Contactless mobile payments (finally) gain momentum

Predictions

Contactless mobile payments (finally) gain momentum

TMT Predictions 2015

Deloitte predicts that by end-2015, five percent of the base of 600-650 million near-field communication (NFC) equipped phones will be used at least once a month to make contactless in-store payments at retail outlets.

Executive Summary

Deloitte expects that 2015 will be an inflection point for the usage of mobile phones for NFC-enabled in-store payment, as it will be the first year in which the multiple prerequisites for mainstream adoption – satisfying financial institutions, merchants, consumers, technology vendors and carriers – are sufficiently addressed.

We predict that by end-2015, five percent of the base of 600-650 million near-field communication (NFC) equipped phones will be used at least once a month to make contactless in-store payments at retail outlets. This compares with monthly usage by less than 0.5 percent of the 450-500 million NFC-phone owners as of mid-2014. Contactless mobile payment will not be mainstream by end-2015, but niche adoption will be a major progression from near nil in prior years.

The core advantage with any contactless smartphone transactions is the potential for greater security, when payments are made with phones featuring either built-in (via hardware or software) or SIM-based tokenization capability. When someone pays using an NFC-device, the tokenization facility creates a unique code (known as a token) which is sent from the device to the merchant’s NFC-enabled till. The credit card number is not transferred which means in the event of a breach, only card information used for traditional transactions would be exposed. The card information is either stored with the issuing networks (such as Visa or MasterCard), or is stored in the cloud (HCE), or in a secure element on the phone. The token is only good for a single transaction and unusable otherwise. A fraudster who intercepted the transaction would only get access to the single-use token but not the card details.

Using a fingerprint, an eye scan or a heart rate sensor as an additional form of authentication makes the payment more secure still. The combination of biometric authentication, an embedded secure element and tokenization may provide more robust security than card swipes or chip and PIN.

We expect the volume of NFC-smartphone transactions and the range of spend value to increase steadily over time as consumers become more familiar with the process, and more banks and merchants in more markets accept this form of transaction. However, contactless mobile payments will likely co-exist for some time with all other means of payment, from contactless credit cards to cash. It will be a long while before the majority of us can jettison our physical wallets.

Contactless mobile payments (finally) gain momentum

Contactless mobile payments (finally) gain momentum

Deloitte predicts that by end-2015, five percent of the base of 600-650 million near-field communication (NFC ) equipped phones will be used at least once a month to make contactless in-store payments at retail outlets. This compares with monthly usage by less than 0.5 percent of the 450-500 million NFC-phone owners as of mid-2014. Contactless mobile payment will not be mainstream by end-2015, but niche adoption will be a major progression from near nil in prior years.

Looking further ahead, Deloitte expects the number of NFC-enabled devices being used for making in-store payment should rise steadily over the medium term, as consumers become more familiar with the process, and more banks and merchants in more markets accept this form of transaction. We expect the volume of NFC-smartphone transactions and the range of spend value to increase steadily over time.

While usage of phones to make contactless payments is expected to increase over time, they are likely to co-exist for some time with all other means of payment, from contactless credit cards to cash. It will be a long while before the majority of us can jettison our physical wallets.

The logic of using mobile phones to make in-store payments has long been recognized, and as far back as the late 1990s prototypes of vending machines equipped to take payment via mobile phones and over cellular networks were being exhibited at trade shows. The benefit of using short-range wireless technologies over a distance of a few centimeters to transmit payment information has also long been understood. Speedpass, the first contactless payment device (a key fob for use in gas stations) was launched in 1997. In the same year, the Hong Kong metro system introduced a contactless pre-paid fare collection system .

Indeed, the combination of contactless payment and mobile phones has existed for over a decade. The first phones with any form of contactless technology were launched in 2004 and the first phone with NFC went on sale in 2006. For many years, smartphones have been used to effect financial operations, such as checking balances, transferring funds, and transacting online.

But prior to 2015 the use of phones to make in-store payments using any technology (such as QR codes, or other short-range wireless technologies) has been minimal, with only a small proportion (ten percent or lower) of the smartphone base claiming to have paid in-store via their phone at any time.

Deloitte expects that 2015 will be an inflection point for the usage of mobile phones for NFC-enabled in-store payment, as it will be the first year in which the multiple prerequisites for mainstream adoption – satisfying financial institutions, merchants, consumers, technology vendors and carriers – are sufficiently addressed.

We expect the largest card issuers in the majority of the largest developed countries to have activated NFC-smartphone payments by end-2015, although adoption patterns are likely to vary by region, due to differing economics and technical (e.g. payments processing) models.
For financial institutions (card issuers and banks), NFC in-store phone payments offer continuity and improvement to their business models. They levy a commission on the transaction value, which they may share with a handset vendor or other entity. They underwrite the risk on the payment. Account holders are subject, with one of approaches used, to the same transaction limits as with a physical card and the repayment terms for credit card holders are the same.

The core advantage with any contactless smartphone transactions is the potential for greater security, when payments are made with phones featuring either built-in (via hardware or software) or SIM-based tokenization capability. When someone pays using an NFC-device, the tokenization facility creates a unique code (known as a token) which is sent from the device to the merchant’s NFC-enabled till. The credit card number is not transferred which means in the event of a breach, only card information used in traditional transactions would be exposed.

The card information is either stored with the issuing networks (such as Visa or MasterCard), or is stored in the cloud (HCE), or in a secure element on the phone. The token is only good for a single transaction and unusable otherwise. A fraudster who intercepted the transaction would only get access to the single-use token but not the card details .

Using a fingerprint, an eye scan or a heart rate sensor as an additional form of authentication makes the payment more secure still. The combination of biometric authentication, an embedded secure element and tokenization may provide more robust security than card swipes or chip and PIN.