Market Watch Payments

Why software is eating NFC

Marc Andreessen’s recent Essay in the WSJ entitled Why software is eating the world generated a strong feedback. He advocates that software is disruptive to all industries, from automobile to financial services as its importance finally comes of age with the growing pervasiveness of connectivity and calculation power. It’s an interesting read.

He highlights the following for financial services:

The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies, such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than $1 billion in revenue in the second quarter of this year, up 31% over the previous year.

While it’s true financial services are a software based industry, it is stil very much reliant on dedicated hardware. Cash, checks, credit cards are all hardware based tokens to materialize value and ownership. NFC is the latest in this chain of hardware based solutions, using secure elements and dedicated POS hardware to ensure transactions. His choice of Square and Paypal is not surprising since they are software based disruptors in payment.

But startups and companies, with backgrounds closer to the disruptive companies quoted by Marc Andreessen (Skype, Linkedin, Netflix, …) are looking at the mobile / online payment market as a software based business. For them the question is : why do I need dedicated hardware when I can use 3G/wifi and cloud based solutions to run local payments and aim at the same level of convenience and security? I am guessing Paypal is one of the inspirations for these companies, having succeeded in internet based payment using a software-only solution, including fraud management when other players where proposing tokens, dedicated credit cards and other “stuff”.

Recent announcements show how these software based businesses are pushing for software based solutions in payment.

– From the outside, Square may seem very much hardware based since it is known for credit card acceptance on mobile. But it’s vision is software based. Card case is the perfect example of this, allowing local payments with merchants via mobile using a existing connectivity. Card case is now open to all merchants and with a dedicated app, I am expecting it to grow fast. To ensure fraud control, Square uses a mix of data (including social based), localization.

Dwolla, the ACH based payment network, recently launched a P2P location assisted payment solution Proxi. Using your location, it allows you to discover other Dwolla users around you and make payment to them.

– Using Paypal on their phone, people can also Bump money to each other, or split tabs.

– Stretching this point a bit, I would be curious to know how many people uses Amazon mobile store and payment “in-real world store” to make their purchase online (comparing prices, finding sizes etc).

What are the advantages of software based solutions?

– They are easier to launch, as the existing connectivity and tools can be leveraged. There is for now a limited number of NFC phones and Paypass POS are not that common.

– They seems easier to adapt as no dedicated hardware is used. App stores have also made app updates more convenient

Possible disadvantages are:

– Less secure (?) – Remains to be proved

What do you think, can software based solutions disrupt NFC?

5 replies on “Why software is eating NFC”

Less secure, maybe not, but there’s another big difference : the user experience

In traditional payments, the key advantage of “hardware” is that it
uses a tangible token to make the “connection” between the payer and the shop.

A “pure software solution” will require some sort of find / type /
select / scan… process that is likely to feel less natural, less quick
and less user-friendly than any tap / swipe / touch process

On the other hand, software could “beat hardware” in more integrated
use cases, imagine a restaurant app on my phone, which integrates
specials and discounts, allows for an easy foursquare check-in, lets me
browse the menu, enter my table number, make my
order, receive the food and pay from directly from the app before
leaving the restaurant.
Lots of “simpler” integrated cases actually already exist : buying a bus
ticket from my phone, making a hotel reservation… And we can imagine
that the payment “step” will increasingly be integrated in
software-impacted shopping experiences (coupons, loyalty cards,
comparison shopping, social shopping, …)

What this all means, I think, is that software will be increasingly
important in the payment experience, but the way it interfaces with the
physical world will remain a key factor of the user experience, and
that’s an area where “hardware” is today the standard
to beat

I would take a different view from in the sense that this is just a UX experience question. Whereas cash and card had a visible physical connection, with NFC its clearly fading away, I don’t think a bip between a phone and a POS is that important.
If you take Square’s experience, the “physical” connection happens when your picture appears in the vendore Ipad and you say your name.
What is the best physical token of the 2?

I think software is clearly leading NFC due to the lack of released phones and infrastructure. That being said none of the things above will reach anything above niche in comparison to the physical transaction world…for a good few years if not decades. NFC when it finally arrives on mass will change so many things including financial services the physical element and action of tapping to interact or enable services will in my opinion be very important indeed. That being said the software and the ux that goes with it is equally important and the two need to interact beautiful or neither will win out and we will end up with a mess…

I think the question is if it takes so much time for NFC to have a significant footing, can it be outdated when it reaches maturity? A technology analog could be WiMax, which to the best of my knowledge never really took off as “good enough” technologies (Wifi for local, 3G-4G for long distance) better served the needs.

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