NFC - The Mass Transit Payment Revolution

The web is humming this week with news that Apple is planning to embed technology in the next generation iPhone that will enable contactless payments. The combination of built-in Near Field Communication (NFC) technology and credit card information in iTunes would turn the phone into a ‘virtual wallet’, and possibly herald the decline of plastic payment cards. In addition to cardless payments, NFC could help deliver targeted, location-based advertising to the phone user and provide a whole new revenue stream to the California-based consumer electronics giant, which recently patented NFC functionality within its products. [caption id="attachment_691" align="alignright" width="270" caption="Pay By Phone where you see this sign"][/caption] Using your phone as a digital wallet is nothing new; Google has NFC technology in its Android phones, and Scandinavians have been able to pay at vending machines with certain models of Nokia phone for several years. Apple’s news is important because with the introduction of NFC in the next iPhone – which will sell in gazillions – the technology will have reached a tipping point that could lead to mass adoption by retailers and other merchants, including mass transit operators. I’m not a stranger to NFC; my iPhone 4 has an NFC contactless payment sticker on its back (see photo) provided by Citibank, which allows me to make payments up to $50 by simply touching my phone to any in-store Mastercard PayPass terminal. [caption id="attachment_692" align="alignnone" width="300" caption="NFC-enabled iPhone using Mastercard PayPass"][/caption] NFC – How It Works NFC uses short-range RF-energized (RFID) tag technology at 13.56MHz with a normal operating range of a few inches. NFC tags are typically embedded in plastic cards or in key fobs, and payments under a certain value – say $20 – can be made via a contactless transaction without the need for a PIN or signature. A key difference between card and phone implementations is that the latter supports over-the-air (OTA) updates, such as topping up credit. Waving your phone near an NFC terminal, at a railway station turnstile for example, will initiate an authentication process with a back-office server that identifies you via the phone’s unique ID. At the end of your journey, a similar process at the exit turnstile enables the system to bill you the correct amount for the distance you’ve traveled. In flat-fee transactions, such as at a vending machine, the charge is debited right away. Billing might be made to a specified charge or debit card, or from a prepaid credit balance. [caption id="attachment_693" align="alignnone" width="300" caption="NFC compared with other wireless technologies. Source: NFC Forum"][/caption] NFC is unlikely to conflict with other wireless technologies in the panoply of transit applications; its lower power and frequency limits it to a much shorter range than ZigBee or Bluetooth. NFC in Mass Transit NFC has already been successfully deployed in mass transit environments for transport ticketing, including the Oyster card by Transport for London’s (TfL) and the Octopus card in Hong Kong. While the Oyster card’s use is restricted to payment for ticketing, the Octopus card is an accepted form of payment for parking meters and in many Hong Kong retailers including 7-Eleven, Starbucks and McDonald’s. With over 34 million Oyster cards issued, 80% of all journeys on TfL’s London transport services are paid using the card, while in Hong Kong the Octopus card is used by 95% of the population. These are impressive figures and illustrate that NFC technology can be hugely successful in the public transport environment when backed with concerted effort. Not that it’s been easy sailing; in 2008 TfL canceled the original £100m ($158m) Oyster contract with its key suppliers five years early following a series of technical failures. A new contract was subsequently issued, no doubt with stricter conditions, which will see Oyster continue until at least 2013. In the United States NFC pilot schemes have included San Francisco’s BART and Boston’s MBTA, both conducted in 2008. The four-month BART scheme, run in conjunction with Sprint and fast food outlet Jack in the Box, comprised over 200 people using the NFC-enabled Samsung SPH-A920M handset; 80% of the trialists considered the virtual wallet ‘easy to use’. A similar six-month pilot was conducted on the New York City Transit by Cingular (now AT&T) and Citigroup using an NFC-enabled Nokia 6131. Unlike the Oyster and Octopus rollouts, these limited trials tested mobile phones as the payment devices, using embedded NFC technology. Visa has taken a different NFC approach in its payWave partnerships with New York City Transit, New Jersey Transit, and the Port Authority. Rather than using a separate card or NFC-embedded phone, the pilots will use an NFC microSD card from DeviceFidelity that is inserted in any phone with a microSD slot. Visa touts the New York trials as an example of how NFC is helping transit agencies get passengers “where they need to go quickly and efficiently”. The Move from Card to Phone The migration from the plastic card to the mobile phone is the key step in the mass adoption of NFC as an enabling technology. Contactless transactions can include transit and retail payments, as well as home applications such as security and sharing information between home electronics including computers and game consoles. On the road to phone-only NFC devices there are some interesting hybrid solutions. Visa Europe’s iCarte ‘bridges’ NFC technologies by using an iPhone app in conjunction with an NFC accessory that fits on the bottom of the phone. This allows users to pay by phone for goods wherever Visa payWave is accepted. While the initial pilot is geographically limited to Turkey, Visa hopes to roll out in European markets following engagements with mobile carriers and banks. The UK is taking a more aggressive approach; this week its largest mobile group Everything Everywhere – the Orange and T-Mobile venture – announced an NFC roll out to over 40,000 checkouts by the summer of 2011. The company’s Chief Development Officer Gerry McQuade said that it was “the beginning of a revolution in how we pay for things”. Back in the U.S. Starbucks has recently announced nationwide acceptance of payment by iPhone at its 6,800 stores, albeit using an app that displays a 2D barcode for scanning by an in-store optical reader. Starbucks is hoping the app will replace some of the plastic payment cards that account for 20% of all transactions in its coffee shops, but has not ruled out a migration to NFC when the technology has matured. One challenge for widespread adoption of NFC outside of mass transit is the presence of NFC-capable terminals in the retail environment. Telefonica, the Spanish mobile operator and owner of UK operator O2, believes that London’s 2012 Olympic Games will be a driver for wider NFC roll out in the UK. According to Barclays, there are fewer than 45,000 contactless point-of-sale terminals in the UK today, but interest from Tesco and Boots, two of the UK’s largest retailers will increase deployments. Along with embedded NFC in its next iPhone and iPad, Apple is reported to be considering seeding retailers with heavily subsidized NFC terminals, while VISA is cutting contactless per transaction fees 50%, from 8p (12.6¢) to 4p (6.3¢). The increase in retail terminals and reduction in fees help pave the way for NFC to become a ubiquitous standardized technology. NFC for Smart Urban Mobility In mass transit, NFC-ready phones could precipitate a move away from just ‘smart ticketing’ to ‘smart urban mobility’ where the phone not only facilitates intermodal payments such as ticketing and retail shopping, but also provides traffic and timetable information, and geo-location services. The NFC Forum, a non-profit promoting near field interoperability, has published a white paper on the use of NFC in public transport. The paper offers an introduction to the potential uses, benefits, and setup of NFC technology in public transport programs, with examples of best practice and business models. The Forum is bullish of NFC’s impact in public transport, stating that in addition to operational efficiencies from faster passenger throughput, transit operators will benefit from “cost savings in eliminating equipment, ending…paper and plastic cards, and reducing cash handling” as well as “increased travel and retention”. In late 2009, the UK’s Department of Transport concluded an eighteen-month research project into the use of NFC for public transportation ticketing. The DoT believes that smart ticketing could save over £2 billion ($3.1 billion) annually, and is the future of transport ticketing. Speed & Security Concerns NFC is not without its challenges; there have been technical concerns about the speed at which contactless devices can authenticate at transit system turnstiles, and whether NFC is inherently insecure. Agencies who have carried out NFC pilots argue that a device must have a transaction time of less than 500ms to be viable, and prevent passenger delays at turnstiles. NFC implementations that use secure applications embedded on SIM or microSD cards can suffer from increased transaction times, in some cases over a second. By putting NFC applications on embedded chips in the phones themselves, as found on Android phones and proposed next-generation iPhone, these transaction times are likely to be significantly reduced. In 2008, the MiFare Classic chip found in Oyster cards and other public transport payment cards was hacked. As a result, agencies including TfL, switched their card-based NFC implementations to the more secure MiFare DESFire. Concerns about the security of NFC on phones have been raised by experts including McAfee, citing holes in the underlying operating system source code that might compromise NFC information – a problem already identified in version of Google’s Android and Apple’s iOS. Threats such as NFC eavesdropping remain a problem, but more comprehensive support for data encryption and tighter OS security should address these. The Open Standard for Public Transport (OSPT) Alliance has proposed an open security standard for ticketing called Cipurse, as an alternative to proprietary systems such as MiFare, specifically for transit environments. What’s Next? In the Harvard Business Review, Google Chairman and CEO Eric Schmidt was clear to point out that the company’s 2011 strategic objectives were “all about mobile”. By adding NFC support in the Android OS in December and acquiring Canadian NFC developer Zetawire at the same time, the behemoth’s plans are clear – to secure a lead in the mobile contactless payments space. With Apple following suit and other handset manufacturers certain to follow, 2011 will be a defining year in NFC market growth. It remains to be seen how fast this will translate to the transit industry, particularly in North America. We need to see an end to pilots and the start of more concrete commitment from transit agencies, mobile carriers and banks. ISIS – a joint venture by AT&T, T-Mobile and Verizon – is a big step towards this. While the transit industry is not renowned for the speed at which it implements new technologies, NFC could just be the juggernaut it can’t ignore. Jim Baker is CEO at Xentrans, Inc., a wireless project management consultancy based in San Francisco and London. A C-level wireless industry veteran, Baker has been involved in many deployments of wireless technologies on passenger transportation worldwide and is a recognized industry expert on Wi-Fi, 3G and 4G convergence. He is Chair of the Technology Committee at the Joint Council on Transit Wireless Communications [http://www.transitwireless.org] that is developing a strategic plan for implementation of wireless technologies in mass transit. Contact Baker via LinkedIn [http://www.linkedin.com/in/jnb65] or follow him on Twitter [http://www.twitter.com/jnb65].

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