Is HCE the Inflection Point for Mobile Payments?

NFC mobile wallets had been disregarded by some in the industry as a viable mobile payment option, but they got a boost with the arrival of a technology that will enable the card data to be stored remotely instead of within a phone. This slight change makes NFC mobile wallets increasingly more attractive as it eliminates one of its biggest stumbling blocks to adoption.

Thanks to host card emulation (HCE), the NFC payment ecosystem is now more open than it has ever been in the past. This means that developers can add NFC-based mobile payment functionality to apps without having approval to integrate it within the phone’s hardware. A wide range of businesses—from banks to fast-food operators to retail chains—can now easily leverage their sizeable user base and consumer trust to integrate NFC payments into their existing mobile apps and become contenders in the world of in-store mobile payments.

Traditionally, NFC-based payments had to store the card details, digital coupons or loyalty programme information on either the physical secure element on the phone, located within the SIM card embedded deep into the handset or added to the device via an external microSD card. This requirement created additional hurdles for mobile wallets because it established mobile network operators as the gatekeepers of the phone’s secure element. Besides having to gain approval from these players, it also could cost mobile wallet entrants a pretty penny to rent space on the secure element.

One of the most well-known mobile wallets that struggled due to these requirements is the Google Wallet. When the Google Wallet came to the US market, it was only supported by the Sprint wireless network. The other major US wireless carriers, including Verizon, AT&T and T-Mobile, prevented the app  from being able to access the secure element on its network devices as those three were behind the competing Isis mobile wallet.

In light of such hurdles, mobile payment players began to look for near-term alternatives, such as QR code-based mobile payment systems that store payment information in the cloud instead of the handset. A QR code-based system can be executed on any smartphone, as opposed to an NFC-based system that requires consumers to have an NFC-enabled phone. Up until recently, mobile payments had to choose between these two approaches, but that changed with the arrival of HCE.

HCE enables apps installed on any NFC-enabled handset the ability to communicate directly with contactless payment terminals and emulate both contactless and EMV cards. The consumer does not need an EMV chip on the phone as the account information is hosted in the form of a token in the cloud. Basically, HCE stores and transmits payment card information via a secure, virtual cloud. This technology removes payment credentials from the handset, which could lessen consumer fears as to what happens if the phone was lost or stolen.

HCE is breathing new life into NFC. Google first enabled this functionality on its phones when it rolled out its latest operating system dubbed KitKat in November. Blackberry also supports this technology. In late February, both Visa and MasterCard announced new specifications for NFC mobile payments using HCE. MasterCard had piloted the technology with Capital One in the US and Banco Sabadell in Spain and plans to issue its specifications for HCE by mid-year. Visa is slightly ahead in that its specifications are already available. It also is trialing the technology that will support its Visa payWave technology with several unnamed issuers. Although there were numerous announcements at the recent Mobile World Congress in Barcelona, the certification of HCE by Visa and MasterCard is likely to have the greatest lasting impact on the mobile payments space.

These announcements are timely given that the number of NFC-enabled smartphones and contactless-enabled POS terminals continue to rise in popularity. Although NFC deployment has been somewhat slow, there are now 324 NFC-enabled handset models on the market today, according to GSMA, the association of mobile-related companies. Of course, Apple iOS devices do not yet directly support NFC, though various vendors offer sleeves to enable iPhones to support this technology. Furthermore, certification by two of the largest international payment networks could be the inflection point in the NFC mobile payments drive as it will likely lead to more investment in this technology from other payment players and greater interest from app developers. Both could lead to greater scale and enable widespread adoption of NFC mobile payment apps.

Ultimately, HCE could lay the groundwork for the future of mobile payments and—at the same time--rekindle interest in NFC-enabled mobile payments. Given that HCE is built on an open architecture, it not only enables payments, but also other NFC services, including loyalty programs, building access and transit passes to be delivered without the use of the secure element. Although there are certainly other technologies vying to be the one to execute mobile payments of the future, the reality is that NFC is the most effective technology out there for instantly connecting a consumer’s phone to a merchant’s POS terminal to execute payment as well as communicate other information such as loyalty initiatives. HCE will make it feasible for a wide range of businesses to launch more NFC-enabled mobile wallets and do so in a shorter timeframe. HCE offers a less complex and expensive route to establishing a NFC-driven mobile payment infrastructure compared to what previously existed. In time, payment players may reflect upon the arrival of HCE as the inflection point that launched mobile payments into a mainstream payment option.

Michelle Evans is a senior analyst covering the financial cards and payments industry at Euromonitor International. Follow her on Twitter @mevans14.