Mobile payments are predicted to grow in value and volume, but the business and operating models are still up for grabs
Mobile payment can mean many things, from using a phone to buy an item of digital content, and then be billed to your telephone bill, to using the phone as a contactless payment tool to authorise deduction from your bank account, or other payment service. Whichever way we choose to understand mobile payments, there's no doubt that it is a market that is driving forward.
Mobile money transfer and contactless NFC (Near Field Communications) will together account for 50% of the overall mobile payment market globally by 2013, (based on the gross transaction values), according to Juniper Research's Mobile Payments Study, released at the end of October 2008.
The Juniper report found that the mobile payments market, which is today is dominated by purchases of digital goods such as ringtones, music, and games, will in future be driven by subscribers transferring money and using NFC features on their handsets to make purchases. This will drive the overall mobile payments market to grow by a factor of ten between now and 2013.
Report author Howard Wilcox explained: "We see significant opportunities for new services making it easier for the ‘underbanked' population and migrant workers to make remittances, using their mobile phones as mobile wallets: the services already in operation are seeing rapid growth." Wilcox added that mobile wallets will incorporate NFC which will enable people to use their mobile phones to pay for small value items such as refreshments and magazines.
However, there will be hurdles to be addressed for the market to reach its tipping point, including NFC handset availability, workable business models and financial legislation.
A survey conducted by Oliver Wyman shows a significant increase in activity across the advanced payments sector in Europe. Advanced payments enable consumers to transact through a variety of non traditional devices, such as their mobile phone, contactless cards and the internet. The survey encompassed 30 of the leading European new players and ventures in this fast growing industry, companies with an expertise and specific focus on advanced payments including Monitise, LUUP, paybox and Margento.
This survey found that in developed countries, the industry in the near term will focus on competing for the most compelling contactless card payments solutions as well as mobile banking solutions. In contrast, contactless mobile payments will take a much longer time to evolve as they will require collaboration between banks and telecom operators.
Zilvinas Bareisis, Senior Manager at Oliver Wyman added: "Europe's fragmentation means a lot of ‘pretenders' are pursuing a niche strategy at present focusing on a particular geography, proposition or customer segment, and to a certain extent it's land grab time. However, lack of common standards implies that future profits are limited. In order to be successful, the players in the industry will need a sophisticated strategic marketing capability, a workable business model and clear approaches to interoperability. The winners will be those who can break out of their segments and constraints."
Certainly, there is plenty of activity on a spot by spot basis around NFC.
In Wels, in Austria, a city shop quality alliance "Shoppen mitten in Wels" is using gift vouchers based on a contactless chip that are processed by an NFC enabled mobile phone. The distribution, reimbursement and administration of the system are achieved through a threeway partnership between Stadtmarketing Wels (Town Center Management of Wels), mobilkom austria and Nexperts. Around 130 merchants in Wels have been equipped since March 2008, with the technology to take contactless payments from mobile terminals. Research has shown that the approach is extending the time shoppers stay in the town.
Technology provider Nexperts has also implemented a new mobile client / server application to manage gift vouchers based on contactless chips embedded in paper gift vouchers, as system that went live as of November 1st.??
Each of the 70.000 vouchers is simply issued and redeemed by a simple touch with the Nokia 6131 NFC phone. The NFC Voucher software by Nexperts manages all transactions from the 130 mobile clients, performs all clearing tasks every night and can generate report by a web interface.?
"This project is a perfect example of a successful go to market approach for what NFC can do already today", says Kurt Schmid, CEO of Nexperts.
Yes this sort of small scale approach is not necessarily the kind of interoperable approach defined by the analysts as crucial to success.
One initiative that might bear fruit if the StoLPaN project, and EU project that intends to turn NFC enabled mobile handsets into multifunction terminals with bi-directional interaction between the wireless NFC interface and mobile communication channels and to demonstrate the use of this generally applicable new technology in the retail logistical value chain, and also in mobile payment, ticketing and other use cases.
Results will be submitted to the relevant trade bodies for adoption by the payment, mobile, transit and ticketing industries with the goal of creating a standardized NFC ecosystem. It wants to develop a JAVA based mobile host application that provides a transparent environment for the simultaneous operation of various NFC based service applications. It also sees the need to establish the back-office architecture and necessary communication protocols to ensure the secure, remote management of the various NFC applications hosted in the mobile handset. As well as this the Project forsees overseeing the porting of selected contactless applications to the StoLPaN specification.
In Italy, Consorzio Triveneto has recently announced the first Payment transaction between an NFC mobile handset and a PayPass EFT-POS terminal. The handset was equipped with software developed within the StolPan EU
"This is the very first step of the evolution of the Payment Industry and, following the Chip Cards rollout, will allow both Person to Person and Remote Payments to grow," said Claudio Canella, Consorzio Triveneto's Director Strategies Products Markets. "Using mobile handsets for making payment transactions is an important step in creating a real mobile wallet application that may soon replace traditional cards, tickets, coupons and perhaps even IDs." said Andras Vilmos, Coordinator of the EU Project.
The technology industry too is reacting to the need for interoperability by forming its own partnerships.
When it comes to allowing service providers to manage NFC applications, NXP Semiconductors says within the next few months it will launch its MIFARE4Mobile Application Programming Interfaces specifications which will manage MIFARE-based applications in mobile devices. This new specification will provide mobile network operators and service providers with an interoperable programming interface for NFC-enabled phones.
The MIFARE4Mobile will manage MIFARE applications from their over-the-air installation to the end-user interaction via the phone user interface. NXP proposes a Global Platform-compliant JavaCard applet to orchestrate all MIFARE services securely hosted in the mobile device.
NXP says it is working to deliver the certification, compliance and rules for the MIFARE4Mobile specification in consultation with NFC stakeholders. Licenses for the use of the MIFARE4Mobile APIs technology will be free if used in conjunction with MIFARE secure elements sold by NXP or licensed by NXP. The first release of the APIs will support MIFARE Classic and will evolve to include MIFARE Plus and MIFARE DESFire to guarantee total compatibility with existing and new contactless infrastructures, according to NXP.
And two French companies – contactless chip maker Inside Contactless and Fime, a smart card and terminal testing solutions provider, have partnered to "speed up the attainment of NFC interoperability". The two companies hope to identify and resolve potential conflicts in NFC devices and develop a process for testing and certifying NFC-enabled handsets.
Inside and Fime plan to offer their customers greater visibility into the testing and certification requirements at an early stage of development of their NFC mobile handset products, and provide them with products, tools and services to ensure compliance. The partnership also intends to consult with various standards bodies, including the NFC Forum and payment and transport associations to boost or amend current certification standards.
The secure element
Yet if there are signs the industry is working together on standards, there remains an issue over where the secure element (SE) will reside in the handset.
The Rathenau Institute takes a close look at these issues in a recent report. In its reacrchers' opinion, there are three potential locations for SE chip placement: namely, embedded in the phone, on the SIM, or on an external memory card, such as a micro- SD card. All of these proposals serve different stakeholders' interests, and have both advantages and disadvantages. An alternative approach would be for an intermediary company to manage the SE, wherever the latter had been located on the phone.
The report says that of the three scenarios, embedding the SE in the mobile phone would allow service providers the most freedom. It is unlikely that handset builders would attempt to charge service providers for using the SE and this option is supported by the Mobey Forum, the international association responsible for promoting mobile financial services that is backed by many banks, and to date this has been the model chosen for introducing NFC phones.
The disadvantage of this option, however, is that it gives little impetus to the integration of NFC in phones. Handset manufacturers do not stand to make money from NFC, but they do face (limited) costs. Discounting interoperability issues, in the absence of consumer demand driving phone sales, handset manufacturers will see few advantages for themselves, and will be unlikely to push the large-scale introduction of NFC. For users, moreover, there is the added disadvantage that many people change their phones relatively frequently. Opting for this scenario would thus necessitate addressing the portability of NFC applications. It is also unlikely that telecoms operators would be receptive to this idea; if SEs were embedded in phones, then the role played by telecoms operators would be substantially reduced to that of merely ensuring that data was flowing correctly from A to B.
Mobile network operators and their industry association, the GSMA, instead support a second option, that of embedding the SE on the SIM that is located in all GSM phones. In a "smart move" that has increased participating actors' support for the fledgling technology, the NFC Forum has sought close cooperation with the GSMA in developing specifications for applications. In 2006, 19 actors joined to form the GSMA Mobile NFC project, a group that included KPN. Perhaps most notably, this working group has developed a communication standard for the NFC chip in the phone and the SE on the SIM card, known as the Single Wire Protocol (SWP). The GSMA is using the SWP to actively experiment with developing a scheme for NFC-based mobile payment, called Pay-Buy Mobile. Placing the SE on the SIM is clearly advantageous for consumers, offering easy portability in an environment in which users tend to change their phones more often than their SIMs. The SIM's capacity might prove to be a limiting factor, however. This model places service providers at the greatest disadvantage. Telecoms operators are planning to let the capacity on SIMs to service providers in much the same way that real estate owners let apartments in buildings. According to Rabo Mobiel, telecoms operators plan to charge service providers between four and five euros per application per user.
So it's clear that despite technical advances, there is still a lot of negotiation to be overcome on the commecial side.