A recent report from US payment consultancy Celent
shines the spotlight on the burgeoning mobile contactless payment
sector, which until now has been held back because of differing
business models and economic considerations. Victoria Conroy
reports on the opportunities and challenges.

A new report from US payment consultancy Celent has thrown cold
water on the prospects of mobile near-field-communication (NFC)
contactless payments, a burgeoning area of the payment industry but
one which has yet to gain significant traction despite glowing
assessments and hype from all manner of payment industry

The allure of mobile NFC payments is their promise to finally
monetise the mobile space for banks. Up until now, mobile payments
have offered little to no revenue for banks, although mobile
carriers make a considerable amount of revenue by selling data
plans to mobile phone users or charging for text messaging, and
software vendors make money by leasing or selling their technology
platforms to banks.

The answer in making profit from mobile NFC payments, Celent
states, lies in interchange reimbursement fees (IRF), one of the
main sources of payment revenue for every debit, prepaid and credit
card issuing financial institution.

If a branded ‘virtual’ card can be embedded into a customer’s
mobile phone and subsequently used as a form of payment,
interchange fees can be extracted from it, just as is done with a
plastic card. Currently, there is no industry discussion of
differentiated interchange for mobile NFC proximity payments. Using
Visa’s interchange rates as a reference, virtual cards could
generate the following revenue for their issuing banks in the

• Debit cards: interchange fees ranging from 0.62 percent +$0.13,
to 1.90 percent +$0.25

• Credit cards: interchange fees ranging from 1.15 percent +$0.05,
to 2.95 percent +$0.10

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According to Celent, given that worldwide branded payment card
volume was $6.7 trillion in 2008, the use of virtual cards as
mobile NFC proximity payments theoretically translates into a
tremendous monetisation opportunity.

Process and stakeholders of mobile NFC

Use of mobile phone NFC payments generally involves a two-step
process, consisting of a one-time download of a software
application that contains information about the customer’s desired
payment type, usually a virtual version of a closed-loop or
open-loop payment card.

This card is downloaded over the air (OTA) by the mobile phone
subscriber from the card issuer via the subscriber’s mobile
carrier. Once the virtual payment card has been downloaded to the
mobile device, the device user is free to use it to make payments.
The user then waves the phone in front of the merchant’s
contactless reader and the transaction is processed.

However, the mobile NFC payments space is unique due to the number
of stakeholders involved in the process. The need for each party to
develop a business case and collaborate with other parties is
tremendous and has slowed down the implementation process. This has
meant that closed-loop public transit payment schemes have been
able to roll out far more quickly than open-loop payment schemes,
which require the widest set of stakeholders. As such, few, if any
open-loop systems have advanced beyond the pilot stage.

The mix of players in a mobile NFC proximity payment scheme
typically includes the following:

• Consumers

• Merchants

• Card issuers

• Payment networks

• Mobile carriers

• Hardware/component manufacturers

• Mobile NFC software vendors

Celent notes that the mobile NFC space is fraught with tension,
rising from competition among players for ownership of the consumer
relationship. Currently, there are three basic revenue/cost-sharing

• OTA-related fees: licensing fees and per event (card issuance,
upgrade) fees. These fees will be charged to card issuers, to be
shared among mobile carriers and OTA provisioning vendors. Celent
research found that there appears to be little ecosystem dispute
about this fee structure.

• Transaction-based fees: The sharing of interchange fees
associated with mobile NFC transactions. In this scenario, the card
issuers/payment networks would pay the mobile carrier. However,
given that the mobile carriers do not process the actual
transaction nor hold any risk, there is considerable resistance to
this fee structure from the financial services industry and is a

• Rent: A fee structure wherein the card issuer ultimately pays the
mobile carrier a per-seat fee for every mobile device that contains
an activated virtual card. This fee model too has run into stiff
resistance from the financial services industry, because an
activated embedded card is not necessarily experiencing usage –
from a bank perspective, there is no direct link to the fee and
added value.

The pros and cons

But there are several factors in favour of mobile NFC payments.
Speed and convenience are often cited as the most popular reason
and is a high driver of consumer satisfaction in the pilots that
have been rolled out so far.

Mobile NFC payments are faster than a traditional plastic card
payment and take place within a single second, compared to an
average of 10 seconds for a swiped transaction. Rather than
rummaging for a card, the use of a nearly-always close-at-hand
mobile phone is more convenient.

However, Celent states that some industry players have developed
merchant business case calculations that include increased customer
throughput as a key line item. But this assumes that customers are
lined up and if the line does not move fast enough, customers will
walk away. Furthermore, if customers are walking away simply
because of the 10-second time intervals for other customers’ card
swipes, the merchant might have more fundamental problems to

The ‘top-of-wallet’ argument also gets short shrift from Celent.
Many industry players make the case for mobile NFC payments by
stating that because of the speed and convenience of such payments,
the virtual card in the mobile phone will enjoy a top-of-wallet
position. But this assumes that consumers have a wide variety of
cards to choose from which in turn means that they hold funds among
multiple financial institutions.

Celent states that consumers tend to construct certain usage
parameters around their accounts. For example, checking accounts
are for monthly budget purposes, a line of credit is for
emergencies and so on. In other words, wallets are ‘flat’, not
layered. Thus, there is rarely a ‘top-of-wallet’ product.

Another argument made by vested interests is that consumers carry
their phones more than their wallets, but Celent describes this
view as myopic. Payment players must keep in mind that wallets
contain important contents aside from payment cards, such as ID or
driving licences. Until players in the associated sectors also
convert to mobile solutions, wallets are unlikely to be left at

Many industry players that Celent spoke to indicated that mobile
NFC payment as a stand-alone functionality does not offer enough of
a value proposition to make consumers give up their plastic cards –
simply emulating a card on a mobile device will not lead to
success. Rather, to be successful, mobile NFC payments must be
complemented by mobile financial informational services, which will
help lead to higher spending on the virtual card or help reduce

Such services could include account balance checks, mobile
promotions of special offers, or promotional coupons sent to the
mobile device, and mobile SMS alerts to indicate that a card
transaction has taken place. However, none of these services are
inextricably linked to mobile NFC.

Celent also points to the ‘fear factor’, emanating from known and
unknown elements lurking within the payments market. The known
elements are closed-loop NFC payment systems for a specific payment
type such as public transit fare payment, which with the backing of
the payment networks, quickly achieve critical mass to push
acceptance into complementary merchants.

The unknown element is whether bank customers will flock to a first
mover bank that introduces mobile NFC payments. There have been no
major bank roll-outs of mobile NFC to date. However, given the herd
mentality of the banking industry, when a major player introduces a
service, other major players tend to quickly follow.

The ability to displace cash is probably the strongest argument in
favour of mobile NFC, as it is most suited for high-frequency,
low-value transactions. Given the speed and convenience argument,
mobile NFC truly has cash in its sights, according to Celent.
Primary and secondary research points to the use of mobile NFC at
very specific, cash-heavy merchant segments such as public transit,
quick service restaurants, convenience stores, news stands, kiosks,
vending machines and parking garages. In the US alone, these
merchant categories had an estimated $772 billion in total

But the big question is what is the payment volume of the target
segment that has not yet been captured by plastic cards? For nearly
every player in the mobile NFC space, this remains the largest
unanswered question, and the answer will have a major influence on
the ecosystem business model; how revenues and costs will have to
be shared by banks with consumers, payment networks, mobile
operators and software/hardware vendors.

Given the early stage of mobile NFC development, there is no solid
data to back the assertion made by some that mobile NFC would lead
to increased account acquisition. But a couple of consumer segments
may choose a bank because of a mobile NFC offering.

The first segment is technology early adopters, but such a group is
fickle and may not be a bank’s most targeted customer. The other
segment is Generation Y (people aged 18-24) which makes relatively
heavy use of mobile phone, data and services. It is plausible that
this demographic would choose a bank because it offers mobile

However, such customers may take a long time to pay off. Given
their lower incomes, Gen Y spending levels are low (although
heavily skewed towards cards), meaning less demand deposit account
margin and interchange revenue for banks.

Major incremental account costs

There are a number of incremental per-account costs relating to
cards that a bank will incur, even at a future point when a large
portion of mobile handsets and merchant locations are

OTA provisioning: Until all customers have
NFC-enabled handsets and all merchants have contactless readers,
banks will need to issue both plastic and virtual cards, meaning
that OTA will be an incremental cost. It is likely that the
starting point for OTA cost negotiations will be the same price as
plastic card fulfilment, around the $2 to $3 mark per provisioning

However, given that OTA is all digital, plastic and postage-related
costs disappear, meaning that card fulfilment-like pricing is not
sustainable. Additional OTA-related costs will likely be fees
charged by OTA provisioners to host cardholder data.

Mobile carrier-related costs: Realistically, the
only sources for such revenues/recouped costs are banks, as
consumers are not going to pay for something (payment cards) that
they have for free today, and merchants are already hostile to
existing card transaction fees.

Celent states that banks are not going to be willing to share
interchange revenues because the justification simply isn’t there.
Carriers do not play any role in payment processing, nor do they
carry any risk. This is analogous to plastic card manufacturers
asking for a share of interchange. Banks are also not willing to
reimburse mobile carriers for NFC chip costs, because NFC has a
wide number of applications that can be monetised outside of
payments and banks therefore do not want to underwrite NFC chip

This thus leaves ‘rent’ on the mobile phone and access fees as
costs that may be paid by banks to mobile carriers. Such
bank-to-carrier relationships are not in place today, so estimating
costs is extremely difficult. Apple’s AppStore has set the
precedent wherein rents are not charged for apps that reside on the
iPhone handset. In the end, access fees may be the only
carrier-related costs, and quite likely will be bundled or
synonymous with OTA provisioning fees.

Customer service: Given the novelty of mobile NFC
technology, there will undoubtedly be an incremental amount of
customer service that banks will have to provide. Inevitably, banks
will receive customer service calls that will be more appropriate
for mobile carriers.

To handle these calls, customer service teams will have to be
trained and may need expertise to interact with mobile carriers,
OTA provisioners and other mobile NFC players. Customer service
costs have the potential to add up very quickly.

Related SMS messaging costs: given the positioning
of mobile NFC with mobile informational services, there will
clearly be more SMS messaging use for mobile NFC customers than for
traditional plastic card customers. SMS messaging comes with a
cost, which will be borne by the bank. Per-message costs are
$0.005, and customers will likely need to opt-in for most messages,
so SMS will be the least significant incremental mobile NFC

The economics of increments

Sales lift is the most significant factor determining mobile NFC’s
attractiveness to banks. How much mobile NFC will increase
customers’ spending levels above plastic cards is the subject of
great speculation and very much an unknown at this point. However,
there is consensus that mobile NFC’s greatest sales lift potential
will come from converting cash to card spending, and that the bulk
of this will take place within the public transit, quick service
restaurant, convenience store, parking, news stand and vending
machine segments.

Celent estimates that these industries combined represent a $225
billion cash conversion opportunity in the US, or the amount of
cash that could be replaced with mobile NFC if it attained a 100
percent penetration rate. This is an unreasonable expectation, but
what is considered realistic? Fifty percent, 25 percent, 10

The graph on page 12 shows what penetration rates would look like
from a market perspective in terms of debit card account sales
lift. For example, a 50 percent cash displacement rate would
translate to roughly $251 in lift per debit card account per

Although many mobile NFC trials have taken place, only a handful
have measured incremental spending compared to other payment
methods. Trial findings indicate that mobile NFC incremental lift
over conventional magnetic stripe payment cards has been in the 10
percent to 20 percent range. In the US, the average spending per
debit card is roughly $2,500.

A 20 percent sales lift would therefore be $500, while a 10 percent
sales lift would be $250. Respectively 20 percent and 10 percent
debit card sales lift thus represent 100 percent and 50 percent
cash displacement rates in target merchant segments. Although such
rates may be desirable, they are probably unrealistic.

A more realistic cash displacement rate benchmark can be gleaned
from overall use of debit cards for consumer expenditures. In 2012,
debit cards are expected to constitute about 29 percent of consumer
spending in the US. Rounding up, Celent assumes a 30 percent
displacement of cash in the target segments. Based on these and
other assumptions, Celent estimates that the average bank stands to
increase its debit card account revenue by $1.83 per annum with
mobile NFC.

But this model does not contain hard-to-quantify revenues such as
cross-sales, nor does it contain marketing costs to promote usage
or start-up costs. Nonetheless, the model is directionally
accurate, which should be meaningful for banks. The most important
levers are sales lift and OTA provisioning fees. To the extent that
banks can focus on these levers, they can positively impact their
economic models.

What this means for banks

Competing business models and investment risks among mobile NFC
ecosystem players have led to a chicken-and-egg scenario of
stagnation. Mobile carriers do not want to invest in NFC chips
until there is proven demand for mobile NFC payments; merchants are
not in any hurry to purchase contactless terminals for the same

Banks and other card issuers are hesitant to develop and support
virtual cards until the contactless infrastructure is in place. But
Celent warns that the banking industry should in no way subsidise
mobile carriers to cover NFC chip or hardware investments. In other
words, the transaction fee revenue-sharing model proposed by the
mobile carrier industry should be a nonstarter. But this also leads
to the banking industry being in a very weak position to hurry
along the roll-out of mobile NFC payments.

Celent states that given the current state of the economy, waiting
for the mobile carriers to come around on mobile NFC might not be
such a bad thing for banks. The time it takes for carriers to sort
out their affairs may offer banks the time to address the realities
of their side of the economic model.

The only true levers in the banks’ mobile NFC business case are
cash displacement ratios and OTA provisioning costs. Interchange is
outside the banks’ control as are customer service levels, since
technology adopted by the mobile industry will be the main driver
of call volumes.

Raising cash displacement ratios will take time and budgeting
through intense marketing and promotional efforts. For the most
part, banks leave plastic card marketing to the payment networks,
and they should do exactly the same for mobile NFC.

On the other hand, banks have work to do if they wish for a more
favourable mobile NFC economic model. Banks will need to have
focused conversations with trusted service managers and OTA
provisioners to determine the cost per virtual card download,
upgrade and replacement. As noted, the logic behind a per-download
cost of $2 to $3 seems untenable.

But it is important to keep the impact of cost reduction in
perspective; even if the assumed OTA costs of $2 were cut to $1,
debit card incremental revenue gain would only be $0.36.

Finally, Celent notes that banks must remember one all-important
point – that mobile NFC will not be for all bank customers, as the
opportunity lies within specific customer segments.

It is likely that early technology adopters and customers with
mobile-centric lifestyles will use mobile NFC more than the general
population. Banks simply need to turn to their customers who have
registered for mobile banking services, thus placing themselves
within the mobile NFC target customer profile.

However, this group is likely to comprise a niche at best; even
Bank of America, one of the mobile banking leaders in the US, only
has around 5 percent of its customers enrolled in mobile

Cash substitution metrics

Incremental revenue model

Cash opportunity