NFC mobile payments: overcoming the barriers for banks

Ben Leighton is a manager at consultancy Baringa Partners

The past few years have seen major changes to the way consumers make low value payments, from pre-paid wallets such as the Oyster Card through to Contactless Cards in retail transactions – thanks to Near Field Communication devices, writes Ben Leighton.

Contactless cards in particular are gaining a good deal of momentum in the UK; the majority of major banks now issue them, and large retailers are increasingly accepting them. Only recently, Starbucks pledged to roll out contactless terminals at over 550 of its company-owned stores across the UK.

Now the increasing prevalence of smartphones (not to mention mobile banking) has in turn resulted in a greater push for mobile payments; there have been several well-documented attempts to converge NFC and Smartphone technology to this end (albeit with limited penetration to date). Examples include Orange Quick Tap (in conjunction with Barclaycard) and NatWest’s trial of PayTouch.

Yet there are a number of significant issues that face firms looking to innovate in this burgeoning arena:

1.      Complexity of the Market

The variety of players involved in delivering an NFC mobile payments solution is large, which results in a highly complex ecosystem. Between the banks, Trusted Service Managers (who produce and support SIM cards and banks’ debit & credit cards), Mobile Network Operators (MNOs), and the proliferation of handset manufacturers, there are multiple routes to market, and multiple delivery solutions.

Deciding on which route to back will be the main challenge for banks; in making this decision they should focus on two core aspects to ensure the greatest chance of success:

a)      Customer coverage – there is little point in a bank supporting a NFC Mobile Payments solution that only works on a single handset, through a single MNO. Taking this approach will limit uptake and not result in anything more than a costly toy for a select group of customers (the Orange & BarclayCard solution being an example). In order to make the solution viable in terms of customer uptake and transaction volumes, banks must choose a route to market that provides a significant level of customer coverage – preferably through an arrangement with multiple MNOs, available on multiple handsets.

b)      Customer need – the capacity for NFC mobile payments is not in and of itself a solution to a customer problem. Customers currently enjoy a variety of ways to pay for goods, the majority of which are well-known and trusted by consumers. Customers are unlikely to switch to NFC mobile payments unless additional services add value, and give them a reason to do so. Promotion of discounts and offers through customers’ mobile phones for payments using NFC could provide one means of delivering this added value, boosting customer uptake and revenue.

2.     The Power of the Mobile Network Operators

The position of MNOs within the value chain also presents a challenge to banks looking to innovate in this area. As owner of the phone’s SIM card (the most likely mechanism for supporting NFC technology) they have a strong hand to play. Banks, in order to get their proposition off the ground, must engage with the MNOs to agree commercial terms as well as terms of engagement around who ‘owns’ the customer relationship and data. This is particularly critical when it comes to defining the customer servicing model, ownership of customer data, and what marketing and advertising customers will receive. This puts banks at a significant disadvantage going into negotiations as they have no means of providing such a service on their own.

So given how can banks ensure they get the best deal?

a)      Gang together – use joint industry bodies to promote co-operation amongst themselves and encourage the setting up of industry standards for data sharing and usage. Such agreements can then be used a collective bargaining chip with other parties including MNOs.

b)      Become an early adopter – Given the number of players jockeying for position, there can be advantage in being a first mover when creating a compelling mobile wallet/NFC mobile payments provider. This approach carries risks, however; backing the wrong horse will incur additional costs when it comes time to reverse or change direction.

c)       Leverage payments schemes – by engaging closely with payment schemes (Visa, MasterCard etc.) during their discussions with MNOs, banks will be able to leverage their position within a larger body to secure a better deal.

None of this should discourage banks from moving into this area; the success of mobile banking applications so far has demonstrated the customer appetite for using mobiles as a means to interact with their bank. So long as banks get the approach to mobile payments right, they will be able to extend this success and widen the channel; turning customers’ mobiles from a service and information-only channel to one that directly generates revenue via customer transactions and purchases.