by David Fessler, Investment U’s Senior Analyst
Tuesday, June 14, 2011: Issue #1534
How often have you left home and forgotten your wallet? Or had to get a credit card replaced because a stranger lifted your number at a restaurant? As a frequent traveler, I’ve had both happen to me on numerous occasions.
With plastic credit cards fast becoming as obsolete as paper money – Visa, the giant credit card issuer, has created an amazing new technology it calls “payWave” that enables you to leave your wallet, cash and credit cards home. Easily allowing consumers to turn their smartphones into electronic wallets.
PayWave uses something called near field communication (NFC). NFC is a short-range, wireless technology that allows secure communications between two proximate devices. You simply bring your smartphone within a couple of inches of the transaction terminal, and voila, a transaction is complete.
Despite the obvious benefits, the e-wallet industry has had a slow, rocky start.
- One one side, the mobilephone users saw no need to incorporate NFC into their devices.
- On the other side, retailers wouldn’t install mobile payment readers if consumers didn’t own phones that could use the technology.
It’s been a bit of a chicken-and-egg thing…
GSMA Issues Call to Arms to Encourage NFC Devices
Back in 2008, GSMA challenged device manufacturers to begin embedding NFC technology into their devices. Fast-forward to 2011, and the next generation smartphones (still a year or two away) will all have NFC capability.
But Visa didn’t wait. It provided a way to use today’s smartphones to take advantage of NFC-enabled vendors. It involves inserting a special micro-SD (secure digital) card into the slots on some phones. For the iPhone 3 and 4, Apple developed a special plastic skin to hold the chip.
Now, users simply download Visa’s special app, and they can begin NFC transactions. So far, 11 banks, including Wells Fargo, Bank of America, Chase and U.S. Bank, all offer the payWave technology.
MasterCard’s PayPass and Amex’s Express Pay are similar e-wallet systems using NFC technology, and all three are compatible with the terminal readers.
Bill Gajda, global head of Visa Mobile, spoke to CNET at the Mobile World Congress earlier this year in Barcelona, Spain. He believes the transition to cardless transactions is well underway. “NFC technology will take off in 2011,” said Gajda. “The move from leather wallets to mobile wallets will come this year.”
So far, vendors include CVS stores, McDonalds and 10,000 taxicabs in New York City. In San Francisco, you can use your e-wallet to buy your groceries at Whole Foods, and pay for public transit in Los Angeles and New York.
(If you’ve already plugged into this technology, or want to see merchants who are participating in your area, you can visit Visa’s payWave merchant locator.)
The 800-Pound Apple in the Room…
Gajda said customers are already installing the chips and skins in their existing smartphones: “People don’t want to wait two years for new NFC-enabled phones to come out or to switch phones. You can make payments today on the iPhone 3 and 4.”
So far, iPhones, certain Blackberry models and Samsung’s Android-based Galaxy S II are sure bets for NFC-based payments.
According to an EE Times article, that appeared back in January, Apple, Inc. (Nasdaq: AAPL) has been in discussions with both retailers and its contract manufacturers about supporting mobile payments.
Quoted in the article, Richard Doherty, Principal at consulting firm Envisioneering, says NFC could be a game-changer for both Apple and retailers.
“Apple could significantly lower the costs credit card companies charge retailers to verify and complete transactions, a major source of irritation for retailers. Tens of billions of dollars [would] flow through Apple in the next several years.”
While no one knows Apple’s plans for sure, it’s a safe bet that the iPhone 5 will be NFC-enabled.
Taking a little piece of every transaction would represent a huge, new incremental revenue stream for Apple. And one thing’s for sure… As the company has with just about everything else, Apple will set the NFC mobile payment device standard that all other manufacturers will be scrambling to copy.
- With its tightly integrated handsets, operating systems and online payment systems already in place, Apple’s in an envious position to be able to leapfrog the competition in the mobile payment space.
- It owns several key patents that have to do with implementing NFC, and it hired an NFC specialist over a year ago.
- Analysts expect most other manufacturers will soon follow, as NFC becomes a standard feature on new phones.
This isn’t just a U.S. phenomenon, either. Consumers in Japan and Korea are adopting NFC-enabled mobile payment systems, with Brazil, India and other countries hot on their heels. Visa has been developing its payWave system for its European customers, as well as Turkish iPhone users.
So how easy is it to use? You simply open the app, unlock it with a swipe of your finger and place your phone near the terminal to complete the purchase.
The payment is immediately charged to your credit card or debited from your bank account depending on your preference. Banks and retailers can also present the user with discounts, specials and coupons through the payWave system.
That’s Great, But How Safe is NFC Technology?
That was my question when I first heard of NFC technology. Criminals can clone existing plastic cards with ease. Cards can also be easily swiped a second time on a separate reader connected to a computer that lifts all of your card information that can later be sold.
With all the cyber criminals out there, are we just one hack away from having our credit cards stolen electronically?
In actuality, it’s virtually impossible for someone to steal a credit card number with the new systems.
- First, the phone has to be two to four centimeters away from the transaction device to work, making it extremely difficult for someone else to intercept the transaction.
- Second, NFC software generates a new authentication code for each transaction. That differs from current credit card technology where the security code is always the same. Once thieves have the credit card code, they’re off to the races (or in my case, they were off to JCPenney’s).
- Third, most phones have the capability of being password-protected by the user, adding another level of security.
Visa’s payWave system monitors credit card use in real time, and can instantly alert a customer within minutes of a suspicious transaction. Compare that to current credit card technology, which can take days to notify you of a bogus purchase.
In a paper written three years ago, mobile security expert Collin Mulliner performed a detailed study on ways to attack mobile phones equipped with NFC technology.
After talking to Visa, he admitted their system was safe from the types of attacks he envisioned. He plans further tests on a payWave-enabled phone, but for now, his feeling is that it’s a far more secure system than plastic.
Deepak Jain, CEO of Visa technology partner DeviceFidelity, said attacks would be nearly impossible. Multiple electronic barriers are in place to prevent them.
Digital keys, the heart of the authentication process, are encrypted on the chip itself. The Visa app is the only app recognized by the device, and the digital keys aren’t stored locally. They all come from the Visa network.
NFC transactions will eventually become the norm rather than the exception. By the end of this year, Apple could be driving a completely new NFC-enabled bus… all the way to the bank. Its competition will once again be scrambling to catch up, and fighting over 10 to 15 percent of the market that Apple leave for them.