Trends & Tactics: Can the NFC Tortoise Beat the Barcode Hare?

Despite the nearly universal opinion that near-field communication (NFC) is a high-capacity, fast, and secure technology for mobile payments, it isn’t exactly winning popularity contests. Mobile-payments leaders PayPal Inc., Square Inc., and Starbucks Corp., along with many other industry players, use other technologies, often quick-response (QR) codes or other 2-D barcodes, because few U.S. merchant locations and smart phones can process NFC transactions.

But NFC’s day is coming, according to Nick Holland, a payments-technology analyst at Boston-based Yankee Group.

“Despite muted uptake, we believe NFC will be the core enabling technology for mobile payments once it finds its stride,” Holland said in a January report. “In fact, Yankee Group forecasts NFC-based mobile payments will reach parity with QR-code-based mobile payments in mid-2014 and will surpass QR codes for mobile payments globally by 2015.”

As evidence, Holland cites growing membership in the NFC Forum industry group and backing by more suppliers. He also points to what he calls a recognition by “realistic vendors,” such as Google Inc., developer of the NFC-based Google Wallet, that NFC will take time. Plus, NFC can ride the coattails of Europay-MasterCard-Visa (EMV) contactless and contact chip card payments as they grow in the U.S., Holland says.

“In short, the tide is turning for NFC…slowly and steadily, NFC is trickling into hearts, minds, and (mobile) wallets,” he wrote.

One of those making a bet on NFC is Minneapolis-based U.S. Bancorp, which in January began testing an NFC-based rewards credit card account in Salt Lake City, Utah, and Portland, Ore. The bank is offering new holders of its FlexPerks Travel Rewards Visa Signature card a sleeve for Apple Inc.’s iPhone 4 and iPhone 4S. The sleeve contains a secure element embedded into a so-called microNFC chip, and an antenna that facilitates payments by communicating with contactless point-of-sale terminals.

The iPhone does not have a built-in NFC chip. With the sleeve and U.S. Bank’s new Go Mobile app, cardholders will be able to use their iPhones to make purchases at any merchant location that accepts the contactless Visa payWave card.

Cardholders won’t have to pay for the case, which is made by Device­Fidelity Inc. of Richardson, Texas. The case includes a battery that extends the iPhone’s charge time by more than 50%, a feature U.S. Bank says will appeal to frequent travelers. The card itself is free in the first year but afterward charges a $49 annual fee.

U.S. Bank already issues the FlexPerks card with an EMV chip so that international travelers can use their cards easily in EMV countries, which is now most of the industrialized world. The new test is part of an effort to learn how consumers and merchants take to NFC, according to Dominic Venturo, chief innovation officer at U.S. Bank Payment Services.

“We understand it won’t initially be for everybody, but we believe mobile will be an important part of payments for customers in the future,” Venturo says. “Every one of these technologies has its benefits and weaknesses. In its current iteration, I think it’s safe to say NFC is the most advanced.”

And while still small considering that the U.S. has about 8 million card-accepting locations, Venturo says the number of locations capable of taking contactless cards, which means they can accept NFC payments, is now up to about 300,000. Earlier estimates had the number in the 200,000 to 250,000 range.

U.S. Bank has no end date for the test and considers it a limited rollout that may expand later this year. “We’re optimistic it will go well,” Venturo says.

The bank is promoting the NFC card account in its 111 Portland and 54 Salt Lake-area branches, and through direct marketing. Minnetonka, Minn.-based Datacard Group supplies the personalization technology for the card and NFC chip.

On PCI, Acquirers Say, ‘Show Me the Money’

In sharp contrast to only a year ago, independent sales organizations and other merchant acquirers now rank revenue generation as their number-one goal for programs they offer to help merchants comply with the Payment Card Industry data-security standard (PCI), according to a survey released last month.

That’s a complete about-face from what acquirers had said only 12 months earlier. In that earlier study, acquirers rated “reducing risk from breaches” as their top priority with PCI programs, with potential revenue from PCI fees coming in fourth. This time around, not only did respondents rank revenue first, they relegated risk reduction to fourth place.

Satisfying card-brand mandates and reaching higher compliance rates came in second and third, respectively, unchanged from a year ago. Both surveys were sponsored by ControlScan Inc., an Atlanta-based security-solutions firm, and the Merchant Acquirers’ Committee, a trade group focused on risk management.

The sudden, 180-degree change in priority for revenue “definitely surprised all of us,” says Heather Foster, vice president of marketing at ControlScan, which with the MAC surveyed 123 banks, processors, and ISOs. Completed in October, the study focused on compliance programs for so-called Level 4 merchants. These are small merchants processing fewer than 20,000 card transactions online or fewer than 1 million card-present transactions each year.

Susan Matt, chief financial officer for the MAC and chief executive of ThoughtKey Inc., a payments consultancy, says she, too, was surprised by the result but attributes it to acquirers’ intensifying search for new revenue to offset higher costs and price compression. “You’re seeing a lot more competition down at the small ISO level, where before it hadn’t hit them yet,” she says. “They’re saying, ‘We’re seeing deterioration in revenue.’”

She concedes that ongoing industry consolidation should ultimately lead to firmer pricing. “With fewer market players, you’d expect to see less competition and pricing compression more lax, but we’re not seeing that yet,” she notes. “That’s a trickle-down effect.”

The dramatically higher priority for revenue is showing up in the fees acquirers charge merchants for PCI-compliance programs. Some 59% of respondents say they charge $71 or more per year for this service, up from 50% last year. The sweet spot appears to be in the $71-$100 range, where 43% of respondents fell. Only 11% say their programs are free.

Nor are program fees causing acquirers to lose business. Some 49% say they have lost less than 1% of their merchants each month because of such fees, up from 37% 12 months earlier. Only 20% say they have lost 1% or more. A cautionary note, however, lies in the fact that fully 30% of acquirers don’t track this statistic.

At the same time, acquirers are cracking the whip on non-compliance—and charging more for it. Eighteen percent now charge at least $26 per month for non-compliance, three times the level from a year ago. A solid two-thirds charge between $11 and $25.

Non-compliance fees also serve more and more as a tool to drive merchants into compliance programs. The use of discounts to encourage participation in such programs stands at 15%, a 7-point drop from last year. And these fees are coming sooner. Only 9% now say they wait at least six months before imposing the fee, down from 22% last year. The majority—60%—hit recalcitrant merchants within two to three months.

Among acquirers who responded to the survey, 23% were banks, 49% ISOs, and 24% processors, while the remainder were agents or other entities. Some two-thirds held Level 4 portfolios of at least 1,000 accounts.

Green Dot Puts Bluebird in Its Sites

At a time when its core prepaid card business faces increasing competition, Green Dot Corp. hopes to one-up its rivals with its new GoBank account built around a mobile app and a full-fledged debit card.

GoBank gives the Monrovia, Calif.-based prepaid card program manager a weapon to fight competitors for underbanked consumers or those simply dissatisfied with mainstream banks, including American Express Co., issuer of the new Bluebird prepaid card for customers of Wal-Mart Stores Inc.

GoBank provides a checking account with a Visa debit card from Green Dot Bank. Green Dot bought that Provo, Utah-based bank, formerly known as Bonneville Bank, in late 2011.

Consumers can open and manage GoBank accounts on Apple and Android mobile devices and fund them through direct deposit, mobile remote deposit capture, or depositing money at Wal-Mart locations and locations of retail partners that Green Dot hasn’t yet disclosed. Or, they can make deposits through debit-card-based funds transfers into Green Dot Bank.

Customers don’t get paper checks. Instead, they pay bills through Fiserv Inc.’s CheckFree bill-pay platform. If a merchant doesn’t accept electronic bill payment, the Fiserv system will cut and mail a paper check based on information the customer provides through the app, says Green Dot chief executive Steve Streit.

Further, customers can make surcharge-free cash withdrawals at more that 40,000 ATMs managed by Cardtronics Inc. or in U.S. Bancorp’s MoneyPass network. GoBank users, however, can’t make ATM deposits.

Developed in large part by the staff of Loopt, a geolocation technology company that Green Dot bought last year, GoBank has a number of differentiating features. For example, the app displays the account balance when the customer moves an on-screen slider, without requiring a login.

The app also has budgeting features, including a savings-account-like place for customers to park longer-term money, and a “Fortune Teller” that gives the user a recommendation on whether a planned purchase is affordable. GoBank also provides person-to-person payments.

Like the Bluebird card, GoBank paints itself as a consumer-friendly alternative to fee-hungry big banks by charging only a few, low fees. “We didn’t design trouble into the bank,” Streit said at GoBank’s launch event.

In fact, while the account is advertised as free, Green Dot is inviting customers to voluntarily pay a monthly fee of their choice, up to $9. Based on what consumers in Green Dot’s test groups said, Streit expects some actually will pay. “We think so, people say they will,” he tells Digital Transactions. “It [the app] was so neat and interesting … why wouldn’t you pay?”

Green Dot’s stock rose 4% on the day of GoBank’s launch after taking a beating over the preceding months. The company’s shares had slumped when AmEx and Wal-Mart announced Bluebird, which many observers thought might encroach on the Green Dot-managed Walmart MoneyCard, a popular general-purpose reloadable prepaid card. The huge retailer accounts for more than 60% of Green Dot’s revenues.

Streit says GoBank and Bluebird are “different offerings.” But he notes that GoBank accounts come from a bank, and customers are protected by federal deposit insurance and can receive federal payments such as tax refunds by direct deposit. Bluebird, by contrast, is issued by a non-bank AmEx subsidiary, Travel Related Services, and thus is not federally insured and can’t receive federal deposits, he says.

Ben Jackson, a senior analyst at Mercator Advisory Group Inc., doesn’t think GoBank “is a Bluebird killer, but it may smash a few Bluebird eggs” by capturing some customers who might otherwise take a Bluebird card. And he says the budgeting aspect is unique.

“That may be attractive because it helps users manage their spending,” Jackson says by e-mail. “Of course, that lowers the risk of overdrafts, which is a positive thing for Green Dot as well as its customers. But this piece could be very attractive to people who are, as Steve Streit said, trying to manage their cash flow as opposed to a more complex budget.”

Streit says Green Dot initially will limit GoBank accounts to 5,000 to 10,000 customers, but he expects a national rollout in a few months.