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When I wrote about Host Card Emulation back in March, it provoked much debate around whether this capability will die on the cutting floor or be meaningfully integrated in to a future Android iteration. And now that it has, this post is an attempt to look forward, even though much of it is speculative. But I will provide some perspective from a number of conversations I had in the last week with Networks, Issuers, TSMs, Merchants, Platform Owners and EMV practitioners and provide some insight in to perceptions, impacts and the road ahead for NFC. And I will provide some context to why HCE matters to each of these players. First – if you haven’t read my previous post on HCE – this would be a good time to do so. Media has unfortunately focused yet again on the controversy in light of the KitKat HCE announcement – focusing on the end-run around Carriers rather than the upside this brings to those who have been disincentivized previously to consider NFC. What they all seem to have missed is that HCE allows for the following: it reduces the gap between merchants and card issuance, brings the topic of closed-loop and contactless in focus, and more tactically – allows for an easy deployment scenario that does not require them to change the software inside the terminal. I hope those three things do not get lost in translation. Google: Being a Platform Owner for once The Android team deserves much credit for enabling support for Host Card Emulation in KitKat. Beyond the case for platform support – something Blackberry already had – there were both altruistic and selfish reasons for going this route. The former – altruistic – had to do with throwing open another door that would invite third party developers to build on an open NFC stack – while firmly shutting other ones (read criticism from Ars that Android is quickly becoming a closed source – partly through its Play services approach). It was time it acted like a platform owner. And being one entailed democratizing access to tap-and-pay. Selfish – because for the more than 200M Android devices that shipped with NFC support – a fraction of these are tap-and-pay worthy. It had become absurd that one must enquire upon Carrier, Platform, Issuer and Device support before installing an NFC payment app, much less use it. Talk about fragmentation. This was a problem only Google could begin to fix – by removing the absurd limitations put in place in the name of security – but in truth existed because of profit, control and convenience. Google’s role hardly ends here. Today – Host Card Emulation – by definition alone, is reserved as a technical topic. Out of the gate, much needs to be done to educate Issuers and Merchants as to why this matters. For retailers – used to much cynicism in matters relating to NFC – Host Card Emulation offers an opportunity to develop and deploy a closed-loop contactless scheme using retailer’s preferred payment sources – private label, debit, credit and in that order. HCE to Merchants: Friend or Foe? In my opinion – merchants stand to benefit most from HCE. Which is another reason why Google really embraced this concept. Despite having certain benefits for Issuers to provision cards without having to pay the piper, Google had its eyes set on expanding the offline footprint for GoogleWallet and to successfully do so – needed to focus on the merchant value prop while dialing back on what retailers once called the “data donation agreement”. Where merchants primarily struggle today in mobile – is not in replicating the plastic model – it is to create a brand new loyalty platform where the customer sets a payment source and forgets it – preferably one that’s preferred by the merchant – for example a private label card or debit. Except, no open loop wallets had actually centered itself around this premise so far. Google Wallet launched with Citi, then reverted to a negative margin strategy – by charging the merchant CP rates while paying the Issuers CNP rates. It wasn’t ideal – as merchants did not want Google anywhere near the transaction value chain. Meanwhile – it gave Google quite the heartburn to see Apple being successful with Passbook – requiring merchants give nothing back in return for leveraging it to deliver geo-targeted offers and loyalty. This silent takedown must have forced Google’s hands in getting serious about building a complete offer, loyalty, payment scheme that is collaborative (HCE support was a collaborative effort introduced by SimplyTapp) and merchant friendly. I believe HCE support now represents a serious effort to help merchants commercialize a closed-loop advantage in contactless without requiring software changes inside the terminal. Contactless was out of bounds for merchants till now. Not anymore. Having fielded a number of calls from retailers as to what this means, I will distill retailer reactions down to this: measured optimism, casual pessimism and “network” cynicism. Retailers have always looked at EMV and terminalization as a head-fake for NFC – to further lay down the tracks for another three decades of control around pricing and what they see as anti-competitive behavior. Though HCE is in no way tethered to NFC (it’s agnostic of a communication method) – due to its current close association with NFC, merchants see the conversation as a non-starter – until there is a constructive dialogue with networks. At the same time, merchants are cautiously optimistic about the future of HCE – provided that there is a standards body that provides them equal footing with Platform owners, Issuers and networks – to dictate its scope and future. As the platform owner – Google should work with the merchant body, networks, issuers and other stakeholders to see this through. It was not a surprise that those who I talked to all agreed about one thing: that Carriers really should have no role to play in this framework. TSM’s/SE Providers: Where to from here? The nine party model is dead, or will be very soon – as the SE rental model has been shown as previously not being sustainable – and now with HCE – simply wasteful. TSM’s had been focused outside of US for the last several years – as the lack of meaningful commercial launches meant that the US market will simply not bring scale for many years. And with Google shifting away from using a Secure Element in its flagship Nexus models – the writing was already on the wall. TSM’s will look to extend their capabilities in to non-traditional partnerships (Gemalto/MCX) and in to non-hardware scenarios (competing with Cloud SE providers like SimplyTapp in the HCE model). Bell-ID is such an example – and quite likely the only example right now. Networks: Certify or Not? What does Host Card Emulation mean to V/MA? It is no secret that the networks had more than toyed with the idea of software card emulation these last couple of years – realizing the rapidly shrinking runway for NFC. Focus for networks should be now to certify the new approach, as a legitimate way to store and transfer credentials. It’s interesting to hear how our neighbors in the north have reacted to this news. There is still ambiguity among Canadian issuers and networks as to what this means – including debates as to whether an onboard SE is still required for secure storage. That ambiguity will not dissipate till V/MA step in and do their part. I must quote an EMV payments consultant from the north who wrote to me this week: “My boss calls the TSM model “traditional” and I remind him in NFC payments there is no tradition… I think for some people the Global Platform standards with the TSM smack in the middle are like a comfort food – you know what you are getting and it feels secure (with 1000′s of pages of documentation how could they not be!)” That should give GP and TSMs some comfort. Device Support for HCE: What does that look like? Google does not report sales figures on Nexus 4, Nexus 5, Google Play editions of Samsung Galaxy S4 and HTC One – the four devices that are slated to receive KitKat over the next few weeks (apart from the Nexus tablets). So if I would venture a guess – I would say approx 20M devices in total that has NFC capability that will support Host Card Emulation soon. That may not seem much – but it’s a strong base . There is also a possibility that post-Galaxy Nexus devices from Samsung may leapfrog 4.3 to go directly to KitKat. If that happens – just based on reported sales volumes for Galaxy S3 and S4 – that would be a total of 100M devices with NFC support. What does that mean for Samsung’s revenue model around SE – who has an embedded SE from Oberthur in the S3 & S4 devices, which it hopes to charge rent to Visa and others – that’s unclear at this point. Issuers: ISIS alternative or more? For those issuers who passed on Isis, or those who were scorned by Isis – this enables them to outfit their current mobile assets with a payment feature. I wrote about the absurdity in a contactless transaction where the consumer has to close his merchant or banking app and switch to Isis to tap-and-pay – instead of equipping merchant/bank apps with a tap-and-pay feature. HCE means a lot more for Private label Issuers – who have a very inspired base of merchants looking to bridge the gap between private label cards and mobile – and now have an alternative to clumsy, costly and complex orchestrations for provisioning cards – replaced with an easy integration and cheaper deployment. More about that later. Finally, Carriers & Isis: Fight or Flight? God Speed.

In the 1970s, it took an average of 18 days before a decision could be made on a credit card application. Credit decisioning has come a long way since then, and today, we have the ability to make decisions faster than it takes to ring up a customer in person at the point of sale. Enabling real-time credit decisions helps retail and online merchants lay a platform for customer loyalty while incentivizing an increased customer basket size.   While the benefits are clear, customers still are required to be at predetermined endpoints, such as: At the receiving end of a prescreened credit offer in the mail At a merchant point of sale applying for retail credit In front of a personal computer The trends clearly show that customers are moving away from these predetermined touch-points where they are finding mailed credit offers antiquated, spending even less time at a retail point of sale versus preferring to shop online and exchanging personal computers for tablets and smartphones. Despite remaining under 6 percent of retail spending, e-commerce sales for Q2 2013 have reportedly been up 18.5 percent from Q2 2012, representing the largest year-over-year increase since Q4 2007, before the 2008 financial crisis. Fueled by a shift from personal computers to connected devices and a continuing growth in maturity of e-commerce and m-commerce platforms, this trend is only expected to grow stronger in the future. To reflect this shift, marketers need to be asking themselves how they should apportion their budgets and energies to digital while executing broader marketing strategies that also may include traditional channels. Generally, traditional card acquisitions methods have failed to respond to these behavioral shifts, and, as a whole, retail banking was unprepared to handle the disintermediation of traditional products in favor of the convenience mobile offers. Now that the world of banking is finding its feet in the mobile space, accessibility to credit must also adapt to be on the customer’s terms, unencumbered by historical notions around customer and credit risk. Download this white paper to learn how credit and retail private-label issuers can provide an optimal customer experience in emerging channels such as mobile without sacrificing risk mitigation strategies — leading to increased conversions and satisfied customers.  It will demonstrate strategies employed by credit and retail private-label issuers who already have made the shift from paper and point of sale to digital, and it provides recommendations that can be used as a business case and/or a road map.  

Credit unions were the only type of lender to have their 30 day plus delinquency rate fall below 2 percent for several key product categories. The table below provides the delinquency rate by lender and product. 30 day plus delinquency rate Q2 2013   Auto* Mortgage Bankcard Credit unions 1.52% 1.36% 1.99% Banks 2.01% 4.91% 2.73% Captive auto 2.40% N/A N/A Sign up to attend our upcoming Webinar on Q3 credit trends and take a closer look at the impact of consumer behavior on the economic recovery. Source : Data for this article was sourced from IntelliViewSM, a Web-based data query, analysis and reporting tool. *Auto delinquency rate includes automotive loans and leases.