August 19, 2016
Guest Perspective: Integrating NFC and the Cloud in a Mobile Commerce World
By Robert Martin, Ph.D., Senior Vice President and General Manager, Attended Merchant Solutions, Apriva
Throughout the history of technology, there have been significant debates between opposing factions advocating a particular philosophy or approach—be it hardware- or software-based—as the be-all and end-all solution for that particular market. One of the more memorable was the Betamax versus VHS debate. While most industry pundits took a pro-Betamax stance, citing its superior quality, the marketplace spoke and VHS was declared the victor.
The same dynamic occurred around the turn of the millennium with the Voice-over-IP versus Frame-Relay argument. Today, you would be hard pressed to find anyone who even recognizes the term “frame relay.” And now, there is the ongoing iOS-Android battle of the titans. It wouldn’t surprise anyone if this competition lasted for years—perhaps until another upstart mobile operating system renders both obsolete.
In the mobile commerce space, the perceived need to back a victor seems to be just as passionate. In one corner are the supporters of NFC (Near Field Communication). They support the idea of keeping payment credentials stored in a secure element on the device, and fervently believe this technology offers merchants and consumers the best possible option to accelerate adoption rates among retailers, merchant services providers and consumers.
On the other side of the equation sits the pro-cloud crowd. They are equally supportive of their approach to mobile commerce and can offer up very compelling proof points in terms of flexibility, ease of deployment, and lower operating costs.
But, while each side makes a strong case, there really shouldn’t be any debate at all. Unlike the other examples cited, where different technology approaches actually competed with each other, the reality in mobile commerce—and in particular the card-not-present world—is that NFC and Cloud can, in fact, be quite complementary. Instead of having our solutions defined by what a technology cannot do. In this particular instance the sum can indeed be greater than the parts.
Much to Like
From a payment presentation perspective, NFC makes sense. There’s something intuitive and appealing about tapping a smartphone against a terminal to quickly buy things like a ride on mass transit. After all, we use our phones for multiple other tasks besides making and receiving calls. When was the last time you took a photo with a camera or turned on the radio to play music? The smartphone made all these tasks obsolete.
While the mobile phone is virtually limitless in its capabilities, NFC, unfortunately, is not. It may make complete sense to use NFC for certain payment situations, but payment is only part of the larger commerce experience, and a fairly uninteresting part at that. The fascinating aspects of mobile commerce come into play when other services are delivered, like socially curated marketing or personalized loyalty programs that make customers feel special or unique. Those are the things that get consumers excited and merchants are fully aware of that. We have never seen anybody run to make a payment. It’s not what motivates us. But, getting a good deal, receiving special treatment or being the expert who helps your friends discover new things does. We want to be special, to have the inside track on an offer and to be rewarded for our loyalty. NFC technology really only helps transfer data and track discrete events—but the cloud can connect the dots to make this information relevant to multiple parties. If we think that mobile commerce is just about conducting a payment or transaction, then yes, NFC is certainly sufficient. But if we believe that there is much more to mobile marketing, and new innovations and services will be the solutions that ultimately appeal to customers, then it’s clear the cloud just makes sense. And NFC can play a role in this environment—possibly an expanding role. But it’s not the whole story.
What about Security and Access for Innovators
One of the ongoing debates between cloud and NFC proponents concerns security. Many staunchly believe that NFC is superior in this category. They refer to the secure element—the technology that actually secures sensitive information—residing on the phone. The secure element safely stores encrypted information that is used for transactions, and helps protect this data from attacks or fraudulent activity. It sounds simple, but, once again, the reality may not live up to the hype.
A key issue with the secure element is that it is considered prime real estate on the phone, and multiple parties claim ownership of it. This includes device manufacturers, wireless carriers and even financial institutions. Each wants to be the gatekeeper of the secure element and limit access by commerce innovators. While those entities most assuredly want to ensure the reliability and security of the payment infrastructure, they also want to be included in any business model that relies on NFC-driven transactions. In essence, security is paramount but the motives of those controlling secure elements directly impact who gets to participate in mobile commerce innovation.
Security through the cloud, on the other hand, is nothing new and, if we look at the success that e-commerce sites have had in the card-not-present world, it stands to reason that the same model would work equally well for mobile commerce. There are hundreds of millions of payment cards stored in the cloud environment of e-commerce sites such as iTunes, PayPal and Amazon. Security is already tight in these environments and the occurrence of fraud is actually declining. CyberSource, a unit of Visa, reported that North American e-commerce fraud in 2012 was nearly 13 percent lower than 2008 figures.
Cloud-based mobile commerce technology builds on this success by keeping all relevant card data safely stored in ultra-secure data centers. There are some compelling benefits from cloud-based security. If consumers loses their phone, all they need to do is sync their new device with their personal data that’s kept in the cloud. Their personal information won’t be walking the streets and they are protected from any misuse. Also, customers interact with their favorite brands from a variety of endpoints—mobile phones, tablets, computers and more. Only when payment credentials, preferences and unique consumer data are stored in the cloud can they be accessed whenever and wherever the consumer wants to conduct commerce.
While any amount of fraudulent activity is worrying, there is a constant evolution of security-related innovations occurring that will have a profound impact in both e-commerce and mobile commerce settings. Next-generation authentication technologies are entering the market on a regular basis and hold great potential in reducing the risk associated with all types of electronic commerce, including m-commerce, and those providers relying on NFC-based solutions as well as cloud offerings. Security today is relative—it’s better than yesterday but not as good as tomorrow. And, if chip-based EMV begins to permeate the card-present world, the expected reduction in risk will hopefully translate into even more good news for mobile commerce providers in the form of reduced interchange rates. Security for everyone: NFC, cloud and e-commerce is good, and it’s only going to get better.
The interchange rate that merchants pay can be directly correlated to security and risk. This, in essence is a function of the card brands, who assign higher risk to transactions that are devoid of physical cards. As it stands today, cloud-based mobile merchants pay a slightly higher fee than their card-present counterparts. While new security measures may, at some point, bring interchange fees to a more equitable level, the fraction of a percentage point won’t make or break the mobile merchant. What matters most is delivering an m-commerce solution that is simple and efficient for merchants to use, does not require a change in the POS infrastructure and can deliver the features and services sought by consumers. There is a floor to interchange reductions, but merchants have no ceiling for revenue and profits when creating valuable, meaningful experiences for their consumers. Merchants should focus on creating value through frictionless commerce versus waging war on basis points in the cost portion of the equation.
A Big Data World
Successful merchants intuitively know what their customers want: special treatment. Customers want their loyalty acknowledged and rewarded. And the only way for most merchants to obtain this intelligence—and act upon it—is through the cloud. Customer data is a treasure trove of information. It gives retailers insights that can quickly translate into revenue.
But accessing customer analytics, and leveraging this information into something usable by the merchant takes enormous computing horsepower. It cannot be performed at the device level. Cloud-based platforms offer the most efficient means to leverage the power of big data. Sophisticated providers already have the engines in place to collect the information, and inject the science to create unique and compelling offers. It’s not a payments dynamic; it is 100 percent marketing-related, and is a function for the cloud.
Gazing into the Crystal Ball
There is no doubt NFC chips are becoming more commonplace on mobile phones, but merchants today still need to switch out their point-of-sale equipment to accept these payments. As it stands right now, the level of NFC use is too minimal to justify a wholesale change to NFC-enabled terminals. However, all that can change with the introduction of EMV technology. As this scenario plays out, new EMV-capable endpoints would need to be deployed quickly. Integrating NFC-payment technology into these new terminals is an entirely straightforward process, and it would greatly accelerate NFC adoption as a payment presentation method.
This means that NFC and Cloud technologies, rather than being adversaries, should actually be working on a complementary basis to enrich the mobile commerce experience. The cloud’s ability to link analytics with relevant marketing, loyalty and fulfillment services makes m-commerce attractive to everyone in the ecosystem. Integrating NFC as a presentation method further strengthens the offering in a card-not-present environment.
Even more likely, in a few years we’ll wonder why there was a debate in the first place.
Rob Martin is senior vice president and general manager of Attended Merchant Solutions for Apriva. He has more than a decade of experience in payments, and 20-plus years experience in management, software development, quality assurance and production software product support. Rob holds a Bachelor of Arts Degree in Physics from Washington University in St. Louis, a Master of Science Degree and Ph.D. in Physics from The College of William and Mary and an MBA from W.P. Carey School of Business, Arizona State University.Apriva has been providing end-to-end wireless transactions and secure information messaging solutions for financial services providers, government entities and the public-service sector since 1999.