NFC: anticipating the “Big Bang” (Cards’ World, №10, 2012)

Vladimir Krupnov, CEO of “NovaCard”, shares his opinion with the "Russian Card World" on the prospects of NFC technology worldwide and in Russia specifically.

«Russian Card World»: What’s NFC in your opinion? What are NFC benefits?

Vladimir Krupnov: The concept of NFC - Near Field Communications – on the one hand is quite clearly defined as a technology, but on the other is vague when it comes to its specific applications in business. From a technological point of view, NFC is the interface between the card and the reader, its frequency and other characteristics are secured in the ISO 18092 standard. The most important feature of this technology, in my opinion, is that the communication does not happen spontaneously, the reader does not find the card automatically as it happens, for example, when two Bluetooth-enabled devices are connected. You need to bring the card very close to the reader because NFC allows only short-range data transfers. Your intention to make a transaction is essential for all NFC applications in business. And certainly any device (not only card) equipped with the appropriate chip suits for a transaction.

NFC technology developers had in mind to invent a new technology with two basic attributes (parameters): speed of transaction and devices durability. I assure you that there is a strong reason why bank cards’ are issued for only three years – frequent contact with the surface of the card readers affects both the magnetic strip, and most plastics. Moreover, the interaction between card and terminal takes some time. For cases when time is crucial and classical technologies do not fit NFC was invented.

«RCW»: How did the NFC technology originate?

V.K.: Background is very interesting. One of the first payment market players, who considered contactless solutions for payment transactions, was MasterCard. It developed its NFC-enabled product PayPass in the early 2000s. In 2003, in Orlando (Florida, USA) nine month pilot proved that contactless payments are convenient for both consumers and retailers. Among testers was reputable fast food operator McDonald's aiming to speed up the payments in order to shorten the service time. Already in 2005, McDonald's and MasterCard delivered commercials highlighting the contrast between the customers fuss over cash at the cashiers’ and smooth transaction executed from a PayPass chip in the form of key ring.

«RCW»: Why contactless payments have not yet become ubiquitous?

V.K.: This is a recurring problem the payment industry faces every time the new technology spans. New products require time to market and ubiquitous infrastructure sponsored by all market participants. Perhaps, unbeknown that EMV standard was published back in 1996. And only now it reaches the mass market momentum and EMV-ready infrastructure worldwide. Well, and since Visa and MasterCard agreed on common standards only in 2005 I expect the journey of NFC to be arduous and turbulent.

It is worth mentioning that NFC-technology gained a foothold first as a transportation application. Today contactless infrastructure catches on thanks to transportation companies, who became the real locomotives driving the market. In fact Moscow Metro tickets – tens of millions of cards - are also NFC-enabled. You see that demanded only a small part of carefully developed in terms of security technology. Most transportation applications have the same contactless protocol and the same frequency as MasterCard® PayPass™ but they do not fully use all the security options incorporated into the standard.

Put another way, transportation projects have blazed the trails of NFC bringing closer this technology pervasion. More than five million transportation cards coupled with acquiring infrastructure is an important foundation for the further uptake of this technology tailored for much wider opportunities than those used by the transport.

«RCW»: How NFC technology is poised today? How do you see its prospects?

V.K.: Well, it is interesting that different businesses consider NFC range of application differently. Thus, the mobile phone manufacturers embedding NFC-ins into their devices primarily rely on the use of NFC-tags. Reading a tag (touching a phone to an NFC tag) the phone receives a command to go, for example, into the silent mode or to pop up some data. Put another way, including the tags in-box is a great way to make device more functional, convenient and as a consequence consumer-tangible and permeating within business ecosystem.

Payment systems – MasterCard and Visa – see NFC as a payment technology. Cost of readers has now dropped through the mass transit projects and it became cost-effective to use them in the retail trade – from payment terminals to vending machines. Thanks to NFC, payment systems managed to roll out products with profits even for small transactions and enroll trading chains. It is not accidentally that MasterCard® PayPass™ and Visa payWave are called "coins killers". French supermarket chain Casino, for example, has decided to equip all cashiers with contactless terminals. Saving a few seconds on the transaction (according to their calculations) will increase the stores capacity so that this whole project will pay for itself within a few months.

For retailers NFC is a tool to reduce queues and, more importantly, a new approach to the implementation of loyalty programs. Now one NFC device, say, a phone can replace the whole thick stack of loyalty cards in the customers’ wallet. In addition, NFC-tags bring a world of new opportunities in the loyalty programs (such new features as individual price offers for each customer, etc.).

«RCW»: Does this mean that the trails of businesses with different NFC applications will not converge?

V.K.: It is not a stretch to say that at the crossroads of these paths a new reality comes into being. The same NFC-module can be used for all applications. Moreover, the same standardized technology employed in different sectors propels creation of cross-industry applications. Say, a mobile phone user can buy any number of tickets for public transportation, paying the bills with his credit card or from an account opened for him by the mobile operator. Thus, different vision of NFC by different market participants results in new business cases. And some schemes are being piloted now in projects such as, say, NFC Village in Nice, France.

«RCW»: What is the meaning of such projects? Is it an attempt to find new and interesting business applications for contactless technology?

V.K.: Well, not only that. The most important objective of these projects is a deep investigation of the NFC technology capabilities and its further standardization. What hinders NFC to become ubiquitous? Lack of cross industrial, fully interoperable environment. Visa and MasterCard managed to achieve significant success in payment standards development. But I am not enthused about situation with the standards on the transportation market despite its large scale. Still it is a beachhead for standardization: there should be a single card accepted by the different transportation operators. Loyalty lacks any standards at all and there are only some attempts to streamline this area. In Nice, for example, 180 stores through a trade association agreed that NFC-phone would serve as a single user ID in all existing loyalty programs. This is a simplified but quite a working scheme.

All participants of the interdisciplinary NFC pilots are working to develop a unique roster of standards and set up rules in the new environment. Three banks and four mobile operators are involved in the project NFC Village in Nice, for example. Ultimately, the issue now is to ensure that the fifth, sixth bank can join the pilot by signing a standard package of documents (as in the case when a bank becomes a member of any association or payment system).

«RCW»: How is the NFC technology poised in Russia? Does anything hamper its progress?

V.K.: I do not think that Russia somehow differs from other countries in terms of the promotion of new payment technologies. We do not have any special legal restrictions; our banks have already rolled out contactless products. As anywhere in the world we do not have any standards and rules of interaction between project participants from various industries. And there is no a full understanding of all opportunities available.

Here is an example. Banks are often puzzled with our proposal to embed a banking application into our product NFC-SIM-card: "The SIM-card belongs to the mobile operator. Why should a bank depend on the third party?" Meanwhile, there is no dependency here. Autonomous, safe co-existence of multiple applications on a card is not a question of future. Banks like other members of the future NFC-projects are psychologically not ready to expand their usual ecosystems. Doing that they will help contactless payment technology build its strong presence and yield benefits!

There are a growing number of successful NFC business cases in Russia. Apart from transportation projects I can name several. In August the Saving Bank of RF began accepting MasterCard® PayPass™ in supermarket chain "Perekrestok" in St. Petersburg, the UCS company acquires contactless cards at the service-stations BP, mobile operator MTS launched Russia's first SIM-card with built-in MasterCard® PayPass™ (produced by "NovaCard"). And I can go on.

«RCW»: How does NFC manage applications?

V.K.: Here we approach a concept of TSM – Trusted Service Manager, a service management application that enables service providers and mobile operators to manage their contactless applications remotely and provides an access to the protected elements on NFC-phones. The important question here is who owns TSM, who defines the rules of cross-industrial projects. The key word is the word Trusted – TSM operator must be a trusted by all participants’ party. TSM coordinates business and technical communication between mobile operators, service providers or other entities that control access to protected elements of contactless applications on NFC phones. In principle, various organizations can become a Trusted Service Manager – from payment systems to providers of technology solutions. The above mentioned project – NFC Village – despite its small scale involves 5 TSMs.

It is important to note that introduction of TSM is the most expensive, technically and logistically difficult part of the project. Many NFC pilots dispense with TSM. Even in such cases based on the cumulated experience it is required a minimum of six months to start an NFC-pilot. The preparation to projects with application management takes even longer. This is one of the reasons why NFC is developing slowly. Like standardization this is a question of time. Along with the accumulation of expertise and document-base the projects roll-out will become easier and cheaper.

«RCW»: What is the role of banks in this process?

V.K.: I think that none of the potential participants of the interdisciplinary NFC-projects – banks, telcos or retailers – should play a major role in the development of standards and regulations, simply because every industry will protect their own interests at the expense of others. For instance, in France a standardization process for all market participants is headed by the National Association for contactless payments (AFSCM, Association Francaise du Sans Contact Mobile). The recommendations of AFSCM eventually formed the basis of GlobalPlatform revised standards in terms of applications management.

Banks, of course, will be key participants in all future NFC-projects, but the role of standards developers will most likely belong to a specialized cross-industry associations.

«RCW»: At the latest NFC Congress held in Nice in September 2012 a term Big Bang was often heard. Do you see any obvious signs of the "Big Bang" in NFC use?

V.K.: Yes, I see and I think I'm not alone. I can mention an example from a payment terminal industry. All the leading manufacturers ship today new models either with a built-in contactless module or “contactless ready” (it means that a module can be inserted into the terminal at any time).

Most mobile phone manufacturers announced plans to launch models equipped with NFC module or already ship them. According to Juniper Research, we shall have 300 million of these devices in 20141 and Gartner predicts 448m mobile payments users in 2016.

It has been already shipped 5 billion NFC-enabled transportation cards. I would like to stress that, according to such a reputable company like Gartner, NFC is now approaching the very top of the technology life cycle curve. It means that NFC has the highest expectations.

Nobody in the industry is questioning that NFC is the future of the payments industry. The only concern is how much time it takes.

«RCW»: How the spread of NFC will affect the market of traditional plastic cards?

V.K.: Oh, this issue is the cornerstone for us. Close analysis of the world’ cards manufacturing industry shows that only a few companies ship industrial quantities of both SIM-cards and payment cards. All of them are heavily investing in the development of NFC converged technology designed to unite the interests of their major customers. One of the results of the first MasterCard® PayPass™ pilot in Orlando was an interesting fact – the cashiers stopped scrutinizing the customer cards. The main elements of security – a hologram and signature, etc. moved inside. Card became a device! Now the market is making the next step. Consumers need not only a credit card or a device in the card form factor (or some other), they need services, such as the already mentioned TSM. Our market is moving towards servicing and it is important not to be late in this conversion.

Will it be a fast transition? Of course, not. Even in Nice (which we are talking so much today) people are not used to paying by phone. I will tell you a funny story happened to me. I asked the girl at the ice-cream kiosk if I can pay with my phone. "No, – she says, – cash or card." I asked her to pass me a terminal with the icon Contactless Payment. Then I touch it by the phone and get a check. "I see, – said the cashier – your card is under the phone!" I show her an empty palm. "Well, then it’s hidden under the lid." You see, she still does not believe in paying by the phone, but she does not care where my card is!

Will traditional cards disappear entirely? It is unlikely, and even if they will – it will not happen soon. Contactless payments with their high-speed transaction are important when replacing coins. For larger amounts this requirement is not so important and contactless terminal in a boutique or a jewelry store will not appear for a long time.

«RCW»: How will "NovaCard" evolve along with the development of NFC technology?

V.K.: I think that even a partial replacement of traditional contactless cards is not an issue of a year or two. According to my estimates, the share of contactless transactions in the retail turnover will become visible not earlier than in five years. Up to this point we will continue to grow on traditional products manufacturing. This market in Russia has not yet reached saturation. This year we shipped 60 million credit cards and 40 million SIM-cards.

However, our business role is changing today. Of course, we continue to manufacture cards, but the share of personalization services in our business is growing steadily. Shipping NFC-enabled cards we have to personalize both phone application on the SIM-card and the banking payment application. We enjoy a unique market position in Russia – “NovaCard” is the only company on the market with the equipment and expertise to do this. In addition, we have a secure network enabling OTA personalization of banking application on already shipped SIM-cards. Put another way, we are the only company in Russia ready to offer TSM to banks and mobile operators.

Twenty years ago, when I became a founder of "NovaCard" and was starting my way to the market, many called me a day-dreamer: “Well, millions of cards in Russia? What for? Is it a business?” Today, something similar is happening with NFC. There are no cards, no terminals or large issuers. But we do know that everything will be available, and probably sooner than some skeptics think. We are in the forefront to promote NFC to the Russian market, and we are confident that we will maintain this role in the future.