iPhone 5, NFC & iWallet – Pick Any Two

Apple

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 rumor-mill 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 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 37m 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 FI’s, 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 Ofcourse?!

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 37m iPhones Apple managed to sell 15.4m 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 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 Q42012 onward, it will be a while before the scales tip in favor of NFC-driven mobile commerce. Though lack of ample NFC enabled Smartphone’s compound the problem, equally hard is to convince merchants to upgrade to contact-less 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 SE’s 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 MC 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 around 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 4-5 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. Further more, 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, therefore 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 am 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 wants everything to go back the way it was, pre 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 US, has just started building a sales force that should equip itself to shift its focus from converting cash based retailers to credit, in to 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 MobilePOS and a shift to Square will be culturally a lot less jarring to customers and employees than say – contact-less terminals in the corner of the store. Square gets a substantial infusion of capital and customers (bringing along 200mn iTunes accounts) and Apple carries its considerable clout in to 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?

What do you think? Sound off below. And please share using the Share buttons below

If you read this far, you should follow me on Twitter here. Connect with me on LinkedIn here.

Board of Advisors at SimplyTapp - creators of Host Card Emulation driving democratization and open access to NFC in Android. Mobile Commerce & Payments Lead at Experian Global Consulting, serving Experian's clients in Banking, Retail, Consumer Credit & Payments. A strategic adviser w/ over 17 years of international Tech & Business Strategy consulting, advising firms in banking, retail & asset mgmt that seek clarity & insight in to the myriad business models around payments, fraud & commerce. Founded DROP Labs, a mobile payments/commerce strategy & advisory practice. Tweets here. I'm on LinkedIn here.
Cherian Abraham
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  • Thomas Noyes

    fantastic post. My favorite point is on Apple’s history on sharing the value chain with others. They are best because they control the customer experience. 

  • Great post.  Thanks for the insight.

  • Nicely put, Cherian. As we’ve discussed, I think Apple’s approach will be a cloud based wallet, maybe using NFC purely as a tethering technology if they go down that path. Let’s see how long before the Google cloud based wallet is announced…

    • You have a point here especially if you put that in context with some of the NFC patents files by Apple.  I can see them taking the approach similar to the smart poster and then triggering the device to do something with a cloud backend, that way they can keep control and bypass the current infrastructure similar to Paypal.

  • Interesting perspective. Apple however does not need to play well with others beyond its current iTunes ecosystem. It can use peer-to-peer, by-pass the secure element and still be inline with the contactless system that are starting to be rolled out. i.e. NFC compatible, just like PayPal. Vivotech and VeriFone are already onboard and working on these systems.

    Nick is bang on correct, NFC will be used and the iWallet will be in an app form alone. Apple will choose the route with least barrier to entry and cut out the complex ecosystem. 

    Apple will make its NFC debut based on innovative services and not so much on the iWallet. iTravel and a whole NFC tag marketing system makes a lot of sense for the iAds platform. It isn’t only Google and Isis playing in this pond as Intel signed up with INSIDE Secure and Microsoft are working with NXP. Samsung are due to announce Tag Services and an access control system. NFC is heating up.

    Apple stands to lose some ground not in sales, but as being viewed as an innovator which to be frank is already happening with Jobs death and the iPhone 4S. Jobs took risks and knew the market well enough to ignore Wall St. What remains to be seen is whether Cook has that same resolve. 

    It was early adopters that brought Apple their success and it will be those who tarnish the brand. Apple needs to keep them happy. The Apple ecosystem extends beyond Apple and the success Apple has had partially comes through other accessories which will no doubt include speakers, headphones and games that will adopt NFC for pairing.

    That is not even considering the benefit that Apple will get by routing everyone past their products and services and Apple ecosystem products and services every time someone makes a payment. Device Fidelity have an NFC wallet on the iPhone now, do you think Apple can allow others to gain brand equity on the iOS platform?

    We could go on all day about this topic and it is all speculation (kinda). I love your article it’s well thought out and identifies key issues, players and the ecosystem problems. We just disagree on the conclusion.

    • Good points Seth, but your point of Apple being seen as an innovator needs to be viewed in greater context.

      Apple deployed a 2G/EDGE only phone even though 3G was deployed, albeit in very few markets. The new Verizon iPhone 4S does not support LTE with the same coverage profile to the then AT&T 3G coverage.

      Apple tends to follow an establishing market in its later stages of development and take it mainstream. This also applies to the chips powering their laptops and desktops where they are always behind in using the newest chip-sets.

  • Pingback: iPhone 5, NFC & iWallet – Pick Any Two Drop Labs | Nick Holland's M-Everything()

  • As we discussed
    there are arguments to be made both for or against and
    while you argue most eloquently against,
    here are some points for:

    1. The Google
    Wallet issue will be present for the iPhone 6 or 7 and
    not putting it in 5 will be merely delaying the inevitable. In addition the weak
    reception and uptake of Google Wallet by users and the partner ecosystem may
    allay any fears Apple may have of Google, although having it on the iPhone can change the entire
    paradigm.

    2. There’s the
    possibility of including NFC without support for an SE of any kind to benefit
    other proximity solutions, such as business card sharing, gaming, music,
    check-in, etc.

    3. Apple can go
    embedded SE contrary to the MNO plans as they are in the unique position of
    holding the upper hand vs. the carriers.

    4. While they hate
    the value chain and being dependent on others, when the need to play is great
    for them they will depend on others. Case in point is the fact that they deploy
    the phones on AT&T’s network or the fact that iTunes works on Windows. That
    said they can take a page out of Paypal’s book and
    deploy direct with merchants thereby avoiding the value chain entirely, and
    Apple being Apple has the heft to pull it off. (A side benefit of this approach
    is that they don’t ever need an SE)

    5. If a wallet can
    add significant value to the iAd platform they may be
    willing to push it.

    6. In all the
    conversations about payments people neglect the fact that Apple acquired 3 very
    important players in the map and geo industry, so if they decided to create an
    experience in store that combined their mapping, geo-notification, 3D
    experience, SIRI and iAd the payment becomes less
    important as yourself argue in your post “Google Wallet – A missed opportunity”
    (http://www.droplabs.co/?p=65)

    7.
    People tend to overlook the fact that Apple is trying to move beyond devices
    into services. While most of them have failed a la PING and MobileMe, iCloud has been
    successful and the mapping and geo stuff they acquired along with SIRI point to
    the fact that they see themselves as a 3 party player of software+hardware+services and not just its old 2 party self
    of software+hardware, or more accurately that
    software/platform now includes services as part of the overall customer
    experience.

    After
    making all these points though I agree that there is probably not going to be a
    conventional iWallet, but more a combination of the
    various Apple components discussed in #6 that in conjunction with 3rd party
    wallets – Square, PayPal, ISIS or anyone else – power a unified shopping
    experience that will
    feed back to the pure Apple experience and ads.

    These are my
    7+ cents and I may be totally off so if the facts don’t bear me out I simply
    overestimated or totally misunderstood Apple.

  • Anonymous

    Typically thoughtful post by Cherian, and one I generally agree with. For me the key line, and one overlooked by NFC acolytes, is “… an NFC mobile wallet flies in the face of the retail experience Apple has pioneered …”. Simply, it is not what Apple is all about.  They have been very adept  at making good money there own way, so I see know reason they’d want to change those ways.

    I’ve read someone in Quora who argues that Apple’s recently-published supplier list confirms that the next iPhone will be NFC-enabled.  Perhaps.  But even if it is NFC-enable, that doesn’t mean for payments using the PayPass/PayWave/Google Wallet method.

    Biggest “ah-ha of course!” moment for me was the suggestion of allying with Square. If anyone has paid for something using Square Card Case, you’ll see right away the it represents the same kind of transformative approach we’ve long seen in Apple. And if you note Square’s secrecy, who does that sound like?

  • Igor A Krstelj

    If i was in the middle of that both exciting and dreaded period that comes every two or so years when I need to pick my new phone … and having had many discussions with myself about what the future will bring, discussions that are so well articulated in this argument … I would hedge my bets and pay extra $10-15 to have an NFC option for the next two year cycle.

    I am sure that Apple has similar internal discussions … Including $10 NFC feature, they can pass on to telecoms and customers, may not indicate a strategic decision but a simple hedge

  • Pingback: » iPhone 5, NFC & iWallet – Pick Any Two Drop Labs | Digital economy and technological convergence()

  • none

  • Great insight – in particular as it relates to Square. I work for a Mobile Banking and Payments software vendor and am continually amazed at how attached traditional players are to the SE and how little it really matters.

  • Steve Everhard

    Interesting discussion. Clearly Apple already has one of the most successful online payment solutions through iTunes and they don’t have a history of chasing markets, such as payments, without a strategic link. Clearly Apple is all about online (no removable storage in any of the mobile devices) so an offline, real-world payment solution has no value for them. The store experience illustrates that. So the only value in a wallet is in pre-payment of value. Again Apple has that evidenced in iTunes payment cards. What else is needed? 

    Certainly if Apple wanted to play in the open loop world of general payments then an iWallet could make sense, but what is the value for Apple in doing so in relation to their other activities? Obviously there is a big market in real world payments but it is hard to make profits without volume and Apple shows no signs of investing in becoming a bank.As several others have said here, NFC isn’t just about payment and the use of tags but are tags the only solution to a problem and is it in anyones interest to have a tight integration with the phone? Well it doesn’t cost $10 to add NFC to any device but real estate is tight in there and why invite a support problem if the integration doesn’t deliver a service beyond the phone? This is what Apple refer to as “a third party opportunity” But maybe there is more. GPS and gyros tell Apple where you are and what way up you are. Bluetooth and NFC can tell Apple what you’re next to…

    So unless NFC becomes a gating factor for network operators in selecting supported handsets – and that day will likely never come – Apple can play everywhere it needs to with what it provides right now, thank you very much. Unless knowing what you are in proximity to has ‘Apple value’….

  • Keith Benson

    Exactly right. Of course, all it takes is one player to tokenize the SE in the hands of the consumer and the vertical market would disappear, Walmart? Citigroup? Chase? Anyone awake?

  • Great post!  Thanks for the insight.  Now, just need to wait and see how it plays out…  

  • Edgar Avila

    Thanks for sharing this interesting article. Even though Cheridan covered several possible scenarios, there is still uncertainty as to what Apple will do. I know that NFC is not picking up at the pace many expected. As a matter of fact I bought the Nexus S in a hope to use Google eWallet but not much luck because the pilot that Google has with its partners does not cover the local market of east Nebraska. Nevertheless, the whole concept of iCloud is even more fascinating. I personally had the experience buying in an Apple store and found it very convenient not having to stand in line.

  • James Monaghan

    In a retail payments scenario, NFC only makes sense for Apple as a means to identify the POS at which the purchase is being made (a more sophisticated version of the QR code payment schemes already in the market). The argument made here for Apple focusing on a cloud-based wallet is almost flawless, and completely in line with my thinking (in fact, I was wondering “when will he mention Square?” just a couple of paragraphs before the cou de gras). Lines like “Apple should be driving a stake in to its heart, not cloning and domesticating it, and slapping an Apple logo on top of it.” are what keep me coming back to this excellent blog 🙂

  • Good blog post and I agree that Apple won’t release something until they have a firm vertical strategy where they own most of the parts or perhaps aquire their way via someone like square. The question I get asked though, time and time again, is how do you change the trust issue i.e. can all people be trusted to pay for things when the traditional point of sale is eliminated? While this works in the Apple Store, it wouldn’t work in a bargain bin type store and therefore isnt a universal solution. This opens up another can of technological worms to protect retailers against those people in the high street who just aren’t as honest as you or I.

  • A well expressed train of thought, but your conclusions are drawn from disparate bits of data.

    A few bits of data to bend your thinking: 

    NFC + Secure Elements in mobile phones is under $3 this year.

    US open loop payment cards still have embossed card numbers circa 1959 and mag stripe circa 1982.  Physical world payments is a $5T+ per year (US only) business.  Net-net: its huge, slow, efficient, and non-uniform across hundreds of thousands of merchants.

    Payments is about wallet share, top of wallet, transaction costs, and risk mitigation.  All actors in payments move rationally based on those factors.  

    Google Wallet, Isis, others, are not about payment.