28 April 2014
I must get 10 calls a week on Apple/NFC. I’m quite concerned that Apple’s new capability will be completely mis-understood by the press, so i thought I would preempt all the NFC zealots out there with my own tag line.. So far I have a 100% success rate in predicting Apple and NFC (blog). Don’t know if I can keep it up as I read the tea leaves. Let me start with facts, then give you my informed opinion
- There are 2 aspects to NFC: 1) the communication protocol as defined by the NFC Forum (this stays as is), #2) The GSMA’s construct and standards for how NFC can be deployed in a handset (things like TSM, SE, SWP, …). See http://en.wikipedia.org/wiki/Near_field_communication
- Neither Google, Apple, Merchants nor Bank Issuers are in favor of the GSMA’s NFC platform. This is a fact in my mind… particularly in the US.
- Host card emulation has created a way for all Android 4.4 and above phones, with and NFC compliant radio, to provide application access to the NFC radio. Phones cannot be certified for 4.4 unless they demonstrate support for HCE. See blog HCE – Now the Preferred Contactless Approach
- The new card present scheme “Tokenization” was announced Oct 2013 at Money 2020, with the specification out last month (see EMVCO details). See my blog Payment Tokenization.
- HCE and tokenization play together well. Tokens must be coupled with something else (Device ID, Bometrics, PIN, …). For those that have been MIS informed by Gemalto… there is NO NETWORK connectivity requirement for HCE/Tokens. A token representing a card is in software on the phone. It can be stolen.. but it is a worthless piece of information without the other identity/device information. HCE gets around the EMVCo Contactless encryption requirements.. and operates under the TOKEN specification. But there is much grey area here.. as “acceptance” of token is not clearly defined (including pricing). Thus the only “covered” presentment method from a phone to a POS is through a card emulation application. Token acceptance will be coming later, but “assurance levels” are making this a cracy space (tomorrow’s blog).
- Update – I see that the smart card alliance has already responded to my blog here. The need for a trusted execution environment.. blah blah blah. Did you know that in an EMV contactless transaction that the PAN is sent in the clear? Yep… the need for the TEE is around signing a cryptogram (to verify where the card came from). Obviously I would much rather hide the PAN in a token, and enhance with phone information than give the PAN in the clear and sign something. There is no need for a TEE in payments, just as I access my bank through my browser on my PC without a TEE.. I can also do so with a phone. arghhh…
- Tokens align well to banks and payment network dynamics and investment. US Banks had been working on a tokenization initiative for the last 3-4 years in the Clearing House (blog).
- In both HCE and Tokenization scheme, the ISSUER IS IN COMPLETE CONTROL of their card. Issuers generate the token, and authorize the transaction. US issuers have their own token infrastructure in place from the TCH initiative (above). I wish I could emphasize this more. With HCE, issuers control which application(s) can present a card.. just as they did with within the TSM provisioning model.
- There are HCE pilots that are live and functional. So much for not being “viable”. The issues are not around technology, but rather validating fraud controls and device ID. Issuers can be up and running with either Mastercard or SimplyTapp in weeks.
- Perfect authentication and security is a nightmare to Banks.. Banks make money on ability to manage risk. There is no risk in a world of perfect authentication. Or as Ross Anderson says “if you solve for authentication in payments… everything else is just accounting”. See Blog – Perfect Authentication is a Nightmare for Banks.
- MNO led payment schemes (the GSMA’s platform) are failing in OECD 20 (mature markets, but are leading the way in Emerging Markets). I have seen the transaction numbers… Reasons are multifaceted (see blog for reasons). The technology works.. it is beautiful.. problem is business/consumer value proposition and consumer behavior.
- Historically, new POS payment instruments and POS payment behaviors are established through frequency of use. There are 3 categories: Grocery, Gas, Transit. Transit is the global success story (Docomo, Suica, Octopus, …)
- 4 Party Networks have a limited ability to change rules, Issuers dominate in influence. Amex is 3-5 years ahead of every US issuer in terms of capability, strategy and execution.
- Apple’s biggest asset is their ability to change consumer behavior (blog).
- Apple’s iPhone 6 will be coming out in October (my best guess) with payment capability. It will have the capability to communicate in the NFC protocol.. but nothing about the new iPhone will be compliant with the GSMA’s architecture
- Apple’s new capability is NOT ABOUT PAYMENT, but about Commerce (see blog) as they act as a CONSUMER CHAMPION (see blog).
- Tokens play very, very well into an iBeacon model. Given that tokens are worthless “keys” that refer to a card.. these keys can be exchanged in the open with BLE. There is no need for near field if the information is worthless.
- -Update- From my perspective I would not refer to Apple’s efforts as HCE. Where Google’s HCE repurposed an existing chipset to create a new software model. Apple has designed a new hardware model. Apple will be using bank issued tokens. Banks will look at using these delivered tokens in combination with: 1) Apple derived authentication score, or 2) MNO device ID from Payfone, 3) Bank mobile application information, 4) combination of above.
- Authentication is key to Apple’s role in consumer trust and commerce. Per my blog Authentication in Value Nets, Apple is 3 years ahead of Google and everyone else in integrating software and hardware level security (ex Secure Enclave). Google has a path for a secure execution environment through Arm’s Trustzone, but this is more challenging as Google does not mandate hardware architecture (yet).
- Apple’s new POS payment method will involve finger print on phone, and token presentment to retailer. It can be transmitted via NFC, BLE, QR Code.. or whatever the merchant and consumer can agree on.
- How does Apple make money on this? I don’t think they will make money on payment, but rather on #1 Authentication (charging the card issuers for an authentication score), or #2 Marketing (charging merchants for consumer insight/ability to reach consumer).
- Gemalto continues to cast stones, and miss revenue targets. Mobile Communications revenue of €225mn (-5.7% YoY growth, -1.0% constant currency) came in below consensus of €245mn (2.7% YoY). This is the second consecutive disappointing quarter for Mobile Communications, with revenue down 4% YoY in 4Q13. Why would any MNO invest in a secure vault on a Android handset when any application can go around it. That’s right.. there is no lock on the capability. This tremendously impacts the willingness of MNOs to “invest” in incremental features.. when their “investment” can be used without their permission.
- What will REALLY impact Gemalto is a VIRTUALIZED SIM. Don’t think this is coming in iPhone 6.. but is it coming (see Viritualized SIM).
- The next 2 years will see mobile payments as a “1000 flowers blooming”. Top card issuers will extend their mobile banking applications to enable card emulation (BLE, NFC, QR, … whatever).
- Payment Networks will be working to expand the 16 digit PAN to something much larger to support dynamic tokens. They will be working to transition Cards on File to tokens.. with perhaps a card present value proposition.
- MNOs will realize that they have a unique ability to create a device ID that competes with Apple’s biometrics. Payfone is the leader in the US, Weve in the UK. Beyond this, they may also begin to realize the $5B KYC opportunity I outlined 5 years ago.