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Chicken-and-egg scenario has stagnated NFC rollout

December 24, 2009

Red Gillen is a senior analyst at Celent

Red Gillen is a senior analyst at Celent

For years, mobile near field communication has been touted as one of the most promising mobile technologies for the banking industry. Will NFC take off in 2010?

In the United States, mobile NFC’s target markets represent a cash universe of about $225 billion. Celent estimates that a 30 percent cash displacement ratio, or an incremental $151 per card account, per year is reasonable, with an average revenue increase of $1.83 per debit card account per year.

“NFC has seen very low adoption in the U.S.—the real action in mobile payments is person-to-person in the developing world, sending money back home to my mom in my village or paying the local rice dealer,” said Red Gillen, Portland, OR-based senior analyst at Celent.

“The biggest barrier right now to mobile NFC is, first of all, the issue of who’s going to pay for the additional cost of including a mobile NFC chip in the phone,” he said.

Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies. It is a research and advisory firm dedicated to helping financial institutions formulate business and technology strategies.

Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies.

NFC contactless mobile payments
The debate about the business model and how the various members of the ecosystem will work together and share revenue has been going on for at least four years.

“Carriers say banks should pay for it because their customers are going to be downloading these virtual soft cards onto the phone, a virtual Visa or MasterCard on their phone,” Mr. Gillen said.

“The banks are saying, no mobile carriers, you need to pay for these chips because we’re not sure if our customers will download apps onto their phones, and by the way, these chips can be used for other things such as downloadable coupons and facilities access—key cards,” he said.

“You carriers can make money in many different ways using these NFC chips.”

Another major barrier is on the merchant side.

“Stores that accept card payments all have to upgrade to contactless terminals, which is still very far away from any critical mass,” Mr. Gillen said. “It takes a long time to do this, and there’s been some progress, but it’s progressing one store, one check-out counter at a time.”

Many banks have built their entire mobile banking strategies on the assumption that mobile near field communication—NFC—would finally lead to mobile monetization.

This assumption has been shaped by the view that mobile NFC technology can embed virtual contactless payment cards that will be used primarily to displace cash and drive incremental interchange revenues.

Unfortunately, a number of business model issues have prevented players across differing industries from achieving mobile NFC critical mass.

Mobile carriers and merchants do not want to make infrastructure investments until there is proven demand. Banks do not want to issue virtual cards until the infrastructure is in place. In other words, a classic chicken and egg scenario has stagnated mobile NFC rollout.

But what if mobile NFC did cross the finish line—should banks care?

In a report titled “The View from the Mobile NFC Finish Line,” Celent draws a clearer picture of how mobile NFC will look to banks in the future.

Specifically, the report concludes that, on an average account basis, banks stand to make little incremental revenue above and beyond that of plastic cards.

In developed countries, this is mainly due to the fact that payment brands and banks have already done an excellent job of growing plastic card usage, and there is relatively little cash left to be realistically displaced.

This report examines key arguments both in favor of and against mobile NFC payments, as well as some key implications for banks.

The banking industry should not subsidize mobile carriers’ NFC chip and hardware investments. As a result, the banking industry is in a weak position to drive mobile NFC rollout.

The only true levers for banks are cash displacement ratios and over-the-air (OTA) provisioning costs. Banks should assign the cash displacement strategy to the payment brands, while tackling OTA costs on their own.

Mobile NFC will not be for all bank customers. The opportunity from pulling mobile NFC business case levers will lie within specific, easily identifiable customer segments.

The mobile NFC finish line does not look as promising as the industry hype would lead a banker to believe, according to Celent.

Mr. Gillen said that success will likely only come from market factors that mobile industry players are going to have to grudgingly accept: reduced prices in technology and recognition of mobile NFC payments as a niche market.

“Mobile payments are in their infancy,” Mr. Gillen said. “The theory is if you were to use mobile NFC, it would generate the same revenue as a plastic card does.

“The tricky part is that to some degree you’re going to see cannibalization—replacing plastic card with a chip in your phone, doesn’t matter from a bank’s perspective,” he said. “It’s very cool technology and people are going to love it, but I don’t think it’s going to make a lot of money for banks, which have done such a good job marketing plastic cards.

“Cards are accepted everywhere and nobody’s complaining, although eventually NFC could replace a lot of that.”

Some retailers believe that the convenience of contactless mobile payments could increase impulse purchases.

The technology has the potential to be incredibly impactful when coupled with a savvy marketing strategy.

“Merchants hope for NFC leading to more impulse purchases, although the real value of mobile phones is a way to increase purchases, using the phone as communication device so a merchant can push out a promotion,” Mr. Gillen said. “‘Come in and we’ll give you 10 percent off’—that’s the value add of the phone as a communicative element for time-sensitive offers.

“Merchants should separate the payments bit from the promotional bit,” he said. “Payments is a commodity today, and from banks’ perspective, there is no revenue advantage comparing one to the other.

“Mobile is a great promotional channel to get someone in the store.”

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Dan Butcher is associate editor on Mobile Commerce Daily and Mobile Marketer. Reach him at

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One Response to “Chicken-and-egg scenario has stagnated NFC rollout”

  1. Rob Fleischer Says:

    Have you ever tried sending an sms to a plastic card – quite a difficult thing to do. Put simply plastic is the old technology and NFC via the mobile is the new technology.

    There are huge benefits for the banks, namely in achieving a closer relationship to their end customers and via NFC and a mobile wallet, providing a far richer experience than what customers have previously experienced. We know customers chase utility and for anyone who has used the new technology, especially when the range of financial instruments that are relevent to the end user are provided, then it is obvious to all where the market will head.

    Just as we have seen customers move from a physical bank book, to ATM’s, to internet banking, it is likely they will move to the mobile being the primary access method.

    I feel your article, when dealing with the NFC chip biz case is really missing the point.

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