Have NFC payments reached tipping point?

A reported partnership between several major cellular phone carriers to implement contactless mobile phone payments at the POS is being hailed by some as the long-awaited breakthrough that will finally drive near field communication (NFC)-enabled smart phone payments into the mainstream.

Recently, news outlets reported that Verizon Wireless, AT&T Inc. and T-Mobile USA joined forces for a smart phone program that enables NFC payments at the POS. The carriers are apparently working with Discover Financial Services and U.K.-based global financial service provider Barclays PLC to pilot the system in a handful of U.S. cities.

Discover and the mobile carriers reportedly involved have all declined public comment, and few details about the purported venture have been revealed. A Bloomberg.com article relied on three unidentified insiders as sources for the news. But analysts say the project could be a landmark for NFC payments, which have largely failed to take hold despite the widely held anticipation that they'd storm the U.S. market.

"While this will be a pilot initially, the fact that Verizon and T-Mobile are jointly engaged makes all the difference," said George Peabody, Director of the Emerging Technology Advisory Service for Mercator Advisory Group. "Now we just have to see what Apple's role will be, given the patent applications it has filed for point of sale merchandising and payments.

"This is the tipping point for NFC payments, and it is a direct challenge to other card networks."

A rocky history

Yet the history of alternative payment projects involving mobile phones at the POS suggests that any wide-scale rollout of NFC faces considerable obstacles. Conrad Sheehan, founder and Chief Executive Officer of mobile and alternative solutions provider mPayy Inc., said there is a parallel between this latest partnership among mobile carriers and a failed consortium in Europe known as SimPay.

Although that project, which started in 2003 and was shut down in 2005, did not revolve around NFC, it did involve a similar partnership between large mobile carriers – T-Mobile, Orange (owned by France Telecom SA) and Vodafone Group PLC – that were pushing an alternative payment plan. In this case, consumers could charge POS payments to their cell phone bill rather than pay the merchant up front.

The plug was pulled on SimPay after one of its founding members dropped out in 2005, and Sheehan said the forsaken project exemplified the difficulties of putting together large consortiums that push alternative payments.

According to Sheehan, broad merchant adoption requires a payment acceptance alternative that's more lucrative than the status quo; but offering a service that's both cheap for merchants and profitable to the array of different players behind it can be tricky and complex to implement.

"It always goes back to the trillion-dollar gorilla in the room, which is the merchant," Sheehan said. "It isn't clear to me how, precisely, this is going to work. Merchants will be reluctant to do anything if it's just AT&T and Verizon earning a ton instead of [card issuers] earning a ton. Merchants aren't going to care and acquirers aren't going to care. They're both going to say, 'What's in it for me?'

"There's a bunch of devils in the details here. Even with half the number of participants, it would still be very complicated. And given the size of these different entities involved, who's gonna give? My perspective is, given the size of the parties involved, it's unlikely you're going to be able to really move the needle on the economics, and we'll chalk it up to one more NFC pilot they've tried. And there have been pilots all over the place."

Tech already in place

However, according to Mohammad Kahn, President and founder of NFC technology firm ViVotech Inc., the consortium project will be simplified by the fact that the groundwork allowing NFC to take off is already in place.

He said NFC acceptance technology is installed and ready for use at the stores of a number of major U.S. retailers – Wal-Mart Stores Inc., Target Corp., Home Depot U.S.A. Inc., Jack in the Box Inc. and McDonald's Corp. among them – and that the entry of mobile giants into the mix will finally cause the NFC dam to burst.

"If this news is true, I think it's a major deal for NFC, because it shows that the [cellular phone] operators are able to see where NFC could help grow their business," Kahn said. "Number two, it shows that NFC is becoming real, and that it is finally going to go commercial very soon – in months. I believe that the year 2011 will be the launching year for NFC in a big way."

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