The reality was that the year would come to an end without much more than the odd trial deployment having occurred – usually in France – but with those in the industry still confidently predicting: “Yes, it will definitely be next year…” Then everyone went to bed, while Bill Murray woke up yet again in snowbound Punxsutawney and NFC remained stuck at the trial deployment stage.
Part of the reason behind the lack of commercial activity in the NFC space stemmed from the primacy of the mobile network operators (MNOs). While network operators are, generally speaking, pretty good at operating networks, their attempts to expand into content and commerce have largely been counterproductive. Operator portals were essentially an exercise in how not to develop a market for mobile content. When, in the wake of the App Store, content migrated to an app-centric environment, the portals rapidly withered away to nothing.
Likewise NFC where, as providers of the secure element (SE) for the process, historically located on the Subscriber Identity Module (SIM) card, the operators were in a pivotal position in the value chain. Their involvement also prompted some interesting discussions around precisely who ‘owned the customer’: was it the operator or the financial institution?
For example, in December 2013 Spanish bank La Caixa introduced a commercial NFC partnership with Spain’s three leading MNOs, allowing customers to store all their La Caixa cards (debit, credit, prepaid and revolving) on the SIM in their NFC phone. However, each of the operators had its own approach to wallet management and each has a different trusted service manager (TSM): Telefonica’s is Giesecke & Devrient (G&D), Vodafone’s is Gemalto and Orange has Oberthur.
Speaking at the February 2014 Mobile World Congress in Barcelona, Jordi Guaus, head of mobile payments at La Caixa, admitted that the situation “means we are not giving the same experience to all our customers” and that “the difference in providers makes it quite difficult to manage.”
It is, in short, an activity akin to attempting to herd cats – although cats are generally less inclined to take a cut in revenues.
Shocks to the System
This complex state of affairs had been going on for so long that many in the industry were on the point of dismissing mobile contactless mobile payments as an irrelevance. However, in the space of just nine months the existing participants received successive wake-up calls in the form of host card emulation (HCE) and Apple Pay.
HCE enables an application to replicate the functionality of a SE in an NFC-based transaction or interaction. In this way, the app becomes a virtual smartcard, with the SE being remotely hosted. In addition, applications can use a reader mode to function as readers for HCE cards and other NFC based transactions.
The introduction of NFC platforms based around HCE rather than a physical SE had potentially seismic implications for NFC stakeholders, given that it promised to reshape both the value chain and the attendant business models.
Firstly, the removal of the SIM-based SE from the equation significantly weakened the grip of the MNOs on the value chain and conversely strengthened that of the bank, making handset-based contactless payment a more attractive proposition. Indeed, numerous banks have rapidly moved to deploy NFC based on HCE, including the Spanish banks Bankinter and BBVA, Royal Bank of Canada, Commonwealth Bank in Australia and First Investment Bank in Bulgaria. Meanwhile, several banks in France, perhaps the last bastion of SIM-based NFC in Europe, are now trialling an HCE-based model.
Although the stranglehold of the SIM had been broken, NFC needed to educate its audience. Consumers understand cash and they understand card payments. NFC involved paying at the point of sale (POS) with a device that consumers typically used to make calls, texts, browse the Internet and view videos of kittens on Facebook. Even when handsets are NFC-enabled, the majority of their owners do not know that they can use their handsets to make a payment (or redeem a coupon). Even those that are aware may not necessarily know how, and even when they know how to use the technology there is no guarantee that they necessarily will.
With Apple Pay, the great educator arrived. Apple had educated both its consumers and the wider public about smartphones, apps and tablets and they bought all three products in their millions. Within three days of Apple Pay being made available on the iPhone, one million US consumers had registered their cards with it.
Unsurprisingly, Apple had also eschewed the use of the SIM for its iteration of NFC, preferring an embedded SE. Given Apple’s control of both handset and operating system, it is ideally placed to do so.
Samsung’s Seal of Approval
The real confirmation of NFC’s rise came with Samsung’s announcement earlier this month at the 2015 Mobile World Congress that it will introduce a proximity payments solution in its Galaxy S6 smartphone. The solution – with the unsurprising moniker of ‘Samsung Pay’ – enables payment both via NFC (as with Apple, using an embedded SE) and via magnetic stripe technology.
Firstly, this provides further evidence of the galvanising effect that Apple has on its competition, and the need to latch onto its coattails and bring out similar products. Secondly, Samsung’s decision to complement NFC with a technology which is everywhere in the US (yet is finally being sidelined there, due to its relative susceptibility to fraud) highlights its desperation to achieve a greater reach than Apple.
However, three major obstacles could thwart this ambition:
- The market share of the S6 is likely to be far lower than that of the iPhone 6.
- With EuroPay, MasterCard and Visa (EMV) mandated by October 2015, most terminals will have NFC as well as chip-and-PIN capabilities, so Samsung’s window or opportunity here is extremely low.
- During that brief window, Samsung is unlikely to sell many additional handsets purely on the basis that they offer a soon-to-be-outmoded payment option.
In the US, Apple Pay has long since left the MNO venture Softcard trailing in its wake – so much so that the carriers have now upped and sold their interests to Google. Elsewhere, many other MNO led NFC projects are either being abandoned or ‘put on ice’ (quite possibly for good). With contactless infrastructure now being rolled out with the belated US migration to EMV, Apple Pay is in a position to steal a march on the contactless card providers.
In Europe, we still await Apple Pay’s introduction. That said, with a public increasingly accustomed to contactless card payment, Apple Pay has the opportunity to become the region’s first mass NFC payment mechanism and is likely to provide further impetus to the wider NFC market.
Finally, Groundhog Day may be coming to an end.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.