For One Swallow Does Not Make a Spring

On Tuesday, Samsung and Google announced the Nexus S, with NFC. The payment technology industry, gathered in Paris for the CARTES & IDentification 2010 conference will no doubt rejoice, yet needs to rise to the occasion.

For the past couple of year or so, many a payment technology exec has been disappointed by the rate of adoption of new technology: cards with display to secure online shopping, contactless devices of every size and shape, end-to-end transaction encrypting devices, secure elements… so many things tried, so little uptake from traditional clients, possibly with the exception contactless cards and stickers.

To appreciate the frustration one can witness the flow of rumors that would have a genie-like savior coming from Silicon Valley to re-ignite payment innovation:

 
1. April 2010: Apple patents related to NFC, including payments and ticketing.

 
 

2. May 2010: Bloomberg reports Apple could be acquiring Vivotech.

 
 

3. August 2010: Apple hires Benjamin Vigier as product manager for mobile commerce

 
 

4. November 2010: Apple and Google Rumored to consider the acquisition of Boku

 

Clearly none of these came true, and ironically if one followed the logic of the exuberant industry reporters, Apple should have removable batteries in their phone (there is a patent for that); Apple should have acquired Sony (per the blogosphere circa October 2010); there soon will be some version of iWare (as in trench coats) since Apple hired a guru of wearable computers last march.

By no means am I picking on Apple. In many ways these amusing “news” are the best form of flattery and an illustration of the many things Apple has transformed in its wake.

Yet one has to acknowledge that the incumbent payment industry hasn’t done much to raise its game, in face of the rapid reinvention of eCommerce from “electronic-commerce” to “everything-commerce”.

It is clear that the original assumptions about NFC adoption — rapidly following that of contactless payments — were inaccurate. Were they wishful? Possibly, after all the last thing a card payment executive might wants is a world without cards. In the light of two major events that occur in the last month, the Nexus S may very well be a turning point for the technology: Google would appear very serious about Local+Mobile (if the reports of an attempt to acquire Groupon were true) and clearly highlights service discovery potential in the YouTube video accompanying the Nexus S announcement. Furthermore, the Nexus S is perfect to support the launch of ISIS and in turn may finally convince Apple to include NFC in the iPhone in face of demand from AT&T & Verizon. The Google-Apple tandem locked in competition for developers are bound to fuel NFC-enabled innovations.

But the implications for the technology industry are not necessarily all milk and honey: More chips will be sold no doubt, but the majority of the value created could end up residing with the providers of NFC enabled services. If they believe we are now witnessing the tipping point for NFC, technology providers beholden to the card format must rapidly devise strategies to create and capture the value created by new proximity enabled commercial services.

 I have been pondering this situation for a number of months, and will again in the near future question captains of the industry about the following:

 
1. As demonstrated clearly by Clayton Christensen, incumbents rarely have a reason to nurture a disruptive technology, and disruptive NFC is. The NFC ecosystem will develop because of new entrants in the commerce chain: transit, telecom operators, payment networks from emerging countries, merchant coalitions, marketing platform providers; all of which have good business model reasons to adopt NFC. The wave of optimism around NFC will fuel these changes.

 
 

2. There are still many other alternatives to NFC (such as 2D bar codes, Bump or variations of Bluetooth), and the industry champions must redouble their efforts to demonstrate the superiority of NFC for proximity transactions. I believe a case can be made due  to the simplicity of the experience, the speed of the transaction and the security of the exchange. However, more needs to be done to enhance the economics, simplify the lifecycle and in general standardize and de-risk the solutions. Google is offering an extraordinary opportunity to do so.

 
 

3. In conversation with business leaders of retailers, I have found that much confusion still remains about NFC vs. contactless, and the spectrum of applications that they enable. The industry should think of this as an opportunity to develop services — rather than technology — that leverages NFC and lets them share in the value created.

 
 

4. Nonetheless, in spite of the attention NFC is receiving it is but part of the solution that delivers value to the consumer, who ultimately is going to choose which delivery method best fit her lifestyle. As seen in Japan, to maximize reach and benefit to the consumers and merchants, one must support multiple proximity technology for the delivery of commerce 2.0 services. Hence in a fully connected world, NFC cannot be predicated on a client-heavy architecture, which precludes other technologies at the point of interaction, and the most valuable approaches will include a consumer wallet in the cloud. Providers with end-to-end platforms will have opportunities to shine in that context.

 
 

5. Incumbent payment services will soon do what every champion in a changing market does: go on an acquiring spree to catch up, bring new blood and diversify the business. Owners of service technologies that could apply to mobile payments could package them for sale as valuation will no doubt explode.

 

NFC, just like mag stripe is about far more than payment (see PYMNTS article: NFC; Past, Present and Future). It is also far more than chips and TSMs. Just has accelerometers and GPS sensors fueled countless novel ideas (starting with the iPhone Laser Saber app), NFC should fuel an outcrop of new use cases. Now is the time for the Nokias, NXP, Inside, and Gemaltos of this world to lead, by feeding the emerging ecosystem and supporting the developers and innovators.

Patrick Gauthier, is a payment industry executive with 20 years of experience in developing, selling and deploying around the world, new technologies for payment and commerce. Patrick is currently Head of Market Intelligence at PayPal. The views expressed in this column are that of the author only and do not necessarily reflect that of PayPal or EBay Inc. Patrick can be reached via LinkedIn (http://www.linkedin.com/in/prxgauthier) or Twitter (PRGauthier).