How a Data-Security Debate Is Holding Back NFC Payments

Tussles between vendors and financial institutions over data security are slowing down progress in contactless payment based on mobile phones, a research firm contends. While MasterCard Worldwide, Visa USA, and major banks like JPMorgan Chase & Co. and Citigroup Inc. have launched trials of handset-based contactless payment in the U.S. over the past 20 months, commercialization of the technology remains years away. A chief reason is that the banks and their payment networks, on the one hand, and wireless carriers and standards-setting bodies, on the other, can't agree on how to secure account and transaction data, says ABI Research, an Oyster Bay, N.Y.-based researcher. ABI senior analyst Douglas McEuen, who follows the market for the semiconductors used in near-field communication (NFC), the technology that drives contactless payment using cell phones, says financial institutions want security mechanisms to reside on NFC chipsets, which they regard as highly secure. Network operators argue they should be embedded in the SIM card, which they control and which identifies phone users to wireless systems. Without agreement, contactless payment based on NFC-equipped phones is likely to remain confined to pilots, he says. And even when agreement is reached, he adds that further real-world trials will be required to test the agreed-upon model. “That's going to slow things down further,” he says, noting such trials typically run 12 to 24 months. Further complicating matters is that the cost of NFC chipsets, while declining, remains about twice what handset makers would like to see. McEuen pegs the current price at $2. “That $1 price point has always been a magic number for [original-equipment manufacturers],” he says. “If you can get a component down to $1, they feel very comfortable adding the component at that price point.” That factor, he says, tends to incline the phone makers to side with the carriers in the debate over where security functions should reside, since putting them on existing SIM cards involves no additional costs. With the cost of chips generally dropping about 15% each year, McEuen says, handset makers get closer to their “magic number,” and the chances of NFC commercialization increase. But the intervening pilots?many made necessary by the debates over data security–will slow things down to the point that ABI does not forecast commercial launches before 2012. With NFC, mobile phones can automatically establish a two-way link with point-of-sale terminals or posters or signs that are also equipped with NFC chips, allowing for an exchange of payment-account information, electronic coupons, Web site URLs, or other data. The technology works only at very close range, typically about 4 centimeters. The data-protection argument has come to the fore as the main element of ongoing tension between banks and wireless carriers over such issues as which party should control payment transactions within the phone, and whether one party should pay fees to the other to enable transactions. Yet Visa USA, which is building out a platform that ultimately will switch person-to-person and Web-based payments from handsets as well as NFC payments, says carriers as well as banks see plenty of opportunity in NFC. Carriers, whose networks aren't involved in contactless transactions at the point of sale, nevertheless have a chance to earn data revenue from short-message-service (SMS) transmissions that often surround NFC payments, says Pam Zuercher, vice president of product innovation at Visa. “Coupons and alerts are delivered via SMS but help trigger NFC transactions,” she says. “And active NFC users are more likely to use SMS to get coupons and alerts.” The good news for NFC backers is that, while progress may be slow, it's not likely to stop. “You'll see steady growth,” particularly after the security issue is resolved and trial periods are exhausted, says McEuen, pointing to the fact that the underlying technical issues are well-understood by players in the market.