Viewpoint: Early Days for NFC (March 2013)
By Lori Breitzke, E&S Consulting LLC
In the initial installment of this article, we addressed how trends in EMV will impact the prepaid sector. But developments in near field communication (NFC) merit an equally close watch, as they, too, should have bearing on the prepaid market and how it plays out moving forward.
Let’s start with a review. NFC is a set of standards for form factors, including mobile devices, to use two-way communication in close proximity. With NFC, mobile devices have the potential to conduct payments and payment-related transactions that do far more than plastic ever could. To make this work, however, the point of sale has to be equipped to handle NFC. At the moment, it remains unclear whether or when large groups of merchants—or a majority of merchants—will migrate to NFC-enabled point of sale systems. Yes, you can pay with your phone at Starbucks, but many mobile payment applications use a barcode displayed on the phone to interface with the point of sale, rather than NFC.
Remember when no one had closed-loop gift cards? Now, of course, they are mainstream and most people have more than one in their wallets at any given time. The initial innovation for these cards happened at nimble startups, which were then bought up by large payment companies that saw a profit could be made in offering the service. It was initially a differentiator that eventually grew until it became expected. Today all processing platforms have closed-loop gift card functionality built in. The transition has gone full circle. We are at the beginning of a similar cycle with NFC.
Currently, there are many small companies that have started developing, for smartphones and other mobile devices, applications and devices that may have a prepaid component, such as a mobile gift card application where value can be loaded onto a phone that can then be used for payment at the point of sale. The acquisition of these little companies by larger, well-established providers signals that mobile payment functionality is at a tipping point. So, too, do efforts by larger players to partner and develop their own solutions; the Isis mobile wallet is an example, as is MCX (Merchant Customer Exchange), a mobile payment effort developed by Walmart, Target, 7-Eleven and other retailers. There is no doubt that prepaid will change dramatically as these efforts gain momentum.
Much like the closed-loop gift card transition mentioned above, smaller, more nimble first-to-market companies providing mobile payment solutions will be bought by the larger, slower-moving leaders in the payment space so that the acquirers quickly can get the functionality they need to slow their customers’ departure to smaller, cutting-edge providers. Such acquisitions will take off, but only after integration challenges are overcome. We’ve seen some examples of this already. A few weeks ago, InComm bought e-gift provider Giftango. Although this deal wasn’t related to NFC, it demonstrates the natural evolution of the market. Small companies gain scale and credibility through the acquisition, while the larger company is able to acquire a proven solution as opposed to building one from scratch. And it helps the larger organization offer capabilities that their clients want. Look for more acquisitions like this in the coming months.
Evaluating the Options and Providers
How can prepaid players be ready for NFC? It depends on the kind of prepaid program you provide. Above all, enabling cards for NFC has to make financial sense.
If you are providing a closed-loop gift card, enabling your system for NFC may be more important than you think. Unlike barcodes, NFC allows for two-way communication between merchants and consumers, making for more powerful customer-engagement solutions. Rather than merely scanning barcodes to obtain payment information, merchants can utilize NFC to send targeted offers and the like to consumers, in turn cultivating long-term customer relationships.
NFC is most essential, however, for GPR programs because it could enable the cards to be tied to some kind of offer, reward or couponing. These capabilities take card programs far beyond plastic and could provide a much-needed retention tool. Providers who can’t offer contactless capabilities won’t be able to compete with those who can.
Start by evaluating your existing partners to determine if they can deliver mobile solutions and, more specifically, NFC-supported capabilities and if not, what their plans are to add them. Depending upon their answer and your timelines, you may need to partner with a smaller company that is more nimble and better able to keep up with the latest developments in mobile technology, including NFC. Trying out smaller companies with a pilot program is a great way to determine their capabilities with less risk. Above all, it is critical that smaller companies can handle your scale.
If you have a GPR card program, be sure to monitor the trends and jump in when it makes financial sense. One way to stay informed is to assess the costs and benefits of NFC on a quarterly basis. Cards that are contactless and, therefore, support NFC, are more expensive (about $1 or more), so program managers need to know what the benefits of supporting this technology would be to themselves and their consumers to make the expense worth it.
If you’re still feeling uninspired to track how prepaid will evolve in the presence of EMV and NFC, consider as a parting thought the game-changing potential of remote deposit capture. RDC enables a prepaid card to be loaded with a check using a mobile device. Users can take a photo of the check with their phone’s camera any time of the day and have the value loaded into their prepaid account. Some prepaid providers are integrating it, though the risk is great and market acceptance is uncertain. Still, the idea that prepaid account holders don’t have to go to a bank, retailer or check cashing business to deposit their checks is intriguing, and depending upon how well you are prepared for the coming trends in payments, terrifying.
Lori Breitzke is founder and president of E&S Consulting, a payments industry consultancy that advises merchant acquirers, retailers, card marketers and issuers in a broad range of payment and financial services domains, including prepaid program management, competitive research, training, marketing, POS hardware and software management, and partner recommendations. View E& S Consulting’s blog at www.eandsconsultingllc.com.
In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. If you’re interested in contributing to Viewpoints, contact Loraine DeBonis.