Simply put, in a cloud-based SE environment,telcos no longer play an inherent role in NFC payments, so theyrisk facing disintermediation and insignificance in the mobilepayments space. Technology and security issues persist, for thetime being, but given Android’s enormous smartphone OS marketshare, the place of major telcos in any future NFC mobile paymentsvalue chain suddenly appears to be under significantthreat.
The majority of NFC payment solutions today utilize card emulationfor NFC operations. With card emulation, the NFC device is loadedusing the secure element with the information needed to emulate acard. That is, a POS device can interact directly with the mobileNFC device with no information communicated to the mobile device.It’s as if a physical NFC chip, just like the ones on a card, hadbeen embedded into the smartphone. Once set up through the secureelement, the NFC chip presented at the POS is totallyself-sufficient.
In the new KitKat host card emulation mode, the transactioninitiated at the POS will be relayed by the service manager to theKitKat OS for servicing. This approach enables a range of services,including cloud authorization and payment services. So for example,a merchant with a closed-loop gift card product could now enablethat gift card to be presented at the POS using NFC. It would seemapparent that Goggle Wallet will soon adopt this approach toenabling NFC and given an open platform, so the two big questionsare these:
1. What will Apple do? Will Apple also implement support for NFC orgo its own way, further complicating the payments market for NFCproponents? That said, the most recent data from IDC indicates that Android has 80% of the smartphonemarket globally.
2. Which of the other alternative payment solutions will alsodecide to utilize this approach? It seems likely PayPal will jumpon this opportunity as long as it can integrate the NFC chip in away that embraces all of its value – add features. But it is lesscertain how Isis and MCX will respond to this opportunity to enablecloud-based payments using NFC.
So KitKat’s adoption of Host Card Emulation establishes a new openplaying field for alternative payments on Android, a playing fieldthat may or may not be replicated in iOS from Apple. The playingfield just got much larger and new rules have been introduced,which will force payment providers to reformulate theirstrategies.
We live in interesting times!