Last week I attended the GSMA’s NFC & Mobile Money Summit in Milan to take the pulse of what’s been happening in the mobile contactless payments space over the past year.
Most of the discussions at the conference left me with a tremendous sense of déjà vu. Although the pace of NFC-handset launches has really picked up over the past 12 months, progress in other areas remains slow. And the same old questions that have plagued mobile NFC for years remain stubbornly in place:
Is there much user demand for mobile contactless payments? Is there much of a business case? How should contactless payments on phones be secured? Who should play that pivotal role? Can a premium be charged for mobile NFC?
Perhaps more worryingly, a new question is looming like a black cloud over the nascent mobile NFC industry: Why are there still no convincing examples of enthusiastic user adoption of mobile contactless payments, even in countries such as Japan and South Korea where the technology has reached significant penetration? Could it be that, going back full circle to the first question above, NFC payments don’t meet any fundamental consumer need?
In Japan, where handsets featuring Felica contactless technology account for more than 60% of the total number of handsets, take up of the technology is relatively low – reportedly around 15% of Felica handset users – and is largely confined to public transport. It is not used much to pay for goods in shops – even though leading Japanese carrier NTT DoCoMo made a huge investment in helping retailers pay for the rollout of Felica-enabled payment terminals.
And when the iPhone and other smartphones started flooding into the Japanese market, many users dumped their Felica feature phones for these new handsets, casting doubt on the stickiness that the Felica mobile wallet was meant to provide.
In South Korea, where 20 million NFC-enabled phones are expected to be in circulation by year-end – amounting to around 40% penetration – take up and awareness of the technology remain poor. Only one in ten NFC-phone users are using the technology; many can’t see that it adds much value to what can already be done with plastic NFC cards (which are widely deployed in Korea); and around 50% of Korean consumers still don’t know what NFC even is.
A big barrier in South Korea – and one that it shares with the vast majority of other countries in the world – is a scarcity of NFC-enabled payment machines in shops. Only around 4% of South Korean retailers have deployed NFC point-of-sale (POS) terminals – even though these are widely deployed in public transport and taxis.
The retail problem
Getting retailers to adopt NFC is proving to be the hardest technical challenge in enabling contactless mobile payments. And what makes it a particularly hard challenge is that it is prey to the horribly tricky “chicken-and-egg” dilemma that has undermined so many other handset-dependent mobile technology initiatives, such as broadcast mobile TV and push-to-talk. Retailers won’t invest in NFC payment terminals until there are more mobile NFC users out there, and users won’t buy NFC handsets or start using the technology (if already incorporated into their handsets) until there are more NFC payment terminals out there.
From talking to retailers, it is clear that most are unsure about the business case for NFC. They are worried about the cost of implementation; about whether mobile NFC payments will end up being costlier than card payments; and about whether the faster transactions that NFC supposedly enables will end up making a big difference to their bottom line. The result is that most are taking a wait-and-see attitude.
The good news for NFC is that some of the big vendors supplying payment terminals to retailers have embraced the technology and are making it a default feature in their new products. One of the biggest of them all, VeriFone, says that 80% of the terminals it ships now come equipped with NFC.
However, even if all point of sale (POS) equipment manufacturers were to follow VeriFone’s example, it would not mean that all payment terminals in shops would be NFC-enabled in the immediate future. That’s because the lifecycle of payment terminals tends to be between five and seven years (although some heavy-footfall retailers say that it can be as short as three years). And big retail chains with hundreds or thousands of outlets can spend two years updating their POS infrastructure.
There are numerous other services that can be enabled in a retail environment using NFC handsets that are far more compelling for users and more lucrative for service providers. These include collecting and redeeming loyalty points and offers; connecting to additional product info; and comparing prices.
The biggest NFC POS deployment so far in Europe, by French retail giant Carrefour, was primarily driven by the supermarket chain’s desire to make its loyalty-points scheme more interactive. And in South Korea, the numerous mobile wallets launched by retailers there are primarily focused on loyalty points.
But although the way of accepting payments on POS terminals from NFC cards or devices has been standardized, the same cannot be said for loyalty points and vouchers. Each NFC POS deployment requires adapting the software on each payment terminal and integrating each terminal with the retailer’s backend loyalty-scheme, offers and CRM systems. This is not only time-consuming but costly.
While the cost to retailers of upgrading to NFC is normally framed in the context of changing payment terminals, most retailers will wait until they have to change these anyway before introducing NFC, and the price of NFC POS terminals is typically only around 15% higher than non-NFC terminals. The real cost lies in backend integration.
What about NFC handsets? Are there enough of these in circulation? The short answer is no, but momentum behind NFC-handset launches had really picked up over the past year or so.
Nine out of the top ten handset makers are now churning out NFC-enabled phones and, in the case of the Android operating system alone, around one million NFC handsets are shipping out every week. There are currently around 85 NFC handset models on sale globally – out of a total of nearly 4,000.
The big gaping hole in NFC-handset availability remains the iPhone. For a second year running, Apple disappointed NFC enthusiasts by not including NFC into its latest iPhone model. It has left some big retailers such as Tesco questioning how soon NFC will gain traction amongst mass-market handsets.
Also, many of the NFC handsets that have been rolled out by the likes of Nokia and BlackBerry-maker RIM are not, on face value, enabled for payments, but rather for activities such as content sharing (by tapping phones against each other) or accessing Web sites and offers (by tapping on NFC tags in posters and other physical-world objects).
Guillermo Escofet is a senior analyst at Informa Telecoms and Media. For more information, visit www.informatandm.com/