KEY POINTS

  • Host Card Emulation (HCE) is a technology that breathes new life into near field communication (NFC) mobile payments — mobile payments made by holding a phone near an NFC reader. Prior to HCE, mobile wallet providers needed to store payment credentials in a highly restricted part of the smartphone controlled by mobile carriers. HCE gets around that, thus lowering the barrier to entry for NFC mobile wallets.
  • With HCE's adoption in Android 4.4 (KitKat) there are now nearly 250 million smartphones in use that are HCE-enabled. Besides Google Wallet, a number of other banks and mobile wallet providers are already beginning to deploy HCE-enabled NFC wallets.
  • While HCE makes it much easier to create and deploy a mobile wallet that can be used by a lot of smartphone users, it still doesn't solve the basic problem on the consumer side — people don't see a good reason to pay with their phones rather than with payment cards.

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INTRODUCTION

Host card emulation (HCE) is the latest technology driving a new wave of excitement in the mobile payments industry.

The new feature, which was first developed by a company called SimplyTapp, was recently deployed by Google with Android 4.4 (KitKat) and quickly received the backing of the major card networks. HCE makes it much easier for any developer creating an app that runs on the KitKat platform to enable payments via near-field-communication (NFC) — payments made by holding a phone near a piece of in-store hardware, as opposed to swiping a payment card.

HCE has created renewed momentum for NFC mobile payments by allowing NFC wallet providers to get around the "secure element," a piece of phone hardware controlled most often by mobile carriers. Bypassing the secure element makes it easier for providers to develop mobile NFC wallets.

Even if HCE creates a much lower barrier to entry for new mobile wallet providers, though, the question remains whether the wider availability of NFC-based wallets will really get people to start making payments with their phones.

In this research note, we take a close look at the NFC payments ecosystem, how HCE works, why it makes NFC payments more viable, and the wider impact HCE might — or might not — have on mobile payments uptake among consumers.

The Market For NFC Payments

The hardware that powers NFC-based [...]