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Who owns the paying mobile consumer: carriers or handset-makers?

The battle between Research In Motion and wireless carriers over mobile-payment data is a precursor to a larger war over who owns consumers making transactions using mobile devices.

United States carriers assumed continued ownership of their subscribers with the announcement of Isis, their bid to create a standard for enabling contactless payments and marketing at retailers’ point of sale via Near Field Communication. Now RIM and other handset manufacturers are exploring alternatives to that model, and the equation gets even more complicated when factoring in payment franchises such as Visa, MasterCard and American Express.

“Technically, RIM and Apple cannot preclude the SIM card solution proposed by the U.S. carriers through the Isis joint venture, and the carriers can’t preclude RIM from developing a mobile OS solution,” said David Schropfer, author of “The Smartphone Wallet,” Red Bank, NJ.

“From a consumer perspective, a smartphone connected to a mobile network will have more features—like loyalty program integration), and offer a higher degree of control for the consumer, than an application that relies on the NFC connection to the retailer during a transaction,” he said.

“The biggest question is whether or not the consumer will have access to those products in the future, or if efforts to bring these products to market will be derailed by the incumbents.”

Who will brand the mobile wallet?
The gist of the debate between BlackBerry-maker RIM and the carriers is whether data related to mobile payments will sit on wireless devices’ SIM cards, thus keeping the control with the carriers, or whether the handset-makers can build payment credentials directly into handsets, potentially doing an end-run around the carriers.

The argument boils down to who owns the customers using a mobile wallet and who gets a cut of the revenue—and how much of a cut.

RIM and other handset manufacturers would prefer to partner with financial institutions directly.

BlackBerry devices set to launch later this year will reportedly have NFC chips embedded in them, as does Google’s Nexus S Android smartphone.

Speculation has been rampant as to whether or not Apple will support NFC with the release of the iPhone 5.
The assumption was that when NFC was brought to market, carriers would control the SIM cards, a single-wire protocol with an NFC antenna directly connected to the secure elements in the device, per Yankee Group.

“That was the traditional model—the assumption was that with NFC, the final say of which credentials go onto the mobile phone would be controlled by the carriers, which is why they thought they could shut out Visa and MasterCard with Isis,” said Nick Holland, senior analyst at Yankee Group, Boston.

Inside Secure is an example of a company that sells chipsets that allow operating systems on mobile devices to access not just one secure element, but many.

Mr. Holland said that it does not have to be just the SIM now that is dictated by the wireless carrier—there can be an additional secure element on top of the SIM that companies such as Gemalto supply.

The key takeaway: Whoever owns the secure element, owns the transactions.

“Maybe six months ago the only option for Visa or MasterCard would have been an NFC sticker, but now they have the potential to completely bypass the carriers by partnering with the OEMs or creating an SD Microcard they put out themselves,” Mr. Holland said. “RIM is doing this, and I would expect others to follow suit.

“Carriers want the potential for everybody to access the secure element, but it is going to be messy, especially in the U.S., where the carriers pretty much dictate which handsets are on their networks,” he said. “Is AT&T going to say, ‘no, I’m not going to stock the new iPhone, thank you very much’?

The real value proposition for NFC is it being really simple to use, and if there are multiple secure elements on a device, that is adding additional dimensions of complexity for consumers.

This fight is over who owns the secure element, which could somewhat disrupt the usability of these handsets, per Yankee Group.

Mr. Holland believes that there will be less of a monopoly in terms of who owns the secure element going forward. That will lead to competition for carrier initiatives such as Isis.

“Isis has a real problem on its hands now,” Mr. Holldand said. “The carriers assumed that they would own the handsets and the SIM, and therefore said ‘We will own the transaction and we can shut out Visa and MasterCard.’

“However, if you are Visa, you probably don’t want to put out an SD Microcard on your own—it would be much easier to rent space on the SIM,” he said. “Isis may have to play nice and let Visa and MasterCard rent space on the SIM and process transactions.

“This is going to be really hotly fought over.”

Gartner’s take
Mobile Commerce Daily’s Dan Butcher interviewed Sandy Shen, China-based research director at Gartner. Here is what she had to say:

What is at stake in the argument about where sensitive financial data should reside?
It is about who has the control. If it sits on the SIM card, then carriers can control the user relations and the deals with other service providers, e.g. banks, transportation providers, airlines, etc.

If it sits on the embedded chip, then anyone that has access to the chip can manage the apps and relations, so it can be the device manufacturer, the carrier or a third party. No difference on security, as they are all smartcards.

What barriers remain to mobile wallets achieving mass-market adoption in North America? How far out is a mass deployment?
Banks and carriers need to agree on the common technology – whether to use SIM, embedded chip or SD card – and business model – how to share the revenues, and what’s the responsibilities.

Currently there is few common ground between the two camps, and each is running on their own tracks. We expect less than 10 percent of the mobile users in mature markets will be actively using NFC payment by 2015. So still a long way to go.

How would widespread mobile wallet usage change the game for OEMs, carriers and retailers/merchants?
For OEMs, it is a new feature to include if they only focus on the hardware business. Of course, they can also be a service provider if they branch in that direction.

For carriers, they hope to retain users by binding the banking relations to the SIM card, and other apps such as mileage card, loyalty card and transit card.

The more relations you have on the SIM, the harder to churn.

For retailers, they could see speedy transactions at POS, and can push coupons/vouchers at POS based on the consumption pattern so to increase loyalty.

Since the market is not decided as to which option to use – SIM, embedded or SD, many device vendors will offer more than one option so that service providers can choose the one they want.

Nexus S, for example, supports both embedded and SIM. Nokia has both the embedded and SIM models, thought not in the same device.

At the end of the day, not all device vendors want to get into the service provider’s role, especially when the business case of NFC is far from proven, and even carriers don’t know how much they can make out of the business.

Final Take
Emily Nagle Green, president and CEO of Yankee Group