London to lead way in NFC mobile payments


Spanish NFC trial shows elements are coming together, partners claim

London will be the first city in Europe to have a mass market, NFC-based, mobile payments system, according to Pablo Montesano, Telefonica’s Director of Mobile Financial Services.

Montesano said that the 2012 Olympics would push the introduction of the technology into the London market, making it the first mass market deployment outside of Japan and Korea.

He added that the elements required to make NFC a success are coming together, with standards forming, handset makers set to accept NFC into a wider range of devices, and consumer awareness driven by contactless transport and card applications.

“I expect there to be a lot of activity in this space in London before the Olympics, with a significant push from several players,” Montesano said. “The reality is no-one knows when this will take off, but we are moving closer than ever to the tipping point,” he added.
Visa is, of course, a major sponsor of the 2012 Olympics, and has exclusivity on Olympic venues in terms of payments.

Telefonica is currently trialling an NFC mobile payments scheme in the resort town of Sitges, just south of Barcelona. The trial is a joint effort between Telefonica, Visa and La Caixa.

1,500 users have been signed up to the live commercial trial, and 500 merchants in the town equipped with NFC-capable point of sale terminals. The trial started in May and will run to November of this year.

At this point, the participating companies insist, the trial is purely designed to see how merchants and users take to the technology, assessing ease of use, acceptance, and ironing out any technical kinks.

The triallists have to use an NFC-capable Samsung Star handset to make payments. The Star comes loaded with Visa’s Java-based payment application, with the Secure Element sitting in a specially made SIM. The Secure Element is the software that carries out the actual transaction – essentially a Visa (in this instance) card sitting as software on the phone.

Those involved in the trial say that so far reaction has been positive – although the figures allow room for interpretation. 80% of those who signed up have used the service at least once. 52% of users use the phone at least once a week. The remaining 48% use it only every 15 days or less. On average users made seven purchases in the first three months of the trial, across three different retailers. One merchant we spoke to said that it’s not surprising usage isn’t heavy, as most of the triallists are commuting to Barcelona and have limited shopping time in Sitges. The range of merchants stretches from food retailers and supermarkets, to clothing and shoe shops, chemists, bookshops and cafes and restaurants.
The average value of a purchase has been €31 – which is a number that may surprise those who see NFC as a high volume, low value, quick and easy cash replacement.

Payments over €20 require the user to enter a PIN, in the normal way, and users are also prompted for a PIN number after a certain number of uses – to try to avoid fraud. If a handset is lost or stolen and used fraudulently, the liability lies with the bank. La Caixa’s Daivd Urbano said that so far there has been no instance of a lost or stolen handset being used in such a manner.


"This trial was not about discovering a business model..."

So what does the Sitges trial tell us about the key elements that have to come together to make NFC payments a success?

As we’ve seen, the information from the trial partners is that the response has been positive. There’s no way to verify this, of course, but we tried the experience out for ourselves, and it certainly works. The application Visa has made is pretty basic, and not utterly intuitive, but that needn’t be an issue as the app developers get their hands on it an refine things a bit.
David Urbano, Director of Mobile at participating bank, e-la Caixa, said that 70% of participants rated the experience as at least an 8 out of 10. 65% said they would “definitely” keep using the service if they could, and 25% said they “probably” would.

This is a key issue. The Samsung Star is not a great phone, and it’s worth bearing in mind that Telefonica didn’t address any users who already had a high-end smartphone, as they knew they would not be attracted to downgrade to the Samsung device. (On the other hand, at least this means the triallists are relatively “ordinary” users, and not a self-selecting group of mobile fans.)
Mary Carol Harris, Head of Mobile Payment Business Develeopment, Visa Europe, said that handset availability is still “one of the biggest nuts to crack”. “Fundamentally, consumers what the handsets of their choice, and not to be constrained,” she added.
Telefonica’s Montesan said that he thinks there will be more NFC-ready devices by mid 2011. “We see a lot of movement in the device sector, including Apple’s well-publicised filing for a patent for NFC,” he said.

This trial uses a SIM-based secure element. There are other options, such as micro-SD based NFC, or even stickers on the phone. These approaches are often referred to as “bridging technologies” by the industry. Obviously the advantage of such approaches is that users aren’t required to acquire new SIMs or phones. The downside, according to Visa’s Harris, is that often the technology hasn’t worked as it should. Integrating the SE and the NFC antenna and chip into the phone and SIM gives more control over how the technology will behave.
But using a SIM means you are definitely committed to using the mobile operator as your distribution channel (this is why the GSMA and mobile operators like this approach, of course), which brings us to…

The business model:
This trial tells us almost nothing about the business model – although the partners said that it was never meant to. Merchants are paying commissions just as they would on a normal card sale, but the operator has not been injected into the “business model” in a financial way. This is critical, as how the money will go around is the main issue up for grabs.
If you inject the operator into payments as your key distribution partner, then what does the operator get out of it? And who pays for that? Will the banks pay, will the merchants see commissions increase? How about Visa?
Another element is that operators are naturally keen to expand the scope of he financial services they can offer. Would that bring them into competition with their banking and payment service provider partners. Montesano, for instance, said the Telefonica would be keen to exploit NFC for micro-payments that would go to the mobile phone bill, not to the user’s Visa account.
Visa’s Harris said, “This trial was not about discovering a business model, it’s a test to see how consumers and merchants react. We’re not saying there isn’t a business model, but we are still agreeing what that business model will look like. Mobile operators are not going to did it for free, and banks are not going to pass on all their revenue either.”
Telefonica’s Montesano said that the operator clearly has “assets to contribute”, such as the devices, a host (the SIM) for the secure element, as well as providing “the place where all the players can meet the end customers”.
Harris said that one business model could be that the operators “rent space” I the device to the service providers and provide a pack of services – echoing Montesano’s vision of the operator as the “meeting point” for service providers to met their customers.

DISCLOSURE NOTE: This article was written after Visa paid for Mobile Europe Editor, Keith Dyer, to visit Sitges and experience the trial. Visa also gave him €50 spending money on an NFC phone to test the technology out, with which he bought:
1. Some ham (expensive ham, naturally). 2. A present for his wife (value not-disclosed).