Sberbank, Biggest Bank So Far to Adopt Host Card Emulation, Aims for 3 Million Users

The mobile-payments variant known as host card emulation captured its biggest financial-institution backer yet with a deal between Russia’s Sberbank and Sequent Software Inc. Sberbank will launch a commercial service “later this year” using HCE software from Mountain View, Calif.-based Sequent, an official with the bank tells Digital Transactions News.

The exact launch date will be announced later, says Mircea Mihaescu, managing director of Sberbank Digital Ventures. The project, which will start in the bank’s home country, aims to reach 3 million activations by the end of its third year, about triple the number of active smart-phone users now at Sberbank. From that base, the bank hopes to begin signing customers for the service in the former republics of the Soviet Union as well as in Turkey and Eastern Europe, Mihaescu says.

Sberbank ranks among the world’s 20 largest banks and is the third largest in Europe. It operates in 24 countries.

To get a commercial mobile wallet off the ground using near-field communication (NFC) technology, host card emulation is essential, Mihaescu says. “This simplifies the whole thing,” he says. “It’s the only way to get to large-scale deployment.”

Sberbank, which is a shareholder in Sequent, chose the company’s software in part because of a feature it introduced late last month that allows financial institutions and other card issuers to inject customers’ payment cards into apps created by outside developers, according to Mihaescu. The feature lets cardholders make payments within the app quickly using their own credit and debit cards. “We liked [this idea] more than others,” Mihaescu says.

Unlike NFC wallets that depend on a chip embedded in the phone to house payment credentials, wallets using host card emulation rely on credentials delivered from cloud servers using tokens to mask actual account data. This allows issuers to bypass the phone’s secure element, typically the SIM card or a chip installed by the device manufacturer. Instead, HCE communicates with the phone’s operating system.

Bypassing the secure element allows issuers to deliver mobile-wallet services to customers without paying fees to access that chip. It also streamlines mobile payments by sidelining mobile carriers and device makers, say some, including Mihaescu. “You’re talking about dealing with the payment network and the bank, and that’s it,” he says.

Currently, Google Inc.’s Android version 4.4, known as KitKat and launched last fall, supports HCE, using a solution developed by SimplyTapp, a startup based in Austin, Texas.

Android’s widespread commercial deployment has made HCE a realistic option for banks and merchants looking for a way to deploy wallets based on NFC. Of the roughly 150 million handsets in Russia, about half are smart phones, of which about 80% use Android, according to Mihaescu. “KitKat changed the whole game,” he says. KitKat now accounts for 8.5% of all Android devices globally, according to Google.

More banks around the world are likely to line up with Sberbank in using HCE, experts say. MasterCard Inc., for example, last year conducted HCE pilots with Capital One Financial Corp. and Spain’s Banco Sabadell, though neither institution has announced any followup so far.