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All players look for partnerships to deploy mobile NFC payments, but some need to more than others

02 September 2011 Guillermo Escofet
Key points

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Partnerships are key to the mobile-contactless-payment-deployment strategies of most market players. At the top of everyone’s list of companies they must partner with are banks and cardpayment networks – since they are the ones that provide all of the necessary payments back-end. The card networks, and most banks, are happy to team up with whoever offers their payment services a route to mobile enablement – be that mobile operators, handset makers or over-the-top players. But they are also exploring bridging mobile NFC technologies, such as microSD cards and smart stickers, to bypass partnerships and go down a handset- and operatoragnostic route to market. Mobile operators are seeking strength in numbers by creating cross-network alliances and joint ventures to compete with the global reach of OTT players. At the same time, they are pursuing their own individual rollout plans focused on own-brand mobilewallet and prepaid-cash products. Meanwhile, interesting alternatives to enabling mobile point-of-sale payments are cropping up, such as plug-in-card-reader-based Square and sound-wave-based Zoosh, which provide a more immediate solution than NFC.

Introduction Competing ecosystems are being established to enable mobile contactless payments. In an unusual spirit of fraternity, rival mobile operators are grouping together into alliances and joint ventures in each territory to lay the foundations for NFC services secured by the only piece of handset real estate over which they still have control: the SIM card. Handset and operating-system makers are pulling in a different direction, looking to secure NFC payments from chips embedded in phones for their native-application ecosystems. Banks and payment providers, meanwhile, are playing along with both of the above, as well as exploring alternatives of their own, such as microSD-card-secured services. It would seem that operators are the furthest ahead with their NFC-service-rollout plans. After all, they are the ones that have collectively dominated the mobile NFC headlines over the past year, with news of partnerships, trials and commercial launches across numerous countries. By comparison, most handset/OS players have remained cagey about their NFC plans – other than saying that they want to make NFC phones. The only one to fully show its hand has been Google, which has launched its own NFC phone, the Nexus S; incorporated NFC into the Android OS SDK; and launched its own mobile wallet for contactless payments and coupons. Google Wallet will compete with operators’ m-wallet initiatives. What all NFC m-wallet rollouts have in common is mobilizing credit- and debit-card payments. So the players that are common to most rollouts are the card networks, such as MasterCard and Visa, and the associated card-issuing banks. As key players in the payments value chain, they will by necessity also play a key role in the mobile-contactless-payments value chain. And they are taking a multipronged approach to playing that role. Operators For operators, contactless payments are part of their mobile-wallet strategies. And many are paving the way for contactless payments and m-wallets with own-brand credit and prepaid cards and other financial products they have launched. In the UK, for example, France Telecom-owned Orange introduced a contactless credit card last year and a contactless prepaid card this year. The carrier sees the prepaid card as a way of getting users used to using an electronic wallet – one that it recently mobilized with the launch of mobile-NFC-payments service Quick Tap. © 2012 Informa Telecoms & Media 1

Rival carrier O2, owned by Spanish incumbent Telefonica, was earlier to market with a prepaid card, O2 Money, which it launched in 2009. Although essentially a plastic-money product that was not enabled for contactless payments, O2 launched it as a first step toward bringing card payments and phones together. Its only mobile element were text alerts sent out after every transaction informing users of how much they had spent and their remaining balance. Orange’s cards offer a similar service. In May, O2 announced the partners for an m-wallet service it plans to launch in 2H11, saying that, as well as contactless payments, the wallet would offer airtime top-ups and peer-to-peer payments. The partners include card network Visa, e-payments company Wave Crest, banking technology vendor FIS and digital-banking software provider Intelligent Environments. At the same time, O2 has applied for an e-money license that will allow it to handle prepaid cash paid into the m-wallet by its customers. Similarly, Orange is relying on the banking license of Quick Tap launch partner Barclaycard. As with O2’s upcoming m-wallet, Quick Tap works as a stored-value account, with users paying in money from their Orange credit card, Barclaycard credit card or Barclays debit card (Barclaycard is the credit-card arm of Barclays bank). Users can store up to £150 at any one time (see fig. 1). Fig. 1: Quick Tap facts

Orange is one of the operators that have moved forward most aggressively with NFC. At the end of last year it appointed someone at group-board level to promote NFC internally and gave January deadlines to its local-subsidiary CEOs to come up with an action plan for NFC. The carrier felt that for far too long NFC had been stuck with the technologists within its organization, in a bottom-up approach, and that it needed a new top-down, business-led approach. With stored-value wallets, operators are trying to target sectors of society that are underserved by banks and other financial services – those who have no bank accounts or credit cards, such as migrant workers and teenagers. Another target audience are those on a tight budget, or just budget conscious, who want to put money aside for certain expenses and make sure they don’t spend more than that amount. The text alerts are especially helpful for customers eager to keep a tight rein on their expenditure.

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Strength in numbers In parallel to these individual moves, all the major mobile-network operators in the UK – including O2 and Orange (under its new guise as Everything Everywhere, after its merger with T-Mobile) – have teamed up to form a mobile-commerce joint venture aimed at providing one-stop access to NFC m-wallet services. The only MNO not involved is Hutchison Whampoa subsidiary 3, whose network has about 10% market share in the UK. It has complained of being deliberately left out by the other carriers. The JV is not a fait accompli – it is subject to competition clearance by regulators – and, with 3 accusing it of being anticompetitive, its approval could run into trouble. Its three partners – Everything Everywhere, O2 and Vodafone – hope to have the JV up and running by year-end and have pledged to provide the necessary startup capital. The JV will combine two strands – mobile marketing and mobile payments – connecting offers, loyalty points and coupons delivered to m-wallet users with contactless payments at the point of sale. During a teleconference on the day of the announcement, Ronan Dunne, CEO of O2, said that there is a “real appetite” in the market to bring both strands together, as demonstrated by feedback from customers of the carrier’s O2 More mobile marketing service – to which 2.5 million O2 subscribers are opted in. Operators are increasingly seeking strength in numbers in the face of the overwhelming competition they have encountered in recent years from over-the-top players such as Apple and Google on the mobile services front. Ganging together enables them to compete more effectively against the global reach that platforms such as Apple’s App Store and Google’s Android Market offer developers and other third parties. The proposed UK joint venture mirrors similar mobile NFC multilateral operator initiatives in other countries, including the Czech Republic, Denmark, France, Germany, the Netherlands, Spain and the US. This newfound spirit of fraternity won’t stop each of the operators involved in these initiatives from offering their own NFC services in competition with their alliance or joint-venture partners. But rather than expect third parties to go to each mobile network individually to rent slots on SIM cards for securing NFC apps, operators can make life much easier for third parties through these alliances and JVs. Aggregating connections But the extent to which it will be possible to present third parties with a single, cross-network offering will depend on antitrust regulation in each territory. For example, it is unlikely that in most territories operators will be able to offer third parties common SIM-slot-rental prices, because regulators would consider that to be collusion. Mobile-network-connectivity aggregators operating in the fields of messaging and carrier billing could provide a fix, though. One such company, Ericsson IPX, is extending into NFC, offering to aggregate access to the rental of SIM slots from all operators in each territory – in essence, playing a kind of trusted-service-manager (TSM) role (see fig. 2). As part of that, it would offer one contract, with an aggregated price, covering all SIMs – in the same way that it, and other aggregators like it, already do with messaging and billing.

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Fig. 2: Ericsson IPX trusted-service-manager model

However, Ericsson IPX is so far the only mobile aggregator to try to extend to NFC. One of its competitors, mBlox, looked into the feasibility of doing so but concluded that there wasn’t much of a business in it. It didn’t see much of a long-term future for SIM-secured NFC services and not enough revenue in it, since in most cases operators won’t be getting per-transaction revenue – unlike in the case of SMS and billing. Initial JV focus The speed at which each operator rolls out NFC services will, of course, vary, and that might have a knock-on effect on cross-network initiatives. Operator sources close to the UK joint venture have told Informa that the initial focus of the JV will be on mobile marketing rather than contactless payments, since all operators are already geared up for the former via basic mobile technologies such as SMS and WAP. It is unlikely that all JV partners will be geared up for NFC by the end of the year, the sources add. And although contactless payments add the ultimate wow factor to m-wallets, they are not the be-all and end-all. M-wallets can still serve a useful purpose without being able to do contactless payments. Online and other remote forms of payment are useful enough, the sources say. As well as providing one-stop shops in each country, operators are also striving to make services interoperable across borders. In June, Orange claimed to be the first to introduce an international NFC-payment service, by ensuring that, starting this summer, users of its UK Quick Tap service will be able to use their phones to make payments in Nice, the launch pad of France’s Cityzi NFC service, in which Orange is a leading protagonist. Telefonica is also working toward offering the same cross-border experience. The phones that were used by Telefonica Spain in a trial alongside Visa and Spanish bank La Caixa in Sitges, Spain, last year use the same underlying technology as those used by O2 in UK contactlesspayment trials at selected stores, for example. In Asia Pacific, meanwhile, Japanese operator NTT DoCoMo and South Korean operator KT announced plans in February to launch cross-border NFC services, including mobile payments, mass-transit ticketing and virtual coupons. B2B forte A strong card that operators feel they have up their sleeve with regard to the OTT players is their business-to-business relationship with enterprises in each country. The likes of Apple and Google might excel at enabling developers to link up directly to a global audience of consumers, but they don’t have local sales teams that have nurtured long-term relationships with organizations that are key to enabling mobile NFC services – such as retailers, transportation companies, banks, local authorities, centers of learning and carmakers, to name but a few. © 2012 Informa Telecoms & Media 4

In relation to retailers, for example, operators have a growing machine-to-machine business supplying SIMs for wireless POS terminals, which are increasingly relying on mobilebroadband connectivity. In Germany, meanwhile, most operators have an M2M relationship with automotive companies, which they could exploit for NFC. And firms for which operators supply work-force connectivity services are likely to turn to those same operators if they are interested in equipping their employees with mobile-NFC-access controls. Operators can also play an evangelist role, using their sales teams to spread the mobile NFC message to B2B customers, such as retailers. That is not to say, however, that OTT players cannot rally businesses around their initiatives. Google, for example, has in the US attracted an impressive roster of big retailer brands to its recently unveiled Google Wallet service, something the Isis operator partners have yet to do, even though their joint venture was unveiled more than six months before Google Wallet. For consumer-facing NFC services, some operators will be taking an if-you-can’t-beat-themjoin-them approach and publishing NFC apps on the OTT platforms. For example, Deutsche Telekom-owned T-Mobile is planning to place its m-wallet in the Android Market. Security Another advantage operators feel they have over OTT players is consumer trust. They feel that with issues of security and data protection, users are more likely to trust them than online or device players. And securing NFC apps via the SIM card is what they see as their main or only role in the mobile NFC market. Mobile users are getting used to making credit- and debit-card-enabled payments on their phones, primarily via online platforms such as iTunes and PayPal. But it will require a big psychological step for them to feel comfortable about turning their phones into wallets, loading them with their cards and magically tapping them in stores to buy goods. Although mobile contactless payments should be no riskier than their plastic equivalent if properly secured, users are likely to need convincing of that. Operators argue that they can offer the reassurance that users need. After all, it is to them that mobile users first turn when something goes wrong, such as if the phone stops working or is lost or stolen, they say. And operators are far better set up for customer-support functions than most OTT players, employing call-center staff rather than expecting customers to make queries via e-mail, for example. By placing the secure element in the SIM, they add, the customer-support responsibility will fall naturally on their shoulders. Not only will they be able to instantly disable NFC apps over the air in emergencies, but having the apps in the SIM will mean that users will be able to take the apps with them if they want to change handset to a different make or OS. OTT players would argue that that is all very well as long as users don’t want to change operator. But maybe that is one problem that the cross-network NFC alliances being set up in each country could address. Some operators, such as T-Mobile, are looking at going beyond what is required by financial regulation and providing users with preferences to add extra safeguards around contactless payments. So, for example, although in the EU contactless payments don’t require keying in a PIN if the transaction totals €20 (US$28.45) or less, operators could provide the option of keying it in for lower amounts – down to €10, say – just for users’ peace of mind. TSM role Key to ensuring scalability when provisioning secure NFC services, for both operators and service providers, such as banks, is the use of a trusted service manager (TSM). Although views vary on the exact role of a TSM, it is essentially an intermediary, such as Gemalto, that specializes in digital security and takes care of managing the life cycle of secure elements or applications, or both – depending on whether it is contracted by an operator or a service provider or both. The most likely arrangement will be a split-TSM model, in which one TSM acts on behalf of the secure-element issuer, or operator (in a SIM-based scenario), and another or several others act on behalf of the service providers, such as banks and transportation companies (see fig. 3). This model has been “successfully” tested in trials such as the one in Nice.

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Fig. 3: Split TSM architecture

All operators and banks interested in enabling mobile NFC payments agree on the need to have a TSM. It is considered a must for ensuring bulletproof security. And the consensus is that rather than develop a TSM capability in-house, most operators would prefer to outsource that role. However, Informa understands that some operators are installing TSM platforms inhouse. Operators don’t usually like to outsource UICC (SIM card) over-the-air platforms. But with the complexities of NFC, most are considering outsourcing, at least initially, the extension required to those platforms for issuing and managing NFC secure elements on SIM cards – separately from their legacy platforms. In the long term, however, they aim to eventually bring this capability in-house. Also, operator groups with a systems-integration arm, such as Deutsche Telekom’s T-Systems, could start offering TSM services via that arm. Gemalto, which is a world-leading SIM and smart-card maker and a leading contender in the mobile NFC TSM field, either offers trusted-service management as a hosted service or sells it as a licensed product. Its hosted-service business model is to be paid an annual fee per user for every application activated on the SIM card – when acting as an operator TSM. Banks and card networks Plastic, not mobile, is the first step taken by banks wanting to offer contactless payments to customers. They issue NFC-compatible credit and debit cards enabled by the contactless payment systems set up by card-payment networks American Express, MasterCard and Visa. MasterCard was the earliest to market, with its PayPass system, which it launched in December 2002, and Visa launched PayWave in September 2007. American Express has had its contactless-payments system, ExpressPay, up and running since June 2005. But even though the first of these systems has been available for nearly a decade and the rest for at least five years, banks have been slow to issue NFC cards. Many have not done so in any significant scale – and some not at all. For example, in the UK, which is the European country with the most NFC-enabled retail outlets, Barclays Bank was left looking nervously over its shoulder to see if any other UK banks would follow suit after its March 2009 blanket introduction of NFC chips on debit cards. It’s taken about two years for some of the other banks to make a similarly bold move. The banks’ focus is likely to remain on plastic for the foreseeable future, while the choice of NFC handsets remains limited and NFC-handset penetration takes its time to build up enough critical mass. For example, Spanish bank La Caixa is not using mobile in the follow-up to the Sitges trial, an NFC pilot that kicked off in the Balearic Islands in May, because there aren’t enough NFC phones available in the market. Instead, the bank has issued 120,000 NFC payment cards for the pilot. © 2012 Informa Telecoms & Media 6

Banks and card-payment networks are taking an agnostic approach to how they enable contactless payments on phones. As the payment enablers, they are the ones that everyone else needs to partner with to launch mobile contactless payments – unless these are enabled by online-payment platforms, such as PayPal or iTunes, or by carrier billing. And they are maximizing their options by partnering or cooperating with anyone offering them a route to market – be that operators, handset makers or online players. Bridging technologies At the same time, banks and card-payment networks have been the most enthusiastic explorers of “bridging” mobile NFC technologies, such as stickers and microSD cards – not only because these provide a shortcut to NFC-enabling the vast majority of handsets out there that do not incorporate NFC, but also because they can be deployed without needing to team up with and share the limelight and revenues with anyone else. Also, bridging technologies are both carrier- and handset-agnostic. In fact, microSD cards are the mobile-NFC-deployment option most favored by many banks. Both the secure element and NFC chip can be embedded in a microSD card and inserted into any microSD-compatible phone to instantly enable that phone for contactless payments. Or, alternatively, the microSD card can contain just the secure element and be inserted into a phone that is already NFC-enabled – as Chinese card-payment network China UnionPay intends to do. China UnionPay is placing its contactless-payments application onto microSD cards that will be used on the NFC Android phone made by HTC. The Taiwanese handset maker has reportedly put a hardware connection between the NFC chip and the microSD card slot in the phone, which resembles a single-wire protocol connection. MicroSD cards are a standardized technology that works with any phone with a microSD-card slot. Its critics point out, however, that the NFC antennas that can be fitted inside them need to be especially small, making them hard to read, and that the applications loaded on them cannot be updated over the air. Although Visa is a regular partner in SIM-based NFC trials with operators, it has also partnered with mobile-NFC-technology vendor DeviceFidelity to have its PayWave application installed in microSD cards. It has done the same with iCarte, maker of an iPhone plug-in peripheral that turns the Apple handset into an NFC device (see fig. 4). Fig. 4: iPhone NFC plug in, iCarte

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In June, Visa teamed up with BPCE, France’s second-largest banking group and owner of Banque Populaire and Caisse d’Epargne, to trial NFC microSD cards supplied by Device Fidelity in the cities of Nice and Strasbourg later this year. The microSD cards will be tested on iPhone, Samsung Galaxy S and BlackBerry Bold 9700/9780 devices. In Turkey, one of the country’s biggest banks, Akbank, sees microSD cards as its best option and is piloting them for a potential commercial launch. Fellow Turkish bank Yapi Kredi, meanwhile, is offering the iCarte plug-in. In Slovakia, UniCredit is using NFC stickers supplied by Gemalto for a commercial mobilecontactless-payments deployment (see fig. 5) – the country’s first. 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, with 9,600 branches in about 50 countries around the world. Fig. 5: NFC sticker used in UniCredit Bank mobile-contactless-payments deployment, Slovakia

Native apps Another route to market that no self-respecting bank can afford to ignore is the smartphone application stores – primarily Apple’s App Store, Google’s Android Market and RIM’s BlackBerry App World. Nowadays, a bank is no longer seen as a credible contender if it has no presence in these app stores – even though in the UK, for example, no bank is present on all three yet. The mobile banking explosion in Europe and North America over the past two or three years has occurred largely because of the native-app phenomenon spearheaded by the iPhone. Figures released recently by market-research firm ComScore show that of the more than 20 million Europeans who are regularly using mobile banking services, 70% are smartphone users. And those with iPhones are the most frequent users, accessing m-banking services twice as much as Android-device owners. For example, Spanish bank Bankinter, a mobile banking pioneer in Spain that even has its own MVNO, revealed in March that 53% of its m-banking traffic comes from iOS app users. Android app users accounted for another 12% of traffic. So, all and all, native apps are now dwarfing traffic from the bank’s comprehensive range of SMS services, some of which it started offering in 2000. It is inevitable, then, that as native-app platforms such as Android and iOS add NFC tools for developers – as has already happened in the case of Android, and will sooner or later happen in the case of iOS – contactless-payment capabilities will start to be added to the m-banking offerings on those platforms. And, just as native apps now lead in m-banking traffic, there is a high probability that they will also lead in mobile-contactless-payment traffic. In that case, it will be the handset-embedded secure element favored by native-app-platform providers that will become the main route to market for banks’ and other payment providers’ NFC services. © 2012 Informa Telecoms & Media 8

Working with operators The likes of MasterCard and Visa and most banks are nevertheless eager to star in operatorled mobile-NFC ventures. Officially, most back the operator’s NFC agenda. Visa, for example, has publicly stated that it sees most mass-market potential in the SIM-based model, because of operators’ distribution and marketing muscle. The relationship between operators and banks is growing closer as mobile phones become more and more important bearers of banking and payment services. For many people in emerging markets, mobile phones are the only bearers of such services, and operators in those markets are increasingly taking on the role of banks as they launch mobile money services geared toward people who don’t have bank accounts – either on their own, when the regulatory system allows, or by piggybacking on the banking license of a local bank. In some developed markets, such as Japan and South Korea, operators have acquired banks and card-payment networks. It has also happened in Austria, where Mobilkom bought A1 bank. And some banks, such as Bankinter in Spain and Rabobank in the Netherlands, have taken on the role of operators by launching MVNOs. These banks will be following a SIM-based approach for any NFC services they launch through their MVNOs. Recently, Orange and French bank BNP Paribas announced plans to launch a bundled service in November for the bank’s customers in France, including a smartphone, unlimited data and m-payment and m-banking apps. Orange and BNP Paribas also formed part of a joint initiative announced in June by all three French mobile-network operators and four leading French banks to deploy an interoperable nationwide NFC-payments service in early 2012. Most secure-element implementations have been on the SIM-based side, according to TSMs such as Gemalto. Gemalto told Informa that a lot of operators are putting money on the table to manage the UICC as a secure element (SE) platform. Relatively few handset vendors, on the other hand, have approached Gemalto to supply them with SEs and TSM services for embedded implementations. POS terminals Another key question in the NFC strategy of the banks and card-payment networks is whether they should try to accelerate market development by helping merchants foot the bill for NFCenabling their point-of-sale infrastructure. Some parties are putting pressure on payment providers to do just that. For example, Eric Schmidt, Google’s executive chairman, was quoted in the press recently as saying: “That money [to convert terminals] is going to be spent not by Google and not by the phone guys but by the credit-card companies, because the fraud rates are so much lower. Nobody knows how quickly this will occur, but it’s in their interests to convert as fast as they humanly can.” Visa, for example, has invested in seeding contactless POS terminals in key markets to get the ball rolling among retailers. But the brunt of the cost going forward will inevitably be borne by retailers. Alternatives for merchants A wide array of new options has cropped up, largely through smartphone apps and peripherals, which offer alternatives to NFC for enabling mobile payments at the point of sale. And some look quite compelling – especially for small-business owners for whom investing in dedicated POS and checkout infrastructure is too much of a stretch. US startup Square, for example, has developed a small card-reader device that plugs into smartphones and reads the magnetic strip of credit and debit cards (see fig. 6). The device, combined with the Square app, turns an iPhone or iPad into a POS terminal incorporating many accounting and CRM functions. The company, which charges a 2.75% fee per purchase, has attracted major investment and in June added Larry Summers, former secretary of the US Treasury, to its board of directors.

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Fig. 6: Square iPhone payments device and application

A similar product, called Pointofsale, is offered by Latvian company Erply, which last year attracted US$2 million in venture capital. Its main market focus is in the UK and the US. Square is available only in the US. Another alternative is Zoosh, an application developed by Silicon Valley startup Naratte that uses sound waves to make mobile payments and is compatible with any device with a speaker and microphone. UK restaurant chain Pizza Express, meanwhile, recently launched an iPhone app allowing customers to pay their restaurant bill with their mobile phone. Mobile NFC phones can also provide an alternative to POS terminals – either in P2P mode or by accepting payments from a contactless card. But it doesn’t provide the immediate reach that systems such as Square and Zoosh can.

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