Being on Week 3 of a self imposed Google Wallet embargo, I had instead been writing about the ongoing turf wars between platform providers and carriers, which is starting to sound like an episode of "Mob Wives." Though the bulk of it was to be focused on Android, it became impossible to ignore rumors around iPhone 5 and NFC. Now that iPhone 5 is a mere couple of quarters away, the rumormill has started to churn yet again on the possible inclusion of NFC along with iWallet – Apple’s own mobile wallet initiative. Most of these indicate that an Apple mobile wallet initiative equipped with NFC is a sure bet. I on the other hand (and ever the doubting Thomas) am not so sure. For the rest of this post I shall lay out reasons why I believe NFC and iWallet are far from a sure bet to be included in iPhone 5. Along with it comes the caveat that my crystal Palantir that helps me see in to Infinite Loop, Cupertino, Calif. has malfunctioned, which has left me equally in the dark as to what Apple may choose to do in Q4 2012. Whatever happens, I have attempted to paint the broad outlines of an Apple mobile wallet strategy, regardless of it being proximity or cloud based.
Before we attempt to answer the question of NFC and iWallet in iPhone 5, let’s separate these out in to two broad questions:
What does Apple stand to gain by including NFC in iPhone 5?
NFC on iPhone 5 will be NFC’s strongest showing yet and can spur other manufacturers in to equipping their own offerings with NFC (there are already around 90 mobile devices in the pipeline with plans to use chips from NXP). Apple sold 37 million iPhones in total during Q1 2012 (it did not provide breakout numbers for 3GS vs. iPhone4 vs. iPhone4S) and there is no reason to suspect that NFC on its flagship product will not be embraced by the market. Beyond the obvious use cases around enabling mobile payments, Apple also own patents that visualize NFC in supplementary retail scenarios.
At the same time, it is hard to ignore that NFC is not yet a leading differentiator while customers shop for new phones (most are simply unaware). Solutions outside of Payments that leverage NFC are still maturing (e.g. authentication, access control, discovery and media sharing to name a few).
Additionally, including NFC in iPhone 5 will incur new manufacturing costs (around $10) for Apple that will eat in to its famed margins, with carriers who may be unwilling to subsidize those costs.
Furthermore, the question also arises as to who will own the keys to the Secure Element (SE) on the iPhone 5. Despite its close relationship with carriers, Apple may balk at having to handover SE key ownership to carriers. It may decide to maintain ownership but provide fettered access to carriers and FIs, but it would also mean that Google may come calling for access to SE, and ‘Google Wallet let loose inside the walled garden’ is a scenario that Apple absolutely do not want to play out.
This leads me to believe that in the present state of NFC mobile wallet initiatives, NFC makes little sense for Apple. Maybe later, just not now.
So that means NO iWallet??
Au Contraire Mon Cheri…
The Ericsson Traffic and Market Data report released late last year predicts that by 2015, of the 5 billion connected devices that will dot the landscape, over 1 billion will be powered by iOS. Apple also enjoys a high rank in loyalty score that translates to around 90 percent of users who upgrade, opts for a subsequent iOS device. As customer behaviors around search and commerce shift to mobile from online, Apple knows it retains a unique vantage point from where it stands to monetize from ad delivery, customer analytics, offers & redemption. It can do so successfully, only if it folds these offerings under the same umbrella – a mobile wallet solution.
So if Apple plans on a mobile wallet initiative at some point, will it be based on NFC or iCloud?
Why, NFC of course?!
iPhone 5 launch is expected to be when Apple lays down its counterweight to Google Wallet and other competing payment platforms such as Paypal. Having considerable clout with Carriers, Apple can be expected to either do it Solo, or partner with Isis or similar initiatives outside of US. If doing it solo, Apple can further integrate its wallet initiative with its iAd platform to serve relevant ads on behalf of its retail merchants, tying together multiple contexts – including temporal, local and social. If instead it partners with Isis, Apple can be expected to charge for accessing the Secure Element, as well as force Isis & Carriers to use its iAd platform to serve contextual local ads through the corresponding mobile wallet on iOS devices. The latter, if Apple manages to force it past the Carriers and Isis, can contribute to the growth of iAd in to a matured local/mobile commerce platform that every other partner m-wallet initiative (including Google Wallet one day) will need to learn to play nice with.
It is also pertinent to remember that, in the final quarter of 2011, along with 37 million iPhones Apple managed to sell 15.4 million iPods as well. With its core target market being young adults and teenagers, who are out of reach for a mobile wallet enabled smartphone, an NFC equipped iPod can allow Apple to reach a vibrant early adopter segment of consumers whose loyalties and payment form factor preferences has not yet solidified. Imagine an Apple prepaid platform available on iPod, iPad and iPhone, front loaded by ACH or Credit Card, that is accepted by PayPass or PayWave on Day One! Doling out weekly allowances to Junior has never been so easy!
Exactly!! So why wouldn’t Apple want this?
To begin with, Apple abhors sharing the value chain with other stakeholders, which it may very well have to do in the stacked payment value-chain that exists today, one that is leveraged by each and every NFC mobile wallet. In reality these are tiny fiefdoms lorded over by existing stakeholders who are bound to frustrate Apple every step of the way in its quest to redefine payments. But does Apple even want to redefine payments?
Let me use that to segue to my next point against an Apple NFC mobile wallet. Primarily, an NFC mobile wallet flies in the face of the retail experience Apple has pioneered so far. Walk in to an Apple retail store, and there are no checkout lanes, no complex Point of Sale infrastructure and certainly no PayPass or PayWave terminals. Through its retail stores, Apple has articulated its vision of a customer centered retail buying experience, and one can imagine how out of place an NFC-based wallet experience chained to clunky Paypass/PayWave terminals will seem. Apple in the recent past has done everything to move as far away from a traditional checkout experience, by equipping its retail store app with the capability to allow customers to purchase accessories without ever having to take out their credit card or stalking an apple sales representative. Any mobile wallet initiative Apple builds will further that customer experience along, not subvert it.
Next, remember the "200 million iTunes accounts with a credit card that Steve Jobs boasted of, that ought to give Apple a head start in mobile payments? That ends up being useless with an NFC-based mobile wallet. The hundreds of issuers, whose customers make up the 200 million will each need to be onboard Apple’s NFC mobile wallet initiative, and each of those customers will need to separately have their cards provisioned, issued to the new form factor. Literally, Apple will have to throw away its considerable advantage and start at near ground zero. And, why would it?
Moreover, even if Apple were to put NFC and a proximity mobile wallet in to every iOS device it ships from Q4 2012 onward, it will be a while before the scales tip in favor of NFC-driven mobile commerce. Though lack of ample NFC-enabled smartphones compound the problem, equally hard is to convince merchants to upgrade to contactless infrastructure, and even beyond – to invest in upgrading their existing coupon redemption and loyalty programs so that they work with the state-of-the-art mobile wallets. Without both of these happening in quick succession, customers find the promised land of "mobile couponing"out of reach, no pot of gold at the end of the rainbow, and are bound to get madder than a ticked-off leprechaun.
Remember the recent Verizon-Galaxy Nexus-Google Wallet brouhaha? Carriers (starting with the recent GSMA NFC Handset requirements Ver 2.0) are requiring that manufacturers putting out NFC-equipped phones will need to ensure SIM based SE remains the default SE of choice. With SIM-based SE, carriers hope to control all communication the NFC chip has with all other SEss that may exist on the phone, and in some cases even exert influence. If at any point Google swallows its pride and opts to partner with Isis, Apple may also have to share those keys with Google. Having failed at its myriad attempts to kill Android off in its infancy, Apple will certainly not be a willing accomplice to Google’s successful transition from online to mobile commerce. At the same time, telling Google "No soup for you!" may not exactly sit well with regulators and antitrust laws.
Also consider that any hardware that is NFC/SE equipped will soon need to be certified by the likes of Visa and MasterCard before qualifying that they work with current PayPass and PayWave terminals. More hassles that a secretive company like Apple can do without.
The reality is that the idea of NFC-based mobile wallets today are weighed down by stakeholder interests, equal parts of "a sense of mistrust" and "fear of disintermediation" – evidence of which can be found in Google Wallet (read about Citi’s unwillingness to share merchant information with Google on my Google Wallet post). An NFC mobile wallet is born with one arm tied behind its back because it has to rely on archaic protocols and infrastructure at the point of sale and beyond, that prevents it from reaching its full potential. These problems cannot be wished away when average turnover period for POS terminals continue to be four to five years (according to VeriFone). And Apple would be able to do it differently because…?
Sigh! So that leaves the cloud option. Right?
Right. The good news is that an Apple iCloud based payment platform will allow it to circumvent the trials and tribulations at the point-of-sale and further leverage its 200 million iTunes accounts to get a leg up on comparable initiatives like PayPal. And they have certainly broken ground recently by equipping its retail store app with the capability for a customer to purchase an accessory without ever having to take a credit card out of her purse. Isn’t that the desirable end-state, not having to lug a wallet around?
That is not to say that Apple gets to ride the rainbow straight to its pot of gold. Even with a cloud-based wallet option, Apple has some significant challenges including achieving scale and incentivizing customer adoption (though the 200 million iTunes accounts do come handy). It could augment the capabilities of its iTunes portfolio through its wallet offering by extending in-app payments to consumable goods. Furthermore, it can also stoke a fire under the combined POS/Issuer/Acquirer thrones by getting its existing iTunes accounts to shift their funding sources from credit to ACH which will allow Apple to offer a lower interchange structure to merchants, if it wishes.
With a cloud-based wallet, Apple can further integrate its wallet initiative with its iAd platform to serve relevant ads on behalf of its retail merchants, tying together multiple contexts – such as temporal, local and social, and even build from scratch a loyalty platform that utilizes mobile as POS. This will be a boon to Apple’s own iAd platform which had made initial stumbles in finding acceptance among competing alternatives, and can position Apple ahead of Google in the race to capture relevance and mindshare in mobile commerce. By circumventing any and all POS infrastructure that currently exists, Apple can focus on its own iOS devices on both merchant and customer ends, thereby reducing coupon redemption to a simple, frictionless process owned on both ends by Apple. Or it could go the NFC wallet route, pull a Google Wallet, and then in time, find nirvana in the cloud (as Google may very well do eventually).
So what is it?
But if cloud is the route Apple ends up choosing, then why bother with NFC on iPhone 5? NFC proponents will have to build a compelling value proposition far beyond payments (in the realm of authentication, access control, discovery, media sharing etc.) for Apple to consider putting it on its suite of hardware products. These may very well end up being the killer apps on iPhone 5 for NFC, but the omission of a mobile wallet that leverages NFC will be far too big to just wish away. I see it more than likely that Apple may delay NFC for a subsequent iteration, purely due to the lack of progress that has been made so far by Google and other OTT players.
But what if Apple was to build a cloud based payment platform, and opts to equip iPhone 5 with NFC?
As absurd as this scenario may sound, let’s assume that Apple rolls out an NFC-equipped iPhone 5 but skips on an NFC-based wallet. Apple would have to either act as the SE gatekeeper or transfer SE ownership to carriers (either by opting for a SIM-based SE or handing over the keys to an embedded SE). Both scenarios lead to the possibility of Google getting access to the keys (either through Sprint /Isis or forced cooperation from antitrust observers). Knowing how imperative the success of Google Wallet is to Google and its quest to becoming the patron saint of local commerce, Apple will be remiss to go this route. Apple simply does not build the latest and greatest hardware without a compelling software equivalent thereby allowing a direct competitor to capitalize on its missed opportunity.
So where does that leave us?
Well, as my Palantir continues to put out nothing but static, I shall rely on what we know already – about Apple, about Google and Android, the carriers, and the emerging payments ecosystem. Other than "OMG! Apple will be remiss if it did not capitalize on this $650 billion opportunity!!" repeated ad nauseum, in perpetuity, I have yet to see a tangible proof as to why it should. Google Wallet is stuck on first gear since launch, retailers are asleep at the wheel, and issuers want everything to go back the way it waspre Dodd-Frank. An NFC mobile wallet, how much ever one argues its benefits, is not a disruptive innovation when it further entrenches current stakeholder positions and incrementally benefits the already broken retail experience. Apple should be driving a stake in to its heart, not cloning and domesticating it, and slapping an Apple logo on top of it.
Finally, instead of doing it alone or starting from scratch, Apple may realize that there is value in partnering or for an outright acquisition of an existing player in the payments space. The name that rings out loud to me is Jack Dorsey’s Square. Square’s notion of a retail buying experience is pretty much in line with Apple’s – in that the technology that enables all of payments and loyalty steps aside and lets back in what’s missing today – the human element. Moreover, Square who had been quietly getting their card readers in to every major retailer outlet in U.S., has just started building a sales force that should equip itself to shift its focus from converting cash based retailers to credit, into going after small to midsize retailers who wants to get out from behind a POS/cash register. Apple’s retail stores already use a form of Mobile POS and a shift to Square will be culturally a lot less jarring to customers and employees than say contactless terminals in the corner of the store. Square gets a substantial infusion of capital and customers (bringing along 200 million iTunes accounts) and Apple carries its considerable clout into the payments world. It is important to further add that Square’s emotive simplicity via CardCase and its focus to overall design evokes the same visceral response from customers that Apple is known for. Dare I say – a match made in heaven?
Cherian is a Mobile Payments Advisor with Experian Global Consulting. He is also an advisor to ModoPayments. As a mobile payments veteran and founder of Drop Labs, Cherian has worked with leading banks, retailers, mobile platform providers and startups in this space. Opinions expressed here are strictly his own, not that of Experian.