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Future of NFC?

As you can tell from my last couple of tweets, I am really interested in the payments sphere right now. The competitive landscape is already so complicated with a plethora of OS and payment platforms. From a strategic point of view, it’s really interesting, and challenging, to think where the industry is to go. There could be a play-in by security players (yes, I apologize, I interned for Symantec’s Strategy group, my first instinct is to think security), yet most concerns have been tackled already, as seen by efforts the likes  of VISA’s “Verified by Visa,” which attempt to deter identity fraud and pfishers (granted, it isn’t perfect, but it’s one of the more trusted security solutions). The major card networks are going abroad so that the payment business model, which maintains the card network’s supremacy, continues to be the de facto method of transaction. So where are the growth opportunities? In my opinion, the most exciting development in the payments industry, more specifically in the mobile landscape, is the rise of Near Fields Communications (NFC).

Some background: in the US, consumers are moving away from an SMS-based protocol and are increasingly adopting NFC. Near Field Communications can not only be used for mobile payments, as Google (see Google Wallet) and PayPal (see commercial PayPal Phone-to-Phone transaction capability) have shown in recent months. For instance, NFC devices can be used to purchase rail, metro, airline, movie, concert, or even event tickets. A NFC device can also be used as a boarding pass, thus reducing check-in delays and staffing requirements. NFC enabled devices can even be used for social networking purposes: a user can tap one NFC device to another to instantly share a contact, photo, song, application, video or website (in this regard, arguably the most popular and successful application is iPhone’s “Bump”).

The security concerns for NFC are not that daunting. Yes,the RF signal for the wireless data transfer can be picked up by antennas, and in consequence, the information being transmitted between devices can be stolen by a third party (similar to man-in-the-middle attack). Moreover, when data is being transmitted from one NFC enabled device to another, it becomes relatively easy to destroy data by using a RFID (Radio Frequency ID) jammer. “Relay attacks” are also quite common. The third party can then simply forward a request to victim (i.e the NFC enabled device user) and relay back its answer to the third party’s reader while pretending to be the owner of the victim’s smart code (very much similar to man-in-the middle attacks). Lastly, NFC enabled devices are single-factor authenticating entities; requiring a secondary, physically independent authenticating facor has not been forced into compliance by any regulatory agencies. Nonetheless, these concerns have not precluded anyone from belittling NFC. More likely than not, self-certs or PKI technology can preclude these sorts of security breaches (in my own humble opinion, I don’t see myself walking around the street with a RFID…too conspicuous?)

Nonetheless, for NFC–and inextricably, mobile payments, as its future hinges on the adoption of user friendly technology–to become consumer’s preffered method of processing transactions remotely, two big plays need to take place. Consumers first need to move away from using credit cards for purchases and begin to use their cell phones or mobile applications for processing payments. For this to happen, card networks like VISA and MasterCard, who play central roles in the payments space, need to instigate this paradigm shift. This second phenomena cannot occur if the card networks do not envision this new business model to be profitable for them in the long run.

The barriers to entry (i.e infrastucture costs, brand recognition) are high enough that non-established players are discouraged from carving out a niche within the payments sphere. And even if smaller companies decide to enter the market, differentiation is hard to come by. For instance, FaceCash, a mobile payments platform trying to turn consumer’s cell phones into digital wallets, only differentiates itself from other platforms (such as Square, founded by Jack Dorsey) by charging lower transactional fees. And if these startups want to gain any sort of traction, they may have to ally themselves with the card networks. Just as young startups enter new verticals by whitelisting their product, start-ups like FaceCash have to negotiate with the larger card networks so they can leverage their already established infrastructure and network of clients.

All in all, this means that the crown players, the VISAs and Googles, dictate the future of mobile payments. As long as  card networks decide to be tenuous in their efforts to make mobile the go-to method for processing payments, and while we wait for NFC to become more wildly adopted, the window of opportunity remains small for companies not already established in the payment space.

1-18-11: note- Square is the exception to the list of startups trying to disrupt mobile payments space. They’ve been so innovative that they’ve actually partnered with retailers such as Apple, Wal-Mart, Best-Buy so that Square users can be accepted in those venues. It will be interesting to see whether they completely change the balance in the mobile payments industry; if they become the preferred payment method, their presence could null and void the growth of NFC. Hence why Square PR has already decried that NFC won’t take off: they think they’ll overturn the balance in the industry before NFC can gain traction.

Categories: Uncategorized
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  1. August 15, 2011 at 3:38 am

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