This article is by MacTalk founder Anthony Agius. It was originally published on his blog and is re-published here with his permission.
analysis You’ve probably heard the rumours that the next iPhone is getting a thing called NFC. You’ve also probably read about Visa doing some funky trials with “PayWave” and iPhones. And you also probably have a credit card which supports PayWave.
Unfortunately, most of it is a bunch of hot air, but in the coming months, things are set to get much more serious. Aficionados of slim wallets will be pleased. Simply put, in the very near future, you’ll be able to use your mobile phone to pay for small items, really quickly. But how does this work? Is it voodoo magic? Can someone get hold of my phone and buy really embarrassing things that puts me on an ASIO watch list?
Let’s look at the first bit of the puzzle – credit cards, money transactions and financial institutions. Right now, if you want to buy something at the shops, you either have to use cash, or some sort of card, be it EFTPOS or a Visa-, Mastercard- or American Express-branded card. Despite the ease of using a traditional card (insert card into terminal, select account, enter PIN, press Enter), it’s the slowest way of making a transaction, plus it unfortunately trips up some of the less technological savvy amongst us. I know I’m not the only one who becomes irrationally violent when someone (typically an old person or bogan mum) takes eons to swipe her credit card, inserting it the wrong way, unsure of which account to select and then entering the wrong PIN.
Using modern technology, the boffins at Visa and MasterCard have devised a “contactless payment system”, in order to simplify and speed up the process. Why did they do this? Surely what we have now is fine? Well Visa and MasterCard hope that if the barrier to entry of their product (i.e make it fast and easy) is low, it can replace the current product leader (cash) for the area of the market they don’t own — small and quick transactions. Paying for things like fast food, groceries or petrol are generally done with cash as they’re small amounts and people are in a hurry.
Visa and MasterCard get a slice of the action every time you use your card, so naturally, they want a cut of these small transactions as well. They’ve already sewn up the bigger end of the market, so they need somewhere else to generate billions of dollars of profit. As little cogs in the financial transaction machine, we benefit from Visa and MasterCard’s efforts to make money every time money changes hands, in that we can complete a small financial transaction in under 10 seconds without having to lug cash, or for the dumber people, remember how to use an EFTPOS terminal.
MasterCard developed PayPass and Visa developed PayWave. Very similar technologies, which at first, were incompatible. So when this technology was first trialled, you had to find a merchant (credit card speak for “shop”) that had a PayPass, or PayWave terminal (credit card speak for “card reading machine thing”), depending on your card. Luckily for us, they both realised having competing standards was dumb and get in the way of them collecting a few cents each time you swipe. Out of that epiphany, EMV (Europay, MasterCard Visa) was born. It’s a set of standards that makes sure all contact-less (and contact cards) operate in the same fashion and are cross-compatible. So now, PayPass and PayWave are pretty much just marketing terms meaning “contact-less”.
At the moment, most Australian banks are issuing Visa and MasterCard credit and debit cards with this contactless technology in them. More and more merchants are getting contactless card readers too. Woolworths just announced they’re rolling them out in all their stores too. Within the next 3 to 5 years, contactless card readers will be everywhere.
The way contactless payments work currently is pretty simple. You go to buy something (under $100), take your wallet or purse out, when the terminal says “insert card”, just tap your wallet or purse on the terminal and you’re done. If you have two contactless cards (e.g: a NAB Visa and a Commonwealth Visa) you need to take the card out of your wallet. The technology doesn’t allow multiple cards to be read at once. If you’re buying something over $100, you just tap the card and then enter your PIN (or sign). Easy.
There are detailed FAQs about the technology on MasterCard’s and Visa’s websites, which explain all the details of how they work, what sort of limits there are and put to bed any security fears. This is one bogeyman people fear when using contactless and PIN-less payments. Seeing as there’s no PIN to keep secret, what’s stopping someone just taking your card and going on a shopping spree? First of all, you can only do $100 or less without a PIN. Visa and your bank have good insurance. If you say you didn’t do those sub-$100 transactions, chances are they’ll return your money with little fuss. Giving people peace of mind and using their cards without hesitation is worth way more to them than whatever it would cost in refunds and loss of trust.
Why did I bother explaining all that? What’s it got to do with the iPhone and NFC? Because what happens now with your credit card using PayWave/PayPass, is the exact same thing you’ll be doing with your iPhone when it gains an NFC chip. What’s NFC? NFC stands for Near Field Communications. It’s a very broad term given to technologies that transmit data, wirelessly, within a short range. Wikipedia has more info than you could ever want about it.
Placing an NFC chip into a mobile device gives the device the ability to communicate with all the target devices out there. A credit card terminal is just one of the things an NFC enabled device can do. Normally an NFC device would be quite dumb and only do a single specific thing (for example: a plastic card that requires no power). But thanks to the magic of software and apps, programs can be developed to give the mobile device the ability to communicate to any NFC target that you write an app for. It’s like having a Swiss army knife. Just without any sharp stuff. Or a toothpick. Or that nail file that’s always totally useless.
Visa and MasterCard (mainly Visa), have been busy getting a way to ride on the iPhone bandwagon, by applying their existing technology to the iPhone and taking advantage of the iPhone’s unique features, such as geo-location, cameras and touch screens. Their aim is to make paying for stuff really easy, so you buy more stuff using your Visa account and therefore, making Visa more money.
As of May 2011, there’s been a lot of trials and PR-type guff as to what Visa will actually do and how NFC on the iPhone and smartphones in general will enable mobile payments. A year ago, in May 2010, Visa launched a US trial to bring PayWave to the iPhone 3G. It was a case, that had a MicroSD card in it, which houses the NFC gear to communicate with the terminals. It was accompanied by an app made by Visa, which communicated with the SD card in the case and enabled it to act just like a PayWave credit card. I assume that the participants had existing Visa accounts and the app simply cloned their existing cards.
Very little detail was given about how the app worked and where the money for it came from. Overall though, it was quite clunky as you had to have the app open (multi-tasking didn’t exist) to pay, plus you needed to have that rather ugly case. If you have a phone with a MicroSD card slot though, it worked pretty well. Following that, in October 2011, Visa worked with some public transport operators in New York and New Jersey to trial using PayWave on a mobile to augment their ticketing systems. That was one of the things that intrigued me most and NFC and PayWave, because as a Melbournian, I’ve experienced our public transport ticketing system Myki and wish it worked like that. In Australia, ANZ bank just completed a four week trial of the same ancient system in April 2011. That’s the state of contactless transactions with your mobile right now. Crappy and kinda lame.
In the next few months however, things will improve immensely. In the UK, it already has. Barclaycard and Orange have released a crappy phone called the Samsung Tocco Quick Tap and it’s sole selling point is that it can do contactless payments. The phone itself is uninteresting, but it’s the first publicly available contactless mobile payment system outside of Japan, that doesn’t suck. What Orange and Barclaycard have done, is made an app for the phone which acts as a prepaid credit card. You simply add money into your Quick Tap account and that money is available to use anywhere that accepts PayWave/PayPass. So while it’s not an actual credit card, and doesn’t interface directly with your bank account like a debit card, it’s a glimpse into what the banks have planned.
Visa recently put out a press release and fluffy video outlining what they see the future of mobile payments becoming. There’s so many buzz words, it will fry your brain, so I’ll break it down for ya. Visa want to make a “digital wallet” which is an app that sits on your computer and smartphone and links to all your money pots (PayPal, your bank accounts, your credit account) and allows you to pay online by entering a username & password, which provides the merchant with all your details, so you don’t need to fill it in each time you buy online.
This same username and password is used to log into a Visa app on your iPhone, allowing you to configure how you want to pay for stuff person to person (e.g: you owe your mate $20 for lunch) or for a merchant (for example buying a can of Coke at a vending machine, a pair of Dunlop KT26s from Big W, or a new MacBook from Apple). That same app can even give you discounts and special offers, using the GPS feature, or a Foursquare style frequent customer feature.
How does that work in practice? We don’t know quite yet as it’s not out, but it’s not hard to hypothesise how it would all go down. Imagine you’re at Woolworths, buying your groceries. You go to the self serve checkout, scan all your goods and bag them. When it’s time to pay, all you do is get your iPhone out of your pocket, hover it over the payment terminal, take your stuff and leave. Only shoplifting would be easier.
On your iPhone 4S+ XP or whatever Apple call the next iPhone, there’s a Visa app. It runs in the background, working with the new fancy NFC chip embedded in the iPhone, waiting for a ping from a target device (the payment terminal). When you tap your phone to the terminal, in the background the Visa app talks to the Woolworth’s payment gateway, does all the usual credit card transaction stuff, just like a credit card would. The Visa app has preferences, in which you can set a default payment method. You can have it set to draw from your credit account by default, or your debit account (using your own money, just like EFTPOS or a Visa debit card now).
If you want to change from your default payment type, you can launch the app and do a one-off account change. Because you’re at Woolworths, your Everyday Rewards card is automatically processed, as Visa and Woolworths worked together to make sure their loyalty scheme (together with all the other loyalty schemes around) is enabled, preventing you from forgetting to scan by needing to dig that extra card out of your wallet, or leaving it at home. The receipt isn’t printed out, as it’s simply emailed to you. You can also instantly see how much money you have remaining in your account, by opening the app and seeing real-time transaction info.
The above isn’t far fetched, the technology is there and Visa probably has everything ready to go. Google’s Nexus S has an NFC chip in it and it’s available now too. But there’s no Visa app for Android that enables this. When it comes into the hands of consumers, is up to whenever Apple decide to release an iPhone with NFC. Visa and MasterCard can’t wait.
Image credit: Mike Gaines, Creative Commons
I bet the ATO is embracing PayPass / PayWave / iPay … Less coins / notes in the register means less fraud and more tax paid :)
I also wouldn’t be surprised if Apple introduces new ways to pay with your itunes account. At the moment you have to enter a credit card, but what about linking it directly with your bank account?
So when you pay for your coffee waving your iphone against the ipad at the coffee shop, Apple takes the cut and Visa loses…
On a final note I wonder what this means for #square (https://squareup.com/)? Since everyone will carry the technology in their pockets I immagine that many apps will popup doing exactly what Square offers (without the need for the little Square bit on top of iPhone/iPad).
Thoughts anyone? :)
Square will do very well – their success is because they allow anyone to take credit cards, at a decent rate. Traditionally, you had to go through a lot of bullshit to get a terminal, plus some hefty fees for a low amount of transactions. The iPhone reader is just a bonus (you can manually enter in the # from a card too). If Square can make a cheap NFC reader to take cards, they’ll continue to soar.
In regards to Apple using iTunes as a payment method – if they decide to do this, they’d need to become a bank of sorts. I don’t think Apple is interested in this. Their motivation for products is to improve where current things suck, or create something new. Visa and MasterCard are doing a pretty good job, consumer wise (merchant wise, it’s debatable). It’s more of a commodity game where Visa and Mastercard have it stitched up (even Amex can’t even penetrate and they’ve been at it for decades). But I bet Apple are thinking about it, heh.
On that topic, Square latest move (Card Case) is interesting. Next obvious step is to optimize the flow via NFC. https://squareup.com/cardcase
Mashable has a good post on how Square’s Card Case works:
http://mashable.com/2011/05/23/square-card-case
It doesn’t even use NFC. You simply open a “tab” at certain stores, and whenever you go there, instead of swiping a card or phone, you just tell them your name and walk off. Your Square account is automatically charged for the amount you spent in the store.
Interesting concept. I’d rather just tap my phone on a terminal, than have to set up these accounts with each store. Seems great if you get food or coffee from a certain store often though.
>> ” which explain all the details of how they work, what sort of limits there are and put to bed any security fears”
Uh, no it just raises more security fears. Basically the “security” is if someone goes and charges stuff to you card, you’ll likely get it back… eventually.
This is _way_ too easy to abuse.
I think the $100 limit does much to quell security fears about this, however.
$100 limit per transaction. Just means it’s smaller transactions which are harder for both yourself and the bank to pick up on.
Not that hard for the bank to realise and compensate. For example:
You lose your wallet. Realise you lost your wallet a few hours later. Log in online, check your transactions and realise someone spent $500 in 6 separate transactions that you know you didn’t do. You then call the bank and tell them to cancel the card and that all the transactions after a certain time are not yours. Bank will credit them back to you once they investigate (and I’ve never heard of the bank not giving back disputed amounts under like $10,000).
“You lose your wallet. Realise you lost your wallet a few hours later.”.
You’re missing the point. People can literally walk past you with a receiver and “steal” your card details. You won’t even know it’s happened. You don’t need to lose your wallet. You wallet can remain in your back pocket the entire time.
Have you seen this in action for PayWave/PayPass? Certainly RFID technology can be gleamed like that, but in order to use the info properly and make transactions with it, you would need to bust Visa/MasterCard’s encryption?
Great. Just what we need; Digital pickpockets.
Can buy one of these (or similar) to prevent digital pickpocketing, heh
http://www.thinkgeek.com/interests/giftsunder20/910f/
You are assuming that the EMV system just blurts out your CC number on request. It does no such thing. It is a challenge response system.
It’s not perfect, but that’s the convenience trade off. Plus, if you’re paranoid, you can always set your card to require a PIN, even if using NFC. That way, even if you want to spend 50c, you still need to enter a PIN.
I’m already a pretty bad impulse buyer. An NFC enabled phone will send me bankrupt. However I’m strangely still looking forward to it :)
Interesting that Samsung won’t be releasing the Galaxy S II with NFC in Australia
What a disappointment.
I bet the RRP of the phone will be the same as the NFC enabled ones as well…
No it won’t this is Australia it will be more expensive.
It will be interesting to see if this makes it into the next iphone though the rumors are that the NFC was dropped from the next one due in September.
The NFC rumours for the iPhone 4S (it’s current rumoured name) are all over the place. Some sites swear it’s coming, while others say it’s been delayed. The reality is no one knows what Apple’s plans are at this stage, other than the fact that MWC will focus on iOS5 (and as you said there won’t be a new iPhone till September at the earliest).
Are the merchant fees the same as EFTPOS? Last time I tried it at a newsagency they said not for transactions under $10. Either that cashier wasn’t on the ball or PayPass still isn’t suited to “micro”-transactions.
EFTPOS is a separate system to credit (Visa/Amex/Mastercard), EFTPOS fees are cheaper, but there’s still a fee.
Most small places like a newsagency or a small cafe are usually loathe to offer electronic payment as it takes a bite out of their small margins. For example. you want to buy a newspaper (to line the floor of your bird cage perhaps) from the local newsagents. The paper is $1.10. The newsagent might pay 70c for that newspaper, leaving 40c for them to keep for each sale of the newspaper. If they need to pay something like 5c + 3% for each transaction, they are losing a fair bit off their already slim margins.
Christ, even Australia Post doesn’t let you use your card if the amount is under $10.
These places are either going to have to suck it up, raise their pricing, or simply not offer it and possibly miss out on sales.
Retailers like Woolworths, 7-11, etc. have no problem taking cards for small transactions though, as because they do way more volume than a single shop, they get a discount on the transaction fees.
Well I’m wondering if PayPass and PayWave have even lower fees than EFTPOS to promote microtransactions.
I see your point about how merchants should suck it up or not offer it however it just seems like these NFC offerings just aren’t tailored to do small transactions. To me it reads as just a “you don’t need to sign or pin” system which frankly isn’t all that exciting if the use cases are still the same as whenever you currently need a credit card.
Having used overseas systems like Octopus in Hong Kong which practically anything can be purchased by beeping (it’s a prepaid debit system) the PayPass/PayWave just don’t seem as attractive if only certain places accept it although it’s a step in the right direction.
Paywave & Paypass have the exact same merchant costs as accepting a credit card now. So if a certain shop you frequent doesn’t accept credit, or only takes it over a certain amount, that’s going to continue and NFC isn’t going to change that.
Octopus still has fees for merchants. It’s pre-paid for the consumer, not the merchant – plus NFC can use a debit card instead of a credit card – which still uses Visa/MasterCard, just your money instead of the bank’s. But the fees Octopus charge may be lower than what Visa/MC charge, so more retailers accept it (just like how some retailers don’t accept AMEX).
I think Visa and MasterCard’s aim is not to lower their fees to make using their system more attractive for small payments, but to make paying for small things with their products, better than cash for the consumer, which will force merchants to accept it, or be left out when consumers demand it.
In 2011, there shouldn’t be any stores, regardless of their size, that don’t factor in electronic payments into their product margins. I personally don’t use cash and rarely have any on me.
Like most things new this will take its time to really take off but before you know it people around you will be using it and then you join in because there will be some comfort that we are all taking the same risk.
This stuff has moved a long way. About 7 or so years ago a did a project with Telstra/Sensis and CityLink/ Transurban looking at using your Telstra bill to pay for more than just Telco services. We even had McDonalds trial payments through your e-tag. However it all went very quite after that. Probably way too early for everyone.
This stuff looks promising. Kmart introduced a no signature no key required policy for transactions under $35 this month. Bit of a shock but as you say the quicker they get you through the aisle the better.
Using an e-tag for other car-related purchases is a brilliant idea. Wish I could pay for parking using my e-tag. Simply roll up to a car park, the e-tag system notes when I entered, then when I drive out, the e-tag beeps and debits my account.
We did all of that but they didn’t commercialise it for whatever reason. Common sense to be able to use your etag for other things.They obviously do it across all roll roads these days so it works. Just needs to parking companies to invest in the technology and Transurban to manage the payments.
please peole see thru the fluff. contactless payment
methods use RFID chips, the same type of
microchip which can I’d your lost pet. humans would be adverse to getting chipped. also RFID can be read upto 70 meters away, this is a perfect way to track people.
I have put a hole through my credit card ti disable the antenna for RFID. this is simply moves by the new world order to track you, your money, movements. this integration onto your phone will be worse as your phone most likely hAs gps, thus enabling you to be heavily monitored. people demand privacy these technologies erode our rights. we know the law is slow, hence where is our protection if laws don’t exist for this technology.
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Do you have any tips on how to get listed in
Yahoo News? I’ve been trying for a while but I never seem to get there! Appreciate it
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