DES MOINES, Iowa — Thanks to host card emulation (HCE), tap-and-go may well become the primary way consumers pay with their phones at the point of sale.
The future of near-field communication-powered mobile payments is looking up, says Brian Day, senior product manager for The Members Group. Day projects that NFC will win in the emerging payments space over technologies such as barcode/cloud and Bluetooth low-energy.
HCE has breathed new life into NFC — written off by some payments experts over the past year, according to Day.
"With HCE and NFC working together, long-standing cardholder relationships are not only safe, they are poised to take off," said Day in an interview with Credit Union Journal following the release of his white paper titled "The Mobile Payments Ignition Point."
Host card emulation allows a smartphone to perform transactions by "emulating" a contactless smart card, with security credentials stored either on a secure cloud or on the smart device's host processor, not the device itself, according to Erik Vlugt, vice president of product marketing for VeriFone, North America.
The open architecture solution enables payments and other NFC services, such as loyalty programs, building access, and transit passes, to be delivered without the need for an in-device secure element such as an embedded security chip SIM.
NFC itself is considered a secure payment technology; the addition of HCE offers both positive and negatives from the payment security angle, Vlugt wrote in an article for PaymentsSource, an affiliate of Credit Union Journal. "It should be noted that simply moving credentialing away from the mobile device is only one element of a secure payment system, which requires a holistic approach encompassing end-to-end encryption, tokenization and compliance with both existing and emerging standards," he added.
Day noted that momentum for NFC payments had faded as cloud-based payments tech, such as those used by PayPal and Square, took hold. "But we felt the pendulum swing back to NFC when HCE was introduced by Google with its Android KitKat update."
Day explained that Google created HCE in response to wireless carriers blocking Google Wallet's access to the secure NFC chips in their units.
The recent adoption of HCE standards by two major payment providers could be the kick-start needed to fulfill NFC-based mobile payments' potential, noted Vlugt. MasterCard and Visa's February 2014 HCE announcements followed the November 2013 news that HCE would be supported in the Android Operating System.
"International Data Corporation figures show that 78% of smartphones sold in Q4 2013 run on the Android OS, and that it's enjoying strong gains in markets outside the U.S., including in China and Latin America," he added.
HCE complements NFC hardware in two major ways, according to Day. "The technologies work together to keep card issuers in play and they allow for a seamless user experience," he said.
Day said a lack of agreement on one core technology to power mobile payments has complicated issuer, merchant and consumer adoption of mobile payments. "Simply put, a plethora of choices for both providers and consumers exists today."
To bring mobile payments to the "long-awaited ignition point," Day said, technology developers and issuers must link up. "HCE technology may be just the innovation to grease the wheels for such a marriage."
Day also attributes growing interest in NFC to last year worldwide shipments of NFC-enabled smartphones climbing 275 million units, up 128% from 2012. Shipments are expected to grow to 416 million units in 2014, he said.
Merchants too, are adding terminals with NFC capability. As retailers prepare for EMV and upgrade terminals to handle the new, more secure, plastic, most new POS devices are equipped with NFC.
"In fact, global shipments of NFC-ready terminals doubled to just under four million units in 2012 and are forecasted to grow to nearly 45 million units by 2017," said Day.
Day sees HCE making checkout more convenient for consumers, as the HCE architecture can support payments, loyalty programs and card access. He sees consumers tapping their phones to redeem coupons, loyalty rewards and make the payment in one step.
"That will help migrate consumers to mobile payments," added Day. "We are starting to see technologies combine and consolidate, so the best pieces of each can contribute to the mobile payment product or system in total."
Citing the example of HCE and NFC working together, Day said, "You could combine Bluetooth with that and really leverage all the positive elements of each technology."
