Apple: Taking NFC to the Mainstream?

The hottest area of speculation at the moment is around Apple’s entry in the payments market.  Already early last year, it was being reported that Apple was putting together a payments team, while patent applications revealed that they would likely introduce NFC the iPhone 5, which will probably launch in June 2011. 

Now, considering that NFC has been around for a long time and that a flurry of prominent companies, from Visa to the major phone carriers to Google, already have NFC enabled products or trials – why is Apple able to generate so much excitement? 

Simply put, Apple has a remarkable track record of popularizing new technologies with a user experience that seamlessly bridges the hardware and software.  Like they have previously applied their midas touch to the personal computer, the music player, the mobile phone and most recently the tablet, people are eagerly awaiting what they will do to payments.

Most interestingly, people are asking how they will enter the market?  What role will they play in the payments value chain?  Consensus says that they will probably use a version of iTunes as a mobile wallet.  However, it will be interesting to see if they simply have their customers pay with their credit cards through iTunes or if they attempt to link directly to customers’ bank accounts, and essentially do their own clearing and settlement.

Moreover, what features will they offer their customers?  Will they start their own offers and rewards program, similar to what Google is developing?  will they do anything cool with the data they collect?  How will they extend NFC outside payments – e.g. identification and ticketing?

Also, will they enter the merchant side of the industry?  Will they enable the iPhone or iPad as payment terminals by developing NFC readers that plug directly in to the devices?  Will they offer data services?

Another interesting perspective is if they will open up their payments platform (iTunes) for external developers to develop application, similar to what Apple has done for the iPhone and iPad and PayPal has done in payments.  We are starting to see some interesting developments coming out of PayPal X and cannot even begin to imagine where Apple could take this market.

Still, with all this excitement, we should still remind ourselves that not all Apple launches are a success.  Apple TV is a classic example.  The payments industry is probably also more complex than industries Apple has previously taken on.  It is the quintessential network business, which might not be a good match for Apple’s notoriously proprietary and closed approach. 

It would take time for the iPhone 5 to build a user base that is sufficiently attractive for merchants to justify new point of sale investments.  If acceptance is not wide from day one, all the excitement that surrounds the launch could whittle away and slow application innovation, etc.

Despite all the excitement and endless opportunities, we should therefore remember that Apple faces big challenges and stiff competition in this field.  Still, the buzz generated by an Apple launch, along with all the other launches upcoming launches, could mean that 2011 is finally the breakout year for NFC.

Boku & Zong: what does the future hold?

Having previously written about emerging payments companies, such as Square, Klarna and FaceCash, I wanted to look at two similar mobile phone players; Zong and Boku.

Zong and Boku are similar in that they target online purchases, using the mobile phone as payment method, rather than a credit card.  The user simply selects Zong or Boku as payment option at the online merchant and enters their phone number.  Both companies then perform a verification process with the customer’s mobile phone – the process differs somewhat between the two companies, but is quick and easy – and the transaction is charged directly to the phone bill – no credit cards involved.  To enable this, both Zong and Boku have entered extensive partnership agreements with phone carriers across the world.

Zong and Boku have both been very successful in capturing micropayments on Facebook and online games.  By making their APIs available to the merchants, their models are highly flexible and integrate seamlessly into the broader online experience.  They also aim to expand into other digital goods, but have yet to proven this model.

The issue is that the carriers take a big cut of the transactions, which makes the method of payment expensive compared to credit cards.  This clearly limits its attractiveness to merchants, who are likely to only accept Zong and Boku if a considerable proportion of their customers don’t have credit cards or are uncomfortable using them online. 

To get around this issue, Zong has added a credit card option, where instead of being charged directly to their phone bill, the customer is charged to their credit card.  This is a very similar model to PayPal and seems like the right approach to capture larger-ticket purchases outside Facebook and online games in the short term.

However, in the longer term, one has to question whether either of these players offer anything unique in terms of technology or business model to expand beyond the social networks and evolve as independent companies.  My bet would be that they are either bought by a larger payments player or pushed out of the market by better a technology.

3 Articles on Innovation in Payments

The Rise of the Hybrid Startup

In this article, Glenn Kelman, the CEO of Redfin, argues that 2011 will be the year of the Hybrid Startup.  Unlike the traditional clicks-and-mortar businesses, that simply add an online presence to its physical-world store, the hybrid business leverages the best of both the online and offline worlds to build entirely new business models. 

Hybrid businesses will enhance customers’ shopping experiences by integrating virtual elements, initially through mobile phones.  Examples are location-based offers, recommendations, augmented reality experiences and so forth. 

As hybrid business are already adding an online layer to the physical-world shopping experience, one would expect that they would take the payment online as well.   

http://techcrunch.com/2010/12/24/hybrid-startup/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29

Point of Sale Revolution: Transformation of Payment Acceptance

Point of Sale (POS) acceptance, a once sleepy, commoditised, add-on to the merchant acquiring business, is in the midst of a transformation, with several game-changing players entering the market.

There are three key drivers behind the innovation:

1.     Internet ubiquity at the point of transaction: virtually all merchants have transitioned from dial-up to always-on connections, facilitating an explosion of new capabilities that integrate traditional terminal functions with new loyalty, marketing, and information services

2.     Wireless proliferation: merchants are increasingly equipping the employees with sophisticated, mobile POS tools, such as the iPhone or iPad, which enables the merchant to fundamentally change the shopping experience

3.     Emergence of more sophisticated loyalty solutions: merchants constantly seek to develop more attractive loyalty and marketing programmes.  POS innovation is enabling them to integrate loyalty more seamlessly in the POS experience and to tailor offers more effectively by leverage the data they captured.

These drivers are significantly altering the POS space and making it one of the more innovative parts of the payments value chain.

http://www.thecatalystcode.com/theconversation/blog/2010/12/21/point-of-sale-revolution-transformation-of-payment-acceptance/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheCatalystCode+%28The+Catalyst+Code%29

Mobile Apps Wars’ Impact on the Payment Biz

In this article, David Evans points out that it is only just over two years since Steve Jobs open up the iPhone for external apps (October 2008).  There are now more than 100,000 apps for the iPhone and, for many customers, this has become an equally important reason to buy the phone as the phone itself.  Since then, Google Android has developed a successful app market of its own, while  Blackberry and others are also having a go.

A number of these apps are payment related.  Transactions and PlanetAuthorize have both developed apps that enable merchants to accept payments anywhere, while Yodlee and Monitise have developed online banking apps.  However, Evans argues that these are all relatively obvious innovations.

The key, he argues, “is that with all these developers, all around the world, thinking about apps, it is probable that someone — perhaps many someone's — will come up with a killer app that will revolutionize payments”.  “Those who believe in a linear path from mobile phone, to mobile phone plus NFC, to mobile phone as payment device at POS are likely to get a rude awakening”.

The payment industry could experience the type of groundbreaking innovation that the computer industry experienced after the launch of the PC or the mobile phone industry experienced after Apple opened up for external apps.

http://www.pymnts.com/mobile-app-wars-impact-on-the-payments-biz-2/

Monitise: Growth Through Partnerships

Earlier this month, Monitise, the UK-based mobile banking provider, announced that its European business has now reached month-to-month brake even.  In less than 10 years, Monitise has struck up partnerships with with most UK banks, including HSBC, Lloyds TSB, RBS and NatWest, signed up more than 3 million customers and is processing more than 10 million transactions per month. 

Key to Monitise’s success has been its flexible banking platform that allows it to work with all types of banks and carriers.  Moreover, it has a range of technical platforms that enable users to perform a range of banking services, such as check balances, view statements, pay bills and receive alerts, on mobile phones of all types, from SMS to iPhone apps.

However, what makes Monitise one of the most exciting companies in the mobile banking space is the partnerships it has struck up around the world.  Through these partnerships, Monitise is becoming the leading player globally and is entering the payments space. 

In 2009, Monitise announced a strategic alliance to develop mobile banking solutions for Visa, which would take a minority stake in Monitise.  This partnership has proven to be very powerful in positioning Monitise as an industry leader and facilitate global expansion.

In the US, Monitise partnered with FIS and entered as the first multi-bank, multi-carrier mobile banking platform.  The venture has proven successful and has now signed partner agreements with nearly 250 banks.

In Asia Pacific, Monitise announced a joint venture with First Eastern and will launch in Hong Kong as the first market.  Beyond Hong Kong, the Monitise has its sights on China, Japan, ASEAN and the Middle East.

Recently, Monitise has also announced launches in India and several African markets, such as Uganda and Nigeria.  In India, it will work with Visa and is interestingly integrating mass transport ticketing with its standard banking platform.

In addition to its geographic expansion, Monitise is also making very interesting moves in the payment space.  In February 2010, it announced that it would integrate Device Fidelity’s NFC capabilities in its global platform.

Furthermore, in November 2010, Monitise formed a join venture with Best Buy and Carphone Warehouse founder, Charles Dunstone, to develop an NFC network in the UK.  This network would initially leverage Monitise’s broad banking partnerships in the UK, Best Buy’s retail presence and Dunstone’s retail experience, to develop the network.

In December 2010, Monitise announced a partnership with ViVOtech, a leading near field communication (NFC) software developer, to deliver mobile phone payments services to banks across the United States.  With Monitise’s already broad base of bank partnerships, this deal could make it a major player in contactless payments when NFC enabled handsets are launched later this year.

In less than 10 years, Monitise has become a leading, global player in mobile banking and payments.  With its open mindset and platform, it has successfully forged powerful partnerships that have enabled it to build an emerging global presence and expand its product capabilities to contactless payments, mass transport ticketing and couponing.  Undoubtedly, Monitise will continue to strike up new partnerships and expand in new business areas, and is definitely “one to watch”.  

PayPal and Bling Nation

Ebay yesterday reported that PayPal tripled its mobile volume in 2010, a clear demonstration of the increased adoption of mobile payments.  To capitalize on this trend going forward, PayPal is increasingly targeting physical payments and has forged a number of partnerships to support this effort.  However, one partner has stood out from the rest; Bling Nation.

Bling Nation was founded by Meyer Malka and Wenceclao Casares in Palo Alto in 2008.  With Bling, they enable mobile phones for NFC payments with an RFID sticker, or Bling Tag, that is distributed for free.  Users simply register their phone number and PayPal account to their Bling Tag and are able to make purchases by tapping the tag on a contactless terminal.

To facilitate merchant acceptance, Bling initially partnered with local banks that would have cardholder and merchant relationships in the local area, to whom they would distribute NFC stickers and terminals.  The advantage of this approach was that transactions were ‘on-us’, which enabled Bling to offer merchants a cost effective solution.  On the flipside, each partnership was relatively small and growth was slow.

To achieve national scale, Bling has entered a partnership with Verifone, in which Verifone’s more than 370 resellers will begin to offer the Bling and PayPal service alongside traditional credit and debit card acceptance to merchants nationwide.  This is the first implementation that combines traditional cards-based payments with alternative payments at the point of sale.

The downside of this approach, is that PayPal transactions are charged at ‘card not present’ fees, and therefore adds unnecessary costs in a physical environment.

Interestingly, co-founder Casares views payments as the “commodity part”.  The value-added of Bling comes from connecting customers and merchants through data services and rewards. 

In the “marketing services” space, Bling has partnered with Facebook, as well as other online communities, where customers register to get access to discounts and rewards and merchants get access to customer data and profiles to drive increasingly targeted offerings.

It is this perspective that differentiates Bling Nation from other mobile payments providers and makes it such an attractive partner for PayPal, Facebook and a host of other companies that will want to leverage Bling’s growing network.

Three Exciting Stories in Payment (Jan 19)

Starbucks has launched a mobile payment application for iPhones, iPads and Blackberry's built on its Starbucks Card platform.  The application will enable customers to make their purchases with a barcode that appears on their mobile phone, check their balance and receive Starbucks loyalty points.
http://www.pymnts.com/mobile-payment-debuts-nationally-at-starbucks-20110119005434/

Softbank Mobile has selected France's Gemalto for their NFC trial in Japan.  The trial will leverage Gemalto's UICC SIM card and N-Flex technology.  Users simply receive a replacement SIM card, which enables a conventional mobile phone for NFC through the antenna.  In addition to a prepaid service, Softbank's trial also enables users to perform NFC transactions from two Japanese credit card issuers. 
http://www.paymentssource.com/news/gemalto-joins-mobile-japan-3004716-1.html

MasterCard has entered a marketing partnership with Transport for London (TfL) to distribute PayPass (MasterCard's NFC solution) branded wallets to Oyster Card users.  PayPass is still not available in London, but the marketing push is in anticipation of TfL putting Oyster on an open-loop network, such as Visa or MasterCard.
http://marketingmagazine.co.uk/news/1049764/MasterCard-brands-Oyster-wallets-PayPass-push/

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3-D Secure: Universal, but not Final

As we consider emerging online and mobile payment technologies, a crucial aspect of their innovation lies in their approach to cardholder verification.  The most prevalent verification online technology is 3 Domain Secure, or 3-DS, which was first introduced by Visa, and has later been adopted by MasterCard, JCB International and American Express.

Traditionally, the card industry has relied on a two-part verification process, where the customer produces their physical card along with their PIN-code.  This is of course not possible with online transactions, also referred to as ‘card-not-present’ transactions.  As these transactions are more vulnerable to fraud, the industry has shifted the liability for fraud from the card issuer to the merchant. 

3 Domain Secure was developed as an additional layer of security for online transactions.   Before online transactions are completed, users will be re-directed to a webpage associated with the issuing bank to authorize the transaction.  Banks are free to adopt any method of verification they prefer, but most opt for a simple password. 

Although 3-DS is expensive for merchants (set-up fee, monthly fees and transaction fees), they benefit from fewer chargebacks, as it enables the issuing bank to properly authorize the transaction and thereby shifts the liability for fraudulent transactions from the merchant to the issuer and cardholder.  This shift in incentives differentiates 3-DS technology from previous verification technologies and has been a crucial element to encourage the broad adoption.

However, in their article titled: “Verified by Visa and MasterCard SecureCode: How Not to Design Authentication”, Steven Murdoch and Ross Anderson argued that 3-DS has considerable security weaknesses.  To summarise:

·      Confusing the user: the industry generally tells users to only enter sensitive data in webpages that use TLS technology, which is recognized by most browsers.  However, 3-DS windows are not TLS secure and generally display the URL of the issuer’s software partner, not the issuer

·      Activated during shopping: the activating the verification technology during shopping, the user is given the impression that they are providing personal details and passwords to the merchant, not the issuer

·      Password choice: the user will generally be more concerned with shopping than security and is less likely to provide a strong password

·      Liability shifting: the shopping process is not an appropriate time to introduce new terms and conditions that fundamentally shift the liability of the user

·      Inconsistent verification: 3-DS leaves the actual method of verification open to the issuing bank, and there are several examples of banks that have made unwise choices, such as using the cardholders PIN-code

·      Privacy: 3-DS specifies that for a user to be provided with transaction-level details, this information must be shared with the issuing bank.  This information enables issuers to profile their customers and may be counter to privacy regulation in some European countries

Murdoch and Anderson conclude that 3-DS has enabled the payment networks to shift liability from merchants to cardholders, without providing cardholders with sufficient security.  To solve for this, the authors recommend transaction authorization. 

From personal experience, I have seen HSBC implement an SMS solution in the UK, where you authorize each payment with a transaction-specific code that is sent to your mobile phone.  Similarly, in Norway we use a key fob that produces transaction-specific codes.

Interestingly, we have seen that although 3-DS is being promoted as a universal solution to online security, it does not solve the crucial issue of verification.  Issuers have mostly opted for a password approach, which does not provide the level of security we need.  SMS-codes and key-fobs offer improvements, but are surely not the technologies of tomorrow.  We have already seen plenty of interesting innovations and should realistically expect this to continue for many years before the industry agrees on one solution.