|
"Your credit card may soon be worthless."
That's the notion being promoted by many in the
investment industry these days. They are referring to a new technology that is
supposedly Visa's worst nightmare and a threat to the status quo of the
credit-card industry worth billions. And they are positioning one small
company as the holder of the secret keys to cash in on what is promised to be
a multibillion-dollar shift in the way we pay for everything from a candy bar
to an oil change. But is it really true? Will this technology really turn the
credit-card industry on its head?
Doubtful. That's because all the popular analysis on
the nascent new technology ignores the fundamental underpinnings of all
successful technologies. In fact, it ignores basic economics.
The supposedly revolutionary technology involves a
specialized chip in your cellphone that communicates wirelessly with other
devices within very close proximity, in order to pass data between two
devices. This "Near Field Communication" (NFC) chip could pass the
equivalent of digital business cards between devices – especially
smartphones, where it makes the most sense to be deployed – by simply
holding them up to each other. Your phone or tablet could be used to identify
you when entering a secure business or even your home, as well as to connect
to a rental car's speakerphone or access the local Starbucks Wi-Fi, just by
waving it near a device that activates the link. Pass two devices within a
few centimeters of each other, and voilà, data is moved between
them.
Thus, the theory goes, you can simply wave your phone
by a payment terminal at the gas station, grocery store, or other location
where credit cards are accepted.
This weekend, I encountered a situation where NFC would
have been useful. I was boarding a United Airlines plane, and the passenger
in front of me went to swipe her virtual boarding pass across the bar-code
reader, only to have it not work. In the time she'd been waiting in line, her
screen had timed out. Thus, she was trying to swipe a blank screen over a
bar-code reader. Near Field Communication would have alleviated that problem
and made it so we were not all held up while the well-meaning woman tried to
type in her phone's passcode and bring the browser back up (only to find she
had to refresh the page and re-enter her ticket number… leaving us all
waiting while the gate agent assisted her).
So NFC could be a major improvement for the ticketing
and access control industry, given that it works wirelessly and can be
completely non-interactive when desired.
But does that make it a logical choice for contactless payment,
the promised multibillion-dollar opportunity? Many seem to think so, and not
just our fellow stock pickers. Germany, Austria, Finland, and New Zealand are
among the nations that have trialed NFC ticketing for public transport,
allowing users to swipe their phones or NFC-enabled payment cards to grab a
ride and get billed later. It's basically EZ Pass without the car, and like
EZ Pass, it works well in some closely defined scenarios.
But outside of those circumstances, things get messier.
Markets dislike messy. So, in order for a new technology to hit the
mainstream, it is critically important that one of the players in the value
chain today has an overwhelming reason to support the technology. Is that the
case here?
Today, the overwhelming majority of electronic payments
– I'm talking 99% plus – are processed by the credit- and
debit-card providers of the world. That's Visa – the 800-lb. gorilla of
the industry – MasterCard, and American Express, along with lesser
known names like Novus, Star, Maestro, and others from the debit/ATM world.
These companies already have well-established networks
of equipment, merchants who accept their cards, and
businesses and consumers who use them.
NFC promises to bring two changes to the industry:
- Introduce new players into the ecosystem with an
incentive for adoption, in the form of whoever supplies the software
operating the NFC device the consumer carries.
- Help secure transactions by only submitting the
credit-card information over encrypted channels, allowing interactive
security controls, and limiting the range of the devices.
But the consequences of these changes may not be as
straightforward as they first seem.
Is NFC
Another PayPal?
The first of those two changes is most unwelcome for
the industry's leaders. However, it's one that they've faced in the past,
with PayPal and other direct-payment providers. When PayPal began life, it
was meant to facilitate direct consumer-to-consumer transfers of money. I
sell a trinket on eBay, you buy it, and PayPal moves the money from your bank
account to mine for a small fee. Essentially, that's the same business Visa
is in.
Luckily for Visa, eBay soon experienced a large rise in
fraud. The credit-card companies saw a massive opportunity there to put their
considerable financial assets and longtime experience dealing with fraudsters
to use, and chose to increase the amount of indemnity they provided customers
against fraud. They marketed this heavily and drove demand for users to use
credit cards instead of PayPal-type accounts online.
At the same time, PayPal's potential users also
frequently griped about not wanting to sign up for an account and provide a
bunch of banking info, just to buy something. So PayPal caved to pressure
from sellers on eBay who were losing business to the requirement and made it
easy for buyers to just check out with a credit card. While through their
website checking accounts are still the default, most of PayPal's business
today is as a plain old credit-card merchant-services provider, behind the
scenes and unseen, processing credit and debit cards.
It also meant that the fees to sellers included both
credit-card fees and PayPal fees on most transactions, a double dip that put
a serious dent into PayPal's attractiveness to merchants. Other than on sites
like eBay (which basically forced sellers to use PayPal),
there was little reason for broad adoption.
This cut seriously into the account growth at PayPal
and reduced its threat as an end run around Visa.
Instead, PayPal's success outside of eBay came from
making it simple for someone to become a merchant. Signing up for a PayPal
account was faster and easier than getting set up with a traditional merchant
account. For Visa and company, that was a win, as they had a firm that would
get paid to reach a market filled with merchants too small to be reached
individually. PayPal transformed from an end run around the payment providers
into the world's most popular payment gateway, funneling the overwhelming
majority of that traffic right through to the credit-card providers. Threat
averted.
But providers of NFC-equipped phones, such as Google,
are gearing up to provide services similar to PayPal. Google's Wallet
software lets a user store multiple cards in a single account and choose the
appropriate one to use when checking out. One of the potential options for
payment is Google's own Checkout service, which works just like PayPal and
does it for less than typical charge-card fees – something merchants
could get excited about much the way they did with cheaper debit-card
payments. Just swipe your phone and choose the card on your screen (or vice
versa), and you are using Google's services to pay and get paid, whether that
service is from Visa or directly through Google.
This sudden entry into the space by big, powerful,
connected companies like Google or Apple (which has yet to load NFC into any
of its phones, but has long been rumored to be looking at such an option)
– with their preexisting relationships with hundreds of millions of
global consumers – into the payment chain is a far more pressing threat
than PayPal ever was. These companies don't face the "cold start"
problem on registrations, have rabidly loyal fan bases, and reach into nearly
every home and business in the industrialized world.
On the other hand, they also don't have the expertise
to combat fraud, putting them into a potentially risky situation if they fail
to do their job effectively.
The phone companies – the other potential
middlemen which could support putting NFC in the hands of millions of
consumers if they thought they could get value out of it – have seen
this movie before:
- Long-distance "bumping"
- 900 numbers
- TXT subscription services
Many times in the past, telephone network operators
have tried to insert themselves into the billing relationships of their
clients and other parties, and nearly every time it has ended in disaster.
Fraud was rampant. Client complaints skyrocketed, boosting costs of keeping
customers happy and problem-free. Overall, it was a series of giant
headaches, and one would assume that not only did they learn their lesson,
but that maybe Apple and Google would learn it from them as well.
Payment-card providers have every incentive in the
world to prevent adding another middleman – especially one with big
influence on consumers – into the equation. They'll do that with a
combination of marketing, lobbying, and threatening behind the scenes, doing
everything in their power to stop the technology from taking off, unless they
control its use and dictate its terms. And those middlemen may just find
themselves treading over treacherous paths that their business models have
not prepared them for.
Wireless
Security
The other argument for NFC is a technical one.
Proponents of the technology say that NFC will be far more secure than the
traditional magnetic-stripe card. They point to examples of widespread
adoption of "chip + pin" technology in Canada, Europe, and Latin
America as evidence that magnetic-stripe cards are faced with fraud problems
and that technology can overcome them.
NFC is pitched as something far more convenient than
the traditional credit card, without the security holes associated with
previous wireless payment technologies. Thanks to the interaction between the
NFC device and its host (a phone in most cases), layers of security can be
added to require passwords, PIN codes, and other protections prior to the
credit-card data being sent across to the merchant's payment terminal.
Unlike previous wireless technology, the data stream
between the merchant and the consumer is encrypted for extra security.
However, all this security becomes moot when a device
simply transmits that data to an unsecured machine or network. Over the past
few years, the overwhelming majority of credit-card theft has happened at the
system level. Hackers have done everything from cloning cards –
something NFC theoretically could prevent, but more on that below – to
hacking hundreds of readers that broadcast card info wirelessly; to breaking
into websites, telephone networks, and corporate intranets to steal cards; and
even to hacking the networks of large credit-card-transaction aggregators to
steal thousands or millions of cards at a time. NFC does nothing to deal with
the latter, a far more pressing and larger-ticket fraud than consumer-level
security issues today.
With consumers educated to protect their cards and
indemnified from damages, and lower-level credit-card fraud a well understood
and easily policed threat, Visa and company have little reason to get behind
NFC, even if it does offer some minor security benefits.
This is why only a single bank, CitiBank,
and a single card company, the distant third-place MasterCard, have signed on
for using the technology. And even they are hedging their bets. "NFC may
become really important in the future," says, Ed Olebe,
head of PayPass Wallet services for MasterCard. But
"we are waiting to see how the industry works out its issues."
Enter the
Merchants
Even if credit-card companies don't want to see that
middleman, won't their direct customers – the merchants who accept
their cards – be willing to jump on the bandwagon and push the card
providers to support it?
Probably not. In order to add NFC, they would need to
upgrade their payment terminals. For small businesses leasing the terminals,
the account provider would have to foot the bill for the new technology. And
with that, they would have to take on more technical support calls for any
issues that creep up from adopting NFC, a far more complex technology stack
than a magnetic-card reader, or even than a traditional radio-frequency card.
That dynamic has always ensured slow adoption of new payment technology for
small retailers.
For larger vendors – like market-leading
retailers and restaurants – the ultimate decision point is checkout
time. A busy Starbucks or crowded Target will quickly lose money from
frustrated customers who walk away from long lines. So they do whatever they
can to optimize the checkout process. Checks are discouraged heavily, as they
are the slowest. Cash isn't too bad. But cards – especially now that
they have lobbied card companies to do away with signatures on small
purchases – are king.
NFC potentially complicates the payment chain –
especially if advanced security features are used.
The point is that the payment providers and most
merchants have little real incentive to support this new technology. Their
businesses are less complicated and quite secure enough already.
Nor are mobile phone companies in the United States apt
to jump into this space. Visa and company will firmly protect their turf,
squeezing margins from any attempt by mobile providers to insert themselves into the existing payment chain. The AT&Ts
and Verizons, with their teams of lawyers,
accountants, and economists, will recognize the magnitude of the challenge
and are likely to take a pass.
Consumer
Demand
All of this leaves only consumer demand to drive
adoption. If there is enough of that, carriers will have no choice but to
accept the technology, and payment-services providers to support it. Sure,
carriers will drag their feet. And payment providers may even attempt to
fight it, by making it less convenient still than the current system. But if
the technology is well designed, widely implemented, and serves a need for
the consumer, no matter the business model behind it, it will prevail in the market.
Is there any reason why consumers would demand the use
of NFC? We are adopting smartphones at an astounding rate, after all. More
than 50% of all phones sold in the US are smartphones now, up from low
single-digit percentages just five years ago. That's a clear sign that a
simple fear of technology is not holding back consumer demand.
And we sure picked up on other convenient technologies
quickly as well... like Wi-Fi.
The reason of course for our adoption of these new
devices, and these new wireless capabilities, is that they directly
eliminated a pain point or provided an entirely new convenience.
Before Wi-Fi, laptops were mostly tethered to a wall.
You had to wire your laptop to an ethernet port to
get access, rendering your portable computer a digital ball and chain. No
sitting out on the porch to work from home on a sunny day.
Before the smartphone or tablet, if you wanted to get
an email, to see what your friends were up to online, or just to find some
news or videos to pass the time, you were stuck flipping open a five-pound
laptop. Now it's all in the palm of our hands.
Consumers are quick to embrace any technology that
makes their life easier. Credit and debit do, and they now comprise nearly
50% of all transactions per person per month, as this pie chart shows:
 
Does NFC similarly provide a benefit or solve a
problem?
Maybe taking a look at its failed predecessor –
RFID – will give us some insight into how high the bar to supplant the
credit card actually is. These small Radio-Frequency ID chips – which
can transmit a signal from an otherwise inert little device (like a plastic
card) when passed near enough to a reader – were
the last hot new invention that was supposed to end the supremacy of the
magnetic-stripe credit card.
You would be freed from the terrible, awful, painful
hassle of removing a credit card from your wallet, thanks to RFID. Heck, they
didn't even have to be cards. Instead, companies like Mobil gas stations
created keychain versions of the same and gave them useful sounding names
like "SpeedPass."
However, there was a simple logistical problem: most people
carry more than one card. If you wanted to simply swipe your wallet or purse
by a machine, or even walk through an EZ Pass-for-people-style gateway, how
would it tell which card to use? Interference problems from multiple cards
notwithstanding, if a reader could get a clear list of all the cards, then it
would still have to prompt a customer for their choice of cards...
Quick, which of your cards is AMEX ...6057 versus AMEX
...7221?
Again, you have customers reaching into their wallets
to avoid confusion and adding to checkout delays. Visit any Target or
Starbucks during prime hours and tell me if you think another 30 seconds per
transaction would be no big deal.
Then pile on the security problems. In theory, anyone
with a relatively cheap reader could pass by you on a sidewalk and read your
card(s) from the outside. RFID would have all but put pickpockets out of
business... at least, the less technically savvy ones.
In either event, the answer was to make the devices so
low-power that they had to be held up next to the reader to work (still not
alleviating the wallet issue, meaning you have to get out a specific card).
Needless to say, after one simple look at the problems,
merchants weren't exactly beating down the door to install costly new RFID
readers in place of their current equipment. It was no better at speeding
customers through checkout during busy times, and it was no more convenient.
Customers weren't exactly complaining about the failures of their credit
cards, and with all the potential problems coming from RFID, the bandwagon
for consumers, for merchants, or for payment providers never really filled
up.
So let's tally up the scorecard for RFID:
- New equipment for merchants
- Less secure than the magnetic stripe
Enter NFC to save the day!
First, let's tackle those pesky duplicate reads. Few
people carry more than one cellphone. Even if they did, chances are they are
not going to turn on the NFC features of both, and load them up with payment
details. A problem affecting 99% of customers just became one affecting less
than 1%.
Then there is security. Unlike RFID, NFC transmissions
can be encrypted. The two devices that talk – up to a maximum of 20
centimeters apart from each other (a nominal distance intended to limit the
chance of accidental cross signals and make spying harder), establish their
connection in a few milliseconds, and then set up an encrypted channel to
talk through before exchanging any sensitive information, like your credit
card number – further reducing the likelihood of that data being
intercepted.
In addition, NFC Forum, the industry trade group
pushing the technology (similar to the Wi-Fi alliance and the Bluetooth
working group, each of which helped popularize their respective protocols and
create huge businesses in the process), made sure NFC was fully compatible
with old RFID tags and reading infrastructure, to accommodate that small
number of merchants already invested in RFID readers, like McDonalds.
Thanks to the fact that the NFC hardware can store
multiple potential payment methods in its secure vault, choice in payment to
match the good old-fashioned wallet is restored. And it can do this trick
with just one device, prompting you on screen to choose your account of
choice (or simply defaulting to a standard payment method until you choose
differently).
So what's not to like with NFC then? Well, let me ask
you a quick question: Has your cellphone battery ever died? Yeah, that's what
I thought.
After I was done waiting in that United line, I was
greeted on the plane by another interesting situation courtesy of the
cellphone boarding passes. Once seated, I noted a man being asked again and
again by the people around me to leave his seat. He'd sit down, the next
person on would tell him it was their seat, and he'd move back a row. Again
and again. After some discussion, it turned out that his cellphone battery
had gotten him only as far as the door to the plane and then died. He had no
idea what seat he was supposed to be in. Upon asking the flight attendant for
help, she told him that he would have to wait until everyone was boarded and
she could get a copy of the manifest. In the meantime, he was to sit down
"anywhere" until everyone else was on board.
NFC is intended to address this problem, of course. The
electronics in the phone for the NFC are activated not by the phone's battery
but by the actual reader, wirelessly. In this regard it works much like RFID.
In fact, any NFC reader can read a standards-compliant RFID tag too. Problem
solved, right?
For the ticketing industry, maybe. But for payments,
not so much. More than just transmitting a device ID, the NFC system has to
transmit credit-card data. If a phone is dead, that means the NFC system will
have to make a choice: transmit the data RFID-style, to any application that
requests it without prompting the user; or stop functioning. That's either a
pretty big security hole or a pain-in-the-butt inconvenience.
Further, have you ever had a hard time getting a
program on your computer or phone to work reliably? Or just fumbled trying to
find the notification or popup for an application that needs your attention?
Now imagine the kind, older woman in front of you in line at Kohl's selecting
her payment method on the touchscreen of her iPhone, tapping in the specific
PIN code for that card, then swiping her phone across the reader in the time
provided. Sure, the workflow can be altered a little. Enter that PIN after
swiping, maybe. Or have the PIN entry on the payment terminal like they do
today with debit cards – just don't move the phone out of range when
you do.
The practical implementation of NFC leaves a lot of
open questions about security, about complexity, about who ultimately
controls the experience – credit-card provider, hardware maker,
mobile-network operator, or merchant – and about who handles all the
support calls that will result.
After all of that, the result is no faster or more
convenient than a simple magnetic-stripe card reader. And you introduce the
complexities of battery life and other mobile-phone-specific issues to a
process that otherwise works great as is.
Credit cards took off because they were infinitely
safer, more convenient, and faster than cash – all valuable benefits in
these harried lives we lead. The debit card made small leaps from there, in
cost for merchants and in convenience for the many Americans who have no
credit or prefer to use it more cautiously.
But NFC – just like RFID before it –
provides no real improvement in any part of the credit/debit-card value
chain. Almost no one is demonstrably better off for adopting NFC, and thus
chances are very low that it will find wide success in the payments industry.
There may be other reasons it comes into massive scale adoption –
another "killer app" as they say – and that will change the
equation down the line. But until then, Visa has little to nothing to fear
from NFC. And those other investors hopping on the supposedly
multibillion-dollar bandwagon should think long and hard about whether their
investment is likely to succeed in the long run.
Like many other "revolutionary" technologies
before it, NFC just may be a solution in search of a problem.
If you're looking for technology investment advice that
won't fall flat in the market, consider Casey Extraordinary Technology.
In our three-year history, we've delivered consistently profitable investment
recommendations. In fact, since inception our average closed position
(including all wins and losses) netted a 34% gain. So far in 2012, we're
sitting at a 61% gain. Overall, 78% of our picks have resulted in gains.
As a celebration of our three-year anniversary, for a
limited time we are offering half off our subscription price for new
customers – as always backed by Casey's unconditional satisfaction
guarantee. So I encourage you to give Casey Extraordinary Technology a try today,
and discover why we're consistently beating the market for our subscribers.
|
