Retail Federation. carrier billing. however. and cards that process transactions over automated-clearinghouse networks. the customer always carries that payment card with the phone. This method was successfully tested last year with taxi drivers in the city of Valencia in Spain. Angry Birds’ Bad Piggy Bank). it is more likely that people will leave their store cards at home than their Visa or MasterCard bank cards when going out shopping. iTunes). reducing cash-handling costs is normally cited as the strongest driver for retailers to enable NFC payments. But that argument is questionable. The limited space in physical wallets could. 64% of respondents said that they would like their mobile-wallet payments to be linked directly to their bank account. With most wallets already stuffed with plastic. banks and operators can strengthen their position in their own markets. This nightmare echoes that which has been haunting mobile operators in the last few years. undermining the hegemony of the big card-payment brands. lower fee-based branded cards. strategy and business development manager at Dutch carrier KPN. be able to drive higher acceptance rates of their preferred-payment options than is possible with plastic cards. For the card-payment networks and card-issuing banks. Democratization of payment options Just as mobile NFC can give a greater chance for store cards to compete against more established cards. Payment services that are currently largely confined to the digital and online worlds. co-branded retailer cards. including: private-label credit.g. “Retailers may. therefore. for example.

the banks’ business case for mobile NFC boils down to savings and additional revenue (see fig. though. playing a leading role in trials and other activities. however. for example. in the case of credit cards). there would be “first-mover” benefits for operators that are early to market with NFC and mobile wallets – in theory creating greater stickiness and a greater chance of churn from other operators. Again. Operators’ business case Like the banks. www. In markets where churn is running at 30% or even higher. Visa. the operators’ business case for NFC payments boils down to savings and additional revenue (see fig. The expense of printing. for example.informatm. 11). as well as acquiring new ones. posting and replacing cards (if they have expired or have been lost or stolen) can be greatly reduced by the over-the-air delivery of virtual cards to mobile phones – as long as mobile-provisioning prices are not too steep. Not all creditcard companies have jumped into the fray in the same way. If a bank is early to market and can differentiate itself from the competition with things like mobile wallets and NFC microSD cards – to turn ordinary phones into contactless payment devices – it has a greater chance of retaining customers. as well as on new services such as P2P payments.KPN is part of a joint venture formed by the Netherland’s top banks and operators that aims to launch commercial NFC services by the second or third quarter of 2012. a reduction of just 1% could be worth as much as US$100 million per year to a large operator. made up its mind early on that NFC would be part of the future payments landscape and wanted to be seen at the cutting edge of the market. This revenue is comprised of transaction fees and interest payments (the latter. © 2011 Informa Telecoms & Media 13 . Additional revenue can come from the commission earned on the greater number of cashless transactions that NFC will supposedly bring. has yet to make any moves in NFC. In Barclays’ case. But the savings component would come entirely from customer retention and acquisition. The card networks also want to make sure they enter mobile NFC early to retain market relevance. 11: Mobile-contactless-payments business model for banks Another potential saving comes in the shape of churn reduction. for example. Bank-current-account churn in Europe is running at around 5%. Having said that. 67. Banks can not only save on cash and check handling costs. Banks’ business case Beyond defending themselves from disintermediation. 12). including the costly business of keeping ATMs topped up with cash. It is taking a wait-and-see approach instead. as payment methods and habits evolve.5% from transaction fees. Card payments are a significant revenue stream for banks. for example. but also on plastic-handling costs.5% of its card revenues come from interest payments and 32. churn is not as big an issue for banks as it is in the telecoms industry. American Express.

www. most of the transfer of data happens via NFC transmission between the phone and the POS terminal and via fixed-line transmission between the terminal and the issuing and acquiring banks. In fact. In the case of contactless payments. charging banks and payment service providers to manage their NFC-payment applications. and users can look up account balances and purchase records. All of this won’t add up to a lot of data. operators can then rent space on it to banks and other payment providers. Mobile users usually turn to operators rather than handset makers or service providers when something goes wrong with their phone. taking on a serviceprovisioning and customer-relations role. Although it is mostly used to purchase digital content consumed on phones and other devices. again over the cellular network. revenue wise. it is also sometimes used to purchase physical-world goods such as parking and transport tickets. or. but will provide another reason for mobile users to subscribe to a data plan or just generate pay-as-you-go data revenue. 12: Mobile-contactless-payments business model for operators The extra-revenue component would come from: transactions. uninstalled. Operators getting a per-transaction-cut of contactless payments are possibilities only in emerging markets. For example. service provisioning. SK Telekom receives © 2011 Informa Telecoms & Media 14 . top up (in the case of prepaid payment services) and personalize applications. customer support. So operators feel that customer support is one of the strong cards they can bring to the table. the skills and knowhow required to be a TSM are not core to operators – and most operators are not looking to take on this role. the upfront cost of the latter is high. The Western operators’ main hope of securing a place in the contactless payments value chain is by authenticating payments via the SIM card. Operators have for years provided mobile users with the ability to charge content purchases to their mobile bill – not only for content sold by themselves but by third parties as well. For example. delegating it instead to companies such as Gemalto. where operators buy their way into the payments value chain by acquiring a credit-card company or bank. requiring huge volumes of transactions to generate an adequate return. These purchases are currently made remotely via either SMS or a WAP site. However. carrier billing is one of the first capabilities that operators chose to expose to developers in their open-API programs. mobile-wallet apps can be installed. Carrier billing Carrier billing is a more compelling proposition for operators. Operators could also earn revenue by playing the trusted-service-manager role. such as remote-device management and insurance.3% of transaction revenues from its Moneta mobile NFC service. operators could also earn revenue from selling customersupport products for mobile NFC services. in the developed world. data traffic and carrier billing. The mobile network only comes into the picture in a support capacity.informatm. blocked or updated over the cellular network. Mobile data traffic revenues are not one of the big selling points of NFC for operators. NFC operates over an unlicensed short-range frequency separate from the cellular network. In addition to that rental income. as seen in Japan and South Korea. in South Korea.Fig. where mobile-wallet services are the only cashless-payment option for most people. however. If the SIM card becomes employed in this way.

UK department store Marks & Spencer. But carrier billing has several limitations. a few cases of retailers experimenting with carrier billing for small physical goods. The biggest advantage that carrier billing has over other payment methods from a user perspective is that it doesn’t require pre-registration. So it makes take-up easier.but NFC could allow users to buy directly from NFC-enabled parking and ticket machines. which has some of the lowest “off-portal” carrier billing rates in the West. has the most advanced mobile payments system in Europe. operators have introduced two-tier pricing for carrier billing. for example. in some cases. for a £5 (US$8) packet of 50 school-uniform name tags. depending on the size of the transaction. How that could be done is not clear yet. straight out of the box. The other options include paying by credit card and directly from a bank account – again. and those above £5 at as little as 10%. mobile card payments could also start encroaching on the ground conquered by operators online in website micropayments – but only if one-click payments can be enabled on websites from phone-loaded cards. In some countries. if m-wallets loaded with credit and debit cards become the norm. but can be as high as 50% – far.informatm. Another limitation is that there is a strict limit on how much users can spend per transaction (roughly around what is allowed for PIN-less NFC transactions) – © 2011 Informa Telecoms & Media 15 . covering all mobile networks and handsets. So it doesn’t make it ideal for physical-goods purchases. At the same time. unless operators drastically drop their per-transaction charges. worse still. carrier billing risks being pushed aside – especially since it is unlikely that many stores will accept it as a form of payment. An operator can roll out an NFC m-wallet through which users can start making payments charged to their phone bill. carrier billing is the most popular payment method out of the options offered by the Paybox m-wallet service. It is expensive. It wasn’t until it lifted that requirement that usage took off. nevertheless. parking and ticketing purchases seem to be what Austria’s carrier billing is most used for. And. without even registering their credit or debit card details. Austria. Here. Again. for example. as a total per month. for one. There are. www. for example. In the UK. transactions of £5 or less in value are charged at around 20-25%. however. this places a limitation on the e-commerce application of carrier billing. as well as buy all sorts of other goods at the point of sale. offers customers the option of ordering and paying. For example. far greater than the proportion kept by card-payment providers. But that is not a typical scenario. via premium SMS. The share of revenue kept by operators typically averages 30%. This is because operators don’t want to risk fronting too much money to subscribers. Austria’s Paybox service got low take-up when it first launched 12 years ago due to a pre-registration procedure that it required from users.