Commentary - Cash as the physical embodiment of money or value is inefficient. It is also expensive to use, considering theft, fraud, security and costs associated with its physical handling: from armored cars to secure sorting facilities, to bank branch costs, and servicing and replenishing ATMs. Plastic money in the form of credit and debit cards has exploited the inefficiency of cash for many decades and can indeed help solve many of the problems associated with cash.
But even cards are not without problems. There are issues of transaction fees, eligibility and the inconvenience of authorizing transactions. These have dictated that smaller transactions tend to be cash-dominated. Also, not everyone carries plastic. In an effort to overcome these limitations, credit card companies have shown more flexibility over transaction charges and have, in many cases, eliminated the need for a signature to speed up transactions. But more needs to be done.
Near Field Communication or NFC, the innovative technology that allows our mobile phones to act as scanners or readers as well as secure credentials, can be viewed as the final frontier in this war on cash. The number of people carrying a mobile phone is huge and rapidly growing, so the concept of a secure credential soon to be carried by almost all consumers is very attractive.
NFC is an exciting opportunity. As with any new technology, analysts are looking for its killer app and financial observers are keen to quantify markets, investments, winners and losers. What's easier than looking at the number of retail transactions; multiply by a modest transaction fee and jump to a potential market forecast? But let's think about a few points before we burden NFC beyond its current scope.
Do we want NFC to replace existing credit cards or target micropayments?
The security capabilities of NFC, if fully deployed, could make mobile phones an ideal replacement for credit cards. They could offer a level of security comparable to the enhanced security standards utilizing a chip and a PIN known as EMV (Europay, Mastercard, Visa), currently used by major credit card companies in Europe and set for wider use in the USA starting in 2014. But are we as consumers really interested in using NFC for our credit purchases or for micropayments or, perhaps, both? The answer, as always, is we want it all. But mostly we want to win the War on Cash, which means mainly the micropayments. We want more convenience for those sub-$20 payments for a coffee or fast food. We want speed, ease and possibly, anonymity. For a larger credit card payment of say, $200, we want a higher level of security and may also be willing to produce ID, enter a pin code or offer some sort of biometric validation.
More people carry mobile phones than credit cards! Mobile phones are fast becoming critical infrastructure; millions of people in emerging economies carry mobile phones, yet have never set foot in a bank. "Pay as you go" schemes have made mobile phone minutes a cash substitute in youth cultures around the world. In many countries Vodafone or other carriers have more customers than Visa, MasterCard, American Express and Discover combined. So how do the consumers get their phone credits? Typically it is through upfront cash payments to phone companies; by buying scratch cards or similar devices with cash; or through contracted plans paying monthly bills to Verizon or AT&T by credit card, direct debt or bank check. For the millions of people without bank or credit card accounts, the use of mobile phones would be ideal for micropayments.
But given that the phone companies already have relations with so many consumers, do we now have a fight over transaction fees and who owns the customer? The phone companies subsidize the cost of handsets to attract consumers and the nifty new devices with NFC could enable them to expand their offering into banking services; unsurprisingly they wish to enter the credit card markets and assume some banking duties for the millions of "unbanked" who carry their mobile phones.
But another important reason most micropayments are still in cash has to do with the retailers' willingness to pay fees. Even if consumers have a cashless payment device, there is the issue of transaction fees: the hot dog stands in New York City or the lunch truck coming by the office operate on thin margins, and even a few dollars a day in commissions or transaction fees may be a deal-killer. NFC will play a huge role in the War on Cash, but it is likely to be most successful through micropayments and will be widely used if transaction fees are minute.
While the VCs and financial analysts are excited about NFC for payment because they can come up with a large estimate for the market, it is probable that this excitement is not shared by the average consumer. I don't really know anyone getting super excited about payment; be it by credit card, NFC, biometric or Morse Code via eye winks, payment is just not a "fun" thing to do!
Let's remember other possible uses of NFC, from the more mundane such as opening the door to your office or hotel room with an NFC phone to the grabbing of info on the fly from advertising boards, tapping phones to follow someone on Facebook, tweeting your location at a club or seeing [getting s discount on] the special drink or dish of the hour.
NFC is a consumer empowerment technology. It is technology that can enhance privacy and choice for consumers and it is the consumers who will eventually decide the killer apps -- so let's not forget that openness, low friction and interoperability are what it's all about! Make no mistake about it, NFC will play a huge role in the War on Cash, but it is likely to be most successful with micropayments - when the fees are acceptably small and the clamor of mobile phone users is loud enough to be heard.
biography Ayman S. Ashour serves as Chairman & CEO for Identive Group, a systems and technology provider for the identification, security and RFID industries and an early solutions leader for the near field communications (NFC) market.