The Future of Payments: Is it in the Cloud or NFC?

Regardless of Your Conclusion, Its About Consumer Choice and Control

White Paper
What will consumers adopt and what will merchants accept in the mobile payment space? As the major
consumer brands, retailers, internet moguls, networks, telephone carriers and banks all place their bets, there
are two distinct wallet solutions being built: NFC and cloud. Understanding these principles and the pros and
cons of both technologies, you could surmise that the success of mobile payment adoption is dependent on the
convergence of these two solutions.
By Scot Yarbrough, TSYS and Simon Taylor, TSYS
Mobile payments and mobile wallets are a subject that has caught re in the
past 12 months, and it seems that people are making bets on where it will
go. So far, everyone seems to accept that the future is mobile. But, for mobile
payments, a battle for hearts and minds has started. In fact, the question is
who will win and how will they accomplish it? Should you adopt Near-Field
Communication (NFC) rst, or cloud rst? What is the right solution for
mobile payments? What is the right go-to-market strategy? At the GSMA
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Mobile World Congress 2012, ISIS
SM
, Google Wallet, PayPal, the telephone
carriers (telcos) and associations have all given their views.
The problem is, however, that there is very little agreement on what the
mobile wallet or mobile payments actually are in the minds of the
main players. As such, the rst entrants into the market are addressing the
question differently in fact, its uncertain if they are even answering the
same question. As such, Google
1
, ISIS
2
and Visa
3
have announced wallets
that are using Near-Field Communication technology. On the other hand,
PayPal
4
, Telefonica
SM
/O2
5
and retailers such as Best Buy
SM6
have developed
solutions that would be classied as a cloud wallet.
So, which technology will ultimately be embraced by consumers and
merchants? That could take time to sort out, because what is best for consumers
may not be preferred by merchants, and vice versa. So for now, advertisements
are being placed on behalf of both solutions, a phenomenon that has been
entertaining to say the least. But, its been confusing to those watching
the industry, even those well-versed in the payments industry. To start, it is
important to outline the differences between NFC and cloud payments.
Defi ni ng the Opti ons
What is an NFC Wallet?
The NFC wallet requires a special chip and an application (app) on the smart
phone. This type of wallet requires the consumer to log in to the app, using
perhaps a secure PIN or password. For the cardholder and the merchant,
this is similar to how EMV PIN codes work. The wallet app can then be used
for proximity contactless interaction with nearby contactless terminals,
transport gates or other NFC devices. NFC wallets denitely have the cool
factor, and when contactless infrastructure or terminals are available, this is
a compelling way for busy consumers to get around. These wallets in many
cases focus on improving the loyalty experience for cardholders allowing
the customer to have many or all of their loyalty cards in one app, and have
these auto redeem at the point of sale (POS), for example. It is certainly
much simpler than cutting out coupons.
What is a Cloud Wallet?
Similarly, the cloud wallet consists of an app on a smart phone. The cloud
wallet concept will be very familiar to PayPal customers. The idea is that users
register for the service (or receive the service from their telco), and then use
the service for one-click check-outs in e-commerce. This may in some cases
include a stored value or prepaid account to draw funds from your bank
and use as cash in the cloud wallet. These wallets are evolving from existing
services from the likes of PayPal and Telefonica. For example, Telefonica has
stated that it intends to grow its priority moments location-based offers
business into the wallet. This is because Telefonica reports that priority
moments have been well received and continues to see red-hot consumer
demand. This approach adheres to technology guru Andy Groves 10x
rule
7
that says in order for consumers to adopt a new technology it must
be 10x times better than what came before. These solutions have helped
consumers get more value from their existing relationship with the telcos.
In POS retail situations, the cloud wallet requires cardholders to enter a
PIN into their wallet app from the receipt to complete the transaction. This
is arguably clumsier than the NFC solution, but has seen much higher
transaction volume initially because merchants do not have to change their
POS infrastructure.
So, the advantages and disadvantages of the two primary wallet approaches
are essentially polar opposites.
2016 is the inection point at which 50% or more
terminals will be contactless/NFC capable
www. tsys. com
The Case for Near- Fi el d Communi cati on
According to Consult Hyperion, NFC devices are predicted to outsell non-NFC
devices by 2015. As a matter of fact, they estimate that 2016 is the inection
point at which 50 percent or more terminals will be contactless/NFC capable.
8

And, in light of the recent announcements by Visa, MasterCard, and Discover
requiring EMV compatibility by 2015, it would seem that the Hyperion
estimates are even conservative. As such, the likelihood of NFC being the
winning approach is a strong bet.
Additionally, at Mobile World Congress 2012, Visa announced a partnership
with Vodafone, Orange Money and Intel to use the Visa wallet in upcoming
smart phone sales.
9
With Visa as the largest network behind digital payments,
it seems that putting that juggernaut behind NFC payments does tip the scale
for NFC. If that werent enough, the three largest carriers in North America
(Verizon, T-Mobile and AT&T) came together to found ISIS, a mobile wallet
solution working with Visa, Mastercard and Discover. And, Google has included
NFC as a core capability of its Android Operating system giving developers
and users access to use the NFC chip for sending each other contacts, videos
or les by simply placing two phones back-to-back. Whats to say payments
couldnt be transferred like any other le? With Android now comprising
48 percent of all smart phones sold in North America and Europe
10
, thats a
strong statement for NFC. And, rumors persist that Apple may launch NFC
with the iPhone 5.
11
NFC Wal l et Chal l enges
Even with all of the evidence pointing toward NFC, the technology is not without
its aws. There are currently upward of 60 devices with inbuilt NFC in market,
however only Sprint
TM
in the U.S. has enabled the NFC capability when devices
are shipped and brought on to their network. And, with all of the publicity it has
garnered, ISIS has not yet launched publicly. Plus, with Google Wallets recent
prepaid issues,
12
security concerns for consumers will slow acceptance.
But, assuming that the technological hurdles can be cleared, the business
model has also traditionally been a challenge with the cost outweighing the
benet. In fact, Osama Beider, Google Vice President of Payments speaking at
Mobile World Congress 2012 stated that the challenges on the supply side are
solvable but that the more troubling issue is consumer demand. This requires
building compelling consumer experiences and a value proposition that
works for the consumer.
13
But, NFC is considered a tomorrow technology
that for the consumer and mobile network operators (MNOs) does not meet
Andy Groves 10x rule.
So, while NFC is usually secure, easily authenticates the consumer, works
well enough within the current POS infrastructure and provides tremendous
exibility, it is not a given that the technology will be widely accepted.
Consumers and merchants are comfortable with the current POS environment.
They understand it, and they do not need to be trained on its use. However, as
phone manufacturers start to embed the secure elements inside the mobile
device, the ecosystem will grow increasingly complex. For many traditional
issuers, the economics just dont add up. In the NFC model, the likes of Google,
Verizon, and AT&T own the secure element, and therefore own the wallet.
Plus, to interface with the embedded secure element, Trusted Service Managers
are required to download card credentials securely into the phone over-the-air
and manage those credentials on an ongoing basis. Back-end systems need to
execute traditional batch processes think the typical card production process
as an example all in real time. That is a lot of complexity and it introduces
insecurity into the mind of the consumer. So, NFC still has obstacles to
overcome before becoming the technology of choice for mobile payments.
The Case for Payments i n the Cloud
Cloud wallets tend to build on an existing user base. For example, 50 percent
of Telefonicas subscribers currently use priority moments, a location-based
offer service which will be evolved into O2 Money, rolling out in 2012 to
Spain, Germany, Brazil and the UK. As such, the costs of setup are typically
lower because cloud wallets are today technology, supporting e-commerce
without additional infrastructure though some merchant set-up may be
required. Cloud wallets can also work at the POS. For example, PayPal has set
up partnerships with Target and Home Depot
14
where a cardholder simply
enters a PIN number and a number on their receipt into their PayPal app
to process a payment. But, cloud wallets do not require merchants to make
signicant POS infrastructure investments. In fact, cloud wallets can bypass the
system altogether or are completely controlled by the MNO/retailer who has
issued the wallet. And, since 50 percent of all consumers use the Internet at
some point in the discovery and research phase
15
, driving this to an e-commerce
payment is an opportunity for merchants to increase conversion rates.
So, while NFC requires major changes to technology to fully implement, the
cloud-based wallets keep it simple. A bank, retailer or network can create and
brand their own cloud wallet. They would control the consumer experience,
and they can make the wallet open or closed. Plus, it ts into existing back-end
systems with very little change.
Cloud Wall et Chall enges
However, there are plenty of reasons that cloud wallets are not the guaranteed
winner for mobile payments. Cloud wallets are heavily e-commerce focused
and are arguably not as slick at the POS for consumers. And, much of the
mobile industry (GSMA, Vodafone, Verizon, AT&T and many more) has come
out in support of NFC, because NFC has capabilities that go beyond payments.
This represents quite an obstacle for cloud technology to overcome. However,
PayPal recently announced Here,
SM
which will provide a POS solution that
appears to focus on device based geolocation, offering new checkout options
to retailers.
16
Even if it werent for the bets being placed against it, there are other obstacles.
One-click e-commerce payments, even through PayPal, have not yet dominated
e-commerce transactions. So, it is unclear whether this trend will persist or see
2
The challenges on the supply side are solvable. The issue
is consumer demand. This requires building compelling
consumer experiences, and a value proposition that works
for the consumer.
The Future of Payments: Is it in the Cloud or NFC?
3
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an inection point for growth. As yet, there are very few cloud wallets that cross
multiple telcos and banks unlike the Visa, Google or ISIS wallets that will
work with many FIs and many telcos, with the exception of PayPal. Perhaps it
is because the loyalty and real-time redemption opportunities have not been
clearly articulated by cloud wallet proponents.
While cloud-based wallets have the e-commerce side well covered, they do
not t as easily into the real-world POS infrastructure. There are hundreds
of companies trying to gure out how a cloud-based wallet can work in the
current brick and mortar world, and there are good ideas in market today.
Unfortunately, most of these ideas require a change in the merchants POS
or back-end system, which leads to the headaches of training staff. They also
require the consumer to learn a new way to check out. Cloud payments can
be completed with so many choices, options, ideas. It begs the question: How
many ways to pay will the consumer want to learn and adopt, especially when
he or she can simply reach into their pocket, pull out their credit or debit card
and pay?
A Thi rd Opti on: Operator Bi l l i ng Is i t the Troj an
Horse?
With all this talk of cloud versus NFC, it is important to remember that operator
billing is growing rapidly. Operator billing is dened as using the telcos bill
as a line of credit for in-app or in-game purchases. Indeed, Facebook
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announced recently that they are heavily supporting operator billing.
17
This
is usually considered for those who cannot get a credit card at the time, but it
is a signal of intent from operators and the giant social network. So, nancial
institutions will have to give some consumer value in the wallet space to avoid
being eliminated.
Readi ng the Tea Leaves
So, what will happen next? For a long time, mobile wallets were considered
a solution without a problem. Supply isnt the key issue, but consumer
demand has lacked, so the stunted progress accounted for the the delay in
acceptance. What is clear is that the winner in the mobile wallet wars will offer
the consumer signicantly more value than their leather wallet but not
enough that leather wallet makers are quaking in their boots.
18
Fragmentation
continues, and there is a good chance that both NFC and cloud wallet
approaches will gain some ground in the coming two to three year timeframe.
These things often dont happen overnight, but they often do start in
darkness. Winning in the wallet game appears to be one where being
open for partnership and competing on value for the consumer are the key
differentiators. Consumers will ask: Does the wallet my FI participates in have
a strong user base? Does it offer me strong loyalty or rewards capability? Does
the wallet allow my bank to service me through my existing mobile channel?
And merchants will likely ask: Does the wallet improve or negatively impact my
core business volume?
So we are approaching a crossroad can the banks, carriers, phone
manufactures and networks all play together? Can mobile NFC survive the
complex ecosystem and still provide a consumer- and merchant-friendly
solution? Or will the merchants accept the reality that the ecommerce way of
shopping has to be adopted in-store, changing how the acquiring back-end
works, potentially re-routing transactions? Merchants are struggling with the
showroom effect today, so do they really want to start mirroring ecommerce
checkout? Or do they have to in order to survive? Maybe the consumer
shopping experience will change completely. And maybe we can develop a
solution that handles it all.
For the consumer to adopt a mobile wallet, it has to work everywhere, and it
must be secure, intuitive and conducive to choice. For a merchant to accept
mobile wallet payments, it must increase sales and accelerate checkout in a
simple and choice-driven manner. Understanding these principles and the
pros and cons of the NFC versus cloud question, it is clear that the success of
mobile payment adoption is dependent on the convergence of NFC and
cloud solutions.
Convergi ng the Connected Devi ce
Convergence does not necessarily mean the two specic technologies
must merge together as they exist today. But its imperative to see the
convergence of a secure and reliable payment capability on a mobile device
that authenticates the consumer within the existing POS infrastructure while
minimizing the players, complexity and cost in the ecosystem. If a cloud-based
wallet could hold a consumers credentials in the cloud, not on the device, and
if it could call on those credentials with ease during the checkout experience
based on the current capabilities, the game would change.
Another option is that the location of the point of sale itself would change
basically eliminating the terminal and changing where the actual purchase is
made. By using location awareness, broadband and consumer authentication
on the device, for example, the merchant could un-tether the consumer from
the checkout line. Today, trials are in market allowing the consumer to pick
up e-commerce items at their local store.
19
With the demand, retailers have
begun to speed up the checkout and in store e-commerce conducted through
mobile devices could become highly desirable. In this not-so-far-away scenario,
the mobile phone is acting as the POS terminal and is tied directly into the
e-commerce website.
The answer to these questions and the exact payment scenarios will be crucial
to the choices credit issuers make in the coming years even new entrants in
the mobile and technology sector. One thing is for sure, mobile payments are
coming, and will look very different depending where you sit in the mobile
value chain.
UK MNOs have launched an alerting, couponing and
advertising strategy, with 02 announcing at the GSMA
Mobile World Congress in Barcelona, the intent is to
evolve this into providing Mobile Shopping and Prepaid
(Similar to how PayPal works today).
The Future of Payments: Is it in the Cloud or NFC?
The Future of Payments: Is it in the Cloud or NFC?
2012 Total System Services, Inc. All rights reserved worldwide. Total System Services, Inc., and TSYS are federally registered service marks of Total System Services, Inc., in the United States. Total System Services, Inc.,
and its afliates own a number of service marks that are registered in the United States and in other countries. All other products and company names are trademarks of their respective companies. (04/2012)
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sources
1
http://www.google.com/wallet/vision.html
2
http://www.paywithisis.com/whatis.xhtml
3
Business News Americas, Tide starting to turn in favor of NFC, Visa says, Patrick Nixon, March 21, 2012
4
American Banker, PayPal Pushes the Cloud, But Declines to Rule Out NFC Chips, David Heun, February 16, 2012
5
Telecoms.com, Telefnica Spain debuts cloud services from fonYou, Mike Hibberd, March 2, 2011
6
Android Central, Best Buy Music Cloud hopes to draw cross platform users, Jared DiPane, 22 June 2011
7
Only the Paranoid Survive, Andrew S. Grove
8
http://www.chyp.com/media/blog-entry/where-will-the-money-be-made-in-mobile-contactless
9
Vodafone and Visa Announce Worlds Largest Mobile Payments Partnership, 27 February 2012
10
Tech & Trend, Apple iPhone 4S vs. Android: iPhone Sales Pass Android Sales in Last Three Months, Anthony Myers, January 18, 2012
11
Macrumours.com, More Hints that Apple is Working on an NFC Payment System on the Next iPhone, January 30, 2012
12
http://thenextweb.com/google/2012/03/21/google-wallet-users-get-5-apology-as-prepaid-service-resumes-in-full-after-security-issues/
13
GSMA Mobile World Congress in Barcelona, 27 February 1March 2012
14
Homedepot.com, Homedepot.com now accepts PayPal, Darren Ryan, December 7, 2010
15
Pew American & Internet Life Project, 2012
16
TechCrunch, PayPal goes in-store, launches global platform for Smaller Businesses, Rip Emerson, March 15, 2012
17
Social Media Blog, Facebook will bring Operator Billing to Mobile Web Apps, Matt Brian, 27 February 2012
18
Information Week, Will Mobile Electronic Wallets Replace Leather Wallets? Bryan Yurcan, March 20, 2012
19
http://www.walmart.com/cp/Site-to-Store/538452
about the authors
Scot Yarbrough brings more than 16 years of experience in the nancial services industry to his role as Senior Director with Implementation
Services at TSYS. Over the last several years, Scot has been responsible for cultivating and delivering corporate-wide strategic initiatives that drive
protable growth, utilizing his experience in enterprise mobile strategies with a focus on architecture design that enables better speed-to-market.
Simon Taylor is TSYS Innovation Lead for Europe. A natural innovator and blogger, he is an early adopter of technology and TSYS mobile expert,
In his current role, Simon identies how and when a business should adopt the new digital technologies and skill sets. Simon works with TSYS
Europe clients to deliver and manage SMS Alerts, mobile apps and is developing TSYS Digital and Offers Strategy for Europe.
TSYS (www.tsys.com) is one of the worlds largest companies for outsourced payment services, offering a broad range of issuer- and acquirer-
processing technologies that support consumer-nance, credit, debit, healthcare, debt management, loyalty and prepaid services for FIs and retail
companies in the Americas, EMEA and Asia-Pacic regions.
contributors
This report was prepared by TSYS.