A key issue within the development process of proximity mobile wallets is the choice between a light wallet and a full wallet with NFC-based card emulation. This decision not only affects the technical capabilities of a proximity wallet; it also has an impact on your potential business model, partnerships, relations with stakeholders and go-to-market strategy. That is why a profound analysis of possible NFC strategies is mandatory at the beginning of a mobile wallet project. It will help you to steer your mobile wallet strategy in the right direction. In this post, I focus on the advantages and disadvantages of available NFC strategy options for proximity mobile wallets, as well as their long-term implications.

What is NFC-based card emulation?

Near field communication (NFC) is a means of communicating data over a wireless connection across a very short distance. NFC-based card emulation is the basic concept of proximity wallets. The aim is the emulation of a contactless smart card within smartphones, which can help ensure the crucial advantages of smart cards: high safety standards, existing and proven infrastructure and standardization, and the contribution of inexpensive cards to customers without smartphones. The advantages of smart cards can be connected with the advantages of smartphones (accessibility to mobile networks and interactive user interfaces). This approach requires that a smartphone fulfill certain technical requirements such as the ability to communicate with card readers and to execute smart card functions.

Smartphones therefore must be NFC enabled to facilitate communication with card readers, and they need to have a so-called secure element—a chip based on smart card functions that allows the secure storage of smart card applications. Note here that NFC can also be used as transmission technology without a secure element, but then features like card emulation or the reutilization of card-based infrastructure are no longer applicable.

Currently, NFC support for smartphones is a heavily discussed topic within the market. Although NFC did not yet penetrate the full smartphone market, its recognition within the market will definitely increase as a result of promotion by today’s top phone manufacturers, who integrate NFC technology into most of their new mobile devices. From a strategic point of view, however, the market development of the secure element is more crucial and quite difficult to forecast and influence.

Secure element solutions for mobile wallets

The secure element is a chip that fulfills the highest security standards. Access is controlled by the owner of the chip. Without the owner’s permission, it is not possible to store applications or data on it. This means that the owner of a mobile wallet must be the owner and the issuing authority of the secure element at the same time. There are currently several solutions available for the use of secure elements:

MicroSD card: The secure element is directly stored on a microSD card (or on another external element such as an active NFC sticker). Mobile wallet providers have the ability to offer such solutions, but it requires a major logistical effort to provide them to users. Furthermore, not every smartphone supports microSD.

Embedded secure element: Smartphone manufacturers can build secure elements within their products. Nonetheless, it is doubtful that leading smartphone manufacturers will integrate secure elements for third-party suppliers, and so there is a strong dependency on the smartphone providers. Apple Pay follows this approach.

Cloud secure element or host card emulation (HCE): The secure element is filed in the cloud and can be accessed through so-called HCE. This approach constitutes an interesting solution for various markets but is not yet standardized and marketable. Also, it cannot provide the same level of security that physical secure elements can.

UICC (SIM): UICC (SIM) cards, offered by telecommunication companies, are the most common secure elements. As I said before, these cards are controlled by the mobile network operators themselves. This kind of secure element is therefore only accessible through partnerships with telecommunication companies.

The support of NFC-based card emulation carries specific risks since each type of secure element has its pros and cons. The difficulties regarding secure elements cause strong dependencies between the secure element owner and the wallet provider. Companies planning a mobile wallet strategy should take this into account when defining their strategic purpose and orientation. A mobile wallet launch that competes with wallets from other secure element owners, like mobile network operators, may hinder a future cooperation among these wallet providers. For example, blogger Robert McCarthy indicates that the struggle between Google and the major mobile network operators in the United States (SoftCard) exemplifies a case of blocking the market due to stakeholder rivalries.

Now that we’ve addressed some things to think about when choosing what type of mobile wallet to use, in my next post, I’ll address the overall business view and recommendations for companies developing a mobile wallet strategy.