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It is much too early to know whether contactless payment will find a market in China's sprawling cash-based consumer economy. But as with other new technologies, the Chinese are going about contactless in their own particular way.
Government-endorsed standards for future banking cards include a separate contactless-payment application. China UnionPay, China's national banking-card network, will push the application as an alternative to competing contactless applications promoted elsewhere by Visa Inc. and MasterCard Worldwide.
And NFC mobile phones also may come with their own "Chinese characteristics."
Indeed, there are ongoing discussions for a national standard for the contactless phones used for payment. One option being considered would put the NFC technology entirely on SIM cards issued by mobile-network operators, including the NFC-like chip itself, say sources. NFC phones under development for the rest of the world embed this chip and associated antenna in the handset.
Chinese officials believe their potential market is big enough to merit its own standard, which would benefit Chinese vendors.
But the only contactless retail-payment service that has made a dent in China so far involves prepaid fare-collection cards that consumers also may use for purchases at a small–but growing–number of retail locations. They are available in a few of the larger cities, including Guangzhou in the south and Beijing, where cardholders can tap to pay at convenience stores, fast-food restaurants and other merchant locations.
Some 700 merchants have deployed 1,000 contactless terminals in retail outlets in Beijing. The number of contactless terminals will increase four-fold by the end of the year, predicts Mark Atkeson, head of KPay, the Chinese division of U.S.-based Vesta Corp. KPay runs the retail-payment scheme for transit card issuer Beijing Municipal Administration and Communication Card Co.
The Beijing transit card began to pick up steam in retail payments only last fall, but KPay already is comparing it with Hong Kong's Octopus card, a pioneering contactless fare-collection system that moved into retail about eight years ago.
"You've got a city with larger demographics than Hong Kong, with more cards issued and more cards active, and (it's) just beginning the development of the retail payment network," says Atkeson.
Of course, Beijing's transit card has a long way to go to match Octopus' numbers. Beijing's heavily subsidized bus and subway fares bring in about 10 million yuan (US$1.4 million) in daily revenue, only a fraction of the sales of the multimodel Hong Kong Octopus scheme. Beijing commuters also can tap contactless mobile phones to pay for fares and purchases, although few do so
And retail transactions with either cards or phones in Beijing still represent only a small percentage of total transactions commuters conduct with the card–amounting to about 1% of the total card spending.
Big Merchant Joins
Last month, however, KPay and other backers of the Beijing scheme were able to announce that the city's largest chain store, Wu Mart, had signed on to accept the transit card at its 400 outlets. About one-third of those are superstores, the rest mainly small convenience stores.
The expansion of the scheme to Wu Mart will add about 500 acceptance terminals. But more than that, it could encourage more retailers to join the scheme, including such popular Western chains as fast-food outlet KFC and Carrefour superstores. These and other merchants want some level of assurance the government will not pull the plug on the retail end of the transit card scheme, as it did a few years ago in Shanghai.
"A company like Wu Mart wouldn't go into the deal unless the Beijing government was really backing a secure system and had a long-term policy," Atkeson says.
The cards, however, do not carry microprocessors, which would enable them to process stronger encryption keys for more security. The issuer limits the amount cardholders can load on the cards to 1,000 yuan (US$142.86).
Similar transit retail card schemes are in operation in Guangzhou and the southeastern port city of Xiamen. All told, China has more than 100 cities with contactless fare-collection systems.
National e-Purse?
Meanwhile, China UnionPay is not saying when it might seek to roll out its own prepaid contactless payment application. The e-purse is part of a national credit and debit chip card standard. The contactless purse probably will be part of a high-profile pilot UnionPay plans to launch this year on NFC phones. During the pilot, 700 to 800 consumers will be able to tap to pay at merchants in UnionPay's home base of Shanghai.
The respective contactless applications of Visa and MasterCard, payWave and PayPass, appear to have little future in China on either cards or phones if UnionPay does not give its nod. The government-controlled card network processes domestic transactions among banks.
UnionPay is "not targeting payWave or PayPass for contactless payment," says an executive of one of the international card organizations who asked not to be identified. "They aim for their own branding in China; they don't want to see expansion from Visa and MasterCard."
UnionPay is not trying to cut out Visa or MasterCard, Meng Hongwen , who is involved in mobile-payment research at UnionPay, tells Cards&Payments. But the network does want to push a Chinese standard for a contactless electronic-purse on chip-based banking cards, Meng says.
It is unclear which, if not both, of China's mobile operators would be involved in the NFC trial in Shanghai. China Mobile and China Unicom, the country's mobile-telco duopoly, both are interested in offering contactless payment to their subscribers.
China Mobile, the world's largest mobile operator in terms of subscriptions with more than 392 million as of the end of March, is a member of the NFC project of the GSM Association, the largest trade group of mobile operators worldwide. China Mobile also was involved in the first NFC pilot launched in China in 2006, putting Xiamen's transit and retail payment application onto a Nokia NFC phone. The branch of China Mobile in Xiamen plans to expand its contactless mobile-payment service there to 20,000 users this year from 3,000 currently, an executive tells Cards&Payments.
NFC, Chinese-Style
Last year, NFC phones went on sale in consumer-electronics shops in Xiamen, Beijing and Guangzhou. Consumers have bought relatively few of them. But the plan to add thousands more users demonstrates China Mobile's continued interest in contactless mobile payment.
Most of the new users, however, will not get NFC phones. Instead, China Mobile will issue them special SIM cards with contactless interfaces and antennae attached, Zeng Dafeng, manager of corporate and key clients for the Xiamen branch of China Mobile, tells Cards&Payments through an interpreter.
These "dual-interface" SIM cards can turn regular phones into rudimentary contactless handsets, which subscribers can tap just as they do NFC phones to pay bus fares or make purchases at convenience stores.
"(With) the cost to change the phone, it's [cheaper] to change the SIM, and there are not many (NFC) handsets available," Zeng says.
Xu Haixiang, a China Unicom value-added service manager, agrees that, at this point, it is easier to expand mobile-payment users by issuing the dual-interface SIM cards. NFC phones, however, can do more, such as enable the phone to read other chips or exchange data with other NFC phones, he adds. "Dual-interface, it lowers the entry point," says Xu, speaking at the NFC Asia Pacific Summit 2008 in Beijing in March.
Unicom, in fact, is one of the main backers of the concept to try to build the NFC functionality entirely into the SIM card, say sources. These SIM cards would be made in China.
The concept is among the options that may find their way into a national mobile-payment standard that government officials are considering.
Such a product may not be technically feasible, although China-based vendor Watchdata System Co. says it has a prototype of a dual-interface SIM that not only can emulate a contactless card within the phones, but also read data from other chips or phones.
Getting these extra features into the SIM card no doubt would be difficult. At least one European vendor introduced a dual-interface SIM card, but it had few buyers.
One advantage of SIM cards that come equipped with their own radio antennae is they could work in a number of handset models. By contrast, only one NFC model is commercially available, the Nokia 6131, which is an older, middle-tier handset that Chinese consumers are not flocking to buy.
Only a few thousand have been sold over the past several months, and the phones have had some technical problems.
Readers on buses and at some other acceptance points in stores do not always read the payment data, report project participants. The users sometimes have to tap several times or reposition the phones on the contactless readers.
"We need to solve some of the technical problems," Guo Man Xue , a project manager in China Mobile's research and development department, tells Cards&Payments.
Nokia has announced it will come out with a second NFC model by the fall, which sources say will fix these communication problems.
But whether Chinese mobile operators stick with standard NFC phones or go with a modified version for the Chinese market may depend more on whether government officials believe contactless mobile payment will become popular among consumers. Only then would market demand justify a special national standard, as officials mandated for third-generation mobile technology.
The same can be said for contactless banking cards in China. But even with the national standards in place, it remains to be seen just how many Chinese consumers will tap their cards or phones to make retail payments. CP
