NFC to enable a plethora of business models: study
The first and most important task for the near field communication ecosystem is to define the kind of infrastructure that will be used to enable businesses to provide NFC-based services to their customers, according to SJB Research.
Most NFC projects to date have been based around the use of a mobile phone or other device equipped with the technology to replace an existing service. However, NFC devices offer far more than that and, ultimately, services will evolve that are designed specifically to take advantage of the full range of capabilities of an NFC device, rather than being built to simply replace services designed to run on today’s technology.
“Indeed, it may be that the development of these new services is an essential requirement for creating demand for NFC technology,” said Sarah Clark, head of research at SJB Research, Monmouth, England.
“The companies that succeed will be those that take the time to gain an understanding of the needs of each of the parties involved and then design an infrastructure that provides a win-win-win solution for consumers, for merchants and for the widest possible range of service providers,” she said.
NFC in the place to be
While most attention to date has focused on the need for secure element issuers and service providers to find a way to share the costs of providing NFC services, this process is actually step two in the task of creating a business model for the provision of NFC services, per SJB.
The first, and most important, task is to define the kind of infrastructure that will be used to enable a business to provide NFC-based services to their customers.
The way in which a core NFC infrastructure is designed and the competitive stance taken by an NFC infrastructure’s developers will have a fundamental impact on how willing service providers will be to adopt the technology.
The more open the infrastructure is to participation by a wide range of technology and B2B service providers, for instance, the more willing businesses will be to adopt NFC and the easier it will be to bring them on board.
Ownership of the NFC infrastructure that will provide the backbone on which NFC services are delivered is not required in order to build a business from providing NFC solutions to service providers.
In fact, it can actually be a disadvantage.
Service providers will prove less willing to sign up for an infrastructure that is closely held by one company or a small group of companies than for an infrastructure that is designed to be open to all.
Here, the internet provides an excellent example of how an open, standards-based infrastructure can succeed — companies such as Google, Facebook and Amazon, for instance, have built multi-billion dollar global businesses on an infrastructure that no one company or group of companies owns or controls.
Ownership of the secure element used to store consumers’ NFC applications and sensitive, personal data is also not required.
Services and platforms now exist to enable any business to acquire space on a secure element issued by a mobile network operator, a handset manufacturer or other entity and then use that space to provide business-to-business NFC services to other companies.
Not all businesses in a strong position to issue secure elements will want to build a business around the provision of NFC services, just as there are many businesses who are not in a good position to do so which will want to.
Payments are at the same time the most critical and the most complex NFC service to deliver.
Unlike other services that consumers may wish to use, however, in a mass market deployment consumers expect to be able to use their NFC device to make payments — it is not an optional extra.
A strong business model allowing leading card issuers and payments processors to share space on an NFC handset has yet to be found.
This is a major reason why commercial NFC services have taken longer to arrive than expected and the reason for widespread interest in microSD and other NFC add-ons amongst payments networks and banks with merchant acquiring arms.
In countries where the majority of the population has a bank account, consumers will expect to be able to make payments with their existing payments instruments, including their full range of credit and debit cards.
This means that the participation of banks in large scale NFC deployments in developed markets is essential to success.
Card issuers are not at threat of losing existing customers from the arrival of NFC services. But payments processors are.
Understanding of the full impact the arrival of NFC will have on the payments processing market is still in its early stages but it is already clear that the impact will be substantial and that there is the potential for NFC to bring about a radical redesign of the current payments processing infrastructure.
This potential for a radical redesign creates a major threat to the current players in the payments processing market — and creates major opportunities for new businesses who enter the market.
This may create an opportunity for smaller and innovative banks without a payments processing arm to win new customers by becoming the first to offer on-handset NFC payments to consumers.
Consumers will also expect to be able to use their NFC phones to make payments at a wide variety of merchants but, to date, persuading merchants to switch to the contactless terminals required to process NFC transactions has not proved easy.
There are a number of ways, however, in which NFC can be used to provide merchants with solutions to core issues that they face, particularly in terms of bridging the gap between their online and offline operations and in driving repeat visits to both high street and online stores.
Contactless POS terminals, however, are not essential for merchants to gain these benefits — low-cost NFC read/write devices can achieve the same goals.
In the long term, products and services will be needed that provide a win-win-win scenario for consumers, for financial services providers and for merchants.
These products will allow mobile consumers to use their phone to make payments in whatever way they prefer, enabling them to choose between funds they have set aside in advance (stored value), funds they currently have available (debit products) or from funds they expect to receive in the future (credit account or loan).
In urban areas, partnering with a single local mass transit operator can deliver the same benefits as bringing hundreds of merchants on board — more swiftly and, potentially, more cost effectively.
“Without ways to use an NFC phone, consumers won’t adopt the technology,” Ms. Clark said. “That means brands and retailers are absolutely critical to the success of any commercial NFC deployment.
“Merchants in particular should expect to be treated as valued partners by companies looking to bring NFC to market, not simply as sources of transaction fees,” she said.