Near Field Communication: Turf War (Part 2)

There are two parts to NFC. The mobile aspect of NFC communication (antenna, modulation-demodulation etc.) are handled by the NFC chipset, just as in any other connectivity technology. Security element (SE) manages the security aspects. The architecture of a mobile phone allows different implementations of SE: embedded in the phone, on the subscriber identification module (SIM), or on a removable medium such as an SD card. Each SE, irrespective of where it is located, is assigned a unique serial number that identifies the device during transactions. The SE includes an on-board microprocessor and secure memory area that houses applications, cryptography elements, and user credential such as payment details. The SE, then, is where NFC will be played out. Given the option to implement SE in multiple  places, vested interests are pushing for different models that would benefit them most.

1. Mobile network operators (MNOs) and SIM vendors want NFC in the SIM. For GSM phones, especially for users not tied to a device, this approach has the advantage of portability. The communication between SIM and NFC chipset, is governed by the single wire protocol (SWP).

SIM vendors see this as an opportunity to reinvigorate a technology that started in 1988 as a means to provide a removable security module. It has remained just that – a way for the MNO to identify the user.

MNOs in South Korea and China, for example, are investing in banks and developing a platform for seamless payments. This approach bypasses traditional mediators such as Visa, MasterCard, American Express, and Discover. While it could lower the processing fees for merchants, it also means less choice for consumers by tying a phone to one MNO–bank alliance. Instead of restricting choice, MNOs should open their platform to application developers and let them innovate.

Money will be made in applications (more on this later). If MNOs plan to benefit from this trend and not be left behind as simply pipes providing network access to other applications, they will have to open their APIs. If the application resides outside of the SIM card – somewhere in the application processor – MNOs have no way to generate revenue from applications.

2. Handset vendors want to embed NFC into the phone. It is quick to implement, and one does not need to bother with SWP. Since the device works in a passive mode for payments, it could work even when a phone’s battery is exhausted. It will work even when a cellular signal is weak or absent.

This approach will enable design reuse for vendors making both GSM and CDMA phones. Application developers will simply see NFC as another hardware feature alongside, GPS, BT, and WLAN and can build on it. It’s simple, straightforward, and there is not a steep learning curve. It provides the best platform for innovative applications. Revenue models are not clear, though.

Traditionally, MNOs have controlled how phones were built. When Apple wretched the design decisions from AT&T, financial implications were not as clear as in NFC. It remains to be seen if device vendors can have it their way with NFC.

3. Financial institutions want NFC on the microSD card. The SE and NFC controller are outside of the phone. This approach enjoys the advantage of portability across devices, whether they be GSM or CDMA devices. Separate trials started by major U.S. banks (U.S. Bank, Bank of America, and Wells Fargo) in recent months have all been powered by microSD cards supplied by U.S.-based DeviceFidelity in an exclusive agreement with Visa.

But there are several disadvantages to this approach. A separate, smaller antenna means shorter operating distance and usability issues – both undesirable, especially when the trials are meant to convince consumers of the simplicity and elegance of NFC. This approach limits NFC phones to card emulation. Users in the U.S. are unlikely to get excited if all NFC enables are contactless payments.

Nokia, incidentally, took some wind out of the sails of this approach when it recently announced that it was removing microSD card slots from upcoming high-end smartphones.

As if this was not enough fragmentation, some players want to take a proprietary route. For example, China Mobile Ltd., China’s largest MNO, used a proprietary system based on a standalone 2.4GHz RF-SIM card. It has now withdrawn from this approach.