Monday, August 05, 2013

NFC: Past, present, and future

Near field communications (NFC) applications are finally appearing in Hong Kong. Why the delay? Hong Kong has an advanced financial services industry and high mobile penetration rate.

Because of the Octopus card. For over 15 years, Octopus stored-value cards are used for quick cashless payments throughout the HKSAR. Transportation, supermarkets, frappucinos...the Octopus (which uses NFC technology based on Sony's Felica reader) handles everything from school attendance records to making donations.

The huge success of Octopus has crowded out other quick-pay methods. Remember Mondex? Visa Cash?

New terminals signal change

But NFC-based credit cards have been making gradual inroads in the local market recently, with more of terminals such as those from Visa payWave appearing on counters, next to Octopus touch-processors. And Hong Kong banks are beginning to issue smartphone-based NFC mobile service apps.

This is a potentially lucrative market: larger amounts available on a single "tap-and-go" payment may convince customers to forgo the familiar sound of the Octopus "dood" for NFC.

Security, standards, regulations

But obstacles remain. Octopus is a debit card capped at HK$500 even with an automatic value-ad. Mobile payment on a credit card is another matter—potential losses due to abuse are harder to cap. As always, there's a convenience/security tradeoff.

Banks and other institutions offering NFC payment services must sweeten the deal with incentives like customer loyalty programs and other marketing gimmicks. But they must instill confidence in their customers that data will not be misused—a lesson that Octopus learned years ago, when it was revealed that the company sold customer data to outside insurance companies.

So, while developers may receive better NFC support from the newest smartphones, successful mass adoption of NFC mobile payment services won't be about technology. Justifying the value proposition to customers for choosing this option means lowering transaction costs for both mobile service platform operators and merchants as well, as well as building user-confidence in NFC's security and reliability.

But then two other issues remain: industry standards, and regulations.

The issues around industry standards may be difficult, because the entrenched incumbents in the mobile payment market today means large business-volumes at stake. Without standards and proper portability, customers will be permanently confused by competing services and platforms. Merchants will also find it hard to support excess mobile payment options as more terminals means more capital investment and more counter space.

On regulatory matters, the HKMA completed a study on NFC payments in early 2013. Some of the questions: How to handle more than one NFC payment service on a single NFC-enabled phone? How to ensure service continuity as a user switches from one phone to another, or from one phone company to another?

Last month, the HKMA launched another public consultation on stored-value facilities and retail payment systems. While this consultation and the suggested regulatory regime is not technology-specific, it does cover NFC-based mobile payment services, including the Octopus card—which despite its incumbent status will be required to take out a new license and comply with other conditions in order to continue properly regulated operation.

It comes down to the apps

I don't believe that regulations alone will ultimately drive adoption and market success. Innovation delivered via apps that attract users and give them incentives to use these apps with their NFC phones is key. The infrastructure is more or less built—with more innovative apps, users will drive the business. After all, apps are one thing you can't have on your Octopus, right?

If card-based services are NFC's past, banks and mobile service companies are building the platforms for NFC's present, then which apps (and other bottom-up innovative ideas) will determine our NFC future?

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Charles Mok is a member of the Legislative Council representing the IT
Functional Constituency. He is also founding chairman of Internet Society
Hong Kong. Contact him at: charlespmok@gmail.com

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