By Shadoe Huard

May 26th 2011

More Square Than NFC   

It was only a matter of time, but Google finally made the first move in the digital wallet arena, announcing Google Wallet, a new service adopting Near Field Communication technology to enable Android users to make contactless payments for all sorts of transactions. Along with the help of MasterCard, Sprint and CitiBank, Google is looking to redefine the point of sale experience for both consumers and business owners. For the sake of maintaining their aura of openess, Google announced they would be making Google Wallet available beyond just Android devices, presumably through an app. It’s astonishing, given how implausible, they even bothered making such an empty statement.

Today’s news is only going to push rumors of when we might see Apple’s NFC implementation in the iPhone. As one of the more popular rumors floating around for the last little while, we’re to hear even more from speculators and analysts on when we may see an NFC equipped iOS device. Rather than wondering when, we might be better served wondering whether Apple is even interested in the technology.

Before we get ahead of ourselves however, let’s use some numbers to try and obtain some perspective on the state of contactless payments as they stand today.

From the consumer’s end

As of the end of 2010, there were approximately 88 million MasterCard PayPass (RFID) enabled credit cards, out of 975 million total cards in circulation. This amounts to roughly 9% of total cards.

Visa boasts a total card circulation twice the size of Mastercard, with around 1.9 billion cards. Finding statistics on the number of cards with Visa’s version of PayPass, called payWave, was a bit tougher. For the sake of argument, let’s say it’s around the same percentage as MasterCard, around 9% , about 171 million cards. 1

The 2009 Boston Federal Reserve Survey of Consumer Payment Choices seem to corroborate these percentages. Their study found that while 24% of U.S. Consumers owned a contactless payment device, only 9% of those were linked to a credit card account.

From the vendor’s end

The statistics don’t seem to quite matchup in this instance, but it’s worth looking at them anyway. MasterCard claims there have 276 ooo Paypass locations worldwide. Meanwhile, David Eads from Kony Solutions estimates in an interview with CNET that there are 750 000 NFC enabled terminals in the U.S, alone. He clarifies that the number represents about 1% of total sales terminals in the country.

Concerning the number of transactions, the SCPC study found that about 3% of transactions carried out in 2009 were done using a mobile device. 1.3% of payments were made through NFC enabled devices.

Getting an idea of the numbers is important because there’s just too much PR fluff going on. When taking stock of Google’s announcement today, it’s good to keep in mind that relative to the entire industry, the lofty figures they throw around is but a small drop in an enormous bucket.

Despite the relatively small figures, there is still lots of money to be made, which is why Google and it’s partners are pushing hard for the transition to NFC payments. Specifically, they are after a chunk of interchange revenues, consisting of fees collected by banks and third parties for actually processing your credit card transactions when you shop. 2 From the same CNET report:

“Electronic payments in the U.S., according to the Federal Reserve was $40 trillion in 2010,” David Eads, who leads product marketing for Kony Solutions told CNET. “So for every 1 percent of mobile payment adoption that happens of that number, that’s $407 billion in transactions.” Eads, who has a background in the mobile payments industry, founded the mobile consultancy Mobile Strategy Partners and held positions at mFoundry and Tealeaf Technology. He explained that the big ticket item in that magic $407 billion number was the “interchange” revenue, which is where various parties get a cut from fees. That can run anywhere from $4 billion to 6 billion on each $407 billion chunk. It also makes things more competitive among the various parties that take fees, since retailers can choose the card or payment provider they want to support.”

NFC solutions are desirable to banks and credit card companies because they are an evolution of a their current business model. A chip replaces a card, but the transaction is still done over a custom POS terminal, where various interchange fees can be collected. They are the ones who stand to gain most from NFC technologies; it’s a reason to charge more money. Obviously, Google wants in on this action. And while their presentation seemed to paint a bright and rosy picture for the future of NFC payments, there are quite a few unresolved issues to deal with. Biggest of all is that the technology isn’t particularly attractive to merchants.

Businesses, especially big chains, are notoriously slow to make any sort of technological change. Any potential changes are bound to be carefully considered and planned well ahead of time. Hence why Google wallet is only starting with a field test in San Fransisco and New York. I don’t think their official launch in the summer is going to be much bigger.

There is some upside for retailers to transition to contactless payments. MasterCard claims that clients with PayPass cards used their cards 27% more frequently than clients with regular cards. There is also the speed and ease of mobile payments. Time is always money in the business world. Finally, as demonstrated by Google, there’s a large potential for the creation of apps that can deliver context based advertisements and deals directly to consumers. All good things for retailers.

The flip side is that there is no pressing reason for merchants to jump onto the NFC bandwagon. With few NFC enabled phones actually out in the market ( I can only think of the Nexus S), there’s not much incentive to make the upgrade immediately, especially taking into consideration the extremely low percentage of sales actually made by NFC payments. It’s a sort of catch-22; that one percent figure is only going to go up if merchants adopt the technology and phones are made available, but they themselves aren’t likely to make a move unless they see that figure rise first. The costs involved in the transition to contactless payments is also something businesses are taking stock of. Even more than just the cost of upgrading or installing new point of sale terminals, the emergence of a whole new slew of players in the interchange fees game might be off-putting. As the ones ultimately footing the bill for those fees, the costs involved are an essential factor. It’s yet unclear how much Google and it’s partners is going to charge for their services, but it stands to reason that costs are probably not going down. If Apple or other companies also get into NFC payments, we’re likely going to see a fragmentation of the market as retailers pick and choose which services to offer.

This is without delving into issues relating to security. The jury is still out. Banks and credit card companies will obviously claim NFC payments are secure, but there isn’t any real hard data to test to. Swiping account numbers and personal data from physical cards is a more labor, time and skill intensive endeavor for potential criminals than something requiring only a few software hacks. 3 This is a problem all mobile payment systems are going to face, not only NFC technology.

Google doesn’t seem concerned with those issues. Beta services are in their DNA. Their philosophy is to just engineer issues away as they arrise. Which brings us to Apple. What might their move be?

Unlike Google, Apple is going to survey the wireless payment landscape before making any decisions. Like any other emerging technology, Apple is never in a rush to jump into any beds unless it has a clear reason to do so. It’s almost certain they will make a move with mobile payments, but it may not necessarily be with NFC technology. Yes, Apple is researching the technology, they’d be remiss not to. That doesn’t guarantee that your next iPhone is going to have an NFC chip in it.

Apple is going to want two things with any mobile or contactless payment system they decide to implement in their devices:

- Curatorial control over the design and delivery methods of any payment or virtual storefront applications. User experience is sure to be primordial.

- A cut of potential profits that corporate partners are likely to find onerous.

Apple is always going to negotiate for these two points, their argument being that they believe no one else can match the popularity, awareness and technical superiority of the iOS platform. With so many people involved in processing an NFC transaction 4, it’s possible Apple sees they won’t be able to negotiate favorable terms for themselves with everyone and that they’d rather not bother with all the bureaucratic hurdles.

Technical factors is also something to take into consideration. Fitting an NFC chip into the internals of their iOS devices, however small, might be something they’d rather avoid, given the limited space. And given Steve Jobs penchant for simple and elegant hardware solutions, it’s possible he may just not like the whole process of an NFC transaction.

So where else could Apple be considering? One option might be to forgo NFC chips altogether and use third party apps that deliver software solutions over a wireless network. Such an example is Square, an application which transforms an iOS device into a portable POS terminal and inventory manager that can deliver a wide range of services. Using a proprietary card reader, which plugs into a headphone jack, business owners can carry out credit card transactions simply and effortlessly. Furthermore, Square recently announced the introduction of Card Case, a customer application that allows businesses using Square as their POS terminals to send menus, advertisements and bills directly to customers using Card Case. One feature they announced, Tabs, allows customers to make payments directly over their phones at participating businesses, after making an initial physical credit card transaction. Your data is stored afterwards with the business and they simply bill you over the air subsequently.

Square is about redefining the entire Point of Sale experience, for both the consumer and the merchant. On their website, Square elaborates on the advantages their system provides to restaurants and small businesses. For them, it’s an easy,simple and affordable solution. Square charges one flat interchange rate and doesn’t require that the business owner meet a certain quota of sales or enter into a contract.

Some critics think that while Square’s solution works for the restaurant industry or small businesses, it doesn’t exactly scale up to large retail operations, where inventory and book keeping needs go beyond what Square can provide. While that may be true presently, it take a serious lack of foresight to be unable to imagine a similar solution at a larger scale. Apple stores already show this is possible. Apple specialists roam the salesfloor with customized iPhones that have bar code scanners and credit card swipers to process transactions anywhere in the store. It’s also not hard to imagine their new iPad sale displays being morphed into an app customers could access directly from from their iOS devices. You could imagine they could allow customers to make purchases directly from their iPhones, with an Apple employee bringing the merchandise right to them.

Following this chain of thought, it’s possible to imagine why Apple might prefer to emulate Square and offer their own App based POS solution rather than adopting the proposed NFC model. This option would definitely satisfy the two main criteria outlined above, concerning design control and profit share. They could develop their own POS application for both retailers and and consumers, where transactions could be handled simply through the credit card number stored in your iTunes account. Unlike Square’s tab system, no initial physical transaction would be required. Adopting this route eliminates the need for Apple to negotiate deals with banks and credit card emitters. They can simply charge businesses one flat fee, from which only they profit. 5 They could also sell customized iOS devices to larger businesses who need access to bar code scanners and have more complex logistical needs. It might be an extremely ambitious move, but it is still a plausible one.

Why might Apple prefer this route?

- They retain control over the whole experience.

- They provide the software and set the financial terms.

- No need to deal or negotiate with anyone else.

- No hardware restrictions. No need to build devices with NFC chips.

- Unlike NFC enabled devices, there is already an enormous iOS device install base.

That last point is one area where Apple could entice businesses in a way that Google Wallet can’t. There is already an established and global presence of iOS devices with iTunes accounts waiting for retailers to use. There is no need to wait and see how long it takes for NFC devices to become popular. Google doesn’t necessarily care about owning the whole experience. Their strength lies in advertising and reaping profits from those avenues. They are happy being just another middleman in the POS experience. However, Google Wallet’s success depends on a whole bunch of different factors, many of which they can’t really control. Dependent isn’t in Apple’s vocabulary.

Near Field Communication is a technology that, similar to Blu-Rays in the video industry, runs the risk of being leapfrogged by something more effective. NFC payments as currently imagined don’t benefit business or consumers so much as banks and advertisers. Which is why Google is so quick to get in the game. Mobile payments are the way forward, no doubt, but they are still a ways off. When Apple makes a move, and it probably won’t be soon, it’ll be because they are ready to make an impact. It’s entirely possible Apple will still adopt NFC for iOS devices and enter into some sort of partnership with major credit cards and banks, much in the same way Google has. Despite this, the trail being blazed by Square shouldn’t be discounted. Their approach is trying to enable an entirely new way for business and customers to interact with each through rich and feature filled software. It’s designed with the retailer and consumer in mind, not interchange fees.

So in trying to consider what Apple may do, think of what Google Wallet and Square are trying to accomplish. Compare them and ask yourself, which model seems more like something Apple would think of?


1. Visa doesn’t seem to really focus on payWave numbers in their press releases and media kits, at least from my own research. Generally, when companies don’t tout numbers, it’s because they aren’t that good. My 9% figure might be generous.

2. Which is part of at the reason why I think there isn’t so much talk about using NFC technology with debit cards. It probably isn’t as enticing since only really the banks are involved in the transactions.

3. There are so many ways it could be done. Off the top of my head: rerouting wireless transactions to another device. Or criminals could set up false “storefronts”, pretending to be the store customers are shopping at.

4. The only way vendors would accept to use NFC payments from various companies is if a multipurpose terminal is available for them to use. This would involve, at some level, negotiations between Google, Apple and any other mobile provider. It’s hard to imagine all of them coming to an agreement easily or amicably.

5. Obviously, Apple pays their own interchange fees when processing transactions from iTunes account. They can cover those costs through the fees they charge the business. The advantage for the business owner is that they only have to deal with one middle man, rather than several, something they would inevitably have to deal with using NFC terminals.

Posted at 7:53pm and tagged with: Square, NFC, apple, google, visa, mastercard, tech, one column,.