Research Notes

NFC – Operators will probably pay banks and credit card companies to get their credit cards embedded in mobile phones

A number of people in the business are talking about which role mobile operators will play when mobile phones start supporting NFC, making it possible to embed bank cards, credit cards and other types of payment cards in mobile phones. When we read articles about this subject in the media, it is very obvious to us that a great many people have an extremely unrealistic view about this new area of the mobile industry.

Let us start by making one thing very clear – the new mobile phones that support NFC and that will launch early in 2011 do not support the single wire protocol, which means they do not have the necessary security functionality that will enable them to be used for carrying and handling bank and credit card data.

Later in the year there will be mobile phones that support the single wire protocol, but the big questions are which role mobile operators will then play on this market, how much they can earn by selling mobile phones that support NFC to their customers and what future business models will look like in this area?

Strand Consult has been closely monitoring NFC and we have published a number of reports that describe this area and its current standards. We have examined the ambitions that the GSMA has on behalf of the industry and made good use of our many years of experience from the financial sector to deduct what we believe will happen in this area in the short and medium term.

Our conclusion is very clear and it is clear to us that many operators around the world currently have a totally unrealistic view about this business area and how it is developing. Quite simply one could say that the various market players in the mobile value chain have little or no understanding about the companies doing business in the credit card and payments sector.

There are mobile operators in a number of countries that are currently dreaming about using the combination of NFC and SIM cards to create a new position for themselves on the traditional credit card payment value chain and thereby ensure that they receive a share of the revenue being generated by credit cards today.

Our research concludes that while operators may have large ambitions about the payment market, they are completely overlooking two factors that will have a great deal of influence on their business case; the cost effectiveness of the traditional payment value chain and the ability of operators to simplify or add value to that value chain by making it even more cost efficient. In our opinion, operators have very little chance of improving the current cost effectiveness of the traditional payment value chain.

The companies that issue credit cards (Visa, MasterCard and banks) are sitting very heavily on this market and are having difficulty seeing the advantage of moving a plastic card onto a mobile phone. The largest single added value factor of moving a credit card onto a mobile phone is the convenience for the end user.

But we believe when people examine or describe this market and the possibility of NFC-based payment cards that reside on a mobile phone, they are overlooking a number of important factors:

1. When you move credit card information from a piece of plastic over to a mobile phone, you are not making the plastic card obsolete. It will take a long time before all point of sales have NFC terminals, which will mean that mobile phones will not replace plastic credit cards in the near future.

2. For security reasons NFC payments will primarily be used for smaller payments, for example payments up to a limit of probably around 50 euro.

3. The logistical savings of having credit card information on mobile phones will therefore be marginal, as customers will still need their plastic cards as a supplement for larger payments or when there is no NFC terminal.

4. Banks and credit card companies are currently unlikely to share revenue from transactions with mobile operators, as they are having difficulty seeing where the mobile operators are actually adding value to their business.

5. It is unlikely that retailers will want to pay more per transaction than they are already doing, as they are also having difficulty in seeing how mobile operators are adding value to their business.

6. It is unlikely that customers will be willing to pay any significant amount per transaction just for having their bank card or credit card residing on their mobile phone.

This leaves us with a number of operators that believe they are entitled to a central role in this area, but where we are having difficulty seeing how they intend to add value that the various parties involved would be willing to pay for?

One very interesting question is whether mobile operators might be willing to actually pay banks and credit card companies to embed their credit cards on mobile phones, to thereby create a business area for the mobile operators? We believe the answer to that question is a big YES!

It is a fact that mobile operators are primarily battling two high cost areas; high churn (customers cancelling subscriptions) and customers with multiple SIM cards, who switch SIM cards in their mobile phone depending on who they are calling and which network they are calling to.

It is difficult for ordinary people to understand the size of these two cost areas and that even slight improvements in these areas can very quickly significantly improve a mobile operator’s margins and earnings.

We believe that some of the above costs can be minimised by merging the SIM card and bank/credit card and furthermore that the savings will be so substantial, that many mobile operators will find it financially attractive to offer banks and credit card companies to handle NFC payments on their mobile phones at no charge – or even pay their financial partners to have NFC payments on their mobile phones.

If you would like to learn more about this business area, the underlying business models and the information and analyses we have gathered about this topic, please do not hesitate to contact us so you can improve your knowledge about the NFC credit card market. With our information and knowledge you can form a realistic outlook and strategy about this market and how it will develop.

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