03.0 mobile nfc ecosystem and value chain

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www.informatm.com 2011 Informa Telecoms & Media 1

Mobile NFC ecosystem and valuechain07 September 2011

Shailendra Pandey

Key points

Mobile NFC is gradually progressing from the trial stage to the commercial rolloutof services. The mobile NFC value chain players are forming alliances with otherstakeholders to ensure the successful deployment of services for a large user base.

It is likely that many mobile operators will continue to pursue their individual mobileNFC plans, while at the same time collaborate with other operators and form jointventures to compete with the OTT players.

By grouping together, operators can offer nationwide coverage to service providers andbig-volume orders to handset makers. But antitrust laws limit how much the operatorscan integrate services; for example, in most jurisdictions, they cannot offer serviceproviders a commonly-agreed rate for renting space on the SIM.

Both mobile operators and handset vendors will deploy NFC services in the comingyears and the existence of different smartphone OSs and competing mobile app storesmeans that there is bound to be much fragmentation in the mobile NFC market. Thesuccess of the mobile app stores indicates that many of the mobile NFC services willbe offered as applications via these stores.

The mobile NFC value chain players need to work together to ensure that NFC solutionsand, in particular, handsets can be certified to ensure all parties are satisfied withsecurity and technical compatibility. Backwards-compatibility is also necessary toensure that future mobile NFC implementations can use existing NFC infrastructureswhere possible.

The tussle for dominance among players for the control of the SE (secure element)has resulted in different solutions and deployment approaches: Smartphone and OSvendors want to bypass the mobile operators; banks also see mobile operators aspotential competitors; while credit card companies want greater control for certifyingNFC readers and devices.

Operators in emerging markets have a stronger position because of their extensivedistribution networks and existing relationships with the merchants and retailers.In most cases, operators also have a stronger brand and good government support.Therefore, the other players are more likely to partner with the operators for NFCrollout in emerging markets.

Overview

There are many players in the mobile NFC ecosystem, and it continues to expand furtherwith the entry of new players in the market. As of now, the mobile NFC market is highlyfragmented and it is expected that the collaboration and coordination between value-chainplayers will initially be complex. In order to understand the complexity of the ecosystem and the challenges and opportunities for players involved it is necessary to consider the role

and motivations of each of the key players in the value chain.

The mobile NFC value chain (see fig. 1) comprises of many stakeholders including the mobileoperators, banks and financial institutions, merchants and retailers, handset and OS vendors,payment network providers, chipset manufacturers, trusted service managers (TSMs), NFChardware and component manufacturers, payment service providers, and NFC applicationservice providers and software vendors.


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Fig. 1: Mobile NFC value chain

The results from various trials over the last two to three years have indicated a positiveresponse from consumers to the use of mobile NFC as an alternative to cash for small-value,frequent exact-change transactions such as purchasing public transport tickets, snacks anddrinks. These findings have attracted more companies to become part of the mobile NFCecosystem to get a share of its potential revenues.

In the last 12-18 months, following Googles backing of NFC technology and also the fear of

Apples entry into the market the mobile NFC market has regained the momentum it lost.This has resulted in a rush from a number of mobile operators in Europe and other parts ofthe world to launch their NFC services.

Mobile operators

Mobile operators see NFC as an enabler technology for payments made via the m-wallet.The place in the NFC value chain that operators are hoping to fill is managing the SE (secureelement) and renting out space on the SIM card to NFC service providers. Operators are keento keep hold of the SE which provides authentication for service access, stores customer dataand provides security.

In Japan, NTT DoCoMo has been providing the Osaifu-Keitai (mobile wallet) services on mobilephones equipped with contactless smart card applications since 2003, using the proprietary

NFC technology FeliCa from Sony. Following DoCoMos lead, other mobile operators andbusinesses in Japan have launched numerous related services, including DCMX, Mobile Suica,Kesaka, Edy and Nanaco, which allow FeliCa-enabled mobile phones to be used as electronicmoney, credit cards, electronic tickets, membership cards and airline tickets. Meanwhile, inSouth Korea, all three mobile operators have offered a similar range of services using FeliCa-enabled phones.

In February 2011, NTT DoCoMo and KT, South Koreas second-largest mobile operator,announced that they will work together to develop new cross-border mobile NFC services including mobile payments, mass-transit ticket and promotional virtual coupons. Bothoperators are presently jointly determining common NFC specifications that will be built intotheir devices, networks and billing platforms in order to enable them to deliver a seamlessservice to customers travelling between Japan and South Korea. In preparation for the servicelaunch, both companies will accelerate the development of their existing infrastructures and

start conversations with NFC-based service providers in different industries to encouragetheir participation in the project.


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However, outside Japan and South Korea, the deployment of mobile NFC services thus far hasmainly been limited to market trials. The results of most of these trials have been positive withclear evidence that there is a latent demand for these types of proximity payment services.

In Poland, Orange is running an NFC payment service trial in partnership with the Polish bankZachodni WBK, Mastercard and Gemalto. Around two million Orange mobile subscribers areexpected use the pilot service, which will allow them to pay for goods and services using their

mobile phones; payments of US$50 or more will require a PIN to be entered into the usershandset to enable the transaction.

In the UK, Everything Everywhere, owned by France Telecom and Deutsche Telekom, alongwith O2 and Vodafone have recently formed a stand-alone JV to define m-commercestandards and accelerate uptake of services. This move closely echoes the one announcedin Spain in March 2011, which, saw the countrys major network operators Telefonica,Vodafone and Orange coming together to jointly develop NFC payments. Similarly, inFrance, operators have been working closely together on a city-by-city basis to define the NFCecosystem and lay the foundations for mass-market uptake based on operator-led commonstandards and approaches.

The UK mobile operators are looking towards a key target date of 2012 for mass market

availability of mobile NFC services. This is driven mainly by the desire to make the LondonOlympics a cashless event a laudable objective as this would give considerable visibility andcredence to the mobile NFC business. It seems a reasonable assumption that by 2012 a numberof NFC handset models will be available in large volumes from multiple vendors, and thatcontactless point-of-sale (POS) infrastructure should be widespread at least in the heart ofLondon.

In the US, Verizon Wireless, AT&T Mobility and T-Mobile have formed the Isis alliance, a mobilecommerce joint venture that has partnered with the four major payment networks Visa,MasterCard, Discover and American Express to drive the mobile payments market. Isis plansto operate as a TSM for mobile NFC services. The initial Isis launches will be in Salt Lake City inUtah and Austin in Texas, mobile NFC services will be rolled out in these cities in the first halfof 2012. It is believed that Isis is also in talks with Google to form an agreement and establishan m-commerce solution that will allow users to keep the same mobile wallet, while switching

from one operator to the other.

In Germany, T-Mobile, Vodafone and Telefonica O2 aim to extend their mPass paymentsservice to NFC. T-Mobile plans to introduce an NFC-enabled m-wallet service in Germanyand Poland in 2011, and further rollouts are planned in Holland and Czech Republic in 2012.In Germany, 60% of retail purchases are still made in cash and T-Mobile believes there areopportunities in offering mobile NFC services as a cash replacement tool.

In addition to Western Europe and the US, operators have also started rolling out mobile NFCservices in other regions.

In Turkey, Turkcell, in collaboration with SmartSoft and Plastkart, has launched a MasterCard-approved TSM solution. The operators subsidiary Turkcell Technology has developed an NFCgateway that can support multiple applications over one SIM card, and OTA platforms. Turkcellclaims this will allow it to offer an end-to-end solution for mobile NFC transactions to serviceproviders.

Turkcells NFC-enabled mobile wallet service is called "Turkcell Cep-T Cuzdan"; NFC-enabledhandsets can be used to perform credit-card and toll-pass-card functions. Gemalto issupplying Turkcell with NFC-enabled SIM cards that can connect to the NFC chips in phonesvia the single-wire protocol. For its subscribers without NFC handsets, Turkcell is offering twoantenna devices which subscribers can purchase and use to equip their handsets with NFCpayment capability.

In Tanzania, Etisalat Group has launched the first commercial NFC payment service in thecountry through its subsidiary, Zantel. The service, called Touch and Go, was developed byEtisalat in partnership with Oberthur Technologies and MasterCard and will enhance Zantels

mobile money transfer service, ZPESA. Etisalat plans to roll out mobile financial services usingNFC technology across its 18 markets in the Middle East, Africa and Asia.


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Key findings

Mobile operators are pushing to deploy NFC services to prevent over-the-top (OTT)giants like Apple and Google from taking the lead in this market. In addition to theirown initiatives, operators have also joined forces in a number of markets to push forthe rollout of NFC handsets and services.

To avoid losing out to the OTT players, mobile operators have formed joint venturesand alliances in a number of countries, including France, Germany, Netherlands, Spain,

the UK and the US, to drive uptake of operator-deployed services.

By working together, operators can offer nationwide coverage to service providers andbig-volume orders to handset makers but they need to find a way of doing this whileadhering to the antitrust laws. For example, in most jurisdictions, operators cannotoffer service providers a commonly-agreed rate for renting space on the SIM.

Mobile operators argue that the SE should be embedded in the SIM card and claim thatthis is preferable because SIM cards can be swapped, changed or upgraded if there areany security issues (i.e., operators can disable services over the air if a phone has beenlost or stolen).

However, NFC has many use cases which are unrelated to the mobile subscription so, inthe longer term, mobile operators may lose the battle of having the SE in the SIM card.

As the real estate on the SIM is limited, it has real value that banks or other PSPs(payment service providers) may be willing to pay for. This could be a relativelystraightforward way for the mobile operator to extract value from mobile NFC services;each issuing bank or PSP would be charged a monthly fee per payment application.

Many mobile operators see the business-to-business sector as their greatestopportunity in NFC, realizing that they have an uphill struggle to compete with OTTplayers on the consumer front.

Operators have existing relationships with many enterprises as communicationservice providers and should look for opportunities to also offer NFC-based workplaceaccess service to those organizations.

For mobile operators, the business case for NFC may be stronger in some of thedeveloping markets. The low penetration of the fixed Internet as well as banking andcredit/debit cards in these markets means that operators have an edge over the likesof Apple, Google and the banks there.

Handset and OS vendors

It has been predicted that, over the coming years, mobile phones will gradually replace thephysical wallet and credit/debit cards and function as a depository for virtual or eCardsfrom different issuers for different applications (e.g., payments, loyalty and access control).This trend will be driven by the use of NFC technology in mobile phones as the means ofcommunicating with the payment infrastructure.

NFC-enabled mobile phones can interact with the present ISO 14443 contactless cards andreaders, allowing users to authorize payments, access services and information, and useon existing contactless infrastructure on public transport systems. An NFC-enabled mobilehandset adds the advantage of user interaction via a display and keypad, as well as an Internetconnection, which enables the use of applications like payments, ticket services, access controland loyalty programs on mobile phones.

A fundamental barrier to mobile NFC services, however, is the lack of handset choice. Only ahandful of NFC-enabled mobile phone models from Nokia, Mobiwire (Sagem) and Samsung,plus Googles Nexus S, are on sale outside Japan and South Korea. More handsets from RIM,LG and Samsung are set to ship in the near future but initially are expected to only beintroduced in selected markets. Hewlett-Packard has announced that it will add NFC to itsWebOS smartphones and tablets. Motorola, Sony Ericsson and HTC also have NFC in theirroadmaps but are not expected to deliver NFC mobile phones before 1Q12. Mobile operatorswant handset vendors to ramp up production of NFC-enabled mobile phones but vendors arestill reluctant to commit to anything beyond the availability of a couple of models in 2011.Most handset vendors want to see a widely-deployed NFC POS infrastructure in place beforethey start shipping more NFC-enabled devices.

Another key reason why handset vendors have been slow to introduce NFC devices isthe disagreement between value chain players on how the SE will be implemented in

the mobile phones. Handset vendors prefer devices with embedded secure elements (eSEs)but, considering that most mobile NFC service announcements so far have been from theoperators, it is likely that many handset vendors, at least initially, will come out with NFCdevices with an eSE that also provides a link between the NFC chip in the handset and a secure


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element in the SIM card, a system referred to as single-wire protocol (SWP). For example, theNexus S has an eSE managed by Google that also supports SWP.

In the longer term, Google, Apple and other handset vendors with mobile app stores wouldprefer to ship devices with eSEs and be the ones to provision security for developers makingNFC applications for their devices and platforms. If the SE is embedded in the handset, mobileNFC services and applications can be used by any user with the device, and not be limited to

specific mobile networks.

Initially, the majority of the NFC-enabled handsets launched will be high-end smartphones.However, announcements from some vendors indicate that mid-range NFC handsets will alsobecome available soon. ZTE has reported its willingness to ship NFC devices for operators; ithas signed a deal with NXP Semiconductors and will build NXPs PN544 chip into its featurephones and smartphones. Fly Mobile has already launched an NFC-enabled touchscreenfeature phone. Fly Mobile was established in 2003 and has offices in the UK, France, Germany,India, Russia, Ukraine and Nigeria; Eastern European markets and India account for most ofits handset sales.

A concern raised about NFC-enabled mobile phones is the possibility of the screen crackingor breaking with the frequent use of the device to tap on readers and POS hardware. The

possibility of this happening is greater in touch-screen devices, most of which happen to behigh-end smartphones. For NFC, handset vendors may have to consider developing deviceswith a stronger screen and outer body. However, this will have an impact on the costs,production cycle and shipments of these devices. And, more importantly, it's unlikely thatusers of devices such as the iPhone or Nexus S will be willing to switch to the specially-manufactured NFC handsets.

GoogleMany industry experts believe that Google will emerge as the strongest player in the mobileNFC ecosystem. In just over six months, Google has added NFC to the Android OS, announcedits Wallet and Offers services, and announced plans to acquire Motorola Mobility. It has alsolaunched the Nexus S NFC phone and signed agreements with MasterCard and a number ofretailers including Subway, Macy's, American Eagle and RadioShack.

Googles approach to drive the mobile NFC market is to get the NFC hardware embedded ina large number of Android devices. The Google Wallet is essentially an Android app whichcan store virtual credit cards, coupons, vouchers, gift-cards, etc. users can make transactionsat contactless terminals simply by running the app on an NFC-enabled handset such as theNexus S.

Googles business is advertising and NFC provides it with an opportunity to link the adsand offers that it serves in the virtual world with purchases in the physical world. With thegrowing preference for CPA (cost-per-action) based pricing for Internet advertising, NFC canenable Google to prove to advertisers that the page impressions, or click-throughs, theyvepaid for have translated into the desired customer action and/or sales at shop tills.

In addition, Google has developed Google Offers, a service that will present users withdiscount coupons and offers in Googles search results. Users will be able to get deals by e-mailand collect offers from NFC tags; NFC-enabled mobile phones can then be used to redeem thediscounts and offers at NFC POS terminals.

The big challenge for Google will be to ensure the security of transactions. The open nature ofthe Android OS means greater risks from hackers attempting to break into the software andmisuse the wallet app. To enhance security, Google is considering putting a system of threePIN codes in place before a user is able to carry out a payment on the mobile phone: The firstPIN to unlock the phone; the second PIN to access the m-wallet; and the 3rd PIN to finallypay. This will no doubt be good for security but wont make mobile payments any faster thanusing plastic cards.

NokiaNokia has been talking in support of NFC for several years but currently only distributes two

NFC-enabled devices the C7 and the N9. A year ago, Nokia had plans to have NFC in all itssmartphones that shipped in 2011 but none of the smartphones it announced by July 2011included NFC.


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Nokias C7 handset is enabled for SWP only and doesnt have an eSE. However, considering thatNokia is working with Microsoft for its smartphone roadmap, it is likely that both companieswill choose the eSE option for many, if not all, of their devices in the future.

Recently, Nokia launched NFC Hub, an online service it claims will help businesses to adoptNFC tag-reading solutions; it believes that initially there will be greater opportunities withNFC tags than mobile NFC payments. Nokias NFC Hub service will allow companies and

businesses to buy generic NFC-tagged posters, aimed at directing people to websites or to getmore information. Nokia will also provide account management service for larger businesses.NFC Hub will also allow the URLs to which the tags are pointing to be changed, enablingbusinesses to update their campaigns without having to change the tags and posters.

RIMRIM had stated that many of its new BlackBerry handsets in 2011 would be NFC-enabled butby July 2011 had only announced two devices, the BlackBerry Bold 9900 and 9930, whichare expected to start shipping in 3Q11. These devices will incorporate the BlackBerry 7 OSwhich supports NFC and includes an API and tag-reader tools to allow developers to build NFCapplications.

In the US, RIM is at odds with the operators over the issue of which company controls the

SE or the users mobile payment credentials. The US operators want this data stored on theSIM cards, while RIM wants it embedded in its BlackBerry devices. As a result, RIM and theoperators are working separately on mobile payments. RIM has partnered with MasterCardand Bank of America for a mobile payments trial, while Verizon Wireless, AT&T Mobility, andT-Mobile have formed the joint venture Isis to sign deals with the merchants.

SamsungOf the top five handset vendors, Samsung has the largest number of NFC devices availablein the market as of August 2011. In contrast with other vendors, Samsung seems willing tolet the operators have control over the SE and is happy to provide them with NFC devices. InEurope, Orange is selling Samsungs Wave 578 NFC handset while Samsungs Nexus S NFCmobile phone is being offered by AT&T, T-Mobile and Sprint in the US.

Samsung has also developed an entry-level NFC smartphone, Player City, available in France

and the NFC version of Samsung Galaxy S2 is also expected to start shipping in the UK in 3Q11.

AppleApple could make the biggest impact on the mobile NFC market with the launch of an NFC-enabled iPhone. It had been expected that the new iPhone in 2011 would include NFC butrecent reports indicate that Apple may choose to wait until 2012 to launch the NFC version ofthe iPhone. It is believed that one of the factors holding Apple back from including NFC in theiPhone is concerns that repeated tapping on NFC tags and readers could cause iPhone screensto crack.

Unlike Googles focus on advertising revenues, Apples business model is selling devices linkedto compelling content and applications on iTunes and the App Store. It sells a broad range ofdevices including desktops, laptops, tablets, smartphones, portable media players and TVsets and the use of NFC technology will provide a way of sharing content and apps acrossall of its devices.

Apples strength in being able to offer an end-to-end ecosystem for NFC services makes it a bigthreat for competitors. The vendor has complete control of the software and hardware thatgoes into the iPhone and it has the most successful mobile app store. To have an iPhone apphas become a priority for many brands, retailers, merchants and banks. Furthermore, Applealready has a well-established payment platform in the form of iTunes.

Key findings

The tussle among mobile operators, handset/OS vendors and service providers over thecontrol of the SE continues to delay the shipments of NFC handsets. Handset vendorsargue in favor of embedding the SE in the device and claim that most service providerswill also prefer not having to pay the operators for renting space on the SIM card.

It will take a couple of years before NFC-enabled handsets will be shipped in significantvolumes, and with sufficient choice, for them to satisfy the expected demand fromconsumers. Consensus in the industry is that market penetration of handsets of at least20% is necessary before the mobile NFC market really starts to reach its potential.

Smartphones allow users to download any applications and software which alsomeans that there are risks of viruses and malware. Handset vendors will need to


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ensure security from such threats, while at the same time continuing to provide anopen ecosystem to developers to enable them to build attractive NFC applications.

Googles main interest in NFC is not payments but the activity leading up to payments,such as search, advertising and special offers. It sees NFC as an extension of itsadvertising business model.

The acquisition of Motorola will take Google closer to having an Apple-like end-to-end ecosystem for mobile devices and services; so far, this has been Apples key

differentiating strength. Apple has complete control of the software and hardware thatgoes into the iPhone and, with the Motorola acquisition, Google will also have similarcontrol over devices manufactured by Motorola Mobility.

Even if it is considered likely that 40% of handsets shipped will be NFC-enabled by2015, the penetration of users with NFC mobile phones wont reach more than 20-25%.So it's unlikely that more than 15-20% of global mobile subscribers will be active usersof mobile NFC services by 2015.

Banks

The current economic woes caused by the credit crunch mean that banks and other financialinstitutions face significant challenges as their payment revenues decline rapidly because ofinitiatives like the SEPA (Single Euro Payments Area) which aims to reduce the cost of cross-border electronic money and payments transactions in Europe and increasingly more onerous

regulation in the financial services sector around the world. Mobile NFC services can providea means for the banks to stimulate greater use of their services especially for card payments,encourage customer loyalty by taking advantage of the value-added benefits of mobility, andhelp in reducing fraud.

In the context of card payments, two entities are involved: the card issuing banks (CIBs) andthe merchant acquiring banks (MABs):

CIBs maintain cardholders accounts; they issue the cards, extend credit to cardholders(in the case of credit cards) and bill cardholders for purchases against their card. The CIBis typically responsible for customer care and handling the cardholders personal data,although this may be provided by third-party processors or card program managers.The CIB is responsible for transferring payment to the relevant merchants accounts(via the payments network and merchant acquirer) for the cardholders purchases.

MABs maintain the merchants accounts that allow them to accept credit and debittransactions. The merchant acquirers provide the means to authorize valid cardtransactions via the interface to the appropriate payment network and facilitatethe clearing and settlement of the transactions through the payment network. Theacquiring bank receives funds from a cardholder when a credit card transaction iscompleted, and deposits the payment amount, less any fees, into the merchant'saccount and from there into its business checking account.

Historically, a single bank would have performed both functions in well-defined geographicmarkets but, thanks to the globalization of retailing and banking and advances in technology,the industry is now dominated by large-scale, specialist organizations and the issuing andacquiring functions are typically offered by independent entities, some of which are notbanks.

Investing in mobile NFC could result in the following benefits for banks:

Reduced costs of handling cash and checks.

Reduced costs of plastic card issuing and management.

Incremental revenues from consumers and/or merchants driven by the greatervolume of transactions, and perhaps also higher payment fees for the greaterconvenience and security offered by mobile NFC payments.

Gaining or protecting market share the early adoption of mobile NFC can help banksdifferentiate and could also provide opportunities to offer more interactive services totheir customers.

Access to new markets and to reach and serve new customer segments previouslyinaccessible to them (i.e., the unbanked or the under-banked user segments).

Increased usage of contactless infrastructure that has already been deployed, leading

to faster pay-back and higher ROI.In France, BNP Paribas, Credit Mutuel, CIC and Credit Agricole, together with mobile operatorsFrance Telecom, SFR, Bouygues Telecom and NRJ Mobile, have plans to deploy nationwideinteroperable NFC-enabled payment services in early 2012.


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The Slovakian bank UniCredit is using NFC stickers supplied by Gemalto for a commercialmobile NFC deployment. The stickers will be used in conjunction with MasterCard PayPassreaders, which are deployed in about 3,000 outlets around Slovakia. UniCredit Slovakia is partof the much wider UniCredit Group, which has 9,600 branches in about 50 countries aroundthe world.

Despite the benefits of mobile NFC, there are a number of gaps or uncertainties in the business

case that is causing some banks to pause and look very hard at the mobile NFC opportunitybefore offering their full commitment. Mobile NFC is unlikely to reduce cash-handling costsany more than contactless cards do and the potential to increase revenues from increasedtransactions can also be attributed to contactless cards. In addition, the potential threat frommobile operators eventually offering competitive financial services is also a concern for thebanks.

Key findings

Partnerships with mobile operators to deliver mobile NFC payments will allow banksto reach and serve new customer segments previously inaccessible to them (i.e., theunbanked or under-banked) and grow their revenues.

Mobile NFC will lead to an increase in the use of the existing contactless infrastructurethat several banks have deployed, generating additional payment traffic on already

deployed or planned contactless infrastructure, which will accelerate the pay-back onexisting or planned investments.

Some banks have concerns about potential conflict or competition between thestandard contactless cards, to which many banks are already committed, and NFC-enabled mobile phones.

Many banks are in favor of having NFC functionality embedded in microSD cards,rather than in the SIM card or the mobile phone. For banks, having NFC in microSDcards means they can offer a service which is both operator- and handset-agnostic,allowing them to reach a large customer base without having to partner with anoperator or handset vendor.

Payment network providers

The providers of the payment networks, such as Visa, MasterCard, American Express andDiscover Network, are the companies behind the credit and some debit and prepaid cards.

They maintain the infrastructure and provide services, such as approval and certification, toCIBs as well as defining their own brand requirements for different payment form factors.They also define payment specifications and provide transaction-processing services tosupport them (see fig. 2). Although critical to many mobile payment services, such as credit-card-linked remote payments and NFC payments, there are unlikely to be major changes inthe way these payment networks operate. Mobile NFC will potentially just reduce the life-cycle management costs of existing card payment systems.

Fig. 2: Credit card value chain


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NFC POS infrastructure is being deployed in countries all over the world, driven primarily bythe payment network providers Visa and MasterCard, which are aggressively promoting theirrespective contactless card schemes payWave and PayPass.

EMVEuropay, MasterCard and Visa formed EMV (Europay, MasterCard and Visa) in 1999 tomanage, maintain and enhance the EMV integrated circuit (smart) card specifications for

payment systems. MasterCard acquired Europay in 2002 and the Japanese card company (JCB)joined the organization in 2004 so EMV is currently operated by JCB, MasterCard and Visa. Thecompanys primary role now is to manage, maintain and enhance the EMV integrated circuitcard specifications to ensure interoperability and acceptance of payment system integratedcircuit cards on a worldwide basis.

Visa, MasterCard and other payment networks have adopted a visual symbol to indicatecontactless payment functionality on cards and terminals. The symbol must be shown on thefront of the card and on the reader at the POS.

Visa payWaveVisa payWave is an EMV-compatible payment platform based on the ISO 14443 specifications.The payWave cards are issued with both the conventional chip or magnetic strip for contact

transactions and the embedded chip with payWave technology.

Financial institutions offering Visa payWave cards include Amegy Bank, Arvest Bank,Barclaycard US, BB&T, Chase, First Internet Bank of Indiana, INOVA FCU, PNC Bank, SunTrust,Wells Fargo and Zions Bank.

Visa is migrating to an enhanced global contactless payment specification, Visa Contactless2.0, which will ensure that Visa cardholders can use their contactless cards worldwide whilestill providing issuers with the flexibility to customize programs to meet local market needs.The specification provides additional security options and enhanced performance for fastertransaction processing. Another major feature of the specification is that communicationsbetween the card and terminal have been streamlined to provide faster transactionprocessing. This makes Visa payWave ideal for environments where speed is of the essence,such as car parks, mass transit systems, fast food restaurants and convenience stores.

Mastercard PayPassMasterCard PayPass is also an EMV-compatible, contactless payment platform based on ISO14443. MasterCard began trialing PayPass in 2003. Its first market trial was in the US, inOrlando, Florida, with JPMorgan Chase, Citibank and MBNA; more than 16,000 cardholdersand 60 retail locations participated in the market trial. A 2007 MasterCard PayPass BenchmarkStudy found that about 90% of respondents that use PayPass were satisfied with theirexperience, and 71% of these PayPass consumers said they use PayPass as their primary cardfor everyday purchases.

Since 2005, MasterCard has rolled out commercial PayPass services in a number of marketsoutside the US including Canada, the UK, Germany, Poland, Australia, Turkey, the Philippines,Malaysia and South Korea. MasterCard has worked with Nokia, AT&T Wireless and JPMorganChase to incorporate MasterCard PayPass into mobile phones using NFC technology, trialingit in Dallas, Texas.

American Express ExpressPayExpressPay, which comes embedded in a card or in other separate forms such as a key fob, isalso EMV-compatible and based on ISO 14443. In June 2005, American Express became thefirst card issuer in the US to launch a contactless-enabled credit card; it was called Blue andhad the ExpressPay feature.

American Express claims that pilot tests in Phoenix and New York demonstrated thesignificant merchant benefits of ExpressPay in the form of time savings and increases inspend. Based on a three-day sample, customers got through the queue 53% faster withExpressPay than with magnetic strip transactions, and 63% faster than with cash.

Discover Financial ServicesDiscover Financial Services runs the POS network that Isis is connected to; it is the fourth-largest in the US. The company operates the Discover card and its payment businesses includethe Discover Network with millions of merchants and cash access locations, the PULSE ATM/


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debit networks, and the Diners Club International global payments network which is acceptedin over 185 countries.

Discovers Zip contactless application is accepted in over 100,000 merchant locations in the USbut there are not many users because the company only introduced contactless stickers andcards in November 2010 and issued these only to selected customers. The company is workingto enable Zip payment from mobile phones and claims that Zip will be accepted at around

90% of the locations that take PayPass or payWave in the US.

Key findings

The business case for payment network providers to invest in mobile NFC is to displacecash payments by growing the number of users of mobile NFC payments. Adoptionof mobile NFC can also lead to strong growth in cashless transactions in emergingmarkets, which tend to have a low credit/debit card penetration, thereby increasingrevenues for payment network providers.

According to American Express, contactless transactions can be 63% faster than cashand 53% faster than using credit cards. MasterCard found that the most significanttime savings are realized in a drive-through environment where using contactlesspayments can save 12-18 seconds per transaction as compared with cash payments.

To accelerate the growth of mobile NFC transactions, payment network providers

should also promote the use of NFC stickers to complement contactless cards indeveloped markets. NFC stickers will also help in driving the adoption of mobile NFCpayments in emerging markets without the need for huge upfront investment.

Payment network providers should also explore opportunities of developing a fully-fledged secure m-commerce platform which they can customize and market tomerchants and banks, as well as Internet and media companies.

In addition to revenue growth, investing in mobile NFC is also important for paymentnetwork providers to ensure that they dont lose out to payment platforms like PayPaland iTunes, to which users can directly link their bank accounts and bypass thepayment network providers.

In the coming years, the payment network providers are likely to face morecompetition from Google and Apple, which already have and will continue to growtheir direct customer connections.

Merchants and retailersMobile NFC has a significant relevance for certain types of merchants. For example,transport operators are already using contactless cards for ticketing, especially in mass-transitapplications, to increase throughput and increase customer satisfaction. Similar benefits willbe experienced by ticket vendors for live events, museums, cinemas and theaters wherepurchasers can be fast-tracked into the venue.

Currently, NFC readers are most widely deployed by public transportation systems. InformaTelecoms & Media estimates that, by July 2011, about 930 cities in at least 50 countries hadintroduced NFC-based ticketing in public transportation systems. In Japan, around 60% ofthe handsets sold now are NFC-enabled and about 20% of people with such phones havereportedly activated them for use on public transportation.

Only a small minority of retailers outside Japan and South Korea have NFC-enabled POSterminals in their stores. In January 2011, Starbucks announced that all of its US stores arenow accepting NFC payments via mobile phones. Retailers in the US and the UK have starteddeploying contactless POS terminals but currently only about 3% of POS infrastructure in theUS is enabled for contactless payments.

In the UK, it has been reported that the Post Office is planning to deploy new POS terminalswith contactless payment facility in 12,000 of its branches in early 2012. By October 2012,it expects to have contactless POS terminals in all of its branches, around 30,000-35,000terminals, making it largest merchant accepting contactless payments in the UK. The LondonTransit Authority expects to install around 20,000 contactless POS terminals during 2012,while it is believed that, as of July 2011, there were around 60,000 contactless POS terminalsinstalled at merchant locations in the UK and about 15 million contactless bank cards havebeen issued.

Mobile NFC payments offer merchants and retailers the opportunity to improve theircustomers experience of purchasing, through improved ease of use, convenience andtransaction speed, and potentially greater security. For merchants and retailers, mobile NFCoffers the following key benefits:


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Increasing throughput by reducing transaction times.

Potentially generating more transactions, especially for micro-payments.

Exploiting impulse purchasing behavior more effectively.

Reducing cash handling costs and risks.

Running marketing campaigns offering coupons and vouchers to increase customer

loyalty.Mobile NFC offers more opportunities to run loyalty programs, enabling merchants andretailers to exploit e-vouchers and advertising delivered either via the cellular network orlocally via NFC (e.g., using smart posters) and stored on the handset.

Key findings

The adoption of mobile NFC transactions is likely to be fastest in the public transportsector, especially in places where a good deal of contactless POS infrastructure isalready in place. The resulting cost savings in ticket issuing and cash handling willstrengthen the business case.

Merchants and retailers will be interested in NFC if it helps to reduce costs, increasesales and provide better protection against fraud. They arent likely to mind whethera user pays with a contactless plastic card or an NFC-enabled mobile phone; in fact, insome cases, they might prefer payments via contactless plastic cards if its faster thanpaying by mobile phones.

An important incentive for retailers is the potential of using NFC for their own mobile-wallet services, such as store-payment cards, loyalty cards and coupons and vouchers.

A reduced cash-handling cost is cited as one of the key benefits for merchants andretailers to enable NFC payments but it also means that retailers will have to pay morefor card-payment fees with the increase in cashless transactions.

In addition to the potential cost of new hardware and potentially higher fees, thereis still some resistance to mobile NFC from merchants and retailers due to securityconcerns and the need for additional training of staff.

Trusted service managers

The role of a trusted service manager (TSM) is to distribute, provision, and manage mobilepayment applications on behalf of the application owners. A number of independent

companies are establishing themselves as TSMs including Atos Worldwide, Cassis,SmartTrust, Giesecke & Devrient (G&D), First Data, Gemalto and Ericsson IPX. TSMs providethe link between the mobile operators and the issuing banks or other application ownerssuch as transportation service providers. For example, First Data is playing the role of TSM,delivering and managing payment applications over the air to the embedded SE in the NexusS, Google Wallets launch device.

The role of the TSM is clearly a vital one in the ecosystem and carries significant responsibility.The TSM will hold the master key to the SE and manage downloads to it; it would also beresponsible for invoicing and supporting the application owners. Therefore, a TSM must be atrusted party. As the owner of the SIM, it would appear that the mobile operator would be thebest candidate to act as the TSM but many in the industry argue in favor of an independentthird party to be the TSM.

Key findings

It has been proposed that a TSM will be required to distribute, provision and managemobile payment applications on behalf of the application owners but there areuncertainties about whether the TSM should be independent or not.

It seems the most efficient and transparent approach would be to use a third party asTSM, which could act as a single point of contact for application owners and mobileoperators.

Although TSMs are meant to be facilitators, they nevertheless add an extra layer ofcomplexity and count as one more party taking a slice of the mobile NFC servicerevenues.

NFC hardware and component vendors

Smartcard manufacturers

The term smartcard can be used to refer to a memory card, a microprocessor card, or acontactless card. Memory cards provide more data storage space than a magnetic strip butcant process the data. In comparison, microprocessor cards (or microcontrollers) have thecapacity to process data and the applications on these cards can be customized or processedvia an OS. Contactless cards are based on radio-frequency communication technologies and


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can interact and exchange data with readers via an electromagnetic field, without the needfor any physical or electrical connections.

Smartcard manufacturers include Gemalto, Oberthur Technologies, Sony, Morpho andGiesecke & Devrient; these four companies account for over 80% of the global smartcardmarket. In addition, there are a few Chinese smartcard manufactures, such as Watchdata,Datang and Eastcompeace, but these companies mostly only cater to the domestic Chinese

market.

Bell ID, the smartcard and NFC software provider, ViVOtech, the NFC software developer, andPPC Card, the credit/debit-card manufacturer are working together to enable the mass-marketrollout of mobile NFC services in Europe.

As NFC is compatible with Philips' MIFARE and Sony's FeliCa contactless smartcard platforms,NFC devices can read information from these cards. NFC devices can also operate like acontactless card, even when switched off, making them compatible with the huge installedinfrastructure of MIFARE and FeliCa systems.

It is believed that Google will subsidize contactless POS terminals to accelerate theirdeployment by retailers and merchants. The replacement cycle for POS infrastructure is

usually five to seven years for most retailers. Therefore, to accelerate the growth of NFCpayments, it is important to encourage more retailers to deploy contactless POS systems andproviding terminals at subsidized rates will help to drive this.

NFC POS terminal and reader manufacturersThe POS terminal and reader vendors are vital players in the mobile NFC value chain asthey provide the NFC-enabled terminals and readers to the merchants and acquirers. The bigvendors in this field are Ingenico, Verifone, Hypercom and Vivotech; other players, includingIBM, Micros and Radiant Systems, also provide contactless POS systems. Most terminals andreaders for mobile NFC transactions tend to be the same as those that can be used, or arealready in use, for transactions with contactless payment cards. Contactless card readers areprovided by companies such as OTI (On Track Innovations) and ROAM Data.

Some interim solutions have also been proposed to drive the NFC market. One example is the

iCarte 110 NFC reader and contactless payment adaptor manufactured by Wireless DynamicsInc. and designed for the iPhone 3G/3GS; the readers dimensions are 62 x 26.5 x 12.3 mm andit can be attached at the bottom of the iPhone.

The iCarte 110 NFC reader has an embedded chip which can be configured as credit/debit cards, prepaid cards and loyalty cards for contactless payments and transactions, andcommunicated by the attached iPhone. It can also read NFC coupons, smart-posters, etc., aswell as used for enterprise applications including access control and asset tracking. The iCarte110 NFC reader is currently only available for payment with Visa contactless protocol and theSDK is available for purchases exceeding 1,000 units.

Wireless Dynamics Inc. has also developed NFC readers such as the SDiD 1010 in SD formatwhich can be inserted in devices with an SD card slot. Payment and transaction informationcan be processed via the cellular network as well as using Wi-Fi and Bluetooth.

Chipset manufacturersFor chipset manufacturers, the mobile NFC market offers a new value-add by providing themwith the opportunity to sell more chips, and at a higher premium. There are three types ofrelevant chipset vendors:

The UICC vendor: The universal integrated circuit card (UICC), more commonly knownas the SIM card, is the key element in mobile NFC payment systems as the UICC iswhere one or more of the security domains are provisioned.

IC chip vendor: Typically the manufacturers of chips used in EMV credit and debitcards are the same as those supplying the UICC manufacturers for the mobile industry,providing valuable cross-sector expertise.

NFC chip vendor: The role of this value chain member is to supply the standards-

conforming NFC chip to the handset manufacturer for integration with the handset.Although they are not directly involved in mobile payments, the chipset manufacturers arecritical to the mobile NFC market as they provide the chipsets to handset manufacturers toenable them to produce NFC devices. Furthermore, the chipset manufacturers work to bringthe technology improvement and innovation which then lowers the costs of NFC chips and


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therefore the BOM (bill-of-material) cost of NFC handsets will initially be only slightly morethan for non-NFC phones. In a couple of years, it can be expected that handset vendors will beable to provide NFC-enabled devices that are in the same price range as non-NFC devices.

Inside Contactless and NXP are two leading NFC chipset suppliers. Broadcom and Qualcommare also developing NFC chipsets.

Inside Contactless, in partnership with Infineon and Giesecke & Devrient, has developed theSecuRead system-in-package (SIP) NFC solution to provide handset manufacturers with asingle package that includes both an NFC controller and an embedded secure element (SE). Thesolution comprises the MicroRead NFC controller, Inside Contactless' open NFC protocol stackfor Android, Windows Mobile, Linux and Java devices and an embedded SE manufacturedby Infineon Technologies; it runs a GlobalPlatform-compliant Java Card operating systemsupplied by Giesecke & Devrient. The solution will make it easier for device manufacturers toembed NFC technology in their products.

NXP Semiconductors has reported that its NFC chipsets have been integrated in over 60 mobilephones currently being developed by handset vendors. NXP's NFC software is open source onthe Android platform and enables the Google Wallet application. Gemalto has contracted NXPto incorporate the companys MIFARE contactless-payment technology into its UICC cards;

Gemalto has been chosen by KDDI to provide User Identity Module cards and Trusted ServiceManagement for its NFC program.

Another company, Watchdata, provides the SIMpass SIM card-based mobile NFC solution.China Telecom has deployed the SIMpass solution in over 20 provinces and has over half amillion users of the mobile NFC service. Similarly, Watchdata claims to have shipped over100,000 SIMpass cards to the Thai mobile operator True for its True Money Service, whichallows users to make mobile NFC payments at McDonalds and other retailers.

Memory card manufacturersMemory card manufacturers argue in favor of embedding the SE (secure element) in thememory card, rather than in the SIM or the mobile phone. They claim that having the SE in amemory card is better than having it on the SIM which has storage limitations. Having the SEon a memory card also means that users are not tied to a particular operator or mobile phone

and can take out and plug the memory card in other handsets to use NFC services (see fig. 3).

Fig. 3: Options for location of secure element in mobile NFC handsets

In Dec 2010, In2Pay microSD, developed by DeviceFidelity, became the first NFC solutioncertified by Visa for commercial deployment.

Another company, Tyfone, has developed the SideTap memory-card solution to enable NFCservices in a large number of mobile phones. The solution consists of a Micro SD card withintegrated SE and NFC antenna and allows users to make their handsets NFC-capable by

simply using the Micro SD card in their handsets. Tyfone claims that the solution will allowusers to remove their confidential information from the handset when switching to a newdevice.


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Key findings

The migration of the banking and payments industry towards EMV standards, thegrowth of contactless payments and the opportunities in emerging markets are actingas key drivers for revenue growth for the POS terminal and reader vendors.

However, these manufacturers are facing increasing price competition, in particularfrom Chinese manufacturers, and, as a result, their profit margins have fallen.

To grow their revenues, the manufacturers are evolving their business to also offer

the management of payments and related services. This includes ensuring the properrunning of the terminals, providing the necessary software for the terminals andreaders, managing the different payment methods, and ensuring adequate securityand protection against fraud in collaboration with banks.

Many vendors are developing and launching a variety of interim NFC solutions suchas stickers, and NFC functionality embedded in microSD and SD cards to enable NFCservices on existing mobile phones.

NFC readers that can be attached to mobile phones, such as the iCarte 110 reader forthe iPhone, are good interim solutions but unlikely to get mass-market adoption. Mostusers wont want to extend the size of their mobile phones with additional hardwareand also wont want to pay extra for it.

A key challenge for the POS terminal and reader manufacturers is to ensure adequateprotection against the growing malware and security attacks on contactless andmobile terminals.

To accelerate the market growth of NFC payments, it is important for the vendorsto encourage new retailers to deploy contactless POS systems. Providing NFC POSterminals at subsidized rates will encourage more retailers to deploy contactlessinfrastructure.

Payment service providers

Payment services that are currently largely confined to the digital and online worlds, such as e-commerce payment platforms (e.g., PayPal, Amazon), digital-content platforms (e.g., iTunes),carrier billing, and even social media and gaming virtual currencies (e.g., Facebook Credits,World of Warcraft Gold, Angry Birds Bad Piggy Bank), could use mobile NFC to extend theirreach to physical-world purchases.

Paypal

PayPal is well-established as a payment service for online purchases; it allows users the optionof making payments directly from their bank account without needing to have a credit or debitcard. Mobile NFC offers further growth opportunities for PayPal because retailers may prefertheir customers to pay by PayPal if that means transaction fees that are lower than using thepayment networks of credit card companies. Mass adoption of PayPal will therefore be a bigthreat to the likes of Visa, MasterCard and other credit card companies.

iTunesiTunes is now one of the worlds biggest online payment platforms with more than 200 millionpeople registered with an iTunes account. This also makes iTunes possibly the biggest credit-card hub on the Web, since users must register their credit/debit card details to open an iTunesaccount and start making purchases. It remains to be seen whether Apple will introduce anNFC-enabled iPhone in 2012 and extend iTunes payments beyond the realm of digital goodsinto the physical world. Informa Telecoms & Media expects Apple to do that in a couple ofyears as adoption of NFC services starts to grow.

Key findings

Mobile NFC offers the opportunity to online-payment platforms such as PayPal,Amazon and iTunes to extend their reach to local payments in the physical world. Italso provides an opportunity for virtual currencies, for example Facebook Credits, tobe used for purchasing physical goods.

Retailers may prefer customers to use services such as PayPal for NFC payments if itincurs lower transaction fees than those charged by the credit card brands.

Security concerns may inhibit customers from using the online payment serviceproviders for making NFC-based local payments. To grow their business in the mobileNFC market, these companies will have to ensure that people trust them as much theytrust the credit card brands.

Application service providers and software vendors

The mobile NFC market represents a significant opportunity for application service providersand software vendors many of whom are relatively small, entrepreneurial technologycompanies. There are companies that provide solutions, such as coding, programming,


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hardware implementation, etc., to integrate NFC in new and existing products companieslike DeviceFidelity, Inside Secure, Monitise, Proxama, Airtag, Tyfone, Zenius, United Tectsa,Schreiner ProSecure, ISS and Near Field Solutions a few examples include:

DeviceFidelity has developed solutions to enable NFC services on mobile phones.Recently, it was granted a patent for the implementation of NFC in mobile devicesto enable them to function like mobile wallets capable of conducting contactless

payments and transactions using credentials issued by multiple different enterprisesat POS terminals.

Inside Secure will provide ZTE's GSM and TD-SCDMA handsets with its NFC solutions,allowing users of the devices to access NFC services including payments, loyalty,ticketing, and access control.

In April 2011, Proxama, the NFC software development company, announced thelaunch of NFC services in South Africa that enable users to make contactless paymentson transport networks.

The mobile NFC market also presents opportunities to e-commerce and m-commercecompanies to extend their presence to local mobile payments. Some of these companies for example Monetise, Fundamo, Vesta, PayBox, and Bango have developed business-to-business (B2B) service solutions that are used by mobile operators or banks which brandand retail the mobile payment service themselves. These solutions are often provided on

a managed services basis, where the technology platform and associated infrastructure isdeployed outside the mobile operators or banks networks. Other mobile application serviceproviders, such as OboPay, Luup and Crandy, have built business-to-consumer (B2C) servicesolutions and have established their own independent consumer brands, selling servicesdirectly to the mobile consumer. Mobile NFC services will also allow these players to exploittransaction data for location-based marketing services.

Industry forums and associations

Many industry forums and associations, including the GSMA, NFC Forum, Mobey Forum andthe Contactless Payments Council, have been instrumental in driving the development of NFCstandards and specifications, as well as encouraging market trials and commercial rollouts ofmobile NFC services.

GSMANFC technology has the backing of the GSMAs Pay-Buy-Mobile (PBM) initiative and 52 mobileoperators were supporting the initiative as of August 2011 (see fig. 4). A number of theseoperators are already conducting trials of mobile NFC services as part of the PBM initiative.

Fig. 4: Mobile operators supporting the Pay-Buy-Mobile initiative, Aug-11


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i f f l & di

In addition to the mobile operators, banks and credit card companies, a number of otherimportant mobile NFC value-chain players are involved in the PBM initiative including:handset vendors, such as LG, Nokia, Samsung and Mobiwire (Sagem); UICC card suppliers,such as Gemalto, G&D and KEBT; and NFC reader manufacturers, such as Vivotech and Harex.

NFC ForumFormed in 2004, the NFC Forum now has over 150 members. It was formed to advance the use

of NFC technology by developing specifications and ensuring interoperability among devicesand services. The main goals of the NFC Forum include developing standards-based NFCspecifications, encouraging products based on those specifications, and driving awareness ofNFC technology among consumers and enterprises.

The NFC Forum has released 15 specifications to date, which provide a roadmap to ecosystemplayers for developing NFC-based products and solutions.

Mobey ForumThe Mobey Forum, established in May 2000 is a non-profit organization; its mission is toencourage the use of mobile technology in financial services. The forum has over 50 membersincluding banks, handset manufacturers, credit card companies, technology vendors and afew mobile operators.

The Mobey Forum has published a number of white papers on best practice for mobilepayments and documentation on the recommended architecture for a wide range of mobilefinancial services. To support its recommendations, the forum has completed demonstrationsand trials based on its recommendations and principles and it is supporting membersimplementations.

Informa viewpoint

Informa Telecoms & Media recommends that mobile operators and other value-chain playersmust look more carefully before investing in NFC services because the technology will requirea large upfront investment and take at least three to four years to reach a critical mass of usersand transactions. Mobile operators are hoping that the SIM will become the default methodof securing NFC applications, but it is more likely especially in the developed markets thatsecurity embedded in the handset will eventually prevail.

Without the presence of a broad network of retailers and service providers that will accept NFCpayments, the opportunity for mobile NFC will be very limited. There are few markets whereanyone other than the banks and payment network providers has the dominance to make thishappen. It is unlikely that the pure operator-driven model that NTT DoCoMo adopted will berepeated elsewhere.

It will take a couple of years before NFC-enabled handsets will be shipped in significantvolumes. The consensus in the industry is that a market penetration of handsets of at least20% is necessary before the mobile NFC market really starts to reach its potential. Google hasimplemented the necessary NFC software in its Android OS Gingerbread and wants to getthe NFC hardware embedded in large number of Android devices. Its acquisition of Motorolashandset business means that Google will be in a position to drive NFC device shipments.

However, there is a high degree of fragmentation in the mobile NFC market and this willcontinue to restrict the rollout of commercial services for the next two to three years.Mobile NFC services can generate significant revenues for value-chain players provided allstakeholders take a pragmatic approach and recognize and accept the contribution andimportance of each to the overall NFC business. The need for collaboration is clear. Revenuesharing as well as risk and investment sharing will be necessary, especially where there is nopre-existing contactless infrastructure.

03.0 mobile nfc ecosystem and value chain

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