NFC – New Money System or New Form of Credit Card

 “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

“I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.” Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924. 

NFC – New Money System  or New Form of Credit Card 

The NFC, Near Field Communication, is being promoted as a new money system but in fact is another form of credit card.    The big banks and our government are promoting the NFC as a new form of money:

• Headline and Global News – “The next form of currency”.
• “A massive digital overhaul- what is likely to be the biggest change in money in the U.S. in decades” [1]
• President Obama signed Executive Order – everyone must accept mobile payments by October 2015
• Banks want it –
  • Largest banks – JP Morgan, Goldman Sachs, B of A, Citigroup, Wells Fargo – will back this new technology,  It reduces their bad debt and hacker losses.
• Payment Processing firm – First Data Corp – wants it.  It provides billions of new transactions and thus new revenue.
• 220,000 retailers have agreed to accept this new form of payment by October 2015.   It reduces their credit card risk if they install before October.
• 3 Credit Card companies – VISA, Master Card, American Express – want it
• Porter Stansbury says that “This upgrade will replace the dollar”[2].   I doubt this statement but it certainly reduce the reason for carrying currency.

In spite of the hype, it is not a new money.  The money was created by credit based on credit card companies providing the credit.   NFC is a better and more secure form of Credit Card “money”.   Money is credit.   Control of that credit now lies in Credit Card Companies, banks and the Federal Government.  It reduces the Credit card companies and retailer companies risk of bad debt and hacker break-ins.  Thus, it is better for banks, retailers and the government.   Also, it will be easier for end users to use.   There will be fewer thefts from hackers, fewer credit card losses from stolen cards and of course more government control.   “1984” is approaching – – – when the government can tell you when and if you can make a purchase – – – but today,  it always in the background.

In truth, we are in the initial stages of a financial credit card revolution.  It is the next stage – – – credit cards in the 1950s, debit cards in the 1970s, online banking in the 2000s and now NFC secure credit authorization from handhelds.   The smart phones will make major inroads in replacing money in our wallets and credit cards in our wallets.

Mobile Phones

VISA says that American over 34 are twice as likely to carry a mobile phone as they are cash and that the 18-34 age grouping is four times as likely.  Business Insider reports that

“The mass adoption of smartphones and tablets set the stage for a move away from fixed-point, card based transaction and toward those completed on mobile.”

The new technology from the viewpoint of the user is simpler even though in fact it is more complex.  Let us review some of the highlights of the technology:

• A smartphone can store multiple credit cards on the same device
• No need to find a card in wallet or remember a PIN
• Faster payments means faster checkout in lines
• An App allows you to store rewards cards and loyalty points

This is going to change the retail buying experience. One wonders about security if everything is in one place.  Let us examine the possibilities.   If your wallet is stolen, the crook has access to all your credit cards and information. At the point of sale, the

• Your information is vulnerable to cashiers
• Store databases are vulnerable to hackers – – – Target, Home Depot attacks

In short, you are vulnerable.  Now let us look at NFC,

NFC and Wireless Phones

First, your phone does not carry credit card information.  It carries a “TOKEN”.  This means that no one except card issuer carries any personal information.  It works this way:

• Phone carries a Token that represents your credit card
• It has a passive non transmitting RFID chip now called a NFC.
• When pinged with an radio frequency signal, it transmits
• When you make a payment – the NFC chip sends a Payment code – not the credit card information.   This payment information is used only once; thus, if intercepted, it is useless.
• Retailer, merchant or cashiers do not see credit card information.
• The Token is sent to the credit card company and the transaction and verification is completed
• Everything is encrypted. Reports do not state what type of encryption.
• I have not seen any technical descriptions but this is how it must work.   This is a four node network – handheld with NFC RFID passive transmitter, Point of Sale device with an NFC RFID reader that Pings the NFC chip in the handheld, a Token security server on the network away from the store with the Point of Sale Device, a credit card server on the network that receives the token and authorizes the purchase.

Some Case Studies

Starbucks – A new payment App for smartphones collected $1.2 billion in 2013.  Stansbury says that they expect $2 billion in 2014.   They currently get 6 million transactions per week

Apple Pay – Apple’s mobile payment technology is on the iphone6.  Apple sold 10 million iPhone6 units in the first few days it became available.  Apple expects 80 million iPhone6s to be sold by the fourth quarter 2015.   Apple already works with 90% of the credit cards.  Apple is just one part of the current $721 billion global NFC payments industry according to Stansbury. The industry became massive overnight.

The NFC installed chip market is growing rapidly.  In 2012, 120 million phones were equipped; in 2013, 275 million were equipped and by 2018,  IHIS technology predicts 1.2 billion phones will be equipped.   To date, Stansbury reports that 40% of Americans have used a smart phone to make a payment.

The critical element to remember is that after October 2015, the end transaction point is a point of sale merchant device and it either accepts payment with a mobile device with token – – – in which case the credit card company is liable – – or they accept a credit card without a token and the merchant is liable for losses.  This means that all merchants will be scurrying to install those readers quickly.

Investment Impact

This size of this explosive growth in the market always brings investment opportunities.  The obvious ones are

• Apple should see explosive growth in 4^th Quarter
• Point of Sale manufacturers should also see increased sales. Not all the devices will have field upgradable chips.
• Semiconductor manufacturers of the NFC chip should see a boom in sales.

In addition, there are non-cash transfer applications for the NFC embedded chip in the iPhone.  The Chip and pin is the next generation of credit card.  New technologies work together and complement each other-

• RFID chips that are the NFC chip. It is latent until “pinged” with a special frequency. Then it “speaks”, the hand shake takes place and transaction proceeds
• Communication protocol – – – This may be proprietary to each NFC chip and reader. There are no industry standards that I can find at this time.

The NFC manufacturers are all jockeying for position to ship into this market.

• Early chip manufacturers are
  • NXP
  • Inside Secure
  • ST Microelectronics.
• Announced plans for manufacturing have come from
  • Texas Instruments
  • Samsung
  • DNP – Dai Nippon Printing
  • Polaric
  • Shanghai Fuden microelectronics

The industry is so new that clear leaders have not been chosen.  This report just provides you places to examine.

Conclusions

The NFC chip is a good solution for secure credit transactions. This relieves much pressure on the Credit Card companies and the retailers for bad debt due to stolen information.   The Federal Government has mandated October 2015 as to when everything must be done.  The end user will be safer in his credit environment but will again be ceding some of his freedom to the government and banks as they march toward a cashless society.   Semiconductor manufacturers have announced plans for manufacturing the systems and retailers will start implementing quickly to meet the October 2015 date.

[1] Porter Stansbury “The End of American Money as We know it”, http:pro.stansburyresearch.com/1501Remapple/lrem2ff/Full

[2] Ibid, p2