Tough year ahead for NFC as retail payments diversify
NFC technology advocates face continued disappointment in 2013 as it is likely to be overshadowed by other developments in retail payments, according to a report by financial research firm Celent.
“NFC has been touted as the next big thing for many years now,” said Zilvinas Bareisis, senior analyst with Celent’s banking group and author of the report. “But to use it to make payments using a phone, as though it were a card, is still very hard. Some markets, such as Poland, are well ahead with the infrastructure – making it more likely to prevail there – but in other markets, such as the US, the infrastructure bill is huge and convincing retailers and merchants is difficult.”
Online and mobile payments are predicted to make up approximately 45 per cent of UK retailers’ total revenue by 2014, according to some estimates. However, many businesses have been reluctant to invest in the technology as yet due to a combination of high costs and scepticism over whether the retail customer will use it.
Part of the problem for NFC digital wallets is that while the physical POS world is dominated by cards and the mobile equivalent is to have payment credentials inside the phone and sent to the POS via NFC, the online world is dominated by cloud-based wallets such as PayPal. That makes it difficult to bridge the online-offline convergence of customers who use their mobiles while shopping to read product reviews, compare prices and order online, or pick up an item from a local store, according to Celent.
Further compounding the difficulty is the limited ability of the consumer to use the technology. Apple’s newly released iPhone 5 does not support NFC – a state of affairs that presents a “huge drawback” given the popularity of the phones and their high share of the smartphone market, says Bareisis. In addition, customers often do not realise that to make NFC payments, they need to ensure that their device has an NFC SIM installed – a requirement that adds further cost.
Lack of interoperability between banks is also an issue. Existing agreements between banks and telcos are often arranged on a bilateral basis, meaning that only the customers of a particular bank can take advantage of the new service.
“You need to be able to make a mobile payment, regardless of which bank you are using and where you are located, for the technology to achieve its full use,” said Bareisis. “But collaboration between banks and other firms is difficult and takes time.”
While several consortia have been set up in recent years, these have struggled to achieve success. In the Netherlands, a joint venture between the country’s largest banks and mobile network operators known unofficially as ‘Sixpack’ disbanded without achieving its goals, when T-Mobile, one of the founding partners, decided to follow its own route to market. In the US, a similar project called Isis is also struggling, according to Celent. In the UK, Project Oscar, an initiative between mobile network operators, has been delayed by the European Commission and has not yet led to any payments solution.
Other top trends identified by the firm for the upcoming year include the growth of the digital wallet, and the rise of cloud-based wallets.
For Bareisis, the advantage of cloud-based wallets is their ease of use. Users are able to sign in with a username and password, rather than re-entering their entire card number and details every time they want to make a transaction. In the coming year, he expects more providers to look at ways to bring cloud-based wallets to the point of sale.
“Cloud-based wallets have a lot of potential,” he said. “I don’t know if it will happen in 2013, but the cloud will come to the POS.”
Both Visa and MasterCard developed their own digital wallet solutions in recent months, V.me by Visa and PayPass Wallet Services.
V.me by Visa was designed as a means of improving the experience of using cards for online shopping – replacing the Verified by Visa process currently used – and extending it to other platforms such as tablets and smartphones. The pilots in the UK, US and Spain that started in November are scheduled to run until spring this year, and Visa is expecting widespread adoption to start from autumn 2013.
PayPass Wallet Services allows payment service providers to accept electronic payments across multiple channels, whether the purchase is made online using a computer, tablet or smartphone. The initiative is currently supported by ten UK payment service providers.
Celent also notes that push payments in Europe, such as new P2P solutions in the UK and the pan-European Online Banking e-Payments initiative MyBank, which is expected to launch in March, also continue to grow.
Finally, Bareisis suggests more regulation is needed on alternative payments to maintain a level playing field, as well as the introduction of a new transaction category, mobile present, for payment networks to take account of the increasing use of mobile devices to initiate transactions.
At present, transactions are divided between those where the card is present, and those where it is not. If the card is present, the risk is considered lower, so a lower fee is charged to use the card. However, Bareisis points out that with mobile payments, they can be considered both card present and card non-present, since the customer is present at the retail outlet together with the mobile device, but the card details are stored remotely in the cloud.
“In many ways it’s still a safe transaction because the customer is present in the store,” he said. “It’s an anomaly, and it should logically be considered as a card present transaction for the sake of fairness and common sense. That’s why I propose a third category for transactions, the mobile present, to take account of the new technology.”