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Banker’s Dilemma NFC or non-NFC Mobile Payments

Explore the history and current state of NFC mobile payments, and the challenges facing adoption. Discover alternative solutions that are gaining traction.

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Banker’s Dilemma NFC or non-NFC Mobile Payments

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  1. Banker’s DilemmaNFC or non-NFC Mobile Payments Matthew WitheilerFlybridge Capital Partners

  2. Quiz Time! • Who in the audience has an NFC phone? Keep your hands up • Who has used the NFC portion of your phone in a retail transaction? Keep your hands up • Who does NOT work at ISIS or Google?

  3. Speaking Frank Frankly, mobile payments will be huge but I do not think NFC is the horse to bet on

  4. Stepping Back: A Bit of History • NFC was created in 2004 by Nokia, Philips and Sony • NFC Forum created to “promote the security, easy of use and popularity of near field communication” • The technology itself was not new but the players around the table were • RFID, NFC’s predecessor, can be traced back to the ‘70’s • RFID even had a go at payments with VeriFone (Speedpass) back in ’97, MasterCard (PayPass) in ’03, AmEx (ExpressPay) in ‘05 and Visa (payWave) in ’07 • But the players around the table were • Marked the first time semiconductor companies teamed up with the leading handset vendors to complete the payments vision • The First NFC phone hit the market in February 2006 Cutting-edge 2006 technology

  5. Next Up: Disappointment • Almost since inception, NFC has over-promised and under-delivered “NFC could be a standard with in 2 years” - CNN, 2011 “NFC offers tremendous potential” - Nokia, 2007 “NFC technology is quickly gaining momentum” - NFC Forum, 2008 “NFC will become a central part of every mobile phone user’s life” - USA Today, 2012 “2009 was supposed to be the year for NFC” - SecureID News, 2009 “NFC stands for Nobody F****** Cares” - TechCrunch, 2013 “NFC… appears to be making a comeback” - GigaOM, 2010

  6. State of Play Today • NFC-enabled phones are all over the place globally • 30M units sold in 2011 • 100M units sold in 2012 • But the majority of them are finding international homes • 5M units sold in 2011 in the US • 18M units sold in 2012 in the US • That’s the same number of iPhone Apple shipped in Q4 2012 • And there are few places to use them for payments • Only approximately 2% of merchant locations in the US have incorporated NFC • With a 7-10 year terminal replacement cycle, it’ll take years before this number increases to a meaningful level • Worldwide, NFC is estimated to account for 2% of mobile payment transaction value • Meaningfully less domestically • Some major NFC initiatives have shuttered, others are struggling with adoption • Google Wallet essentially dead • ISIS lost Capital One last month

  7. How Did We Get Here • It turns out that NFC adoption isn’t as easy as getting chips in mobile phones • The path to NFC adoption is complex and players have ulterior motives High • Carriers • Opportunity to diversify revenue stream • Will require payment for access and investment • Multiple carriers needed to reach critical mass • Merchants • Opportunity to build loyalty and increase spending • POS upgrade a major hurdle to critical mass • Issuing and retail banks • Opportunity to protect and deepen relationships • Want to maintain ownership of customers • Payment Networks • Opportunity for revenue growth • Provide contactless “rails” to build mobile payments • Third-party Services • Opportunity to exploit new channel • Will join after critical mass is achieved • Acquirers and manufacturers • Opportunity for growth with limited risk • Will join ecosystem willingly Issuing Banks Merchant Merchant Acquires Retail Banks Merchant POS Manufac-turers Chip Manufac-turers Risk Carriers Payment Network Consumer Third-party Services Handset Manufac-turers Low • Users • Just want the thing to work Key player Support player User

  8. Complexity Abounds • Take NFC Security as an example

  9. The Failed Analogies • The common rebuttal to this argument is to point to Kenya, Japan and Korea as success cases of NFC adoption • The analogy is a failed one due to unique market conditions • Kenya: single carrier in Safaricom, no banking regulation (really!), no established merchant or ATM infrastructure • Japan: dominant carrier in NTT (>50% market share), massive NFC phone adoption (47M phones), huge government catalyst in mandated NFC transportation ticketing • Korea: the national regulator brought together operators, banks and device manufactures to force adoption and standardization • The US has 3 nearly equal sized carriers, a fragmented bank ecosystem, billions in legacy infrastructure, and our government can’t even agree that a law passed two years ago is actually a law • Can you imagine any of these conditions existing here?

  10. Alternative Solutions • In the absence of NFC adoption, merchants and consumers are hacking the system • Implementing vertical, cloud payment tools that are seeing strong adoption Provider Stat 575M accounts Issuing Banks Merchant Merchant Acquires 3M+ users Retail Banks Merchant POS Manufac-turers Chip Manufac-turers Little public data but very well adopted Carriers Payment Network Consumer Third-party Services Handset Manufac-turers 4M mobile transactions per week, >10% of all transactions Key player Support player User New entrant

  11. What To Do? • First off, don’t feel bad if you spent cycles on NFC • “One third of all terminals will be NFC enabled by 2013” - Eric Schmidt (even he got it wrong) • Consider ways of plugging into non-NFC initiatives • BTLE holds promise with Apple and PayPal pushing the format and an established existing ecosystem (something NFC has lacked) • Cloud-based payment initiatives gaining momentum (and don’t disrupt the established ecosystem, at least for now) • Be open to working with smaller companies and startups who are putting the consumer first

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