M-Commerce: Isis Looks for Fertile NFC Ground

Elizabeth Whalen

The long-awaited test of the telco-backed Isis mobile wallet is under way in Salt Lake City and Austin. What are merchants experiencing?

Many in the payments industry believe in the bright future of mobile payments and the potential benefits to consumers and merchants. But after the much-anticipated launch of one mobile wallet, the details of that future remain hazy.

Anecdotal evidence from the launch of Isis, a mobile wallet backed by AT&T Mobility LLC, T-Mobile USA, and Verizon Wireless, suggests that it may be some time before that picture crystallizes.

After two delays, Isis finally began service on Oct. 22 in Austin, Texas, and Salt Lake City. The company chose those two cities for their relatively large populations of early technology adopters and their geographic isolation, an Isis spokesperson says by e-mail. Isis isn’t providing data about transactions or adoption rates and did not make an executive available to Digital Transactions for this story.

Merchants in Salt Lake City and Austin that accept Isis have yet to process a substantial number of transactions. In the early going, it appears that Isis is attracting merchants more through offers of free terminals than through the potential benefits of its loyalty programs or fast payment transactions.

These free terminals, however, could encourage adoption of near-field communication (NFC) technology in the U.S. NFC is the engine that powers Isis and Google Inc.’s Google Wallet. The powerful radio technology transfers data between the consumer’s device—a card or smart phone with a contact or contactless chip—and a chip-reading point-of-sale terminal.

NFC not only handles payments and has strong security, it also enables merchants to provide electronic coupons and sophisticated loyalty programs via smart phones. In fact, the marketing aspect is what many NFC backers say is the technology’s best asset.

The downside is that NFC requires a smart phone to have an NFC chip. Only a few NFC-capable smart phones are being sold in the U.S. today, though their numbers are increasing. The hot new Samsung Galaxy S III, for example, is NFC-ready. But Apple Inc.’s iPhone does not support NFC.

Plus, merchants must install terminals that can read contact or contactless chips in order to accept an NFC transaction. Industry researchers believe only about 200,000 such terminals are installed in the U.S.’s approximately 8 million card-accepting merchant locations. The Salt Lake Tribune said in December that about 420 merchants in the metropolitan area could accept Isis.

‘Big Purple Banners’

Another reason behind the small number of transactions processed so far could be low consumer awareness. Merchants in the two launch cities say that while it’s hard to miss the local advertising for Isis, they’re uncertain the ads are having the desired effect.

“Isis just started its big marketing push a couple of weeks ago here in Austin, and you’re seeing it everywhere: on the buses, on Yahoo shopping, on Facebook, but I don’t think a lot of people still understand what it is,” says Shelley Meyer, co-owner of two Austin music-themed gift stores that both accept Isis: Wild About Music and Austin Rocks.

“It’s just a lot of big purple banners and things. They’re not quite getting the message across. I know what they’re trying to say, so I get the message when I look at it, but I’m not sure that a person that’s not clued in that this is coming to the market would,” she says.

Amy Gomez, bakery manager at the Isis-accepting Granite Bakery and Bridal Showcase in Salt Lake City, also has seen many local ads but isn’t sure their message is clear.

“I went to a concert right before we got the system, and there was a booth outside that told you all about it. That was helpful and explained it well, but as far as advertisements like billboards, it’s not as clear,” she says.

Although no one as of late November had yet used Isis at either of Meyer’s Austin stores, a few customers have at Granite Bakery. The staff was unsure how to process the first transaction, but they managed to complete it even without consulting the instructions, Gomez says.

“We thought, ‘what do we do?’ And it was super easy to run through. It was basically, ‘OK, you push this button and the customer is going to put their phone on it [the terminal]. And it just rings up like a normal sale,” she says.

Neither Gomez nor Meyer cited loyalty programs as the primary reason for accepting Isis.

Meyer did find that aspect of Isis attractive, and she does plan on taking advantage of the programs once her independent sales organization implements them, but she says she signed up mainly for financial reasons. Adopting Isis meant a free lease on payment card processing terminals, which she was paying for with her previous ISO, and a free wireless terminal, which she was renting the fourth quarter of every year. Her husband’s frequent international travel already had introduced her to the idea of mobile payments, she says, so her desire to try the new technology also drove her decision. 

Granite Bakery made the switch because it also received information from its merchant processor touting the benefits of Isis and offering a free terminal.

“We figured, ‘why not?’ We were looking to get a new terminal any way,” says Gomez. She adds that her company does try to keep pace with payment trends and accept a variety of payment methods.

Steve Wright, owner of High Point Coffee House in Salt Lake City, signed on to Isis to resolve a conflict between his current point-of-sale system and his card-acceptance system that was going to cost him roughly $500 to fix, he says. His ISO suggested a solution: switch to a system that accepts Isis.

“They were giving it away at the time,” Wright says. “The terminal was free.”

Wright already has a loyalty program for his customers and has no plans to use Isis to create a separate one. He prefers not to collect too much personal information from his customers, he says, because he dislikes having such information collected from him.

‘Future-Proofed’

The free terminal leases have not come with any special conditions, say Meyer and Gomez. Granite Bakery did have to agree to accept Isis payments and to return its old terminal to its ISO.

According to two of the merchant processors working with Isis in the test cities, Isis is subsidizing at least part of the costs of the terminal leases. But neither company—Heartland Payment Systems Inc. of Princeton, N.J., and MobiSquad of Phoenix—could disclose specific terms of their agreements with Isis.

As part of a study of mobile-wallet usage, Linthicum, Md.-based First Annapolis Consulting Inc. analyzed loyalty-program usage and found that, at least for now, consumers are mostly using retailer-specific applications, says associate Dara Khan.

“Mobile offers and loyalty are, at least from a value-add perspective, a big focus of these wallets,” says Khan. “We found that, with mobile-loyalty programs, there’s not a lot of activity around that in general. We looked at the largest 100 merchants in the U.S. and found that there’s a good amount of mobile-coupon activity, but most of that is driven by retailers and merchants with in-house programs.”

Adds Paul Grill, a partner at First Annapolis: “Like many things in this industry, there’s a little bit of a circulatory aspect to it. It’s a question of where these wallets are able to source compelling offers from.”

NFC adoption is another aspect of mobile payments that many see as circulatory. Both Isis and Google Inc.’s Google Wallet depend on NFC—Isis more so than Google, which last summer moved storage of card credentials for the wallet to a cloud-based model to speed up adoption.

PayPal Inc.’s mobile wallet, meanwhile, does not rely on NFC, and PayPal just happens to be, by far, the mobile-payments leader. The eBay Inc. subsidiary predicted it would do $10 billion in mobile-payments volume in 2012.

Although Mountain View, Calif.-based Google has not released specific data on Google Wallet usage, a spokesperson says by e-mail that since the August change, usage has more than doubled. Some 60% of Google Wallet transactions are at convenience stores and quick-service restaurants.

PayPal’s strategy is to use the technology consumers and merchants prefer, says a spokesperson for the San Jose, Calif.-based payments provider.

“NFC is a great technology. People sometimes mistakenly say that PayPal is anti-NFC. That is not the case. We will use it because PayPal is a technology- and platform-agnostic company,” he says. “What we don’t do is bet the company’s future on any one technology. We think the cloud-based approach is more future-proofed.”

Isis is focusing on NFC, says its spokesperson, because the technology’s combination of software and hardware offers more security than a software-only payment method.

Grill believes that, for NFC to catch on, it will likely need many use cases.

“I don’t just mean payments and offers at the POS,” he says. “I mean applications like using it as an airline interface for your boarding pass. If NFC is able to gain wide-scale adoption for many applications, that helps its chances in payments.”

‘The  Stars Aligned’

One of those use cases could be public transit. The Utah Transit Authority (UTA) bore no incremental costs to accept Isis, says a spokesperson, because the agency had already upgraded its payments system on its bus and rail network to accept any contactless card compatible with the ISO 14433 standard. It hadn’t intended to accept mobile wallets when it installed the open-fare system, but it now accepts Google Wallet and Isis, according to the spokesperson.

“We had no idea it was on the horizon, but the stars aligned, and we were fortunate enough that we had a fully implemented system that is ready to accept mobile wallet,” he says. “It required no additional investment, no configuration, no change.”

The agency launched a promotion, funded at least in part by Isis, the day the wallet went live.

“Anyone using an Isis mobile wallet can ride free on our buses or trains for the duration of the promotion, and that began Oct. 22 and will continue to Jan. 31,” says the spokesperson.

He adds that the promotion, which the UTA is advertising on its trains and buses, has a value equal to a $189-a-month premium monthly pass.

“So for three months, that’s a $567 value,” he says. “You would essentially pay for a brand new smart phone, even more than that. We’re still waiting for numbers from Isis on how many people have adopted, have downloaded the app, have the new phones.”

The UTA plans to continue making similar offers to its riders, he adds.

“It might not be at the same level, but certainly one of our goals is to create frequent-rider rewards or benefits that encourage people to keep coming back.”

About 1% of UTA’s riders currently pay with a contactless credit or debit card, a number that’s held fairly steady for some time, according to the spokesperson. Until the Isis introduction, the agency had not mounted a significant campaign advertising its acceptance of contactless payments.

Wallet Confusion

Grill of First Annapolis believes that, despite the obstacles facing NFC adoption, carriers have an advantage when it comes to encouraging use of mobile wallets.

“They have huge distribution networks with consumers,” he says. “Not unlike banks with bank branches, carriers have a network. They could use that space to sell customers on payments that are unique to what they have to offer.”

Yet Meyer, the Austin music-themed retailer, expects consumer awareness and adoption to take months or even years. She’s experienced some of the confusion surrounding mobile payments: she had ordered an iPhone 5 in part because she thought it would have an NFC chip.

“But, as it turns out, I got my iPhone 5 and then found out that the chip didn’t make it into the phone,” she says. “And when I went to the AT&T store and quizzed the salespeople about Isis wallet, they knew nothing about it. Nothing.”

The PayPal spokesperson also sees confusion surrounding mobile payments and clarifies that PayPal sees its service as a digital wallet—that is, a place for consumers to store all their financial information and access it anywhere, be it online, in a store, or on a mobile phone—rather than as a mobile wallet per se.

He sees a mobile wallet like Isis as simply exchanging one physical device, the wallet, for another, the phone.

“We don’t think that’s a winning strategy,” he says. “You’re not left with the ability to pay wherever you want to pay and take advantage of the digital wallet no matter where you’re shopping.”

He adds: “Sometimes you need to forget about the technology and think about, ‘What does it mean?’ Consumers care about two things: it has to either save them time or save them money.”

There’s very little data so far to support the benefits of one payments technology over another, says Grill.

“A lot of this will have to pan out in terms of how consumers behave,” he says.