Mobile payments will surpass $235 Billion in 2013 (Gartner); NFC still disappointingly small, despite the hype

Gartner predicts that 245.2 million people will make a mobile payment in 2013 (an increase of 22.1 percent from 2012), making global mobile payments worth US$235.4 billion (up 44 percent from last year). But only 2 percent of transactions will be powered by near-field communications (NFC) – i.e. tap-and-go contactless payments – despite all the media hype about this technology.

By 2017, Gartner forecasts there will be 450 million users making global mobile payments of $721 billion, but NFC will still only be 5 percent of that total. The slow growth of NFC has even taken the analysts by surprise, particularly in North America, and has forced Gartner (and others) to downgrade its mobile payments forecasts.

So many ways to pay by mobile without NFC

Before going on to discuss what is, or isn’t, happening with NFC and the outlook, we should underscore that mobile payments are growing rapidly without NFC. The other 98 percent of global mobile payments are made via SMS, USSD (Unstructured Supplementary Service Data), mobile Web and mobile apps. These vehicles of mobile payment are here today: SMS- and USSD-based payment services work with all handsets; mobile Web works on any handset with a browser (most new handsets ship with a browser today); and native apps work with specific smartphones.

UP to 245 million people worldwide will use these technologies (i.e. not NFC) to make mobile payments in 2013; 71 percent of payments will be money transfers, 21 percent will be mobile purchases, and the remainder will be paying bills and other tasks unspecified by Gartner. Africa (led by Kenya) and Asia account for the lion’s share of mobile payments. Many countries in Africa and Asia are developing countries where smartphone penetration remains minimal, which goes to show that people don’t need smartphones, fancy apps or NFC to make mobile payments, they just need companies to provide useful services via technologies that work on everyday handsets.

Westerners: won’t pay or can’t pay by mobile?

Mobile payments in North America and Western Europe are expected to be worth $37 billion and $29 billion respectively in 2013, according to Gartner. That’s should be enough money to get any company excited, but it’s only 15 percent and 12 percent of the global total of mobile payments.

The question is: are Westerners less interested in making mobile payments than people in Africa – after all we have more ways to pay than the average African – or are Western companies failing to provide Westerners with the opportunity to pay by mobile?

If companies don’t offer SMS payment or don’t have an m-commerce-enabled Website, how can people pay by mobile? As charities have come to realize with text donations, if you give people the opportunity to make mobile payments, they will. Similarly, if companies don’t have an m-commerce site, they will never know if they’re missing out on mobile sales.

As Gartner comments: “People are not purchasing as much because the buying experience on mobile devices has yet to be optimized. People are spending less via mobile devices than via online e-commerce services and at retail outlets.”

Gartner appears to be unimpressed by US retailer’s mobile apps: “The region [North America] has been impacted by low adoption of NFC payment services and many merchants launching mobile apps in a copycat fashion without a clear winning strategy.”

So what’s the problem with NFC?

NFC is a wireless or contactless technology that enables the cell phone to be used as a travel pass, an event ticket, an office pass, to pay for goods in-store, redeem vouchers or interact with tourist information or outdoor media by placing the device near to an NFC terminal. It works in a similar way to contactless “tap-and-go” smartcards used for travel in some cities or to access workplaces.

As mobiThinking has pointed out previously, NFC isn’t a magic bullet that makes m-retail, m-ticketing etc happen, it is just an enabler, performing the contactless handshake that allows the phone to communicate with a terminal. 99 percent of an NFC-based transaction is the service, network, data warehouse, security and billing systems to which the user is oblivious. Unless you are adding mobile to an exciting (and compatible) NFC-based smartcard ticketing system, it is going to be a considerable undertaking.

Stripping it down, an NFC transaction requires the following:
a) The consumer must have an NFC-enabled phone;
b) The retail outlet must have an NFC terminal;
c) The retailer must have the back-end system in place to process the transaction and/or subscribe to someone else’s, such as a financial service provider.
d) It must be as easy, or easier, than other methods of payment;
e) The cost of transaction to the must be reasonable for the consumer and retailer;
f) The service (e.g. purchase, deal) must be attractive;
g) The consumer must be present (i.e. any remote mobile purchase will be via SMS, mobile Web or app).

What’s happened in the last two years?

Since the last time mobiThinking penned a reality check on NFC, two years ago, things have moved on. The hype remains the same, but now there is slightly more to get excited about. The major change is the availability of NFC-enabled handsets. Two years ago it was just a couple of Samsung handsets; now, according NFC World’s list there are 137 different NFC-enabled devices, with 37 coming soon.

NFC handsets:

Berg Insight estimates that 140 million NFC handsets were sold in 2012. Berg estimates that there are 170 million units in use worldwide (about 3.3 percent). This is going to rise rapidly until in 2017 when there will be 2.1 billion NFC handsets in use (about 32 percent of total handsets). ABI Research estimates there will be 500 million NFC-enabled devices in use by March 2014.

Almost all manufacturers, except Apple, have introduced NFC-enabled handsets. Apple’s reasoning for its reluctance to play ball is unclear. Two years ago it was rumored that Apple would adopt NFC. It didn’t. There are still rumors now. But Apple isn’t even a member of the NFC Forum, which isn’t very encouraging.

In our previous article, mobiThinking criticized Nokia – Nokia up to that point had been the largest producer of feature phones and smartphones – for dragging its feet on NFC. We pondered how different the prospects would have looked for both NFC and Nokia if the vendor had made NFC standard across its handset range and launched a mobile wallet (m-wallet) with a local provider in each country.

While Apple doesn’t have the global footprint of Nokia, as number two in smartphone sales (behind Samsung), its intransigence can’t help the NFC debate – Juniper Research cites Apple’s failure to deliver an NFC-enabled handset as one of its reasons to revise down its NFC forecasts. But equally, if consumers and retailers want to move to NFC, then they’ll move on without Apple.

NFC terminals:

The story has also improved with NFC terminals. Berg Insight estimates that 3.9 million NFC-ready point-of-sale (POS) terminals shipped in 2012, which was double the 2011 total. NFC is now a standard in cash/check-out registers, from POS vendors such as VeriFone and Ingenico. By 2017, 44.6 million NFC-ready POS terminals will ship annually. By then 87 percent of European cash tills and 82 percent of cash registers in the US will be NFC ready.

NFC-enabled wallets:

NFC is closely tied to the fortunes of the so-called m-wallets. An m-wallet enables mobile users to pay with their phone at participating outlets and the funds are deducted from a balance (topped up via a bank account etc) or directly from a credit/debit card of a participating bank. It works in a similar way to online payment methods such as Paypal. Usually these m-wallets are a joint venture between mobile operators and/or banks and/or handset manufacturers.

There were NFC m-wallet services commercially live in 13 countries worldwide at the end of Q1-2013, up from just 6 countries at the end of 2011, according to Berg Insight. The analysts say these services are still available to a very small number of consumers: “With the exception of a few projects in Asia-Pacific, there are only three NFC mobile wallet services in the world that have an effective addressable market of more than 100,000 people. These three services are Google Wallet and ISIS in the US and Turkcell Wallet in Turkey.” N.B. “addressable market” is potential subscribers, not actually subscribers. Berg Insight predicts that this will all change over the next few years due to the massive rollouts of NFC-enabled phones and NFC-ready POS terminals.

[UPDATE June 2013: Berg Insight informs mobiThinking that the notable NFC mobile wallets in Asia, referred to above, are: SK Telekom’s Smart Wallet; KT’s Olleh myWallet – both in South Korea; NTT DOCOMO’s Osaifu-Keitai in Japan (which is based on the FeliCa smartcard network); China Unicom and China Merchants Bank’s Unicom Merchants’ Bank mobile wallet (launched late 2012) in China; as well as several mobile wallet services which are part of Singapore’s IDA consortium project.]

It’s hard to get excited about the progress of m-wallets for in-store purchases in the US (i.e. ISIS and Google’s home turf). Berg Insight estimates that in 2012, US shoppers only spent $500 million in-store using m-wallets. Most of this $500 million was via Starbuck’s mobile app. Neither Starbuck’s mobile app, nor the more recent Starbucks/Square Wallet (which has received mixed reviews) are not NFC, as mobiThinking understands it, they work by scanning a quick response (QR) code on the phone’s screen at check out, but the concept is similar to an NFC service (more on this later). Meanwhile the news from the true NFC m-wallets, in the US, isn’t very encouraging:

ISIS, a joint venture by AT&T, T-Mobile USA and Verizon Wireless, is still only at the pilot stage, only operational in Salt Lake City and Austin. According to ISIS, as reported by NFC World, the wallet can be used at 10,000 locations in and around the two cities, which sounds impressive – and certainly suggests companies are interested – though there is no mention of how many people are using the service.

Google Wallet recently saw the departure of its leader, Osama Bedier, for pastures new. Hearing this news, analysts at Yankee Group stated: “Bedier’s exit is indicative of the troubles Google Wallet has been facing since its inception. Two years after launch, Google’s initiative remains stagnant, failing to gain traction in the mobile payments ecosystem. While consumer dissatisfaction is visible through the poor adoption rates, displeasure has been just as evident from within the company. Over the course of the past year, Google has lost key executives leading the wallet team who were undoubtedly disappointed by the lackluster success of their project.”

Turkcell Wallet is the only non-US wallet mentioned by Berg. Introduced in October of 2012, according to the Turkish mobile operator Turkcell Wallet is “currently on the mobile phones of 1.2 million people.” While this is a very impressive number, it is unclear how many of these people are using the wallet for NFC-enabled transactions.

So where do we look for NFC inspiration?

As with most things mobile, it is important to look East for inspiration. While the NFC story in Japan and China is encouraging, it is South Korea that stands out particularly. As highlighted in mobiThinking’s previous article, back in 2011, the national regulator, the Korean Communications Commission (KCC), has brought together the major mobile operators, financial institutions, device manufacturers – note Samsung the world’s number one handset/smartphone manufacturer is Korean – and other stakeholders in a Grand NFC Korea Alliance to put the country at the forefront of NFC and to ensure the establishment of interoperable systems.

Since then, 10 million NFC handsets (all compatible with the global standard) have been put in Korean consumers hands – that’s equivalent to 20 percent of the population, according to Korea Blazes Global Trail for NFC, a GSMA briefing paper. South Koreans are increasingly using NFC smartphones to purchase goods in shops and street markets, pay fares on public transport and access buildings. The paper estimates that 10 percent to 20 percent of South Korean customers are active users of NFC services.

[UPDATE June 2013: Korea Times reports that SK Telekom’s Smart Wallet now has 10 million users].

NFC is coming, but don’t wait until then to get your m-commerce strategy in place

Bearing in mind that the NFC Forum was set up in 2004, NFC has been much slower to come to the fore than anyone expected. But if you look at South Korea, it is easy to see how quickly things can change when the regulator, operators, banks and manufacturers work together (however, it is difficult to see the same level of forward-looking co-operation happening with stakeholders in the US market, for example). So don’t believe the hype, but don’t believe the naysayers either.

But let’s not forget that most m-payments are not and will never be NFC. Non-NFC m-payments will be worth $231 billion in 2013 and $707 billion in 2017, according to Gartner. These will be facilitated by today’s technologies: SMS, UMTS, mobile Web, mobile apps, QR codes etc. Remember, NFC will only be relevant for transactions when the customer is present, for remote mobile purchases people will continue to pay by SMS, mobile Web or mobile app.

While NFC could revolutionize in-store payments, travel and event ticketing, it isn’t actually necessary for m-payments, m-travel, m-ticketing, m-vouchers and any of the other m-solutions cited in connection with NFC. The actual NFC bit is as little as 1 percent of such services, in mobiThinking’s opinion, and could be substituted with ubiquitous technologies such as SMS and mobile barcodes… until NFC takes off.

The important thing is to get customers used to paying with mobile. This requires a cultural shift, requiring patience, innovative service design and the right inducements. Inducements might be reduced cost and rewards, but ISIS in the Salt Lake City trial took this to a new level: customers that tapped in and out by phone traveled for free on Utah Transit Authority’s buses and trains.

Starbucks success with mobile – it claims to process 3 million mobile transactions each week in the U.S – is proof that people are willing to pay by mobile if the service/inducement is right. Consumers don’t care whether it is NFC, QR codes, SMS, mobile Web, mobile app or any other technology – to them it’s just paying by mobile or m-payment. If it makes sense they’ll do it. Intelligent system design/build should facilitate an easy migration to NFC when the time is right.

Recommended reading:

If you read nothing else on NFC, read the GSMA briefing paper:
Korea Blazes Global Trail for NFC, a GSMA briefing paper.

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