While the list of start-ups focused on mobile payments for digital content, eCommerce physical goods and/or person-to-person transfers continues to grow, another part of the industry is biding its time, with an eye on what may be a much larger prize.
What’s at stake are point-of-sale, in-person payments – what Glenbrook estimates to be roughly $4 trillion and 107 billion payments each year in the U.S. market. Some of these today are done by card; some by cash and check. All are targets for the companies looking at using the phone to make those payments.
Background: Conventional Wisdom on Mobile @ the POS
- NFC (Near Field Communications) technology is seen as the key enabler. Think of this as a “modem chip” on your phone (actually, an antenna) – that can communicate with appropriately enabled terminals.
- NFC-equipped phones aren’t in the U.S. market yet – but may become prevalent in new phones in the 2010-2012 time period (estimates vary); someone is going to have to pay the incremental cost of putting the NFC chips in phones. (This could be the carrier, a payments provider, or a marketing company – NFC chips are also going to enable a slew of POS couponing kinds of applications.)
- Merchant terminals need to be capable of interacting with chips – but the good news is that the same terminals that support contactless cards (MasterCard PayPass, Visa payWave, etc.) work for NFC phones as well. (Contactless cards and NFC-enabled phones both use RFID technology to communicate with terminals.)
- Contactless cards in the U.S. are either (pick one point of view):
- On a roll – initially implemented at fast-buy locations, rapidly spreading to other merchant categories, consumers love the convenience
- Stalled out – have found their market at fast-buy locations; won’t go much further, consumers find little incremental value in waving vs. swiping with no signature
- The key issue about the “when” of NFC (and even the “if”) is the carrier’s place in the economic model. Provisioning card data onto a phone requires security, and the most likely candidate is the carrier-controlled SIM chip. Carriers will undoubtedly charge issuers for provisioning and maintenance – but will they also get a share of transactional revenue?
- Stickers containing a contactless chip may help bridge consumer adoption issues; consumers who do not yet have an NFC-enabled phone will put these stickers on their phone. These are either (pick one point of view):
- A key transitional offering – consumers will get used to “paying by phone” and make an easy transition to NFC when their phone is enabled
- A market-confusing distraction, which may slow the rollout to full NFC capability
(Download Glenbrook’s Conventional Wisdom on Mobile @ POS)
First Data Corporation is a pivotal player in POS payments – a key provider of processing solutions to both the merchant and the issuing sides of the business. So it was particularly interesting to speak last week with Barry McCarthy, President, Mobile Commerce Solutions for First Data
McCarthy sees mobile payments at the POS as an eco-system that is being built, piece by piece – and that a giant tipping point will occur once all of the pieces are in place. The four key pieces are the terminal base, the NFC-enabled phones, issuer participation, and consumer education.
He’s very optimistic about the terminal base. (He should know, as this is First Data’s core business!) In other words, he’s squarely with the “on a roll” point of view on contactless readers. He thinks most analysts looking at terminal deployment have missed a central point. If you look at the absolute number of terminals in the U.S. market, about 300k to 400k out of maybe 7 million are contactless enabled – that’s still pretty low. But if you look by categories, the penetration is impressive. Almost all QSRs (quick service restaurants), almost every drug store and convenience store chain have installed contactless readers. Furthermore, contactless-enabled locations in those categories represent over 40% of card transactions in that category – a very impressive number.
What’s more important, McCarthy says, is how quickly contactless is moving to other classes of trade. He’s seeing “some name brand mall merchants” and big discounters moving “pretty aggressively”. Smaller merchants, he thinks, will still lag, but will end up adopting as terminal providers start incorporating contactless capabilities into standard terminals, or introducing integrated peripherals (which handle contactless, PIN and mag stripe cards), as First Data recently did.
In terms of phones, McCarthy thinks that 2011 will see large-scale introductions, with essentially all new phones in the U.S. market being NFC-enabled by 2012. “All it will take is one”, he said, “if RIM or Apple or Palm introduce an NFC phone, the rest will follow”.
Card issuers, he believes, will be heavily influenced by the “top of wallet” factor. This is particularly true with contactless stickers, which by definition have only one card: true NFC phones can easily support wallet software giving consumers a choice of cards to pay with. An issuer already supporting a contactless card program will (assuming satisfaction with the carrier-negotiation issue discussed below) have no problem in supporting an NFC program. I asked McCarthy about his views on the relative interest of banks in provisioning their signature debit cards vs. credit cards on contactless stickers and NFC phones, but he (diplomatically) declined to comment. (Personally, I can imagine some pretty heated debates around the old payments-council table at a bank!)
The $64 million question (actually, that’s probably pretty low – given POS card interchange of maybe $30 billion a year in the U.S.!) is consumer adoption. “It’s no secret”, according to Barry, that overall consumer adoption of contactless cards – in terms of actual use – is in “very low percentages”. There is a “fundamental consumer education issue” – although there are 50 to 60 million contactless cards in distribution in the U.S., many consumers aren’t even aware that they have the capability.
The contactless sticker is, he believes, the key to solving this problem. Consumers will want to use their phone for payment, and a sticker will let them do that. For many consumers, he thinks, a phone they often have in their hand will be much more convenient than digging out a card and using it for a fast purchase. First Data’s “Go Tag” sticker is getting enthusiastic response. Right now, the sticker is available just in prepaid form. This will continue – in fact, he sees contactless prepaid stickers as being a hot “J Hook” item – but First Data will also be providing Go Tag’s to support issuer’s credit and debit card programs.
On the key question of economics between carriers and issuers for NFC payments, McCarthy was quick to say “we’re not involved in those negotiations”. His opinion is that carriers will end up content with revenue for provisioning and maintenance, and will leave the transaction revenue for the issuers. This is particularly true if carriers want to avoid taking transaction liability. But, as he says, “it’s early days yet”.
So what’s First Data’s play in all of this? Terminals and stickers, of course – but a much bigger piece is their planned role as a TSM – or Trusted Service Manager – for NFC payments. This concept is just beginning to be fleshed out within the universe of concerned carriers and financial institutions. Basically, the idea is an intermediary, who would separately contract with MNO (mobile network operators, or carriers) and card-issuing financial institutions. The intermediary would manage the secure provisioning of the card data onto the phone, and conceivably perform a wide range of value-added supporting services, including billing, customer service, reporting, etc. According to Barry, the role is “exactly analogous” to the role First Data plays today in creating and personalizing cards on behalf of issuers. The key attribute for a TSM, he believes, are neutrality, security, connectivity, database management savvy and the ability to operate in scale with integrity. I asked about who their competitors would be in the TSM world. Other processors, he thinks, and maybe software platforms. Banks, card networks, and carriers are all considering it, but may be too neutrality-compromised to be successful.
Of course, phones are going to be able to do a lot more than make payments. In fact, one way to look at the emerging world of phone applications is to see a battle of sorts between applications downloaded by consumers onto phones from “app stores”, and applications provisioned by TSMs onto secure chips on the phone. Common wisdom, again, says that card purchases will have to be supported through the latter model. But this could all play out in a number of ways. One view might find that there would be a lighter-weight way of securing card purchases – potentially eliminating or invalidating the whole TSM concept. Another view is that the TSM role would be of value for a wide range of applications outside of payments – creating a much larger world of opportunity for First Data.