Proximity Mobile Payments: Leveraging NFC and the Contactless Financial Payments Infrastructure

"The convergence of payments and mobile communications is not just logical--it is inevitable." In March 2007, John Philip Coghlan, then CEO of Visa USA, made this announcement at the CTIA Wireless Conference. Yet only a few years ago, people were still saying, "Some day, we will pay using mobile phones." The Smart Card Alliance and related industry groups representing financial institutions, merchants, and mobile operators have talked and written about "some day" for almost a decade. But now, virtually every industry group involved in the transaction chain is investigating the use of mobile payments. And mobile payment will soon be a standard transaction method for payment in many North American merchant locations.

What has happened to move mobile payments from "some day" to "inevitable?"

Contactless payment adoption by payment brands, issuers and consumers . American Express, Discover Network, MasterCard, and Visa have issued contactless payment cards and devices based on a single standard. These contactless payment products (ExpressPay(TM) from American Express, Discover ® Network Zip SM , MasterCard ® PayPass (TM) and Visa payWave(TM)) have shown both merchants and consumers the benefits of contactless payments. Consumers enjoy increased security, speed, and ease-of-use.
Contactless payment acceptance by merchants. Merchants have seen the benefits of faster transaction time, increased spending and increased customer loyalty. Plus, transactions using contactless cards and devices are processed through a single, contactless-enabled point-of-sale (POS) system and through the existing financial networks, encouraging merchant adoption.
Mobile phone ubiquity. Mobile phone subscribers don't leave home without their phones. In addition, near field communication (NFC) technology has established communication standards that can facilitate a simplified and robust implementation of contactless payments using the mobile device. NFC, a short-range, standards-based wireless connectivity technology, will soon be available as standard functionality in most mobile phones. NFC will allow consumers to perform safe, contactless transactions, access digital content, and connect electronic devices simply. An NFC chip in a mobile device can act as a card and/or a reader - enabling consumer devices to connect, receive and share information, content and data, in addition to making secure payments quickly.
Expanded mobile functionality. The mobile device can deliver a variety of payment and payment-related services. The mobile device is a powerful new tool that can enable proximity mobile payments, remote payments through the mobile Internet or text messaging, and person-to-person money transfers. Value-added applications can enrich the purchase experience and include account management, banking, offers, and security applications.

What would drive a consumer to adopt and use mobile payments? The answer may be expanded payment functionality, increased convenience, enhanced security, and faster transactions.

The debate about who is going to build and deploy the infrastructure for mobile commerce has gone on for years. Some argued that the mobile operator would take on the payment process; others, that the financial institutions would deploy readers, software, and the necessary technologies. With the introduction of contactless financial payment cards and NFC-enabled phones, however, the debate is getting more interesting.

Proximity Mobile Payments

Proximity mobile payments leverage the financial industry's payment infrastructure. An NFC-enabled phone is provisioned with a version of the payment application (i.e., credit or debit card) issued by the consumer's financial institution. The application and payment account information are encrypted and loaded into a secure area in the phone. The phone uses the built-in NFC technology to communicate with the merchant's contactless payment-capable POS system, similar to the contactless payment cards and devices in use today. The payment and settlement processes are the same processes used when the consumer pays with a traditional contactless or magnetic stripe credit or debit payment card.

Proximity mobile payments can be made at both attended POS locations (such as stores) and unattended locations (such as vending machines) that use the existing merchant payments infrastructure. To pay, the consumer simply brings the phone to within a few inches of a contactless-payment-capable POS system and the transaction occurs. The process is the same as that used by the contactless credit and debit cards currently being deployed in the United States.

Implementing proximity mobile payment is complicated by the number of stakeholders (shown in the figure to the right) that are involved in establishing the eco-system. Consumers, merchants, payment brands, issuing banks, mobile operators, mobile handset manufacturers and other application and service providers must cooperate to deploy a fully functioning system that delivers benefits to all parties.

Current Proximity Mobile Payment Programs

Mobile payment programs have been running successfully for over a year throughout the world, in Hong Kong, Korea, Taiwan, Japan, Malaysia, France and the Netherlands. Some programs are led by mobile operators; others, by financial groups. Still others are run jointly by operators and banks.

Recent examples of North American proximity mobile payment programs include the following:

In June 2007, Visa and Wells Fargo announced the launch of an extensive mobile pilot to test consumer mobile payments and services using mobile devices equipped with NFC technology. The pilot will test secure, over-the-air delivery of payment account information to the mobile device, mobile payments in stores and restaurants accepting Visa payWave technology, receiving and redeeming mobile coupons, and account management services.
In June 2007, Cellular South announced the launch of the first-ever consumer trial of its WirelessWallet service based on the Kyocera biometric NFC phone and ViVOtech wallet software. This service allowed consumers to open their mobile wallets on NFC mobile phones using their fingerprint.
In March 2007, MasterCard and Mobile Candy Dish launched a pilot in Chicago to enable consumers to advance order movie tickets and to purchase concessions in real-time using an NFC phone. Consumers can also get directions, maps and a list of nearby points of interest including restaurants, shopping malls, and gas stations.
In February 2007, Discover Financial Services and Motorola Inc. launched a mobile payment and account management trial that enabled participants to check their Discover Card account balances, review payment history, and make purchases using their mobile phones in place of the traditional plastic credit card.
In January 2007, HSBC launched a mobile phone payment pilot in partnership with MasterCard and ViVOtech. Using a simple OTA personalization process, participants in New York, Chicago, and several other large U.S. cities loaded their HSBC credit cards onto their mobile phones. Participants are able to use their NFC phones at thousands of PayPass-enabled merchant locations nationwide. Recently, HSBC has extended the pilot to allow its debit cards to be downloaded onto NFC mobile phones, resulting in the first multi-card NFC mobile phone pilot.
In December 2006, Citigroup, MasterCard, Cingular, and Nokia announced a team effort to pilot next-generation mobile phones using NFC technology with "Tap & Go(TM)" capabilities in New York City, using software and services provided by Giesecke & Devrient and ViVOtech.
In November 2006 , MasterCard Worldwide announced a market trial of the use of NFC-enabled mobile phones for "Tap & Go" payment in partnership with Nokia, 7-Eleven, Inc. and Peoples Bank of Paris, Texas.
In December 2005, Visa participated in a first-of-its-kind NFC trial for mobile phone proximity payment and content downloads in the Philips Arena in Atlanta, working with Philips Semiconductor (NXP), Nokia, Cingular, Chase and ViVOtech.

Since the fall of 2006, initiatives related to developing, testing, piloting, or building proximity mobile payment programs have been announced virtually every week. Many stakeholder industry groups are working toward making mobile payments a reality, including:

Global Platform
MOBEY Forum
Mobile Payment Forum

Expectations for Proximity Mobile Payment Deployment

The argument for mobile payments for all stakeholders is compelling. As illustrated above, stakeholders in North America have demonstrated interest in deploying mobile payments and are now actively implementing pilots. To date, however, mobile payment applications have been viewed as providing a competitive differentiator, so are being implemented among specific partners and not in a way that promotes interoperability across the industry.

There are clear benefits for the key stakeholders in offering mobile payment applications.

Mobile operators can:

Attract new customers.
Reduce customer turnover by offering new value-added services.
Add revenues from data services related to payment.
Encourage consumers to upgrade to more feature-rich NFC-enabled mobile phones.

Financial services providers can:

Reach new customers and offer new, differentiated payment services to existing customers
Increase credit and debit card transaction volume from replacing cash sales.

Merchants can:

Increase the number of customers making contactless payment transactions.
Speed transactions for customers using mobile handsets.
Improve customer convenience and loyalty

However, viable business models must emerge to encourage cooperation across a complex ecosystem. Mobile payment implementation at the physical POS is complex and requires a solid business case and value to be delivered to all stakeholders. Mobile payment requires the deployment of new technology to consumers, merchants, mobile operators and the financial community. New business partnerships must be formed among mobile operators, financial service providers, and mobile device manufacturers. The new services must be presented to consumers and merchants in a way that drives adoption of the new services, while enhancing security and usability. Overcoming these challenges while still delivering benefits to all stakeholders is the key to driving mobile payment implementations successfully.

An open platform is also necessary to make mobile payment adoption feasible. The successful implementation of proximity mobile payment is dependent on the industry moving to an "open platform" that makes the payment wallet available to multiple financial institutions, mobile operators, handset manufacturers and contactless readers. This openness is essential in providing the consumer with flexibility and choice in both the handset and payment card to be used. An open system will speed implementation, reduce the need for single operator/one issuer projects, and allow global replication of proximity mobile payment.

The combination of contactless financial payments and NFC technology offers opportunities for convergence. In North America, the current convergence of contactless payment adoption by consumers and merchants, financial industry promotion and support for a standards-based approach to contactless payments using traditional credit and debit cards, and new NFC-enabled mobile devices that are compatible with financial payment standards is driving increased interest in mobile payments and pilot implementations. This convergence provides opportunities for the mobile and financial industries to overcome the challenges to deploying mobile payment at the physical POS and to make mobile payment a reality that delivers compelling benefits to consumers and business stakeholders alike.

About this Article

This article is an extract from the new white paper, Proximity Mobile Payments: Leveraging NFC and the Contactless Financial Payments Infrastructure,developed by the Smart Card Alliance Contactless Payments Council. The full white paper describes what is necessary to implement and deploy proximity mobile payment systems, discusses the relevant technical and business issues from the perspective of the various stakeholders (e.g., mobile operators, the financial industry, end-users, providers and vendors), and outlines the potential opportunities and barriers that may impact its market adoption. It is available from the Smart Card Alliance web site, at no charge.

About the Smart Card Alliance Contactless Payments Council

The Contactless Payments Council is one of several Smart Card Alliance technology and industry councils. The Contactless Payments Council was formed to focus on facilitating the adoption of contactless payments in the U.S. through education programs for consumers, merchants and issuers. The group is bringing together financial payments industry leaders, merchants and suppliers. The Council's primary goal is to inform and educate the market about the value of contactless payment and work to address misconceptions about the capabilities and security of contactless technology. Council participation is open to any Smart Card Alliance member who wishes to contribute to the Council projects.