Google’s NFC Move Hands New Opportunity to ISOs, But Much Depends on Carrier Reaction

Independent sales organizations and other acquirers could exploit Google Inc.’s move to decouple mobile payments based on near-field communication technology from a phone-based secure element, observers say. At the same time, much depends on how the mobile carriers, which have held tight control over the secure element, react to Google’s ploy, they say.

Much also depends on how well Google convinces consumers to use its new NFC system, particularly with Google Wallet, which has struggled with adoption and usage. Google may need to resort to consumer incentives, some experts say. “They need to attract consumers,” says Rick Oglesby, a senior analyst at Boston-based Aite Group LLC. “If you don’t have consumers who are actively looking to pay that way, how do you get them to pay that way?” Incentives could include offers served up through search results that could be redeemed only through using the wallet, Oglesby suggests.

Google stunned the payments business last week when it said its latest update to its Android mobile operating system, dubbed KitKat, includes a feature that allows mobile-device users to make NFC payments without the need to store card and other account credentials in the phone in a chip called the secure element. The country’s major mobile networks have pushed NFC based on the SIM card as the secure element. Generally, the secure element is regarded as safer, and since the carriers control the SIM card they have an opportunity to charge fees to issuers to load payment credentials.

Google’s move, which depends on a technology called host card emulation, is widely seen as liberating NFC from dependence on the carriers and so-called trusted service managers, companies that provision the secure element with payment credentials. Observers say the move could breathe new life into NFC by allowing large and small merchants and financial institutions to run NFC payment programs more readily and with less cost.

It could also revive the fortunes of Google Wallet, an NFC-based product that has struggled in part because of Google’s reluctance to pay the tolls the carriers demand for access to a phone-based secure element. Three of the country’s biggest carriers—AT&T Mobility, T-Mobile USA, and Verizon Wireless—offer a competing wallet called Isis that relies on the SIM card as the secure element.

With Google introducing host-based emulation, tech-oriented ISOs see a big opportunity. “It’s a brilliant move by Google,” says Henry Helgeson, chief executive of Boston-based Merchant Warehouse, a merchant processor that has invested heavily in a platform called Genius to enable mobile forms of payment and rewards processing for merchants. “I’ve always been bullish on NFC. We’ve been pushing out NFC in all our Genius deployments.”

By simplifying NFC, the new Android version also makes it possible for more ISOs to push the technology to merchants, Helgeson says. “For ISOs long term, this is fantastic,” he says. “This keeps acquirers relevant [with payments], and we’ll be able to offer merchants discounts, offers, and gift cards.”

Getting more ISOs behind NFC will be critical to getting more NFC readers installed in stores, especially small ones. Most U.S. merchants lack the equipment they need to run NFC transactions. “That’s where all the friction is right now,” Helgeson notes. “It’s that merchant countertop. If Google can just demonstrate [NFC’s] value, merchants may start to adopt it.”

How, if at all, the major carriers can react to Google’s latest ploy has many industry sources speculating. Most agree the mobile networks’ options are limited. Outside of the SIM card, other pieces of the NFC puzzle are largely outside of their direct control, these sources say. While the carriers enjoy considerable sway with smart-phone manufacturers, “it would be very difficult for carriers to lock down the NFC radio,” notes Oglesby, referring to the dedicated chipset in the phone.

Another option could be to induce phone makers to branch off from Android and create a derivative OS that would disable host card emulation, a process known as “forking.” Cherian Abraham, mobile commerce and payments lead at Experian Global Consulting, calls this a “shortsighted” strategy that would likely come back to haunt the carriers if it invited attention from regulators. Also, forking Android is difficult. “It’s not easy, and the upsides are unclear,” Abraham says in an email message.

Yet another tactic might be to try to enshrine the secure element in the Payment Card Industry data-security standards, making a bypass hard to justify. “The only thing [carriers] can do is point to the secure element and say it should be mandated,” says Helgeson.

AT&T Mobility and Verizon Wireless, the two largest U.S. mobile networks, did not respond to requests for comment from Digital Transactions News.

A more enlightened reaction, says Abraham, would be for the carriers to embrace host card emulation. “Roll with it. Adapt. Pivot on to a strategy that sees Isis embracing HCE and working with issuers and others to enroll customers to use wallets,” he says. “Come up with new business models where they are a meaningful partner providing substantial value, not a gatekeeper controlling [NFC].”