Preparing RetailFor the Mobile NFC Transactions Evolution

Prepared for VeriFone

Andy CastonguayDirector

acastonguay@yankeegroup.com

Why Near Field Communications Should BeOn Your Short-term Radar – An NFC Overview

From the telecom salad of acronyms, one that has potential to make a real impact

What is NFC?• A Technology Standard that permits important personal account details to be delivered

quickly to a “contactless” or “touch” reader• Near Field Communication (NFC) is an evolution of contactless and short range RFID

technologies. NFC enables easy and straight forward use of cards and mobile phones with touch-based technology – operating at a distance of only a few centimeters.

• Leverages current payment infrastructure in use through out the world• Currently: A chip and an antenna residing in debit, credit, stored value, and special

purpose cards• In the future, NFC will be embedded in mobile phones

When will NFC reach the U.S. market?• NFC-style implementations have been a small but growing part of the payments

market for years

Why is it important to retail and commerce?• Fast, secure payment – Ideal for high volume establishments• Growing demand and usage among US consumers• Future mobile phone deployments have explosive volume potential and dynamic

interface

NFC Is Growing Independently of Mobile Operators – Providing Retailers w/ Short and Long-term Benefits

US Issuing Banks Estimate Over 15m Have Been Issued Since 2005

NFC cards will outpace mobile wallets,creating behavior that is potentially difficult to alter unless 3-point balance becomes more advantageous.

Credit Card Offerings• MasterCard PayPass

– Embedded cards being issued since 2005. – Bank partners include Citi, HSBC, MBNA, KeyBank

• Visa Blink– Embedded cards being issued since 2005– Chase is key bank partner– Upwards of 5m cards already issued

• American Express ExpressPay– Embedded in Blue cards and key FOBs since 2005– Exclusive to Amex

Merchants Deploying POS

• McDonalds• CVS• 7-Eleven• Subway• AMC Theatres• Fry’s• Walgreens• NYC’s MTA• Eckerd• Ritz Camera• Wawa• Cold Stone Creamery• KFC• Arby’s• Carl’s Jr.• Duane Reade• Regal Cinemas• Sheetz• QuickChek

NFC-based Programs and ProductsQuickly Evolving

Public Transportation

• New York City, MTA

• Boston, MBTA Charlie Cards

• Parisian Metropolitan Subway System

• London Oyster Card for the Underground

Gasoline Stations

• Mobil Speedpass

Mobile Operator Trials (for US)

• AT&T/Cingular

• Verizon Wireless

• Sprint/Nextel

Social Spending Programs

• Health and Food Benefit Programs in US and Western Europe

Primary NFC Activities

1. Purchases at POS

2. Ticketing & Transport Pass

3. Content Discovery & Info Exchange

Mobile Provides Scale, Distribution & Dynamic Interaction

Mobile phones represent the next great focusfor transactions, advertising and marketing

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2003 2004 2005 2006 2007 2008 2009 2010 2011

Total Mobile Users in US, 2003-2011

Source: Service provider’s reports and Yankee Group, 2Q07

US Mobile Services Market is Maturing & Consolidating

1Q2007 Market Share, by Subscribers*• Provides retailers with a “short

list” of potential marketing partners to drive usage of mobile NFC in stores

• Heavy competition drives Mobile Operators to constantly offer service technology innovations to gain marketing edge – NFC is among key priorities for 2008

• Competition also ensures constant effort to offer newest, most robust handsets. Like Bluetooth and Wi-Fi, NFC will become a necessary standard for future mobile phones

AT&T26%

Verizon25%

Sprint23%

T-Mobile11%

Metro PCS1%

US Cellular3%

Leap1%

Alltel5%

Dobson1%

Other4%

*includes direct, reseller/affiliates, and wholesale subs within each carrier

Source: Service provider’s reports and Yankee Group, 2Q07

The Mobile NFC Ecosystem Involves Significant Number of Players with Unique Strengths

Mobile NFC Contactless Ecosystem

Merchants

OTA Provisioning

Banks

Card Associations

POS Terminals

Mobile Carriers

SIM/NFC Chip Manufacturers

Handset Manufacturer

Source: Venyon

How Will Mobile NFC Work in Real Life?Over-The-Air (OTA) Provisioning Facilitates Ease of Use

Defining the Leading Edge of Mobile Transactions

• Involves any type of transaction initiated or completed on a mobile device. These transactions fall into activities of Marketing, Selling, and Servicing customers via mobile devices

• Sub categories of Mobile Transactions include:

– M-Payments (e.g. point-of-sale, peer-to-peer, remote)

– M-Coupons (e.g. discounts, loyalty programs)

– M-Service (e.g. M-Banking alerts and account management, situation-aware Airline customer service, etc.)

• Examples:

– Using a mobile device as a cash replacement at a fast food restaurant to pay for a meal

– Receiving and redeeming a coupon at a retail POS

– Accessing real-time financial account information or executing a trade with your mobile device

– Purchasing a ticket to a sporting event online and receiving an “m-ticket” on your mobile device which you use to enter the event

– Checking in for your flight over you mobile device

– Remittance payments in lesser developed countries

• This is primarily and Interactive activity that involves both the end-user and brand, merchant, agency, enterprise to take action

Mobile Transactions

Mobile Transactions is a Disruptive technology and a key area of focus for YG

Understanding the Importance of NFCIn Mobile Commerce

MobileCommerce

MobileContent

MobileAdvertising

MobileTransactions

M-Payments M-Coupons M-Service

Despite Outstanding Potential, Mobile Payments Have Suffered By Not Leveraging the Existing Point-of-Sale Payment Infrastructure – NFC Changes That

Core Payment Focus

Core Billing/PRM Focus

Global Players

Regional Players

Defining the Value Proposition to Consumers & Retailers

Mobile Wallet Payments Have Important Benefits Over Existing Mechanisms to Gain Traction With Consumers – Striking Important Balance of Primary Payment Characteristics

Cost Efficiency

Convenience

Security

Who is Successfully Leading the M-Commerce Charge? Japan’s NTT DoCoMo Expanding With Diversified Financial Services

Device distribution provides entry point for m-commerce iD Credit Platform services

• DoCoMo-branded DCMX/iD mobile credit services

– Operator expanding into retail credit sector

– Partnering with other financial institutions like Mizuho Bank and UC Card

– Leveraging distribution infrastructure for handsets to drive credit card uptake

– Currently over 3m subscribers and 150,000 iD payment terminals

• Edy contactless payments

– Utilizing Sony FeLiCa technology and bitWALLET platform

• ToruCa data retrieval service

– Allows storage of coupons on handsets

– Coupons and information can be accessed and stored by reader/writers at retail outlets

US Mobile NFC-Based PaymentsEcosystem Is Defining Structure

Player TypePrimary Expected Benefit Key Barriers

Likely Short-term Outcomes Wild Card Options

Mobile Carriers Transactions fee participation

Card Associations, Banks & Merchants

No Major Progress Until 2008

Create Parallel Network to Bypass Cards

Card Associations Expanded Volume of Transactions, Enhance Brand

Contactless POS Coverage Slow to Grow

Driving Solid Volumes of Card-based NFC deployments

Push for OEM adoption of NFC

Issuing Banks Incremental Spend Increase, Potential for Payroll Products

Contactless POS Coverage Slow to Grow

Driving Solid Volumes of Card-based NFC deployments

Integrate NFC Experience with mobile banking services

Merchants/Retailers

Operating Expense Savings, Better Ability to Track Customers

Costs of POS, Compatibility across systems

Larger chains investing in POS upgrades

Could partner with operators to force hand of card associations

US Mobile Wallet Initiatives –Moving From Trial to Implementation

US Market Identifying Business Models That Benefit Whole Mobile Wallet Ecosystem

• For NFC deployments, the key business model is transaction fee participation – operators see little upside to other potential revenue streams (e.g. content discovery, slot leasing, subscriber fees, couponing, etc) that will benefit card associations and retailers

• ISO/IEC 14443 standard is gaining final structure. multiple trials for mobile phone contactless payments:

– Atlanta (Cingular, Chase, Nokia, Philips, Visa, & VivoTech)

– Dallas (MasterCard, Nokia, AT&T & JP Morgan Chase)

• Ramp up period for handset volumes 6 to 12 months

• SMS-based payments gaining acceptance

– PayPal & Obopay SMS-based payments facing difficult push to critical mass

Business Model Structure Benefits Next Steps

Transaction Fee Split

Peaks Carrier Interest and Guarantees Quicker Roll-Out

Credit Cards Associations Work to Develop Marketing & Cost Plans

SIM Slot Leasing

Creates Steady Revenue Stream for Mobile Operators, Potentially Reduces Costs for Cards

Issuing Banks Must Work Out Details for Leasing Space on Mobile Wallet and Ensure Top Placement and Customer Experience

NFC-enabled POS Will Support Payments & More

Strong Future Opportunity for Retailers in Mobile Marketing/Coupons

• Coupons delivered to the phone as a text or dynamic message

• Can use real time analytics from the merchant and real time location from the carrier to deliver the right messages to the right person at the right time

• Can scan the bar code directly off the phone

– Problems with screen resolution, scratch on the screen, etc…leads to an inability to scan a coupon directly from the device

– Merchants want the ability to scan directly from the device to eliminate human error and to identify whether this coupon is unique or has been forwarded

• Coupons should be time based and location based

• Loyalty programs

– Can be stored on the phone so you don’t need to remember all of your cards

– Can be combined with a coupon such as buy 9 get the 10th free promotion

Thank you!

Andy CastonguayDirector, Consumer Research

Yankee Group

acastonguay@yankeegroup.com