mannerisms

Ruminations on the electronics industry from David Manners, Senior Components Editor on Electronics Weekly.

NFC Could Kill The Credit Card Companies

NFC is an opportunity for handset makers to make some big money. Apple, with its existing iTunes payment system, could clean up if it puts NFC technology in its phones and allows people to pay for goods with their iPhones, by-passing Visa, Mastercard, Amex and the like. Google, via Android phones, could do the same.

Bye Bye traditional credit card companies and their exorbitant charges.

 

The network carriers, always a few years behind the times,  look as if they want to be  in cahoots with the traditional credit card companies with AT&T, Verizon and T-Mobile  saying they’ll work with Mastercard and Visa on their Isis joint venture.

 

. “The carriers hope to leverage the dominant position enjoyed by Visa and MasterCard in credit card payments to ensure a seamless consumer experience when customers use their mobile phones to make payments,” says iSuppli’s Dr Jagdish Rebello, “such a move will drive an increase in unit shipments of cell phones with embedded NFC capability in the United States and around the world,”

 

But there is absolutely no need to have the traditional credit card companies, who have charged vendors big fees and users big interest charges, to be cut into the NFC deal.

 

If Apple and Google take the initiative and cut out the card companies,  the move to NFC could  become very lucrative for them.

 

iSuppli expects that over 90 million NFC-enabled phones will be made this year, rising to 400 million in 2014 and one third of the market – over 500 million phones – in 2015.

Tags: apple 2c, consumer experience, google, mobile phones, system 2c

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25 Comments

  1. Anonymous
    June 21, 2011 21:10

    Apple would probably make money on the transaction while they were acting as the conduit facilitate the value exchange. In large part, cards and/or banks are still going to be in that mix.
    Anybody have experience with iTunes chargebacks or fraud resolution, merchandise returns?
    But, back on the NFC track…..
    Robert mentions that the funds would be prepaid and downloaded to the cell phone and from that point forward all transaction activity would be self contained on the phone. This sounds a lot like chip today, with the value being on the chip.
    One thing I think is missing in Robert’s scenario is the concept of account management.
    Assuming that the consumer with said NFC phone wants to continue to make purchases using their phone, they will need to reload funds. Part of that may involve keeping track of what was spent where when in NFC mode from a master account.
    I think there is a bigger picture here that is not being addressed.
    NFC is an enabler that will expand the access to a payment form factor and potentially expand the footprint of payments acceptance.

  2. David Manners
    June 19, 2011 13:00

    What if Apple put an NFC chip in an iPhone which routes all transactions through iTunes, [Anonymous]?

  3. Anonymous
    June 19, 2011 04:38

    I fail to see how NFC will change payments any more than the changes experienced by e-commerce as the line speeds went from dial up to DSL to ethernet. All we’re really talking is the network communication protocol that facilitates the exchange in value, not the mechanisms that actually manage that exchange.

  4. XZQ-me
    May 23, 2011 12:02

    Also could inspire theivs. In the past, they would steal a credit card. Now they steal the credit crad and a 700 dollar smart phone!

  5. AndyRem
    May 18, 2011 17:00

    OK, let’s ignore all the technical pros and cons for a moment: you mean that Apple and Google would not rip the customer off with extortionate handling fees? Ha ha ha ha ha ha ha ha . . . . .

  6. Robert
    May 18, 2011 03:16

    @Tom Sielger
    With all due respect, your post completely misses the point of NFC as a credit card replacement. Nobody expects the Credit card and associated system infrastructure to disappear, rather it will have reduced scope. Say limited to purchases above $50USD.
    Today in many parts of the world Subway travel cards can be used in taxis and even used for small purchases (soda, cig’s whatever), this role will be replaced by NFC in a cellphone. For the most part virtual Tokens will be pre-paid and downloaded to the cell-phone, these tokens will be signed by the POS and automatically instigate a micro-payment transfer. The credit worthiness of the card holder is irrelevant, because the Credit was established when the virtual cash “token” was loaded onto the NFC device.
    Because it functions more like a debit card there is reduced risk that anyone can steal the details and empty your accounts, They’ll only get the money that is loaded onto the card at that time.
    There will be some smart people that figure out how to forge the micropayment tokens, but this is also self limiting because how many soda’s or packs of cig’s do you really need?(and how much does the secondary market pay for them?)

  7. REN
    May 17, 2011 19:29

    Largely correct. But, I must take issue with the dividing pennies comment. Let’s expand the subject to include banking, and not just credit cards. Suppose you buy a home for 100K drachmas, and over 30 years you pay 400K drachmas. That means your credit costs were 300% over time. Not all industries borrow at the same rate, and therefore the cost of capital in the economy is not 300%. For example, the garbage man has low capital costs, where a semiconductor company has large capital costs. The overall capital cost to an economy that runs on credit money is about 40%. That means for each of your drachmas, you are paying a little less than half for the right to use it. The cost is buried in every transaction. You work about 1/2 the year to pay for your credit.
    Ironically, Britain’s tally stick system, which lasted for 600 years, did not have usury imbedded in it, and hence it was real money, not credit. The money system is one of the most important things an intelligent person can study. We were not taught this stuff in school, and probably for good reason. It allows rent seeking activity and a plutocracy to remain in power. The bank of england was the first private bank that could issue credit and tax the public (1694).

  8. David Manners
    May 17, 2011 16:45

    Fascinating stuff, Tom, thanks for that. My education on this subject is proceeding apace.

  9. David Manners
    May 17, 2011 16:43

    Ha Ha, Fred

  10. David Manners
    May 17, 2011 16:39

    You’re right about that, dion, I don’t have a clue how CC companies work. But I’m learning as we go along.

  11. Tom Siegler
    May 17, 2011 16:27

    Apple, Google, etc have no infrastructure in place for brick and mortar payments. There are no “hooks” in the current infrastructure for them to integrate a mobile payment.
    Consider; The purchaser is standing at the POS. The clerk scans their purchase. The total is presented to the clerk and purchaser. Then..
    1) payment authorization data is captured (amount, card data, date, time, location, merchant ID, etc)
    2) the auth data is sent to the credit granting entity or their stand-in
    3) if approved, the issuer responds that the buyer is credit worthy (if it isn’t cash. If there is an issue… another process kicks in.)
    4) the POS system tells the clerk the purchase is authorized.
    5) there is/was some authentication of the buyer (e.g. signature or already entered PIN)
    6) The queue moves ahead one.
    Unseen to the clerk and purchaser, the credit-granting entity checks if the buyer is OK (open account, valid information, open to buy sufficient to the purchase, no strange activity). This entity responds to the authorization request in real time. That response travels to the POS from the bank or other company that grants credit and/or holds the purchaser’s account.
    None of this is possible with my iPhone because it doesn’t “talk” to the POS. So how does the clerk know a payment is made? NFC is not the solution until the POS and processing network get upgrades – NFC reader device, software to handle the new data, differentiating tags for a new payment type, and more.
    There is a lot of infrastructure from the POS all the way to the authorization point that is missing for mobile payments.
    There is often 2 or 3 companies between the POS system and the issuing organization – bank, credit union, AMEX… They route the data, deal with exceptions, add services and security. They provide reconciliation, charge back processing, refund credits… all for a few pennies and basis points per transaction.
    There is actually a lot more happening in the background. And after the sale is complete, all the players need to get paid. For those of you unfamiliar with the process, in the credit/debit world it is called “settlement.” It’s a backroom, off-line, batch process reminiscent of the 1970′s.
    If the new guys don’t use this system, they will have to replicate most of it AND assume the risk. It can be done. But it is a huge undertaking.
    This is the biggest change for the payments industry since electronic transactions were first used. It will happen, but it isn’t going to be without a significant amount of effort.

  12. May 17, 2011 15:58

    NFC ? No F*****g Card ?

  13. May 17, 2011 15:56

    A complete misunderstanding of how CC’s work is required for this article. Yes, rates need to decline. Yes credit card companies have ignored merchant and consumer issues for too long. However, the value is this. When my iTunes account was highjacked (yes it happens) Apple’s response was “We will not stop the fraud, you need to call the police.” Yes, that was really their response. I called my bank (card issuer) that the account was connected to. They closed the account in a micro-second and issued a new card. That is why this article is 100% fantasy. Sorry, but a semiconductor guy shouldn’t tell the world about mobile payments any more than a banker should advise you on what car gets the best gas mileage. Apple, Google and others do not understand consumer trust or attitudes towards money. And Citibank, BofA and others have very poor understanding of consumers. Besides, why would Apple or Google with their amazing margins want to get into a business that is about dividing pennies, they just want your data not your payments.

  14. David Manners
    May 17, 2011 15:32

    Thanks REN, that is most interesting – I’m learning a lot about how this works which makes me realise how little I knew about it before.

  15. REN
    May 17, 2011 14:59

    Banks can borrow from the overnight market to give you a loan. They don’t really even need to hold reserves on hand. In effect, they have double entry accounting mechanisms, and they create new credit money as a ledger entry. When you swipe your credit card, you are the credit, not the credit company. You have been hypothecated, and if you don’t pay, you fall out of the statistical data base. In other words, credit money is ledger entries backed up by your willingness to pay, or give up real assets to the banker. If you don’t pay, then they will get you somehow. If you pay off your credit card bill every month, that credit money popped into being and extinguished with maybe only a nominal service fee applied.
    Apple and Google could easily start a bank, and they don’t need a lot of money on hand to do it. AGAIN, banks create credit money out of thin air. YOU are the source of the actual wealth. The bankers club may or may not let them in, and that is the real issue.

  16. Mike Bryant
    May 17, 2011 14:02

    I believe the Apple app store links to iTunes which is linked to …. your credit card company.
    Apple and Google do what they do best and leave other functions to things others do best :-)

  17. David Manners
    May 17, 2011 12:40

    Well I wonder whether the CC companies actually do all that, El Rupester, or whether they sub-contract all that admin stuff to some financial management centre which could be used by anyone wanting to set up a similar system. As for providing the capital to fund it – Apple has tens of billions sitting around doing b. all. So does Google.

  18. El Rupester
    May 17, 2011 11:37

    Think about what a credit card company does:
    * They evalutate risk (big databases, smart algorithms, lots of experience)
    * They lend money (hold huge piles of cash so they can fund the credit you have)
    * Chase collections (experience, IT systems).
    There is no way that the handset makers will do this. Why should they? They have none of the ingredients, and it is a wholly different model.
    On the other hand, the carriers could eaily do it. Indeed, they do it already in a big way (look at Vodafone’s balance sheet).
    Every contract customer is effectively a £20, 30, 100 credit card customer.
    So for Voda or O2 to support NFC and be a payment mechanism will be very natural.
    But Apple, Google? Not a chance.

  19. May 17, 2011 09:57

    It’s an interesting idea, but I can’t see Apple choosing to compete in a commodity business with inherently low margins. Even Amex, whose commission is too big for some retailers, is charging about a tenth of the 30% commission that Apple currently takes on apps in their iTunes store.
    I know that an app sale is different from simply processing a payment, but Apple appears proud of their position as the owner of the app store that takes the biggest cut.
    Google, of course, could be a much more dangerous competitor to the banks.

  20. David Manners
    May 16, 2011 10:45

    Carriers can’t stop Easyjet taking a debit card payment, Dick

  21. David Manners
    May 16, 2011 10:40

    Well it may work that way, Keith, but if Apple introduced options: e.g. ‘Pay with Mastercard add £4:50; Pay with Visa Debit add £2:50; Pay with Apple Direct Debit £0.00′ then they might find a way to taking the CC companies’ cut for thermselves.

  22. David Manners
    May 16, 2011 10:36

    Wicked, Dr Bob

  23. Dr Bob
    May 16, 2011 09:35

    and standing next to the checkouts with a small handheld jammer in your pocket could lead to hours of entertainment :-)

  24. Dick Selwood
    May 16, 2011 08:59

    Carriers won’t let handset makers handle the transactions. If they share with the credit card companies they will get a split of the excess profits – as well as their tariff for transmitting the message.

  25. Keith
    May 16, 2011 08:49

    If I buy something via iTunes, it is charged to the credit card I used to set up the account. So unless Apple and Google devise some way for users to pay them without using a credit card, NFC will just increase the CC companies business, no?