Will HCE revive NFC mobile payments? No.

As of late there has been a lot of press coverage regarding HCE (Host Card Emulation), which in a nutshell allows devices to make NFC based mobile payments without needing the mobile operators secure element on the device. Both VISA and MasterCard are backing this new approach, in the hope that finally, they can kick start mobile payment offering with NFC, effectively locking merchants back into the card schemes for mobile. Google is also heavily behind HCE, because they need a way of getting their Wallet distributed on actual devices and networks. Google has already had a rocky time with NFC, supporting it, then ditching it, only to now attempt to bring it back to their offering through HCE.

There are many companies pinning their hopes to HCE, touting their solutions and the promise of mobile payments. But is HCE really the saviour of NFC based mobile payments, or is it simply the same old issues dressed up in a new party frock?

 

Secure NFC in the cloud

Effectively HCE allows secure details to be stored in the cloud. This makes a lot of sense if you want to bypass the mobile operators and effectively quash their mobile payment offerings (ISIS in the USA and WEAVE here in the UK). But does it actually add any value for the consumer or for the merchant? Is there actually any real difference? The answer is pretty much no.

If you are using the solution in its pure form, then your phone (no matter how it gets details, from the cloud or a secure element on the device) will broadcast card scheme data to the merchant’s terminal. No matter what that data is, it is being broadcast and is data that is used to complete the payment. This is actually very powerful if you are looking for mass distribution, potentially. I say potentially because though there are businesses accepting NFC contactless payments, they are still small in their numbers. In addition, the merchant still has to opt into accepting contactless payments – and it is worth noting that contactless payments in pure card form are not the same as contactless payments using your mobile phone. In many cases the “handshake” is different requiring businesses to invest yet again in contactless for mobile phone. Do we really think SME owners will continue to invest in technology for zero benefit to their business?

So does HCE make any difference here? No…

 

Availability

HCE and NFC are only available on Android based devices (and not all of them). Though Windows Phone 8 supports NFC, it is locked very much into the Secure Elements, so no HCE support there. If we then look at the most successful mobile smartphone out there (iPhone), we should note no NFC or HCE support (and it doesn’t look like there ever will be). So with this in mind, you are only available to customers on 1 of the top 3 mobile platforms. Though many will say that Android has the lion share in the mobile world, it’s worth noting that they are a distant third in their share regarding mobile web being used. This indicates that the majority of Android users are not embracing all the features on their smartphone, and as such, these probably are the same users that will not look to be early adopters of any form of mobile payment.

Essentially, the consumer base that could potentially look to HCE and NFC payments is quite limited.

 

The customer experience

Many articles will talk about adding value into the mobile phone payment option, but when we do this, any distribution advantages you may have due to card schemes and contactless being accepted vanishes. You may ask why, but the fact is that the acquiring banks (the people who actually operate those contactless card devices) will not be accepting data regarding a discount, or loyalty scheme. To be blunt, they simply can’t accept that data as it’s meaningless to VISA, MasterCard, the Acquiring bank and the customers bank. So in order to accept that data, the mobile payment provider needs to sign the merchant up to their particular version of mobile payments, in order for them to enjoy any added value. Therefore the argument for NFC as an open loop environment using card scheme rails doesn’t fly.

So what does HCE bring my customers in terms of experience over what they have currently with a card. The answer is nothing, unless I buy into a particular vision of HCE by a particular company, and if I am going to do that, I may as well look at alternative payment solutions, that save my business money.

 

Payment processing costs

Do these decrease with HCE? Nope, the poor old merchant is still paying full wack for their card processing, and maybe in some situations more. They will be paying for more expensive NFC based infrastructure on a monthly basis too, so mobile is now costing businesses more to accept. That’s simply not good news for any business owner.

 

HCE a game changer? Nope…

To make mobile attractive to businesses it must be cheaper for businesses to run, maintain and it must bring some added value to their business. It also needs to be available to the vast majority of my customers, so that means available to the top 3 mobile operating systems (Android, iOS, Windows Phone). HCE simply doesn’t stack up on any of these basic business needs. It’s more expensive and provides no added value.

Mobile will no doubt be a game changer in the payments world, but it will not be changed by solutions that look to the same old rails dressed up in a pretty new mobile dress. It will be companies that offer real added value through mobile services, and companies that deliver savings back to businesses with large reductions in payment processing fees.

So if you are a small business, look to see what alternative payment solutions out there provide you with the added value and services you want to move your company forward, helping you increase sales and increase your profitability? It’s an exciting time, and a chance for businesses to break away from the old and embrace the new more productive world.

The cost of plastic

We live in a digital age, and yet all our online and over the phone payments are carried out based on a very non-digital technology – payment cards. Essentially cards are protected by you needing to know a few numbers off the face of the card, and 3 additional security numbers on the back. If you aren’t the only one who knows those numbers, then you aren’t the only one limited to spending on that card.  Yes, there are many new security measures online, such as 3d secure and verified by blah, and yes, there are endless reams of PCI compliancy rules that businesses should follow. But at the end of the day, a bunch of numbers is hardly the easiest thing to secure.

 

The end of cards?

Cards have served us well for a long time now. But the cost of issuing a piece of plastic with some numbers on, isn’t cheap (on such a large scale). The costs of trying to protect those numbers for banks and mainly businesses are always on the increase, and this always results on businesses being charged more to accept a card based payment. What’s worse is, that when that card isn’t physically present, such as online or over the phone (especially when online sales are increasing) the poor old merchant is charged even more for the pleasure of accepting their customer’s payment.

What we must remember is that fraud doesn’t cost your issuing bank much at all. Rather it is the merchant who sold the goods that loses out financially, and they will lose out on the value of whatever they sold. For small businesses that’s quite a risk, especially when they branch out onto the web. I have known many small businesses to be stung like this, loosing thousands in revenue and of course lost product (a double hit for them).

Now we have a number of alternative payment systems and services starting to become available, some in the form of virtual currencies, mobile payments, different payment schemes and processes online (ala PayPal) and these are starting to become quite disruptive to the traditional card schemes and banking business. With alternative payment options growing in popularity, could this possible be the beginning of the end of the card? I say the beginning, as cards are heavily entrenched in our daily lives, and to date, only Starbucks IMHO has shown that consumers and businesses are starting to really make a choice when making a payment – and opting for something other than their card.

 

Digital payments for a digital age

I am a strong believer that when the technology landscape changes drastically, you need to embrace it fully. When cards were first becoming popular, there was no internet, no over the phone payments nor over the phone banking. But the internet is here, and cards haven’t changed at all. The infrastructure hasn’t changed, all that has changed is that software developers let us type in our card details so that the card can be identified. Not much evolution or embracing of the new digital age there.

Payment schemes need to be designed with their current landscape in mind, payments need to be designed for the digital world, which with mobile devices now blends seamlessly at times into the real world. This is what we have done at CloudZync. We have designed a payment scheme for the digital world that can be used online and out there in the real world, day to day via your personal mobile device.

For me, this is just the beginning of looking at how we transact, how commerce takes place, how customer relationships are forged in the real and digital worlds, and it’s an exciting time to be in this space. CloudZync is pushing the boundaries of what we expect from financial products, commerce, customer relationships and in terms of technology making our lives easier. Technology making my life easier and safer as a consumer, and the same applies to businesses. Technology making sales, transactions, experiences and relationships easier to manage and more profitable. To achieve these goals, we must always challenge what has gone before and that includes cards and banks…

The cost of taking our money

As consumers we don’t really think about the costs involved with doing business, all we care about are the products or services we are looking for, and getting them at the lowest possible price. Oh, and to be fair, there is nothing wrong with that. All consumers know there are costs involved in running a business, but some costs, like a business paying to take our money, we often forget about…

This is something that even the EU is now trying to look into, proposing a cap on the “interchange fee” charged by your bank back to the merchant for taking your money from your debit / credit card. The problem here though, is that those fees will probably move elsewhere, meaning it will be pushed onto the consumer – more than likely in the form of us having to pay annually for the privilege of having a debit / credit card (something many EU banks already do).

So in this post I want to quickly look at costs businesses have to pay in order to take our money…

Someone has to pay, every time we use these

 

The average costs

When a business accepts debit / credit cards, they pay for being able to provide that option to us, the consumer. Now you may think that it’s a cost based purely on the transaction process itself, but you would be wrong. Typically, in order to take card payments, a business has to register for merchant services (SMEs and independents usually go through high street banks – though the actual merchant service is usually sub-contracted out). The business pays a monthly fee for this, and the cost of that will depend on the business, amount of transactions they process and their value. But many small businesses, start-ups etc pay around £30 per month per terminal. On top of that, there is a standard flat fee per transaction that goes through the machine, again this will vary in price. For debit cards though, a start-up maybe looking at loosing 20p per transaction, while credit cards may also have a fixed fee associated with them, but will include a fee based on a percentage value of the transaction value. To give you an idea here, this fee could be anything from 1% right up to 4% of the value of the transaction, again depends on your business, your provider etc etc.

Now these fees may seem small, but remember these fees per terminal are per month, and that every single transaction is subject to these fees. When you look at tight operating costs and small profit margins, you all of a sudden see why providing card facilities isn’t always an option for a business.

Here are some facts and figures. The average cost of a credit card transaction (remember average) to a business is 36.2p. This cost drops to 9.6p for debit cards, while handling cash is 1.5p. If you were to calculate your shop sold 100 items in a day – that would mean you have spent £36.20 in handling those transactions (if credit card). Now multiple that by 300 working days (just for simple maths) and you see you have £10,860 lost in credit card charges (not including the monthly fees). Now, for many SMEs, independents, start-ups, actually any business, this is a large chunk of money lost.  Obviously these are just some figures to illustrate my point, and that point is that actually, processing cards is not cheap.

So with these sorts of costs, is it any wonder that businesses want a cheaper alternative, and are actively looking for alternatives.

 

Will Mobile drive down costs?

Mobile payments are the most obvious alternative to typical card transactions. But there are 3 different form factors of mobile payments at the moment:

1. Typical card processing, but using a mobile phone as a card terminal
2. Using NFC technology for contactless payments
3. Use real mobile payments, originating from mobile devices and no need for cards at all

 

So, option 1: Companies like Square, iZettle, Sumup etc provide a dongle that allows any business to turn their smart phone device into a device that allows them to process card transactions. This proposition brings down the monthly cost to the independent and SME business – they no longer need to pay for their merchant accounts with high street banks etc. But these solutions are still expensive for the merchant. Typical fees are at least 3.75% per transaction! That’s very high and ultimately expensive for the merchant. You must remember that these are still card transactions, so in our example earlier, the £30 per month fee may have been removed (saving the company £360 over the year), but their fees have gone up, so still looking at £10,000+ in card charges.

Option 2: Use contactless technology…Well you still need merchant accounts here, so you are still paying your £30 per month (if not more if your bank charges etc for NFC enabled technology). However, your card processing fees will drop a little – and this is because at the moment the interchange fees on an NFC transaction are lower than those associated with Chip and Pin transactions, signatures, and card not present. But this is making only a small dent in the overall fees paid, and again the merchant in our example is shelling out £10,000+

 

Option 3: Real mobile transactions offer real options to merchants. Since they aren’t dependent on card schemes such as VISA, MasterCard, there are less companies involved in the transaction handling process. This means savings can be made in every step of the process, and these savings are passed onto the merchant. Companies like CloudZync and their Zync Wallet product provide drastic savings to businesses. Take our merchant example, with CloudZync the merchant pays no monthly fees, and since they are processing 100 transactions per day, are simply charged 1p per transaction. That means their daily processing fee has dropped from £36.20, down to £1. So the business annual handling fee drops from in excess of £10,000, down to just £300 for the year.

 

Cost of business, and cost of not adding value

What we must remember with mobile though, is the potential here to add value to the merchant – consumer experience and relationship. While cards, cheque and cash provide payment methods, mobile has a lot more to give (just as it does with our emails, social connections, organisers etc). Mobile transactions can be the gateway to greater consumer merchant engagement, better shopping experiences and ultimately, provide a potential tool to ensure business growth.

So while this post really is focussed on the cost of doing business, and potentially doing business with mobile devices, we should also remember the cost of potentially not doing business with mobile devices….Can a business afford to not make processing savings and not increase customer engagement and retention? I don’t know any that can afford to miss out on both…