2012: the year of confusion for NFC payments

1Executive Summary

Near field communication (NFC) payments seem poised for takeoff next year in the U.S., with the launch of Isis from the carriers and a wider deployment of Google Wallet. But while 2012 will surely mark some big growth for NFC, it is also likely to be a year full of confusion as the technology and the business relationships around it work through a number of challenges. Those include consumer adoption, standardization and interoperability, merchant uptake and evolving business models, and the players working with, not against, one another.

Progress — but with moving parts

After years of trial and preparation, 2011 has been a pivotal year in helping prepare NFC for mass adoption. We have seen the launch of Google Wallet, the commitment of handset manufacturers and credit card companies behind Isis and the cooperation of NFC reader manufacturers like VeriFone, which is building NFC into all of its new payment terminals. Payment networks like Visa are getting involved with carrot-and-stick approaches to convince merchants to adopt NFC. And though NFC phone shipments are modest right now, perhaps less than 40 million this year, there is potential for about 100 million units to be sold next year. But NFC chip shipments are expected to ramp up quickly, hitting 1.2 billion by 2015, according to In-Stat.

As with any new big technology, many moving parts exist, and those will cause a number of growing pains that we will see on full display next year. The technology itself won’t be as much of an issue. Rather, much will come down to how the different players in the markets work together and how each party finds value in its piece of the NFC ecosystem. “There’s so much value and eventual consumer desire in NFC that it’s inevitable,” VeriFone CEO Douglas Bergeron said. “But we won’t get there without some first tough steps. I don’t think the next year will be the year of the mobile wallet. It’s more a year where we get things resolved, we see where things are going and we have more capabilities on the phones and then the subtle appreciation by retailers that this is really coming.”

Plenty of challenges for 2012

Here is a look at some of the issues facing NFC next year.

Consumer comfort. Consumers will need to first become more familiar — and comfortable — with the idea of NFC payments. There are still lingering concerns about the safety and security of contactless payments, and those will come to a head next year when Google Wallet rolls out on more devices and is accepted at more retail locations and when Isis finally has its formal launch. Consumers will need to be sold on the value of NFC overall and its benefits over a card swipe, which is pretty convenient for most people. Users will also have to choose among types of digital wallets, which will likely not work on all devices initially and all networks and won’t be supported by different retailers and merchants to the same degree. Visa is also coming out with its own digital wallet called V.me that will incorporate NFC. Users may find the confusion a little off-putting and may wait for more clarity.

Coexisting players. The two main NFC wallets, Google Wallet and Isis, will also need to figure out how to coexist. Right now, Google Wallet is ahead in the game, but it’s limited to just one device: the Samsung Galaxy S from carrier partner Sprint. Google Wallet has not been able to be activated by other devices from AT&T, Verizon and T-Mobile, who are collaborating together on their NFC joint venture, Isis.

The two wallets are similar in many technical ways, but Isis will charge fees to banks and other financial institutions to host them on the secure elements of their NFC-enabled phones. Isis has also won support from HTC, LG, Motorola Mobility, RIM, Samsung Mobile and Sony Ericsson, so it’s looking like Google may have trouble getting its wallet on more devices.

There’s no reason why both wallets can’t work on the same device, but the Isis carriers need to be convinced to let that happen. Having the two wallets interoperate well could help bring more value and clarity to merchants and consumers, but it’s not clear that these two are interested in moving quickly toward some kind of deal.

Investment. Merchants will first have to decide when to make the investment to support NFC. Without many NFC handsets in the market, there may not be much incentive early on. But with NFC phones expected to proliferate starting in 2012, they might start the necessary upgrades next year.

Still, merchants will face a lot of questions about which wallet to support. Some early adopters will have no problem integrating with both, but many merchants may wait for some type of cooperation between the wallets so they can better optimize their efforts and ensure that both platforms and their coupon and loyalty offerings work with their point-of-sale systems. Some will also need to work out who owns the customer data in these transactions. Google is forgoing payments; it wants data on users so it can provide targeted offers. Some retailers will want that as well, which could also be an issue. These are concerns that need resolving, said Charles Walton, the COO of NFC chip maker Inside Secure, but it could be resolved quickly if some of the major players like Google and Isis come together. “We think at some point in the year, the business factors will settle themselves out,” said Walton. “It’s like the browser wars. The functionality is not that different one to another, it just took a while to sort it all out.”

Finding the profit. A lot of the players are still working out their positions in this new ecosystem and where they stand to make money off NFC payments. Outside Citi, the banks haven’t jumped on board with Google Wallet, and some appear to be questioning the business arrangement set up by Isis, which will charge banks to host their cards, said Bergeron, the CEO of VeriFone. That’s going to be an issue in sorting out how much the banks pay and how much Isis hopes to make from its NFC wallet. Dickson Chu, Citi’s head of global enterprise payments for digital networks and mobile, complained last month that Isis could be slowing the rollout of NFC by trying to extract too much of a toll on banks. Isis has said it will launch next year with three banks. Getting acquiring banks on board is going to be key, because that’s a relationship that many customers trust. Getting their direct integration into the wallets will encourage more transactions and should be easier than using prepaid accounts on the wallets.

Collaboration holds the key

Mick Mullagh, the CEO of ViVOtech, a provider of NFC hardware and software, said the players in NFC payments need to consider how the overall mobile market and Internet have come together through openness and collaboration. He said 2012 will be more of a settling year as the relationships work themselves out, a process that could extend into 2013. But ultimately, the ecosystem will realize there is more money to be made by working together than apart.

“We’ll eventually see more open collaboration models and more value propositions for merchants,” said Mullagh. “I think the major wallet providers will recognize that and once they’re up and running, the natural evolution is to see how can they grow faster.”

The idea of collaboration is going to be key in NFC’s success. If the major players work together and establish an even playing field, there’s a better chance that consumers and merchants will get a more coherent look at the value of NFC payments that is not fragmented by different business agreements.

We keep writing about the future of NFC payments, and every year seems like a breakthrough. And in many ways, 2011 has been an extremely critical year in working through a lot of the last trials, proving the technology, getting the hardware prepared in both handsets and terminals, and creating the back-end work to make payments and offers work. But there is still a lot of jockeying going on. Everyone wants a piece of this new pie or at least doesn’t want to get left behind.

Now the hard work is not in establishing the technology but in striking the right business arrangements and convincing consumers and merchants that this whole NFC thing is worth it. I would like to think that with so much at stake, the interested parties would cooperate quickly. But it’s because so much is at stake that we will likely have to slog through a year or more of settling in and sorting out.

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