NFC and the Mobile Payment Initiative-Part 6 of 6

By Craig Conkling

[Part 6]

Perspective

The credit card companies – MasterCard, Visa, and Europay (originally know as: EMV) as well as American Express and Diners Club – and their early involvement with smart cards to create its specification, have helped to guide the way for contactless payments. EMVCo was established to oversee long-term maintenance and compatible of the system. With the exception of countries such as the United States, EMV-compliant cards and equipment are global. Today, a country's national payment association, in coordination with MasterCard, Visa, American Express and JCB (formerly Japan Credit Bureau), jointly plan and implement EMV systems.

Contactless payment terminals are increasingly available at merchant locations (e.g. McDonald’s, company cafeterias), transit ticketing (e.g. train and bus terminals) and unattended locations (e.g. vending machines). Payment terminal manufacturers are seeing an increase in the rate of contactless terminal sales (e.g. high-end terminals that have displays with in-store personalized mobile marketing capabilities), while credit card companies are seeing an increase in use of contactless cards and alternative devices (e.g. key fobs).

Carriers who have rolled out mobile contactless proximity payment trials to date have clearly benefited from the ability to leverage the contactless infrastructure that already exists in many regions of the world, due to the success of contactless payment deployments which utilized a variety of form factors, including cards and attachable /programmable stickers.

Handset manufacturers are beginning to recognize the value proposition of NFC-enabled phones and are introducing many Smartphones with NFC beginning in 2011. The ISIS JV (a trademark of JVL Ventures, LLC) has been formed to deliver/launch a mobile payment system in North America into key geographic markets over the next 15 to 18 months. Europe and other regions (globally) have rolled out their mobile payments system and are beginning to upgrade (e.g. Japan), or are completing trials and will offer mobile payments soon.

In addition to the confluence of available/usable contactless payment technologies and stakeholders collaborating with a common interest both with trials and actual deployments, the various factors driving the business case to include NFC technology in mobile devices can be summarized:

•         The ubiquity of the mobile phone, and more specifically, the Smartphone

•         The capacity for extended functionality of the handset now that more Smartphones are in the hands of consumers and prosumers

•         The continued increase in the number of contactless cards and contactless payment terminals

•         The continued increase in the use of mobile phones for transactions, e.g. SMS

•         Carriers, banks, credit card processing companies and handset manufacturers in North America have realized that now is the time to combine forces and drive the ecosystem for mobile payments

•         Additional revenue can be gained through OTA provisioning and eWallet advertising

For the consumer and prosumer, mobile payments have a compelling value proposition – secure payments, flexibility and convenience. However, “mobile payments” isn’t for everybody and consumers that find “change” difficult, will less likely integrate this technology into their lives.

Purchasers of goods and services that have a Smartphone (or other advanced mobile technology), would be more inclined to utilize this payment vehicle since these Smartphone owners usually are Innovators, Early Adopters and Early Majority (as described by marketing terminology). The product diffusion curve in Figure 9 depicts the penetration of a product as a percentage of people. People are defined as: those who own and use (even if it’s only on occasion) a “cell phone”; and Smartphone is a category within cell phones.

As time advances so does the penetration of a (new) product or technology as more people use it. The curve can be used as an illustration for personality types that would have a greater (and lesser) tendency to use (i.e. buy and implement in their life style) the product: greater tendency – Innovators, and lesser tendency – Laggards.

Moreover, not all Innovators who embrace a new product, e.g. a Smartphone, would be equally as quick to embrace a new technology subset of that product, e.g. mobile payments using NFC technology. In other words, a portion of Early Adopters may be Innovators or Early Majority when it comes to actually using their Smartphone’s NFC technology for mobile payments; which is example of NFC utilization and enablement (as earlier described) as a percentage of subscribers.

Source: MindTools website

Figure 9 – Product Diffusion Curve

There are a myriad of papers written on the psychology of habit adoption, but a study conducted by the Boston Federal Reserve in 2007 on Consumer Behavior and Payment Choice may provide some insight into barriers as well as decisions behind adoption. This study used employees of the Fed, so the results in terms of percentages may be more conservative in comparison to the general population. However, the reasons and thoughts behind the choices for using cash, checks, debit or credit cards to paid bills or buy goods does have validity. A couple of interesting facts include:

•         Cost, convenience, and timing are the three most important fundamental characteristics that determine consumers’ adoption and use of a payment method

•         Safety and privacy also are important as they relate to susceptibility / consequences of identity theft

•         Payment method; as most consumers use a variety of payment methods each month for each type of bill

•         Payment choice is a joint decision (between couples)

When consumers switched from checks to other payment methods, the method they chose depended on the location and amount of the payment, among other things.

1.      For payment amounts below $20 (also called micro payments), 51% used cash

2.      For medium-sized payments ($20–50), 46% used debit cards

3.      For large payments (amounts above $50), 48% used credit cards

The study further discusses as to why respondents change payment methods:

•         About 37% of respondents reported that convenience and various elements of cost were the primary influences on their decisions to substitute electronic payments for check

•         18% of responses stated that cost (i.e. saving money on checks) was a factor

•         13% of responses indicated that better recordkeeping was a factor in respondents’ switching (from checks to debit cards)

•         Almost one-third (~33%) of responses indicated that use of debit cards increased because more stores accepted them than previously

This last sentence can also describe why and how barriers could have been lowered earlier – by implementing electronic payment terminals at the retail stores. More specifically, if merchants installed only NFC-enabled terminals with mag-stripe capabilities and credit card companies issued more contactless credit/debit cards, then this push mechanism could drive consumers to transition their payment habits more quickly, thus penetrating the product diffusion curve faster. (Personally, I don’t recall ever being asked by my credit card companies if I wanted a contactless-enabled credit or debit card.) Once NFC-enabled phones become readily-available, consumers will have other payment options then to use a contactless terminal for a transaction.

Two NFC-enabled phones using the peer-to-peer mode – one in Active (or Reader) mode and the other in Passive (or Tag) mode – can transact with each other without the need for a contactless terminal as the point of interaction (POI). This can open the market for new types of transacting that bypass the present contactless terminal system. Virtual and mobile merchants, for example, would be able to offer discounts, their own loyalty cards and accept payments – phone to phone – using the OTA provisioning to finalize the transaction.

In addition, a user could pay their bills from their eWallet, transfer funds from saving to checking, transfer balances from credit card to credit card, and transfer funds to a relative across the country – rather than using Western Union! The one-to-one transaction feature could further motivate the phone owner to start using mobile payments as a vehicle for making financial transactions. Whether the transaction is made peer-to-peer or through a contactless terminal, it’s safe and secure. Mobile payments security, and the capability of preventing someone from hacking or accessing your eWallet information, is greater than with a credit card or check book.

OTA “remote access” software used by companies on employee’s laptops to access it and lock out a third-party from retrieving the files is similar in capability as the software used on a company-issued mobile phone. This security software capability is presently available and is used to secure the eWallet, creating several barriers to access.

If your mobile phone is lost or stolen, a PIN number (i.e. barrier #1) prevents a third-party from accessing your eWallet. “Three tries and you’re out” feature (barrier #2) could also be included as a means to lock down the eWallet when the PIN is incorrectly entered. As biometrics becomes more available and reliable, a fingerprint scan, iris scan or retinal scan (barrier #3) can be also used to prevent unwanted access to your eWallet.  Further, OTA provisioning will give the mobile phone owner the ability to send an SMS or go online and enter a “remote swipe” code (barrier #4). This code can be sent to the handset via the cellular network and/or Internet (accessible via Wi-Fi), so when the mobile phone is “on” all eWallet data will be automatically deleted or “cleaned” from it. Whether the phone is “on” or “off”, however, and the battery or SIM is attempted to be removed, a “local swipe” to the eWallet can be automatically executed (barrier #5), thwarting the intruder.

Since all information is backed up automatically to an off-phone or cloud-based storage, when you buy a new mobile phone or find the old one, the eWallet information can be re-downloaded to the phone through OTA provisioning. With all Smartphones having built-in GPS, apps exist (see AptoLink) that can run in the background and can track (and upload) its location so a lost or stolen phone can be quickly traced. This functionality may be the first line of defense, since many phones are merely “temporarily lost” or misplaced. GPS can be used for more than just tracking a phone’s location.

GPS will become more valuable, however, as a tool for location-based services (LBS), primarily advertising to the handset with information that is geo-based and habit-based. With the understanding of a person’s buying habits that are based on location/day/time-of-day, over time an efficient notification, advertising and coupon offering can be provided without spamming. This functionality is a complement to mobile payments – by assisting a phone owner to make a purchase based on location and habit, then using your handset to complete the financial transaction, wirelessly.

NFC mobile payment technology is safe and secure for consumers to use whether it’s finding the phone’s location (lost or stolen), having remote access to delete all eWallet data, or efficient advertising based on location/habit-based activities. Some additional thoughts on moving the consumer towards adopting NFC technology include:

1.      Make the process simple, secure and effortless

2.      Do the work for the handset owner – don’t ask the handset owner to fill out streams of paper work and re-enter all credit, debit and loyalty card information

3.      Prefill-out the phone owner’s confidential information and have them OK a simple and concise “list” online

4.      Securely provision their information in a way that the phone owner only has to accept each digital application (with the prefilled-out information) on their eWallet

5.      Simple editing should be available on the eWallet if previously reviewed information online isn’t fully accurate or needs to be updated on-the-fly

NFC-enabled mobile payment has the financial infrastructure in place. Stakeholders have conducted trials globally for a number of years and are now moving forward and pulling together complementary partnerships. Japan is a testimony of a country already using mobile payments, a model to learn from. As more consumers and prosumers become aware of (and use) mobile payment technology, it will also profoundly affect and revolutionize the financial transactions industry.

References

A – Mobile Payment - Advanced Technologies (NFC), Strategies And Future Of Remote & Proximity Payment In U.S., Aug 26, 2010, http://www.pymnts.com/research-and-markets-mobile-payment---advanced-technologies-nfc-strategies-and-future-of-remote--proximity-payment-in-us-20100816005641/

B – Nokia, Philips and Sony establish the Near Field Communication (NFC) Forum, http://www.nxp.com/news/content/file_1053.html

C – Radio Frequency Identification Technology History, http://en.wikipedia.org/wiki/Radio-frequency_identification

D – Smart Card Technology History, http://www.smartcardalliance.org/

E – Smart Card History, http://en.wikipedia.org/wiki/Smart_card

F – Cell Phone Mobile Payment Market Set for Take Off, Dec 20 2010, http://www.isuppli.com/Mobile-and-Wireless-Communications/News/Pages/Cell-Phone-Mobile-Payment-Market-Set-for-Take-Off.aspx

G – Mobile Wallet Users Forecast To Reach 800 Million in 2015
Date: 29 June 2010, http://imsresearch.com/news-events/press-template.php?pr_id=1474&cat_id=169&from

H - Cingular Starts NFC Trials in the USA, http://www.geekzone.co.nz/content.asp?contentid=5601

I – Trains and burgers: Sprint launching NFC trial in Bay Area, http://mobile.engadget.com/2007/12/21/trains-and-burgers-sprint-launching-nfc-trial-in-bay-area/

J – Digital Wallets at the Ready in NYC for Visa's Latest Trials, http://gizmodo.com/5617754/digital-wallets-at-the-ready-in-nyc-for-visas-latest-trials

K – Proximity Mobile Payments: Leveraging NFC and the Contactless Financial Payments Infrastructure, http://www.sunildewan.com/uploads/Proximity_Mobile_Payments_Leveraging_NFC_and_Contactless_Financial.pdf

NFC and the Mobile Payment Initiative-5

By Craig Conkling

[Part 5]

NFC Solution for the Mobile Phone

The NFC Forum and other alliances, organizations and standards bodies have been influential in laying the ground work for NFC technology. NFC technology is based on RFID technology standard and specifications. It communicates via magnetic field induction and uses an antenna to transmit the information. It operates within the globally available and unlicensed radio frequency ISM band of 13.56 MHz with a bandwidth (BW) of 14 kHz.

Other specification features include:

•         Communications range: up to 20 cm

•         Data rates: 106, 212, 424 and 848 kbits/s

•         Two modes of operation:

-          Passive: The Initiator device (such as a payment terminal) provides a carrier field to the Target device (such as a NFC chip in a handset or contactless card). In this mode, the Target device “may” draw its operating power from the Initiator’s electromagnetic field, thus allowing the Target device to work in a low battery condition mode.

-          Active: Both Initiator and Target device communicate by alternately generating their own fields. A device deactivates its electromagnetic field while it is waiting for data. In this mode, both devices typically need to have a power supply.

•         NFC devices are able to receive and transmit data at the same time. Thus, they can check for potential collisions if the received signal frequency does not match with the transmitted signal’s frequency.

Standards and compatibilities include:

Air interfaces:

•         ISO/IEC 18092 / ECMA-340 - NFC Interface and Protocol-1 (NFCIP-1)

•         ISO/IEC 21481 / ECMA-352 - NFC Interface and Protocol-2 (NFCIP-2)

•         ISO/IEC 15693 - forms part of a series of International Standards that specify a contactless smart card

Other technical/communications information:

•         ISO/IEC 14443 Type A (defines proximity cards used for identification and the transmission protocols for communicating, normal)

•         ISO/IEC 14443 Type B (defines proximity cards used for identification and the transmission protocols for communicating, banking/short range)

•         MIFARE – contactless card standard (and trademark) of Philips (now NXP)

•         FeliCa – contactless card standard (and trademark) of Sony

•         NFC Data Exchange Format (NDEF) – NFC Forum data format

Other standards bodies, alliances and forums with an interest in NFC:

•         Open Mobile Alliance - facilitates the transmission of card and application management commands

•         GlobalPlatform - post-issuance card and application management capability necessary for Over-The-Air (OTA) provisioning

•         European Association for Standardizing Information and Communication Systems (ECMA)

•         International Organization for Standardization (ISO)

•         GSM Association (GSMA) - facilitates a standard connection between SIM cards and NFC chip

•         European Telecommunications Standards Institute (ETSI) - intends to standardize the interface between the SIM and the contactless modem

•         MultiService Forum (MSF)

Use Cases and Applications include:

There are currently three high-level use cases (discussed earlier in my blog):

•         Card emulation: the NFC device behaves like an existing contactless card

•         Reader: the NFC device is active and reads a passive device

•         P2P (peer-to-peer): two NFC devices are communicating together and exchanging information

Applications include:

•         Mobile payment

•         Mobile ticketing in public transport

•         Smart poster

•         Travel cards

•         Identity documents

•         Biometrics

•         Electronic keys replacements for physical keys

•         Bluetooth and Wi-Fi pairing

•         Configure and initiate other wireless network connections

For NFC technology to function more completely in the mobile payments ecosphere, it requires 1) a secure element (SE), i.e. a chip providing additional security, 2) a SIM card (if the mobile device has a SIM card), and 3) an eWallet.

The SE connects to the NFC chip, and depending upon the architecture, may also connect to the applications processor. The SIM card holds information about the mobile device, such as International Mobile Equipment Identity number (IMEI), service-subscriber key (IMSI), phone number and other network specific data.

The “NFC architecture solution” for mobile devices has functionally changed over the past several years as chips and the SIM card have evolved. Although the SIM card is the more general name used, a more encompassing definition for the SIM card is: UICC (Universal Integrated Circuit Card), which is used in GSM and UMTS networks. It contains a microprocessor and stores contacts, enables global roaming, remotely adds new applications and contains other services.

The UICC card is a type of smart card and comes in mini-SIM [25 (L) x 15 (W) x 0.76 (T) mm] and micro-SIM [15 (L) x 12 (W) x 0.76 (T) mm], with the mobile industry moving towards the micro-SIM card size. In a GSM network, the UICC uses a SIM application, for UMTS networks it uses a USIM application, and for CDMA networks it uses a CSIM. The UICC card communicates with the NFC chip and the applications processor (but is architecture dependant).

The eWallet has also increased its functionality and is thought of as a source for advertising, and not just containing personal information for transactions. The eWallet holds the user’s digital versions of their credit cards, debit cards, loyalty cards, coupons and other credentials, and resides in the SE. The eWallet is secured and accessed by a PIN number, similar to how a magnetic stripe debit card is used at a payment terminal.

The secure communications interface between the NFC chip and UICC card is relatively new (and GSMA required) and is called the Single Wire Protocol (SWP). The UICC with a SWP can run a SE application on it, thus eliminating the need for a separate SE chip (however, this is also architecture dependant). For a CDMA only mobile device, a separate SE chip is required.

Another architecture version is to replicate the SE in a removable microSD card which would allow for more flexibility if the user has multiple phones. Different architectures would also mean that the software (SW) and its related functions that assemble the communications link between the hardware (HW) layer and application layer would also require modification.

The diagram in Figure 8 is from the Smartcard Alliance white paper on proximity mobile payments and describes how a SE can be used in both GSM-based and CDMA-based phones^K. To complete the communications within the mobile device, the UICC card and NFC chip use the ISO/IEC 7816 interface to connect to the applications processor, but other interfaces have been used as well.

Source: Smart Card Alliance

Figure 8 – NFC Architectures for Mobile Phones

The eWallet is an application that operates within the SE and contains all the functionality and personal information for a user to make safe and secure mobile payments. Service providers and handset manufacturers, NFC chip suppliers, eWallet application providers and financial entities all want some level of ownership of the eWallet since this is the center for managing payment, billing and advertising activity. ViVOtech offers an eWallet application, called the ViVOwallet, that provides the following functionality and features:

•         Credit and debit payment cards

•         Prepaid (gift), loyalty, membership, discount cards

•         Coupons and discounts

•         Individualized opt-in marketing messaging

•         Tickets (transit, events, movies, etc)

•         Access control cards for corporate campuses, universities, hotel

Besides the eWallet for carriers and handset manufacturers, ViVOtech also offers merchant, issuing bank, ISO (independent sales organizations) and acquiring bank SW solutions, bringing the ecosystem together as a seamless functioning system. VeriFone, Hypercom, Stollman, Gemalto, Oberthur and others, all offer a range of NFC-based SW solutions for mobile payment that cover: the NFC stack SW, eWallet/SE SW, OTA service management SW and financial transaction ecosystem SW.

NFC and the Mobile Payment Initiative-4

By Craig Conkling

[Part 4]

Mobile Payments and the Market Potential

Mobile payments are more than another method to make purchases, it will likely emerge as the way to pay for most all your goods and services, eliminating the dependence upon carrying credit and debit cards, checks and cash. In December 2010, iSuppli released a forecast for NFC-enabled cell phones, see Figure 1^F. Moreover, 13% of all cell phones shipped in 2014 will integrate NFC, up from 4.1% in 2010, according to iSuppli.

Source: iSuppli, Dec 2010

Figure 1 – Shipments of NFC-enabled Cell Phones

IMS Research expects to see an upward progression of mobile payments in mature economies, primarily as peer-to-peer transfers and for completion of online purchases. It sees the greatest growth in “unbanked” transactions in African and Asian countries using SMS. Today, SMS is the dominate medium for conducting transactions; however, the mobile payment market (in general) will use both SMS and contactless methods and is projected to account for 140 billion transactions in 2015^G.

Contactless payments which have been in use since the 1980s have paved the way for NFC-enabled cell phone payments (i.e. mobile payments). Contactless payment studies have been carried out in fast-food restaurants, cafeterias and transit authorities in North America and European for a number of years^H,I,J. Pilot programs in North America and Europe have shown that:

•         Contactless payments cut the average transaction time in half

•         Contactless payments reduce the transaction time relative to a cash transaction

•         Contactless payments are about five times faster than card payments requiring a signature

In these pilot programs, mobile purchases have taken place using a variety of contactless devices – prepaid contactless stickers, key fobs and cards. These pilot programs have helped to further develop the NFC-enabled mobile phone model. Similar to a card payment, to finalize the NFC transaction the user simply enters a short personal security code (i.e. personal identification number, PIN), and then touches their phone to the terminal for confirmation.

Once the transaction is complete, the phone’s purchasing capability is secured and locked so no further transaction takes place unless re-initiated. This means that if you lose your phone, nobody would be able to use that mobile device to make unauthorized purchases. This provides an essential higher-level of security compared to credit cards or other payment methods that typically reside in a physical wallet. The payment transaction is then processed in the conventional way as a regular credit card. A general credit card transaction process is shown in Figure 2.

Figure 2 – General Credit Card Transaction Process

Once the credit card transaction goes through – funds are transferred from the customer’s bank to the merchant’s bank. Banks and credit card companies then share a “cost of transaction” fee called an Interchange Fee.

Figure 3 shows an example of how the present credit card fee model dsitributes a $100 purchase amongst the present ecosystem stakeholders. This is a general model and actual fee amounts may differ between banks, credit card processors and merchants. The credit card transaction fee has been part of the financial transaction process since the national credit card system was formed and will continue after NFC-enabled devices enter into the model.

Figure 3 – Distribution of Interchange Fee

Once the NFC-enabled phone is included in the transaction process, the carrier and a trusted service manager (TSM) are two additional stakeholders added in the transaction processing loop, see Figure 4. An NFC-enabled phone behaves just like a credit card; however, with the NFC-enabled phone over-the-air (OTA) updates are possible and all service providers (in general) in the transaction process may find other revenue generating opportunities that add value.

On the merchant side of the transaction process, the POS terminal is equipped with an NFC chip reader. When the NFC-enabled phone touches the contactless terminal, the terminal is able to pull essential personal identification and account information from the phone, similar to the data contained on the magnetic stripe of a credit or debit card. Because mobile devices will be provisioned with several payment accounts, the phone owner can choose which account to debit the cost of the purchase.

The phone owner may select from the eWallet, a credit or debit card account, or a merchant-specific ”stored value account” – something like a refillable gift card. Because commerce-enabled mobile devices can manage multiple accounts via the eWallet as well as receive OTA updates, this capability puts merchant-sponsored prepayment incentive programs on the same level as major credit and debit cards from the customer’s usability perspective. And that opens new opportunities for merchants to directly build customer loyalty and possibly even lower their (i.e. merchant’s) transaction costs.

Figure 4 – Credit Card Transaction Process with NFC Mobile Payments

Because NFC-enabled phone transactions generally do not change the transaction process for the consumer, it should be easier for the consumer to adopt the technology, thus lowering the learning curve. This transaction has implications for the entire mobile commerce value chain, which includes merchants, POS equipment manufacturers, financial entities, transaction processors, mobile phone manufacturers and carriers.

It opens the door for new entities to enter into the transaction process and additional fees to be garnered. Figure 5 describes the additional fees that could result from the inclusion of a (NFC) mobile payment.

Figure 5 – Proposed Monetary Flow After NFC Mobile Payments Is Introduced

Mobile commerce, or m-commerce, offers significant revenue opportunities (for the entity/ies that accept the TSM role) in the form of provisioning costs and potentially higher-priced data plans to customers. Revenue from advertising carried over the network and additional revenue from transactions are part of the new model as NFC-based phones become available. As the financial transaction process has gone through a number of phases, its “value proposition” has evolved, increasing the opportunity for mobile commerce services, as described below:

Phases in the Financial Transaction Process

•         Phase 1: Plastic card/magnetic stripe

•         Phase 2: Contactless payments using NFC chip in plastic card

•         Phase 3: NFC mobile payments, advertising and promotions

Value Propositions

•         Value proposition of Phase 1:

o       Convenience

o       Alternative to carrying cash

•         Value proposition of Phase 2:

o       Replaces cash faster

o       Moves lines faster

o       First step towards alternative payment option

o       Increased customer loyalty

o       Added security

•         Value proposition of Phase 3 (in addition to phase 2):

o       Higher usage of (digital) cards

o       Low cost alternative payment options

o       New customer acquisitions

o       Highly efficient promotion programs

o       Targeted coupon issuance and redemption

o       Tailored product and services information dissemination

Carriers have an opportunity to be the first mover, or lead, in this NFC-enabled phone market. A key financial measure for carriers is Average Revenue Per User (ARPU), which is the overall revenue divided by total number of users. A fundamental business strategy for carriers is to increase ARPU, and mobile commerce provides an opportunity to do just that.

As the financial transaction process matures from Phase 2 into Phase 3, so does the evolution of several possible ecosystem models that illustrate the administration of the OTA information and role of the TSM. Each model would be based on the geographic location of the service, and as the models evolve so will the opportunity to increase the ARPU. The carriers, handset OEMs (e.g. Apple, RIM and Motorola) and financial institutions, may have a mixed role in managing the transaction. Three possibilities are:

•         Self-managed: Carriers, financial institutions and OEMs will self-administer their NFC trusted services

•         Cooperative: Other carriers, financial institutions and OEMs will outsource their NFC trusted services to an existing or new ecosystem players

•         A developed NFC environment: Carriers and OEMs will outsource some of their NFC trusted services to multiple ecosystem experts

Because carriers provide the wireless link to the handset owner, they also have a greater influence in determining how the additional revenue is generated and shared. There are several vital questions to consider: what new services form the basis of NFC business model revenues, and will mobile commerce increase ARPU enough to offset the added cost of NFC-enabled handsets? The following is a list of new services to that could generate additional ARPU:

•         Provisioning – fees per download

o       Secure download of credit, debit, prepaid, loyalty, tickets, transit

•         Card Services – fees per event/action

o       Such as lost and stolen management

§         Remote card deletion when lost phone is reported

§         Re-issuance to new phones

o       Reissuance on card expiration

•         One-to-One Marketing – OTA postage fees

o       Personalized coupons, promotions, rewards, and advertising

•         Smart Posters – data air-time fees

o       Content delivery based on user tapping NFC-enabled (smart) posters

The “increased ARPU” value is somewhat unknown because until mobile commerce catches on – becomes “sticky” – a percentage of those mobile devices purchased probably will not be activated for mobile commerce and therefore won’t help raise ARPU immediately. Financial entities pay fees to have their cards and coupons activated – Existing Solution Fees – in Table 1. Now carriers (and TSMs) could use OTA provisioning as the vehicle that drives the additional (delta) ARPU by charging more for card and coupon activation. Costs in this model are estimates:

Source: Various sources from Internet

Table 1 – Estimated Costs for OTA Provisioning

The categories in Table 1 are the “most likely” categories that reflect the present use cases for non-cash or non-check (i.e. credit or debit card) transactions. And as mobile payments mature and become the norm with consumers and prosumers in the coming years, other or new categories will also become valuable ARPU drivers.

For the above categories and their given cost assumptions, to determine the total yearly revenue derived from OTA provisioning, the user base of NFC-enabled phones along with their enablement and utilization should be considered. Table 2 reflects the calculation for Years 1 through 4, as the number of subscribers, enablement and utilization grows.

Source: Various sources from Internet

Table 2 – Estimated Revenue for OTA Provisioning

Table 3 depicts the Delta Yearly Revenue. There is potentially over $206 million in additional revenue in Year 4 with a NFC user base of 7.2 million (60M Subscribers x 30% NFC Enablement in Phones x 40% Consumer Utilization).

Source: Various sources from Internet

Table 3 – Delta (Increase) in Estimated Revenue using OTA Provisioning

Assumptions (2 year phone life-cycle) for Tables 2 and 3:

Year 1: 50M subscribers, 15% NFC Enablement in Phones, 25% Consumer Utilization

Year 2: 55M subscribers, 20% NFC Enablement in Phones, 30% Consumer Utilization

Year 3: 60M subscribers, 25% NFC Enablement in Phones, 35% Consumer Utilization

Year 4: 60M subscribers, 30% NFC Enablement in Phones, 40% Consumer Utilization

As mentioned, new categories will become relevant as the market matures. Here is a short list of new categories to consider:

•         Employee/Student badge

•         One-to-One marketing

•         New NFC-enabled applications

By including the new categories in the calculation for ARPU revenue, see Table 4, the additional revenue garnered could grow to over $100 million in Year 4.

Source: Various sources from Internet

Table 4 – Estimated Revenue using OTA Provisioning + New Category Revenue

Comparing Table 5 and Table 3 shows that the Delta Yearly Revenue plus New Categories Revenue could grow to over $308 million in Year 4, up from about $206 million, for a NFC user base of 7.2 million (60M Subscribers x 30% NFC Enablement in Phones x 40% Consumer Utilization).

Source: Various sources from Internet

Table 5 - Delta (Increase) in Est. Revenue using OTA Provisioning + New Categories

Assumptions (2 year phone life-cycle) for Tables 4 and 5:

Year 1: 50M subscribers, 15% NFC Enablement in Phones, 25% Consumer Utilization

Year 2: 55M subscribers, 20% NFC Enablement in Phones, 30% Consumer Utilization

Year 3: 60M subscribers, 25% NFC Enablement in Phones, 35% Consumer Utilization

Year 4: 60M subscribers, 30% NFC Enablement in Phones, 40% Consumer Utilization

It is clear that the incentive for carriers to develop and launch NFC-enabled services can provide additional ARPU. This is just one model and other categories, fees, number of users/subscribers, and NFC enablement and utilization will vary for other models. Since carriers could generate additional ARPU, will merchants, banks and credit card companies also benefit, either directly through increased transactions and transaction efficiency, or in the sharing of revenue by the carriers? All stakeholders will benefit from NFC-enabled mobile payments and a revenue distribution model will develop as the ecosystem evolves. For the NFC-based mobile payment market to thrive, however, merchants need to install contactless terminals.

Contactless payment terminals present a somewhat different challenge for merchants. Although they are not significantly different in cost compared to standard credit or debit card readers, traditional card readers cannot be retrofitted with NFC capability, which means that merchants will need to invest in new equipment to support mobile purchases.

IMS Research predicts that the number of locations worldwide accepting contactless payments will grow to over 12.5 million by the end of 2013. Figure 6 shows an estimated growth of NFC-enabled POS terminals relative to non-NFC POS terminals through 2013 (in North America only). There are presently about 600,000 contactless POS terminals and about 13 million non-contactless POS terminals at merchant stores – an installed base of about 13.6 million (at end of 2009).

Source: Various sources from Internet

Figure 6 – POS Terminals in North America

By end of 2013, there are estimated to be nearly 3.6 million contactless terminals and about 11 million non-contactless terminals at merchant stores – an installed base of nearly 14.6 million. Figure 6 shows growth in the total number of installed terminals of about 1 million over four (4) years, and about 2.9 million contactless terminals will be added in that same period.

Higher-end contactless terminals that allow the consumer to swipe or tap their cards or mobile devices, enter their PIN or signature, respond to prompts and be exposed to real-time offers and promotions through its LCD display typically cost about $550 each. Lower-end contactless terminals typically cost about $350. The cost for installing new terminals by the merchant isn’t high and shouldn’t be a barrier.

However, the lack of incentive or initiation by merchants to more aggressively upgrade to contactless terminals could change as more and more consumers begin using NFC-enabled phones (as well as contactless cards).

Which merchants are inclined to upgrade sooner than later? There are three levels of merchants, with a tiered breakdown of each merchant shown in Figure 7. The numbers are taken from Figure 6 and further specified. Tier 1, Tier 2, and Tier 3 categories are defined as:

Tier 1 locations are nationwide companies - Target, Walmart, Starbucks, McDonalds, etc

Tier 2 locations are more regional companies - Jack in the Box, Foster Freeze, etc

Tier 3 locations are smaller businesses - Neighborhood dry cleaner, taxis, etc

Source: Various sources from Internet

Figure 7 – POS Terminals in North America by Merchant Category

Each Tier will have approximately the same absolute growth over the next several years as merchants choose to upgrade to contactless payment terminals and new enterprises open for business. It’s not difficult, however, for merchants to recover this investment.

Because mobile transactions are faster than cash or card transactions (as mentioned above), more customers are processed (e.g. move through the checkout lane) in a given period of time, raising the operational efficiency of the business. Why haven’t more merchants been interested in upgrading to contactless payment terminals to take advantage of the contactless cards (installed based), and will they upgrade once the upcoming new NFC-enabled phones become available?

A barrier could be cost – there is some premium for an NFC-enabled payment terminal. Another possibility it that most merchants who understand the technology have already started to use it, or there isn’t a need to reduce the queue time to speed the transaction. Also, at this time the majority of merchants may not see enough customer demand (or requests) to use a contactless card, something the credit card companies can be more proactive to promote. Optimistically, NFC-enabled phones will change that circumstance.

As the benefits to consumers become evident through aggressive (gorilla) marketing and promotional campaigns by terminal suppliers, carriers and financial institutions, in time the rate of adoption of (both attended and unattended) contactless terminals will increase, exceeding the present market forecast.

As mobile payments rollout globally, the role of managing the accounts and OTA updates will become more important. The role that provides this breadth of account management service for mobile devices is more involved than traditional credit and debit card processing. And many of the stakeholders in the mobile commerce ecosystem want to control that role. Ideally, the candidate for fulfilling the role may be an entity (or entities) with relationships to financial institutions, handset manufactures and carriers, or some combination there of.

In North America, the ISIS joint venture may be the answer to this pending quandary – they’ve pulled together the key partners who have experience in contactless payments and who can contribute to managing the mobile commerce ecosystem. In Japan, DoCoMo was instrumental in establishing a TSM role, called FeliCa Networks. Nokia had invested in a TSM joint venture with Giesecke & Devrient in 2006, called Venyon, and exited it in 2009 by selling their share to Giesecke & Devrient. Europe has a number of other TSM-oriented suitors: Gemalto, Obethur Technologies and Zapa Technology, to name a few.

The NFC Forum released a white paper in 2008 that describes the NFC ecosystem and the need and benefits for a TSM. A partnership that is comprised of the key stakeholders should determine and facilitate the cell phone-enabled NFC transaction process so it works smoothly and seamlessly. There are many options, and as the mobile payment ecosystem matures, so will the TSM role and the addition (and sharing) of revenue generating services.