Dropped Call

The mobile carriers once stood bestride the payments world as major players. Now, not so much. What happened, and can they stage a comeback?

Not so long ago, the mobile network operators, or MNOs for short, cast a long shadow over the nascent business of mobile payments. While banks and card networks scrambled to develop vital technologies like near-field communication (NFC), companies like AT&T, Sprint, T-Mobile, and Verizon exercised enough clout to hold things up while the parties battled over heated issues like transaction fees and control of customer data.

That carrier clout was potent enough to mire NFC, a close-range transmission technology that can link phones to payment terminals, for years in seemingly endless trials and pilots. That frustrated developers who were ready to move the technology into commercial applications, but it suited MNO executives who wanted to ensure their companies had a place at the feast of revenue mobile payments was expected to deliver.

To seal that deal, AT&T, T-Mobile, and Verizon nearly five years ago came up with their own NFC-based mobile-payments entry, originally called Isis but rechristened Softcard last year to avoid association with the Middle Eastern terrorist group. And when Google Inc. in 2011 launched a rival wallet for its Android platform, carriers were able to hobble it by keeping it out of their network of stores.

“In Softcard’s case, [the MNOs] spent a lot of money trying to figure out whether it could scale or not. They figured that out. They proved some points with NFC on Android devices,” recalls Tony Abruzzio, who is retired now but until last year helped head up Softcard sales to issuers and acquirers.

And while Softcard may have struggled to boost consumer usage, the carriers’ distribution strength helped ensure the wallet was in plenty of consumers’ hands. “The uptake was massive. 2014 into 2015, it was a very big number,” says Spencer White, a former AT&T executive who left Softcard in February to become chief operating officer at Atlanta-based Sionic Mobile Corp.

‘Definitively out of It’

Now, the question is, where has that clout gone? With Google’s launch last month of Android Pay, competition in the mobile-payments market ratcheted up yet another notch. But in all the talk about tech companies, handset makers, and banks ushering in services like Android Pay, Apple Pay, and Samsung Electronics Co. Ltd.’s Samsung Pay, one obvious set of players suddenly seems to be missing in action: the MNOs.

When the carriers behind Softcard decided to divest the operation early this year, Google ended up buying the assets in a deal that included an agreement for the operators to preload Android Pay on Android-powered phones they sell. That agreement represented a 180-degree turnaround from the days of boycotting Google Wallet.

New technology is further sidelining the carriers. NFC deployments in some cases can now brush aside carrier control by using host card emulation, a cloud-based variant that bypasses the secure element (“NFC’s Cloudburst,” June 2014), a crucial chip embedded in the phone that stores payment credentials and usually belongs to either the MNO or the phone manufacturer.

To many observers, the balance of power in mobile payments has plainly shifted away from the mobile networks. “That’s been wrested out of their hands,” says Tim Sloane, vice president of payment innovation at Mercator Advisory Group Inc., a Maynard, Mass.-based payments consultancy.

Adds Rick Oglesby, senior analyst at Double Diamond Payments Research, Centennial, Colo.: “At least in the U.S., they’re definitively out of it.”

To be sure, the carriers still exercise some power in the payments market, as Verizon Wireless has demonstrated in recent weeks in holding out on endorsing Samsung Pay, which was set to launch commercially in the U.S. late last month.

But this is widely seen as a negotiating ploy before the huge carrier gets what it wants and falls into line. “It may seem like unfriendly value extraction, but right now that seems to be their opportunity and they’re taking it,” notes Ted Fifelski, president and co-founder of Austin, Texas-based SimplyTapp, developer of host card emulation.

It may be an opportunity, but one cast in a negative light for some observers. “It’s rather sad if the operator role is to be defined as an inhibiting factor on service provision rather than an enabler, but all that will achieve is customer churn,” notes Windsor Holden, head of forecasting and consultancy at Juniper Research in the United Kingdom, in an email message.

Contacted by Digital Transactions, representatives for Verizon as well as AT&T Mobility and T-Mobile International AG, the three carriers behind Softcard, did not timely respond with comment for this story.

‘Distracted’

Theories abound on what went wrong with Softcard, and with the carriers’ position in payments generally. Some speculate that the advent of Apple Pay, a more potent exponent of NFC and one based on the secure element, darkened Softcard’s prospects by making it seem redundant.

Other factors may have played a role, including the introduction of host card emulation, which weakened the case for the secure element as a carrier-controlled vault for payment credentials.

“The minute that banks got the opportunity to pursue a model that cut out the operators—which was what [host card emulation] offered—they took that chance,” says Juniper’s Windsor.

As a result, adds Cherian Abraham, global consulting practice analyst at Experian Decision Analytics, host card emulation “nailed Softcard.”

Also, the MNOs recently weathered a price war in mobile voice and data service, which may have made it harder to justify further investment in a service that, while it might have helped sell phones, was unrelated to the basic business of mobile network communications. “They became more distracted with their core business,” notes Abruzzio.

‘Second Fiddle’

Still, the operators might not be done in payments. Observers see a role for the companies in critical businesses such as transaction security and user authentication, for example. And some argue they could expand their stake in carrier billing, which involves processing transactions for merchants and charging the payments to customers’ monthly mobile bills.

One of the carriers’ big strengths is that they control billing and other data that can determine whether the owner of the phone is the one who is trying to do a transaction. “They know a lot about the consumer,” says Oglesby. “If you can authenticate the device and authenticate the user, you can get a lot closer to a secure transaction.”

And this is an opportunity, some say, that remains a largely virgin field for the MNOs. “They’re sitting on a pretty sizable opportunity in identity fraud, which they haven’t really done anything with,” observes Abraham.

Carrier billing might be a trickier proposition. Because of the risk, carriers have restricted the service to low-ticket goods and have charged sky-high fees to merchants, all of which has depressed adoption in the United States and made it hard to push the service into the physical point of sale, where the bulk of transactions are.

“There was never a real opportunity to bring a carrier-based billing product into the physical world that made sense for the merchant,” says White, who was involved in carrier-billing deals while at AT&T.

Ultimately, the MNOs will have to find a way back onto the mainstage of payments, observers argue, or risk staying in the wings permanently. That could hurt more than their pride. Warns Abraham: “In a networked world, there’s not a lot of money to be made playing second fiddle.”