A recent product announcement in France may have effectively torpedoed today's mobile payment business model. As a result, it may require some hefty strategic rethinking by retail IT execs who, until now, have assumed that they would own the relationship with the customer.
The Inside Secure OpenNFC standard can allow third parties to access NFC capabilities on phones, effectively bypassing mobile-operator-led initiatives such as Isis. Is it too late for the Isis consortium to change direction and work in conjunction with existing card networks such as Visa and MasterCard?
In any change as potentially disruptive as mobile payment, the industry's first reaction is always going to be a jockeying of players It's never been more the case than with mobile payment, as the number of players involved—carriers, banks, card brands, retailers, payment processors and handset manufacturers, among quite a few others—is staggering.
The mobile operators are particularly frustrated, having to figure out ways to somehow get a cut of revenue from all of the profitable services being pushed through their pipes, including voice, video, music, gaming and app stores. The mobile operators have, in every case, attempted to control subscriber access to these services and been bypassed by third parties, relegating them to that term operators hate the most—"dumb pipe."
Now there is an opportunity these carriers can, theoretically, control: mobile payments.
(Related story: The CIOs of Pizza Hut and Ann Taylor—plus the SVP/IT at Home Depot—discuss the advantages and dangers of turning part of their revenue flow to mobile payments.)
And retailers will likely find themselves squeezed in the middle. Banks and card networks are unlikely to provide phones to customers, so the gatekeeper to accessing consumers will be the mobile operators, right? Let's say that history has an unpleasant habit of repetition.
It is pretty much a given that NFC will be the enabling technology for the interface at the point of sale. But the ownership of the virtual wallet—or, as it is known in the trade, the Secure Element—is still up for grabs. Perceived wisdom is that the SIM card will be the Secure Element and, consequently, the operator providing this SIM controls the access to, storage of and payments made by virtual payment cards. This assumption has been prevalent in recent operator-driven NFC mobile payment initiatives.
In France, for instance, the mobile operator business case for NFC is known as "SIM rental," where issuing banks, mass transit agencies and retailers pay the mobile operator for rental of secure memory within the SIM card for storage of virtual cards. The roles of banks, mobile operators, retailers and others remain largely untouched—banks are not competing for mobile operator business; mobile operators are not competing for bank business. The status quo is largely maintained.
In the U.S., a more combative approach is playing out, with the Isis joint venture (Verizon Wireless, AT&T and T-Mobile) aiming to go head to head with the major card networks.In the U.S., a more combative approach is playing out, with the Isis joint venture (Verizon Wireless, AT&T and T-Mobile) aiming to go head to head with the major card networks.
The operator collective, along with Discover Financial Services and Barclaycard U.S., plans to bring NFC handsets to market that will directly compete with MasterCard and Visa for point of sale transactions. Should outsiders wish to provide virtual cards that would reside on the Isis Secure Element, they will have to negotiate with the Isis consortium for access. For a price.
But the actions of the French NFC developer, a company called Inside Secure, complicates matters. Its platform effectively bypasses the mobile carrier's control of a single secure element within a handset. Instead, it supports multiple secure elements that could be embedded by handset manufacturers or provided by third parties as add-ons like external memory cards.
What's more, OpenNFC allows these third parties to also access the handset NFC capabilities to perform transactions such as mobile payments. So, whereas before card networks such as Visa and MasterCard may have been blocked by Isis from accessing NFC phones, they may now be able to bypass them on the very same devices.
So, retailers, what are the operators likely to do about this? They could prohibit handsets on their network with any additional form of Secure Element, which could be somewhat tricky if, for instance, Apple decided to place an additional Secure Element in the iPhone 5 (no thank you, Mr. Jobs, I will not stock your cash cow).
Or the operators could attempt to control the penetration of OpenNFC among handset portfolios, which could also be somewhat hard to police given that this is an open standard already available for Android, Java, Linux and Windows operating systems. Expect Blackberry and Apple's iOS to soon be added to the roster.
Or they could recognize that they are in a position where they are once again faced with disintermediation and work with stakeholders to encourage a collaborative approach. At this time, the path taken by Orange in France to work harmoniously with existing payment service providers is likely to garner greater favor than the Isis venture that aims to block them.
Is Isis destined to crash and burn? From the very outset, the initiative has been ambitious to say the least: a consortium of mobile operators bringing an unfamiliar technology to merchants and consumers, creating a new payment brand and going head to head with companies that have had decades of experience in quickly and securely facilitating payment transactions around the globe.
The one major strategic advantage operators had—device ownership—could now be used against them. So, is it too late for Isis to work collaboratively with MasterCard and Visa?
It may be the best option for Isis if SecureNFC becomes commonplace. It would provide an open platform and access to the SIM as Secure Element, saving the card networks from having to work with handset vendors or other third parties to provide alternate Secure Elements for handsets.
If Isis doesn't work with the card networks, then they can simply cut out the middleman—a move the networks could now make anyway. Ultimately, the success of Isis will come down to articulating a viable alternative to retailers by offering a significant discount on transaction processing fees. Retailers will need to be convinced that Isis is as robust as existing card payment networks but with enhanced cost savings and loyalty initiatives. Differentiation based purely on a new form factor will simply not be enough.
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