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Thursday, September 13, 2012

Testimony: NFC evolutionary not revolutionary

Predictions that near field communication (NFC) technology will soon reach ubiquity at the POS took a hit when Apple Inc. released its much anticipated iPhone 5 with no NFC component. It appears NFC providers will, for the moment, have to rely on market expansion via merchants incorporating NFC technology at the POS as they implement the Europay/MasterCard/Visa security and technology requirements.

Apple's decision not to include NFC on the iPhone 5 will come as little surprise to Michael Katz, a professor at the University of California Berkeley, who testified Sept. 10, 2012, before the U.S. Senate Committee on Banking, Housing and Urban Affairs that "the changes associated with NFC and so-called digital wallets will be evolutionary, not revolutionary."

At the hearing titled Developing the Framework for Safe and Efficient Mobile Payments, Katz noted a revolution is underway, spurred by smart phone and tablet computer adoption, that is being manifested "in the ways merchants manage their relationships with their customers."

Cool technology not enough

The NFC-less iPhone 5 does however include a loyalty card and ticket storage tool, Passbook, which some payment experts see as Apple's entrance into barcode-enabled mobile payments – another technology gaining popularity, but which has possible drawbacks.

Katz told the committee that this kind of "cool technology" will not be enough to overcome the easy-to-use, widely accepted and trusted payment options already available to U.S. consumers, nor will it disrupt consumers' relationships with merchants who have already made "significant investments in equipment, systems and employee training" to provide payment services.

"In order for new payment services based on smart phones and tablets to compete successfully, these services will have to offer merchants and consumers additional value in comparison with current options," Katz said, adding that mobile payments must either lower merchant transaction costs or attract additional customers to win merchants over.

Katz observed that an NFC-enabled digital wallet can be more convenient and possibly easier to use than a conventional wallet filled with multiple payment cards. However, most consumers will still use physical wallets, if for no other reason than to carry drivers' licenses and other physical forms of identification. "In the short run, ease-of-use benefits appear to be too limited to be a significant driver of adoption," he said.

Katz believes the capability of mobile phones to deliver targeted messages and offers to consumers will drive the adoption of mobile payments. He called this service "a very powerful marketing tool that will be worth tens of billions of dollars annually to merchants."

More views offered

The committee also heard testimony from Sarah Jane Hughes, a professor at the Maurer School of Law at Indiana University, who discussed the benefits and costs of mobile payments for merchants. According to Hughes, the benefits include:

  • Offering quick and functional payments
  • Expanding the economy via small merchants collecting more payments
  • Deterring fraud at the POS
  • Building customer loyalty
  • Reaching unbanked and underbanked customers

But with those benefits come concerns. Among Hughes' concerns are:

  • Data interception and malware infection risks
  • Imposition of new and often unfamiliar data protection responsibilities on merchants and other payment system participants
  • Chargeback problems and other data security and fraud risks
  • Increased need for consumer education
  • Compliance with federal anti-money laundering requirements
  • Influence of foreign nationals banned from doing business in the United States

Thomas Brown, an adjunct professor at the Berkeley Law School at the University of California and a partner at the law firm Paul, Hastings, Janofsky & Walker LLP, testified at the hearing and warned against more regulation of the payments industry, particularly in the areas of information security and privacy. "[N]ew layers of regulation could easily stifle innovation and benefit some providers at the expense of others," he said.

He noted that payments innovation is occurring "against the backdrop of a very complex regulatory regime" and that a reduction of regulation, particularly in state-by-state licensing requirements, would be beneficial to the emerging mobile payments space. end of article

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