A channel challenge

[Dave Birch] Writing in E-Finance & Payments Law & Policy (volume 4, number 9), Dan Schutzer (the Executive Director of the Financial Services Technology Consortium, FSTC) writes on “Challenges of the US banking and finance channels”. He notes that innovation in the US seems to be centred on the mobile phone and can be divided into three categories: innovations that mean new payment networks, innovations that use existing networks but bypass banks (note that both Visa and MasterCard have followed PayPal in opening up their APIs) and innovations (often targeted at merchants) that use existing networks and issuers.

If mobile is the key new channel (and I’m sure Dan’s right about that), then it’s reasonable to ask to what extent innovation is possible in the latter case: that is, given the well-known provisions of the “innovator’s dilemma”, how can (in the specific example of mobile) banks and schemes develop great propositions? Patrick Gauthier highlights three key roadblocks.

1. The economic buyers – i.e. the Mobile Operators and Issuers – have not solved their rivalry: Behind the scene a furious battle has raged on the ownership of the secure element used to secure transactions, a proxy for the question of who will own the customer relationship.
2. Consumers have good enough methods of payments as it is: Without prejudice for the vision behind NFC, the need for a new method of payment delivery based on handsets is tenuous… Absent a reason for consumers to want it and a business case for Issuers to support, standalone payments is an unlikely “killer application.”
3. No good path has been proposed to reach a critical mass of users: If I had a penny for every time I have heard about “the-chicken-and-egg” problem, I would be retired by now.

[From NFC: Past, Present and Future – pymnts.com]

Patrick’s analysis explains the paralysis in the operator-handset-bank domain. Yet the truth is that customers like NFC and they want it: hence the action is shifting from a consensual evolution at the interface between the mobile industry and the financial industry to a “screw you” revolution where more aggresive service providers (not only in payments) are using stickers (Bling Nation), microSD (Visa) and other technologies (China Mobile) to simply bypass Nokia and Telefonica, Apple and AT&T, RIM and Vodafone.

Given the rich landscape of non-NFC, “bridging” and NFC technologies, what are the likely paths for NFC innovation in the US? A focus of attention is the joint venture between AT&T, Verizon, T-Mobile, Discover and Barclays USA. It is planning to pilot phone-based NFC payment applications next year.

The joint venture formed by U.S. mobile carriers to launch NFC-based mobile payment has chosen… Gemalto to download and manage payment and other secure applications on NFC phones to be used in pilots expected to be held in three to four cities during the second half of 2011

[From U.S. Carrier Joint Venture Chooses a Trusted Service Manager | NFC Times – Near Field Communication and all contactless technology.]

Many people think, quite reasonably in my opinion, that payments are not sufficient to drive adoption in the US market by themselves. The promise of the mobile phone is that it can provide a cluster of sophisticated value-added services around payments. In France, for example, payments are being integrated with a wide variety of other services to exploit the power and convenience of mobile proximity technology.

A dozen French cities plan to launch wide-scale contactless payment and information service on mobile phones with the backing of the ministry of industry, reports Les Echos. The city projects approved under the initiative will receive state assistance for consultancy and engineering, but no other subsidies are planned at this stage.

[From Aid from French Ministry of Industry for mobile contactless cities. « Contactless & NFC City League]

The next stage for the US must be to begin to plan for the value-added services. One viable direction might be that chosen by Bling and Taggo, delivering POS integration with loyalty schemes, another might be information-based, helping customer to realise the value of their information (perhaps building on Blippy and such like). Whichever path, it is a path that sees payments as a commodity utility and seeks to earn a return from one of these payment-related opportunities.

There is a wild card, though. I strongly suspect — and I must stress that this is my position as an independent observer and not on the basis of any knowledge of their plans — that both Apple and RIM will launch devices with NFC next year, but in both cases they will go with secure elements (SEs) under their control and not the operators. Both of them might be able to bring desirable non-payment applications to the mass market (exchanging contacts, secure log-in, who knows) and thus accelerate market evolution.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]