NFC Standoff

  Talk of enabling mobile phones to initiate contactless credit and debit card payments is turning to action in the United States. Pilots are moving out of card networks' and issuers' corporate cafeterias and into the public arena, though such migration on a broad scale could take time.
  Helping propel this movement is Near Field Communication, a type of radio-frequency identification technology that uses electronic chips and antennae to expand the functions supported today by contactless cards and key fobs such as MasterCard's PayPass and American Express Co.'s ExpressPay. In addition to initiating payments, consumers can place NFC-enabled phones against other NFC chips embedded in media such as posters. This can allow theater patrons, for example, to view movie trailers or shoppers to download coupons from posters in stores.
  NFC could add card accounts to the expanding lineup of mobile phone functions, connecting issuers to undreamed-of possibilities for payments, personalized marketing, loyalty and rewards delivery through phones. And NFC could reduce the time and expense of activating and updating card accounts by mail by allowing issuers to program customers' NFC chips remotely to enable their phones to work as contactless payment devices.
  But to tap that revenue potential, payment networks and issuers first must overcome significant business hurdles. Chief among them is that the main providers-card networks, card issuers, phone manufacturers and mobile-network operators-must negotiate operating agreements that make good business sense for each of them.
  This, it turns out, is no easy process.
  "It's not clear who wins and how the elements will play together," says Ed Kountz, senior analyst at New York-based JupiterResearch. "Questions remain about who controls the customer, who gets paid what to provide access to those customers and whether banks could, in fact, be threatened by [mobile-network] operators who develop prepaid payment applications."
  Indeed, such negotiation hurdles spurred Oyster Bay, N.Y.-based ABI Research in September to scale back a previous five-year forecast that said by 2010 some 500 million cellular handsets, more than half of total handsets shipped worldwide, would be embedded with NFC technology. ABI now forecasts NFC to be embedded in 450 million handsets, or about 30% of all phones, by 2011.
  ABI could not provide an NFC-phone sales forecast specific to the United States, but British research firm IDTechEx Ltd. predicts that North America will account for 19% of 300 million worldwide NFC-phone sales in 2010 and 28% of 600 million worldwide sales in 2013.
  "It's all about the [mobile-network] operators," says ABI Research analyst Jonathan Collins. "If they don't want the technology in their phones, it's not going to reach them."
  When banks and payment networks first approached mobile networks about NFC payments, Collins says, the mobile operators asked what cut they would get of the transactions their phones hosted. "The answer was, 'You're not going to get anything,'" he says.
  Oliver Steeley, vice president of MasterCard Worldwide's Mobile/Wireless Center of Excellence, agrees payment networks and issuers do not want to give up their transaction turf, especially to an outside industry. "The banking sector has been very clear that we're not about to give a slice of a transaction that happens on a cell phone to the mobile carrier, the cell-phone manufacturer or anyone else," he says.
  But Steeley acknowledges that neither side can proceed without the other. "Banks don't buy cell phones. Mobile carriers buy cell phones," he says. "So if a mobile carrier is going to support a new function, it needs to be worth their while. They need to be convinced that this is a function that consumers really want, and if they don't support it, they're going to lose market share."
  Nearly 20% of consumers ages 18 to 24 say they would be most likely to use their cell phone for contactless transactions compared with 8% of the 3,215 consumers polled overall who said so, according to Javelin Strategy & Research.
  Mobile network Cingular has been involved in multiple NFC payment pilots in the United States because the company sees new revenue potential in adding the payment function to its subscribers' phones. "We see an opportunity to participate in the vast revenue that has been in place in the financial-services area," says Shih-Ming Wang, a Cingular product manager.
  Wang says Cingular is exploring different revenue options with financial institutions, including receiving a fee from partner financial institutions or a share of the transaction fee. "It could be other monetary agreements," Wang says. "Right now, it's still being discussed."
  Which partnership model gets past the revenue-sharing roadblock remains to be seen. Scott Rau, senior vice president of Chase Card Services, a division of JPMorgan Chase & Co. that recently participated in an NFC phone-payment trial, says pilots help iron out such business bumps as much as technology hurdles.
  "One of the reasons we do trials and pilots is to learn how the ecosystem works and how partners that come to the table will figure out the economics and profitability," Rau says. "It's a little different with a cellular phone. There are lots [more] people involved."
  Collins says that while ABI Research has pushed back its timeline for the adoption of mobile payments while negotiators debate such details, he believes NFC payments eventually will become widely adopted. "It's just been pushed back a year or two," he says.
  Participants in the first U.S. pilot of NFC chip-embedded cell phones, which ended in April, say they are happy with how it turned out. Visa USA, Chase, Cingular, Nokia and Atlanta Spirit LLC, which owns Philips Stadium in Atlanta, the Atlanta Hawks National Basketball Association team and the Atlanta Thrashers National Hockey League team, conducted the test during seasons of both teams.
  During the pilot, about 300 season-ticket holders who had Visa credit cards issued by Chase could use Nokia phones embedded with NFC chips to pay for snacks and souvenirs by tapping their phones on Vivotech contactless point-of-sale readers in the stadium. They also could tap the phones against posters embedded with NFC chips to download free content about the teams and games at the stadium or premium content such as team fight songs for 99 cents each.
  Pam Zuercher, Visa USA vice president of product innovation, says Visa views NFC phone payments as a way to enhance customer satisfaction by delivering not just payment functions but also such content as coupons, movie trailers and songs. "Besides enhancing the experience for consumers, NFC technology also provides value to mobile carriers, as consumers with NFC-enabled phones will use those chips for other activities, too," she says.
  Ticket holders who participated in the Philips Arena trial liked the ability to use the NFC chips to download information, says David Lee, Atlanta Spirit vice president of business development. "We literally couldn't deliver enough content," he says.
  Lee says the concerns of participating ticket holders changed during the pilot. "At the beginning, it was security if their phone was lost," he says. "At the end it was, 'Why can't I use this everywhere?'"
  The only glitch Lee recounts from the pilot is pockets of inadequate cashier training. "There were several occasions where a customer came back and said, 'You might want to interact with employee XYZ,'" he says.
  Preparation and excitement-building with season-ticket holders is lost if "I get to the cashier and the cashier looks at me as if I've presented them with a banana to pay," Lee adds.
  Rau says the Visa pilot was a logical extension of Chase's relationship with Atlanta Spirit that originated with a cobranded, contactless blink Atlanta Thrashers MasterCard. "We try to find places we can test, learn what we want to learn and provide things that the partners can learn," Rau says.
  Though Chase's pilot with Visa was a big step forward as one of the first NFC-phone payment trial in the U.S., Rau notes that newer pilots have advanced NFC further. This includes over-the-air personalization of NFC chips via mobile-phone networks to activate accounts when phones already are in the hands of users.
  In November, MasterCard, Nokia and 7-Eleven Inc. took the over-the-air programming step in announcing they had launched a six-month pilot in the Dallas area. Munich, Germany-based Giesecke & Devrient will act as a trusted third party between the telecommunication and payment-industry participants in the trial.
  When more than 500 customers of 7-Eleven's Speak Out wireless program opted to join the pilot, they responded to text messages waiting on their new Nokia 3220 phones. Those messages linked them, via the mobile-network access that Dallas-based Ztar mobile Inc. manages for 7-Eleven, to Giesecke & Devrient, which remotely programs and is managing information on NFC chips in the phones.
  Once programmed, the chips act as password-protected MasterCard PayPass contactless devices tapping eFinity prepaid accounts at Peoples Bank of Paris, Texas. Account holders also received plastic eFinity magnetic stripe cards with PayPass functionality as companions to the payment functions on their phones.
  MasterCard and Peoples Bank will charge no transaction fees on the payment accounts for the pilot. Steeley says MasterCard, which is overseeing most aspects of the trial, had no trouble enlisting account holders. "Right now, we can't ship enough phones out," he says. "We have more people who want to play than we have toys to give them."
  THREE'S A PARTY
  Though the pilot now only involves one payment card per NFC chip, sources say its model of after-the-fact chip programming and third-party chip management could ease the activation, deactivation and updating of several payment accounts on a single chip, even those of competing card brands and issuers.
  MasterCard, Cingular, Nokia and Citigroup announced in December the long-expected launch of a new NFC pilot, this time involving an unspecified number of New York City residents with Cingular service and Citi-issued PayPass accounts
  The three- to six-month trial, which is planned to begin Jan. 10, also will use the services of Giesecke & Devrient. The phones will work anywhere PayPass is accepted, including at turnstiles of a few New York City subway stations where PayPass acceptance also is being tested.
  JupiterResearch's Kountz agrees that the third-party chip-management model of the trial is significant. But he says there is no guarantee it will be the model for all future NFC-payment partnerships. "I don't think we're at a critical mass where everyone agrees this is the way to do this," he says.
  Visa also is positioning itself with a third party. On Dec. 14, Visa announced it had acquired a minority stake in mFormation Technologies Inc., an Edison, N.J.-based company that provides software and services to enable mobile operators to configure handsets and other wireless devices over phone networks.
  MFormation will develop programs to configure NFC and any other payment methods in customers' handsets too. That way, if an accountholder has trouble completing a phone-based transaction in a store, the customer can call an issuer service number. If the issuer finds no problems with the account, the issuer and mobile operator can exchange relevant information, and the mFormation program can reconfigure the phone over the air.
  Discover Financial Services, the last of the major U.S. payment networks to roll out its contactless infrastructure, has been taking its time with NFC-enabled mobile phones, testing different versions of payment models for several months.
  "We've been working on scalability and making sure we're not just having a test to have a test," says Joby Orlowsky, Discover vice president of network marketing. "We're also very cognizant of the security issues involved. We've been very careful to make that part of our due diligence." (Many consumers fear that contactless payments could allow virtual pickpockets to steal data from contactless tokens using small proximity readers.)
  Discover is limiting participation in NFC phone tests to 100 of its own employees. The workers can use NFC-enabled Motorola phones to pay for purchases in company cafeterias and shops and at several merchants in suburban Chicago and in Salt Lake City.
  PHONES AS WALLETS
  Discover ultimately wants an NFC-based mobile-payment system that routes transactions over the mobile-network space that Ztar mobile buys from another wireless network. A virtual mobile-network service provider such as Ztar could act as middleman between Discover and whatever mobile network-Cingular, Sprint or U.S. Cellular, for example-a Discover cardholder already uses.
  The technology would allow holders or applicants of cards issued on the Discover Network to activate or reprogram NFC chips on their phones via secure messaging routed from Discover through Ztar mobile to any mobile carrier. Discover's platform supports up to seven Discover Network accounts in an electronic wallet on a phone.
  Discover also hopes to take advantage of its status as both a payments network and a card issuer to enable delivery of banking information over mobile networks to wallets on cell phones. "It's a real-time connection between your phone back to the Discover card system," says Rick Reese, Discover vice president of technology architecture. "I can make a purchase with a Discover card at any store, and it will tell me that real-time balance."
  Discover is testing the service with its 100 NFC-payment pilot employees and an additional 900 employees who use a variety of non-NFC phones. "We'll take a look across the spectrum of those handsets and see which ones the consumers like using," Reese says.
  Despite Discover's development of an electronic wallet to work with NFC technology, Reese believes the best business case for NFC payments will place those wallets under the control of mobile-network operators. "We've created our wallet so that it's plug and play," Reese says. "The ultimate solution is that the cellular folks will host the wallet and then the networks-Discover, Visa, MasterCard, AmEx-will plug into those wallets."
  Reese says Discover hopes to bring its wallet to the public soon. "We're ready to go live with a consumer implementation of this in the first half of 2007," he says.
  Of course, that will depend on Discover's negotiations with unnamed mobile carriers. One model could reward a mobile carrier with compensation if the carrier, instead of Discover or another issuer, convinces a customer to add the NFC-based payment account.
  Whatever technology challenges that trial and others face, NFC's biggest hurdle will be finding a business model that all partners-card issuers, mobile networks, phone manufacturers, merchants and consumers-believe is worth the expense and effort to strive for wider rollouts of cell-phone enabled payments.
  "The bloom is back on the rose of the concept of mobile payments," Kountz says. The question is, when will mobile payments move from concept to reality?
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