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Mobile:
ARCchart
Market Study March 2003
The days when a mobile phone was only capable of making phone calls are long gone. In many markets, the mobile phone is ubiquitous and is a constant companion, with only the wrist watch and the wallet being carried as often and as closely linked to the owner’s identity. As wrist watch sales suffer from displacement by mobile phones (which also have a clock function), so the handset industry is setting its sights on the functionality provided by the wallet; payment methods, identification documents and even transaction receipts are all up for grabs as the handset extends its capabilities well beyond telecommunications.
At the heart of these new capabilities are proximity payments. With proximity technology embedded, swiping a mobile phone across a reader turns it into a transactional tool, whether the transaction is a simple purchase of goods or the debit of a single-journey on a mass transit system. There are still technical and industry hurdles which must be overcome before handset proximity payments become a mass market reality, but in Japan phones equipped with FeliCa, the proximity platform backed by NTT DoCoMo and Sony, are already being used to conduct millions of transactions each day.
Any move towards increasing the proportion of electronic payments would be welcomed by the retail industry which estimates the cost of a $25 cash transaction to be as much as 60 cents. Tesco, the UK’s largest retailer, is considering ‘cashless stores’, where only electronic payment will be accepted, and users of American Express’ ExpressPay proximity system are exhibiting 30% higher spending activity than equivalent cashspending customers. French retailer, Groupe LaSer, has joined Orange and Philips in a proximity payment trial using Samsung handsets in North Western France.
This report examines the emergence of handset proximity payments and the impact this will have on the mobile industry. The report identifies the ecosystem of players, which includes the financial companies, network operators, handset vendors, technology companies and the various standards bodies. The handset proximity strategies of companies such as Visa, MasterCard, Nokia, NTT DoCoMo, Motorola and Samsung, are reviewed. While the financial companies are actively engaging the industry to drive the standards process forward, there are indications that operators are being less aggressive, probably because the value proposition for them is less clear.
Proximity (or ‘contactless’) payment and ticketing systems have been around for many years and the report examines several, including systems based on Philips’ MiFare, ExxonMobile’s Speedpass, MasterCard’s PayPass, Dexit in Canada and the Octopus mass transit proximity system in Hong Kong.
On a mobile phone, there are several wireless technologies or platforms which can deliver proximity functionality, including Infrared, Bluetooth and RFID. The report outlines the advantages and drawbacks of each approach, and profiles historic and ongoing deployments which leverage these technologies on a handset to deliver payment or ticketing services. Services from Mobiqa and O2’s Blue Zone are discussed, showing that primitive systems based around Infrared and even the venerable bar-code are demonstrating the benefits of all-electronic ticketing and payments, and the considerable revenue potential those benefits represent.
We conclude that NFC is the proximity technology most likely to be adopted in handsets, and a detailed case study is provided for Japan’s FeliCa (which is similar to NFC). However, while NFC enjoys industry support, there are several outstanding issues which must be resolved before it is ready for implementation on a mobile phone: these include the location of the secure micro-environment and specification of the service discovery protocols. There are also questions over who should act as the application signing authority: should it be the financial companies, the handset vendors, the operators or even the handset operating system provider (like Symbian or Microsoft)? These issues are explained in detail and ARCchart’s view on the likely outcomes is provided. If these issues are addressed, ARCchart forecast that NFC handset integration will grow from 6% in 2007 to 38% in 2011.
The report looks specifically at the benefits provided by a proximity payment system embedded into a mobile phone. We identify the concepts of Passive and Active handset integration, and the report explores how Active handset integration will give consumers an experience far richer than traditional, non-handset proximity payment systems currently deployed; allowing users to check their balances and top-up their accounts in real time, as well as more innovative uses, such as a MasterCard application on their handset automatically crediting their Air Miles application following a purchase. The report provides two case studies for deployments of proximity payment systems which have been fully implemented on mobile phones – EDY in Japan, and the trial underway in the French city of Cean, backed by Orange, France Telecom and Samsung.
For banks and credit card companies, the benefits of handset-based proximity payments are understood, and these companies have placed their weight behind NFC. However, the major challenge for handset proximity payments is to demonstrate its revenue-generating potential for the network operators and device manufacturers, and these vital areas are examined in detail. The report concludes that proximity payment is unlikely to be the application which drives NFC into the handset. Instead, we believe that other proximity applications, such as Bluetooth handshaking and pairing or contactless data exchange between devices, will be the motivation for handset vendors and operators to install NFC. However, with NFC embedded, the handset can be used to make payments once the owner installs at least one payment application.
We conclude that operators will miss a valuable opportunity if they do not embrace handset proximity payments and recommend that they drive forward the NFC standardisation process and establish themselves as the application signing authority. The report presents a business model based on a typical European operator launching its own proximity payment offering, and shows that the revenue generated directly from the payment service can boost ARPU by 5 to 10% by 2011, depending on how widely the operator can partner with providers of various consumer services. More importantly, we demonstrate that operators will experience significant cost saving benefits owing to the reduced churn which would result from controlling their subscribers’ handset ‘proximity experience’. For handset vendors, the report details the potential of extracting ‘bounty payments’ from banks and credit card companies in return for pre-installing their respective payment applications.
The report concludes with a schedule for ARCchart’s view of likely timelines for the roll-out of NFC and handset payment systems, as well as providing forward looking recommendations for network operators, handset vendors and financial companies.
For full details, please email jeremyk@cmsinfo.com
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