NFC: When Will The Breakthrough Come?

  The mobile-payment trial announced last September in Taiwan was to be a coming-out party of sorts for Visa Inc.’s much-touted mobile platform. But the party got started a bit late, says Chunghwa Telecom, Taiwan’s largest mobile operator and one of Visa’s main partners on the contactless Near Field Communication project.
  Handset maker Nokia shipped the phones for the trial with Visa’s payment application already onboard. That was not according to plan, and it meant vendors had to remove the application so they could later securely download it to the phones. The parties also debated over who should control the security keys to handle the downloads, says Chunghwa, although Visa denies this was ever an issue. Meanwhile, government regulators dragged their feet on approving the project.
  All in all, Hsueh-Hai Hu, Chunghwa deputy managing director for value-added services, figures the telco lost two months and the benefit of its original publicity campaign for the trial because of the delays.
  â€œThe procedure is more complicated than our expectation,” Hu tells Cards&Payments.
  But Chunghwa is not deterred. The mobile operator plans to launch yet another NFC trial this month, its fourth, and it intends to roll out commercial service as soon as it can get the phones and business agreements in place.
  Indeed, a growing number of mobile telcos, banks, transit agencies and other service providers around the world want to move out of the trial stage with NFC and into rollouts. But a few problems stand in the way–not the least of which is the scarcity of NFC phones.
  Some aggressive players are moving forward, regardless, with small rollouts or major trials (see chart on page 33). This follows dozens of pilots that have tested the contactless technology since 2005, not only in retail payment but in ticketing, access control and electronic couponing. For its backers, NFC is the missing link to the billions of dollars worth of mobile commerce that never materialized over the past decade, even as world subscriber numbers soared.
  Unlike contactless cards, which simply store and transmit data, backers say NFC phones offer much more: A display screen, keypad, network connection and the possibility for reading data, not just sending it.
  It means banks, merchants and other service providers could communicate anywhere, and at any time, with their customers. Merchants or banks, for example, could target consumers with e-coupons or advertisements right at the point of sale. Or they could let customers check balances and recent transactions and recharge prepaid accounts over the air.
  The phones could use the same growing base of readers that accept contactless banking and transit-fare cards. Along with tapping their cards, consumers also would tap their phones to pay for purchases or board buses and metro trains.
  And because NFC also enables phones and other devices to act as contactless readers, merchants and others could embed hundreds or thousands of cheap contactless chip-tags in posters, on store shelves, or at bus, tram or train stops or platforms. By tapping a tag, the phone automatically would open a mobile Internet or short message service session and fill in data fields. If a particular sweater size is out of stock, a clothing store could enable the consumer to order it online, right at the empty shelf, for instance. Some transit operators already are using the tags to sell low-cost tickets and snacks at vending machines.
  Eventually, subscribers will be able to transfer coupons, tickets, even funds, by tapping their phones on their PCs or other devices, or on those of their friends, say backers.
  â€œThese things are virtually impossible to do with a contactless credit card,” says analyst Alan Goode of UK-based Juniper Research. “With the mobile phone, it allows you to be more intelligent. It’s a payment tool for value-added services.”
  Juniper predicts mobile payments will soar from a little more than $2 billion in 2007 to nearly $22 billion globally in 2011. That takes in everything from subscribers buying ringtones over the mobile network to tapping their phones to buy a sandwich or pay a bus fare. NFC will fuel much of that growth, says Goode, who predicts the technology will account for 55% of mobile payments in 2011.
  â€œThe figures look very big, (but) if you compare that to what the credit card companies are doing at the moment, which is trillions of dollars, the overall percentage for mobile payment is low,” he says.
  Growing Pains
  Some other industry observers are not as optimistic. As the Taiwan trial illustrates, rolling out NFC is more complicated than backers, including trial organizers, first thought.
  Of course, any new technology has a gestation period, and NFC is no exception. But unlike the effort it took to get Wi-Fi into the majority of new laptops sold or wireless Bluetooth chips embedded in most new mobile phones, NFC requires more players to come together. This so-called emerging NFC “ecosystem” includes telecommunication companies, banks and other service providers. It also takes in a range of vendors, from handset makers to smart card suppliers to a new category of companies set up to securely download and manage applications on the phones. Until this ecosystem coalesces, NFC will continue to suffer teething pains.
  An essential part of the ecosystem not yet in place are NFC handsets. Senior analyst Vincent Poulbere of UK-based research firm Ovum has been following the topic closely. His report, released last fall, predicts NFC handsets will be scarce until 2010 and will not represent a sizable share of new handsets sold–23%–until 2012 (see chart on page 34).
  â€œIt’s not a story about consumer demand for new applications; you don’t have users asking for NFC,” Poulbere tells Cards&Payments. “The availability of phones is more driven by (mobile) operator demand.”
  And mobile operators will not order NFC phones in convincing quantities until they have firmly established a business case for the technology, Poulbere says. Among other things, adding NFC functionality to phones will hike costs by $10 to $30 per unit in very early rollouts, including about $5 for the chips and antennas themselves, he estimates. That cost will drop dramatically when the technology gets widely deployed. Telcos usually subsidize the cost of new phones for their customers, sometimes heavily, depending on the market.
  Mobile operators in most countries considering introducing NFC also issue subscriber identity module, or SIM, cards to their customers to log them onto the network. The big telcos have seized upon the SIM as their key to extracting revenue from banks and others that would deliver service via NFC phones. Most hope to charge the service providers rental fees for storing their applications on the cards. The fees also could include updating the applications and regular downloads, such as sending monthly transit passes over the air to the card; or telcos might charge extra for these downloads.
  NFC phones, unlike contactless cards and fobs, can store multiple applications, possibly including payment programs from competing card brands. The more applications on the SIM card, the more rental revenue, reason the telcos.
  Negotiations are still at an early stage. But Cards&Payments has learned that the opening demand from European telcos is about 1 euro (US$1.45) per month per subscriber for each bank or transit application residing on the cards.
  The telcos have enlisted their giant trade organization, the GSM Association, to push through the idea of using the SIM card to play host to the NFC applications. Twenty of the largest network operators worldwide, including such heavyweights as UK-based Vodafone, France Telecom/Orange, China
  Mobile and U.S.-based AT&T Wireless, are backing the plan.
  Power Play By Telcos?
  This approach, however, has delayed the introduction of NFC handsets by at least a year, as standards makers iron out details for connecting the SIM card to the NFC chip within the phones. This is necessary because an application, such as Visa Inc.’s payWave or PayPass from MasterCard Worldwide, stored on the card needs a contactless interface with the point-of-sale readers. The NFC chip provides this interface.
  But even as the physical connection between the SIM and NFC chips, called the single-wire protocol, appears close to final adoption, turf battles within the standards bodies threaten more delays. The latest dispute involves the way the various applications in the phones will talk to the NFC chip and to the handset itself.
  The big telcos and their SIM suppliers want to set a standard that could give the SIM control over what applications get downloaded to phones and how they communicate–even if those applications are not stored on the SIM itself. And the telcos want this standard, which they call the host-controller interface, decided by the European Telecommunications Standards Institute, over which they hold sway.
  Nokia, the world’s largest mobile-phone maker and a strong NFC backer, views this as a power grab by the telcos. It wants the organization it co-founded, the NFC Forum, to set most of the standard and has gotten some other big names to back its cause, including No. 2 handset maker Motorola, MasterCard, Microsoft Corp., and NFC co-creators NXP and Sony.
  Leaders of both camps say they want to resolve the matter peacefully by early this year, lest SIM-based NFC phones get delayed further and wind up supporting a hodgepodge of standards.
  Consumer Choice?
  All this assumes consumers will take to the idea of paying at stores and other venues by tapping their mobile phones. The market has yet to bear that out.
  Japan has launched the biggest test of the concept by far. There, telcos, led by NTT DoCoMo, have sold more than 40 million NFC-like “wallet phones.” These can store a range of applications, including contactless credit and retail e-purses. Because telcos control the features on all handsets, they do not face the same problems as their Western counterparts in getting contactless phones into subscribers’ hands. They simply add the contactless chip to most of their new models.
  And DoCoMo has gone the furthest of any player, creating its own mobile-credit brand and collecting interchange or other fees each time a subscriber pays with it.
  But DoCoMo does not release figures on transactions. All it would say is that one in three subscribers who carry its wallet phones use them at least once a month for any service, including nonpayment applications.
  Moreover, a much-anticipated mobile-transit ticketing service, Mobile Suica, launched on the wallet phones by East Japan Railway Co., had only 700,000 registered users as of late November, nearly two years after launch. That is well below JR East’s goal of 1 million users after the first year.
  Elsewhere, the only “rollouts” of NFC-based payment as of December were in China and Austria. They involve the sale to the public of the only NFC model commercially available, Nokia’s 6131, a previously introduced, mid-tier handset.
  Mobilkom, Austria’s largest mobile telco, launched NFC in September. The service enables riders on Vienna’s metro and its national railway in and around the capital to send just one text message to buy low-cost tickets or snacks at vending machines. The NFC phone and network do the rest.
  Mobilkom ordered 15,000 of the Nokia phones to sell in its shops and in consumer electronics stores. But after three months, the telco had sold only a little more than 3,000 of them, and only 1,000 users had registered for the m-payment service, a source tells Cards&Payments. Use of the mobile- ticketing service has increased only slightly since the telco introduced NFC. “We are still at the beginning of a big market; you need to be patient,” says Christian Kantner of Mobilkom’s Techlab. “It takes time.”
  Calling For Phones
  For NFC service to take off, telcos must be able to put a variety of phone models on sale, especially new handsets offering such attractive features as high-end video and music players, say observers. As in Japan, subscribers rarely will buy a phone for the contactless wallet alone.
  â€œWe say, ‘one handset is no handset,’” says Evert Buitenwerf, strategic innovation manager, m-commerce, for Dutch operator KPN, which has launched three NFC pilots. “Customers want a choice.”
  But Nokia, NFC’s biggest backer among handset makers, had not disclosed plans for a second model as of last month, though its venture-capital arm, Nokia Growth
  Partners, announced a large investment in
  NFC-chip maker Inside Contactless of France in December. Gerhard Romen, head of NFC business development at Nokia, says the handset maker will make more phones and launch additional models when standards are set and mobile operators place orders.
  â€œYou tell me you want to buy 100,000 phones or a million; fine, we’re happy to serve you,” he said in mid-November. “We can ship them before Christmas.”
  Nokia and other handset makers are likely to have a few more models commercially available, including those supporting NFC applications on the SIM, as early as mid-2008, say observers.
  And when they do, French telcos and banks likely will be interested. Six major banks and four mobile operators joined in November to launch an NFC pilot, the first anywhere with such a large cast of players.
  The banks are confident they will eventually “commercialize” mobile payment with NFC, says Patrice Hertzog, director of the payment systems group at Crédit Mutuel-CIC. “It will happen in 2009, when handsets are available,” he says. “As banks, we know mobile will be used for payment. It’s something you always have with you, the mobile.”
  That optimism comes despite the fact France has virtually no contactless readers yet at stores or other points of sale. In the United States, on the other hand, banks and merchants have installed readers at perhaps 60,000 locations. But none of the big U.S. banks has committed to rolling out NFC.
  That is not for want of evidence consumers like the technology. For example, in a six-month mobile-payment trial Citigroup held during the first half of 2007 in New York City, transaction activity more than doubled compared with conventional credit cards, according to a senior executive at the company’s Citi Cards unit. But M.V. “Raja” Rajamannar, executive vice president for Citi Brands, still called the technology “very premature” in an interview last fall.
  â€œIn 18 to 24 months, we will be in a better place to say this is ready for commercialization,” he said.
  Cellular South, a plucky regional operator that wants to differentiate itself with mobile payment and couponing, is the only U.S. telco to announce plans for commercial service. It hopes to launch in early 2008, but it does not yet have a bank partner to move beyond the trial it held last summer.
  U.S. banks and mobile operators are a lot more cautious than their counterparts in Europe and especially Asia when it comes to NFC, says Louis Blanchin, a senior analyst for U.S. Venture Development Corp. who is doing research for a forthcoming report on the NFC ecosystem. “This isn’t an ecosystem where you basically flip the switch to turn it on,” he says. “This is climbing Everest, one step at a time, and you start from base camp. You don’t get parachuted in.”
  That may be overstating things a bit, but NFC certainly will not happen overnight.
  In Taiwan, for instance, Chunghwa Telecom’s Hu estimates he would have to offer consumers a choice of 10 NFC handset models for a major rollout. That is provided the telco can conclude agreements with banks and transit operators on how to share NFC revenue.
  â€œWe still need one or two more years before we can do the big commercial launch,” he says. “We still have work.”
  So do other mobile telcos and banks, but they say it is not a question of if NFC rollouts will happen, but when.
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