This post explains why only 8% of all potential NFC Service Providers will enable NFC. This is the “rooster” side of the “The chicken-egg-and-rooster dilemma: NFC Wallets are dead” that I recently introduced. There, I cited three funnels for NFC wallet payments ever to happen:
- 1) The Consumer “Chicken” funnel — how many consumers are able to transact with an NFC wallet?
- 2) The Merchant “Egg” funnel – how many merchants are NFC enabled at the POS?
- 3) The Service Provider “Rooster” funnel – how many service providers (e.g. banks) will have enabled their services (e.g. payment cards) in such a way that they are both enabled at the POS and accessible in the consumer’s wallet?
For a successful NFC wallet payment, all 3 conditions must be met.
In an additional blog, I also described my assumptions regarding the Consumer “Chicken” and the Merchant “Egg” side of the dilemma in more detail estimating that only 3% of all mobile subscribers are able to transact with an NFC Wallet and only 12% of all merchant POS can accept contactless payments via an NFC wallet.
Today, I would like to detail my assumptions on the Service Provider “Rooster” funnel and apply simple pipeline economics to demonstrate that only 8% of all potential NFC service providers will enable NFC.
The Service Provider “Rooster” Funnel
Typical NFC Services include card payments, tickets for transport or events, loyalty cards or coupons and access keys (e.g. for hotels). Providing an NFC service means that Service Providers must be able to electronically deliver their services to the consumer’s wallet and that merchants must accept their service via an NFC Terminal at the POS.
To NFC-enable their services, Service Providers must meet 5 preconditions making up the the service provider funnel. The first 3 funnel stages are business specific: the service provider must (1) run a service with NFC relevance; (2) see an attractive business model delivering his service via a wallet; (3) have critical domestic scale to make integration efforts worthwhile. The two additional funnel stages are technical: the merchant must (4) have the ability to execute on the integration into all required Trusted Service Managers (TSMs) and (5) find enough space for his applet on the Secure Element (SE).
Let’s look at each funnel stage in detail to derive assumptions for each stage of the Service Provider “Rooster” funnel:
Stage 1: NFC-relevant service
NFC has been the talk of the mobile payment world for the past three years, ever since companies like Google and Isis—the joint venture between AT&T, T-Mobile and Verizon—created NFC-based mobile wallets. However, as NFC is not available in all phones, there are good reasons why NFC will not replace other technologies, in particular barcodes. In addition, PayPal and Apple both appear to be embracing Bluetooth LE as an NFC competitor. By using BLE technology, a merchant can be made instantly aware of a shopper’s presence—enabling location-based coupons, promotions or other services – in particular cloud-based payments.
Taking cloud-based models into account, we could even argue that NFC wallet payments are killed by other technologies altogether.
From a technology perspective, we believe that NFC is the best choice for scheme payment services and transportation since they can be done offline and even when the phone is dead. All other services, in particular coupon and loyalty, can well be implemented via other technologies.
For stage 1 of the service provider funnel, let’s assume that only 50% of all services have sufficient NFC relevance.
Stage 2: Business Model Attractiveness
After many years of trials, the momentum behind the provision of near-field communication services gathered pace in 2011 thanks to a number of collaborations between operators and banks in different markets and the Google and ISIS initiatives in the U.S.
Since then, all players realised that the provision of NFC payment services on mobile phones requires a huge amount of cooperation between operators, banks, technology providers and the service providers such as retailers and transport providers. Business models were still uncertain when they started pilots and they have not become clearer in the meantime. Players claim that this will change in three to five years, but that’s what they have claimed every year for the last 10 years.
Let’s make the positive assumption that 50% of all service providers see an attractive business model in NFC. For stage 2 of the of the merchant funnel, this results in 25% of service providers enabling NFC service.
Stage 3: Critical Domestic Scale
If the goal is to allow a consumer to replace his physical wallet, then the wallet provider must have relationships with many service providers, and each service provider must have relationships with many wallet providers, in order to replace consumers’ physical wallets with applications on the device. In theory, the approach to build this vast ecosystem is to have a neutral third party to bring the wallet owners and the service providers (application owners) together. This entity is called the Trusted Service Manager, or TSM. In real life, however, there are manyTSMs as each bank and each wallet provider are selecting their own. The integration challenge remains with an additional player in the value chain! From a service provider perspective, this is confusing. A service provider with mostly domestic customers like a local bank has to connect to the TSMs of all domestic wallet providers (3-5 players per market). If a service provider even has international customers (like a hotel chain), the challenge grows exponentially. This service provider would have to connect to all the wallet providers that their international customers use (30-40) to have sufficient scale for their NFC solution.
Let’s assume that 80% of all service providers have sufficient domestic scale, which takes the percentage of service providers at the third stage of the service provider funnel down to 20% (80% of service providers left in stage 2)
Stage 4: TSM-execution capability
Collaboration and integration of multiple ecosystem components have proven to be challenging. The integration of TSMs is not straightforward. Standards can be interpreted in diffent ways, different implementation options are available (e.g. Secure Elements, embedded Secure Elements, UICC, MicroSD, Cloud Secure Element, etc.) and vendors are still developing their products. A TSM integration goes much beyond the integration of an API and takes about 1-2 man years. Each integration must be certified, ensuring that despite a complex technical environment comprising many stakeholders, each building block of a deployment complies with the necessary specifications, testing, and security requirements.
A certification includes all components: secure element, mobile, terminal, back-office and/or TSM and should be end-to-end. For each component, it may cover the hardware level, functional level, security, integration, and personalisation. This is not for every service provider.
If 50% of all service providers can manage these complexities, that would seem to be a high number. This takes the number of NFC-enabled payments down to 10% of all service providers in stage 4 of the service provider funnel (=50% of service providers left in stage 3).
Stage 5: Available SE capacity
The card schemes require that NFC Wallet Payments be done in the so-called “Card Emulation Mode”. This is supported by all merchant contactless terminals and in this mode, the phone appears to the reader as a contactless smart card. Isis and other NFC mobile wallets rely on card emulation to transfer payment credentials to the POS. However, the downsides to this is that payment apps are limited to the capacity of the Secure Element (72kb on the original embedded SE on Nexus S, between 128 and 256kb on most UICC/SIM cards). This often allows no more than 8 applets to be stored on one SE. Even if my physical wallet stores significantly more cards ..
Google has started to completely eschew the secure element paradigm and has instead opted for a virtual solution, using what Google calls “Host Card Emulation” technology to get the job done. Emulation, in layman’s terms, essentially means virtualizing a piece of hardware such that a computer acts as though it’s interacting with a physical device.
It is doubtful that the card schemes will ever certify this mode for NFC Payments (it would open the door for cloud-based payments and undermine their traditional card-based approach)
Again, let’s be optimistic and assume that SEs have enough capacity for 80% of all service providers which want to do NFC. That yields a penetration of 8% of all potential service providers which will enable NFC (80% of service providers left in stage 4).
Our assumptions regarding NFC service providers certainly vary widely across verticals and markets. Nevertheles, we believe that we have applied our overall assumptions in a positive way. Do you agree with them? Happy to hear your opinion.
In the next few days, we will introduce the NFC Chicken-Egg-and-Rooster Calculator. That will bring the results of all 3 funnels together so that you can test your own assumptions and calculate the market share of NFC Wallet Payments for your region.