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Apple’s NEW NFC Patent

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10 April 2010 (updated 14 April)

I’m still reading through the 243 page patent application… but this is exciting… not just because Apple is taking such an aggressive, broad approach.. but because Visa, MasterCard, ATT, … are also about to “pull the trigger” on some very substantive efforts. As a consumer I know that where there is competition… I win!

From a “payments perspective” Apple looks to be expanding the “iTunes wallet” to support NFC: either as an aggregated payment account (apple as issuer), or an “unaggregated” iTunes Prepaid Card model. In the aggregated model, someone like JPMorgan Chase may be the underlying bank and could provide Apple with an average margin of up to 150bps of TPV. This assumes that the NFC interchange holds at 300-350bps as Merchants are not jumping for joy in current pilots (see BestBuy).

In the “iTunes wallet as prepaid card” model Apple’s NFC revenue would be equal to TPV of ACH payments times the average interchange between POS transactions and other (ex P2P) transactions. Given that iPhone customers are rather Savy, I believe they will quickly educate themselves on the stronger Reg Z consumer protections associated with bank cards (as well as the existing rewards programs) keeping Apple’s interchange revenue suppressed to less then 20-50bps of POS TPV. We should not compare Apple to a “PayPal” as the transaction economics will be much different, given PayPal’s role as both issuer and acquirer. Also note that NFC value proposition is focused at the physical POS.

This is not to say that this will be a marginal business for Apple, in fact my view is the opposite, the real revenue streams to apple will not be from “interchange” but from advertising as  iAD provides the “Yang” to the NFC’s “Ying”. Creating a new payment ecosystem means having incented partners. The timing on Apple’s iAD and NFC developments are not accidental, my belief is that they are part of a very solid mCommerce expansion strategy. (note that the iTunes wallet is clearly evident from patent diagram 5A above).

My guess is that JPMorgan Chase and/or BAC will be a launch partner here, specifically on the “googlization” of financial services (see previous blog). The banks have a tremendous amount of data which can be monetized if consumers give permission. Both BAC and JPM have very aggressive exec teams focused on driving new business models. My guess at a value proposition: Consumer accepts a bank disclosure allowing use of your card data for mobile marketing (x ads per month), in return consumer receives rewards/ discounts/ offers.

On the iAD side, Apple will coordinate  iAD mobile advertising, banks provide “propensity to buy” information (for registered consumers) to Apple’s marketing engine, Apple will manage campaigns and share click revenue with banks. The revenue stream for Apple is in mobile advertising, developing a new ecosystem which will create a “win-win” for: consumers, banks and merchants, and Apple’s application development community.

Beyond near term NFC payment at the POS, many questions will arise on the openness of Apple’s NFC API within the iPhone architecture. Will Apple try to lock the wallet? If it is open Apple may loose control of the ecosystem as other “channel masters” emerge. Beyond payment at the POS, NFC/RFID has many applications.. from opening a door at a college campus.. to a price check on the RFID tag of  a new HDTV. I can’t imagine the strategy discussions going on in the Valley this week “What do we build”….

My messages for the start up community:

  • Better to ride a wave then create your own. Find a way to add short term value in this new ecosystem. Visa/AT&T are far ahead in coordinating a launch of products.
  • Network effects: volume, intelligence, routing, expand nodes, …
  • The iAD revenue stream. Find a way to become part of it. Integrating existing marketing programs (ex. NFC on a subway billboard).
  • Beyond the POS to mCommerce/physical confluence. How can you drive sales or store traffic? (ex. will apple integrate an RFID reader?)
  • Supporting banks. Example. Look at page 4 of patent application, taking an image of a credit card/check. How will a bank use this to make an authorization decision?
  • International. Apple has a tendency to design for US markets… what will it take to localize?

Apple’s approach to controlling its ecosystem is not perfect, but is the right thing to do early stage as both technology and consumer behavior evolve (I remember my Apple IIe). Right now my bet on “mobile wallet” is with Apple precisely because of their ability to orchestrate such an extended ecosystem. This is going to be hot, within the US there are currently 3 major competitive teams:

  • Apple (likely with JPM/BAC)
  • ATT/Visa/First Data (possible that they are aligned w/ Apple)
  • Citi/MasterCard (NFC Stickers)

Comments appreciated

Written by tomnoyes

April 12, 2010 at 3:51 pm

Posted in US

Tagged with , , , , ,

PaybySquirell and iPhone Payment

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Twitter founder Jack Dorsey. Card swipe on iPhone.

http://www.finextra.com/fullstory.asp?id=20618

http://www.engadget.com/2009/10/17/twitter-founder-jack-dorseys-squirrel-project-revealed-as-th/

Roberto Garavaglia was nice enough to share this finextra story on linkedin. Is this a consumer play.. or a “merchant play”? Will I see my local ticket scalpers taking credit cards on their iPhone? This start up was certainly “in the black”.  Data we know:

  • Squirrel has a “signature” line in the app
  • Have hardware on the phone
  • Alpha test in NYC
  • Receipt in engadget pic above shows consumer payment (you paid)
  • Mind behind it is Dorsey
  • Top VCs know about it, and seem to think it is a merchant play.
  • Very US centric.. no EMV (Chip and Pin)

There are certainly some conflicting data points. If a consumer play.. this signature will not be valid… and transaction will be treated as a CNP (so why the signature?). If this is a merchant play who would possibly want to act as acquirer (fraud loss)? The merchant use would make most fraud heads loose a little sleep, for they would have a whole new threat vector. Can you imagine the buyers of the merchant use?.. The bank and I will have to worry about every kid in a fast food window and every waitress holding my card swiping on their iPhone (in addition to paying for my dinner). My guess is that squirrel has the technology working.. but haven’t figured out the “banking side”.

Fraud attacks the “weakest link” in payments quickly. Would love to hear from others on the community, but my view is:

  • Interesting as a merchant play…. but acquirers will shy away from originating transaction in either network without solid fraud controls. The merchant owns the loss here by rules of network in a “CNP transaction”. Signature capability will be debated…
  • Squirrel biz model.. questionable as anything but a hardware business. The fraud numbers of leading merchant selling digital goods is astounding. All top merchants have had to develop their own internal specialist teams to handle.  If Apple and PayPal have trouble with teams of 300+ (after 10 years) this will be a challenge for any new “merchant”. As a payment method, squirrel will have to take this on. Having access to the physical card may allow them to try something disruptive like MagTek which reads the randomness (noise) in the card stripe to establish a “unique” card… which has the downside of card registration. Something like this would push squirrel further into a “US centric” model as it appears that they do not support EMV (aka Chip and PIN).  
  • “No go” as a consumer play. Why not just keep my card at the Apple app store? or at PayPal? What is the incremental value that this provides me? Why not just key in my card data.. why add a reader to my sexy iPhone .. .in its sexy case.

Innovation in payments is tough…  if I were going to add something the Steve Job’s product plan for the iPhone what would it be?

  • Global
  • Ubiquitous
  • Unique to every person
  • Globally Accepted for use in Payment and Authentication, by merchants, banks, networks, regulators
  • Low error rate
  • Impossible to clone
  • Difficult to crack

The answer is… (   ). OK so nothing fits my criteria, but any appendage on my iPhone must certainly seek to optimize the goals above. Apple has a payment patent around a semacode displayed on the screen and “scanned” at the POS (Starbucks in trial).

Apple has been VERY non-committal with respect to NFC, as it develops strategies to get a cut of the transaction revenue … merchants would be insane to put yet another vendor in the mix at the POS (apple Semacode reader)… I don’t see it on HP/Verifones product plan either.  We may be left w/ putting NFC stickers on the back of our beautiful iPhone.. . of course that is better then a card reader.. or a semacode… but not as nice as NFC embedded w/ chipset with software providing OTA capability.

Apple’s instance in getting “control” in payment, combined with same tendencies at carriers, is leaving the door wide open to Android and competitors. There are some super start ups with plans to enable all kinds of services through NFC. Imagine using your iPhone to open doors, store coupons, vending machines, college campuses.. a whole new ecosystem all locked up because Apple wants to control the payment channel (and refuses to embed NFC).

Regarding this Apple payment patent: What is starbuck’s business case? is it driving traffic? How many more stops will the average iPhone user make because of this app? My guess is that this was funded out of Starbuck’s marketing budget.. and payback will be minimal. But it is cool. (I wish I could make a living out of being cool.. of course I would first have to be cool… not currently the case)

https://www.starbucks.com/mobile-apps/#num=01&id=coffee_home
https://www.starbucks.com/mobile-apps/StarbucksCardMobile/default.asp
http://www.genoco.com/link/interactive_iphone+starbucks.html
http://www.forbes.com/2007/12/26/apple-patents-iphone-tech-wire-bc_1227appatent.html

Perhaps a more ubiquitous form of payment is something coupled with authentication. Perhaps IRIS scanning, which is now being miniaturized to fit on a chip the size of your thumbnail (below).

Iris Reconition Built into Phones

Iris Reconition Built into Phones

http://www.nydailynews.com/archives/news/2002/01/07/2002-01-07_credit_card_cloners___1b_sca.html

http://4g-wirelessevolution.tmcnet.com/news/2009/08/19/4331395.htm

Written by tomnoyes

October 20, 2009 at 1:14 pm