Mercator Blog

Android KitKat Creates a New Mobile Playing Field, Who Will Join the Game? Isis? PayPal? MCX?
Date: November 15, 2013
Tim Sloane
VP, Payments Innovation
Gilles Ubaghs described the impact of Host Card Emulation included in Android’s new KitKat operating system in his article “Android KitKat is bad news for telcos’ NFC ambitions.” He states:

"Simply put, in a cloud-based SE environment, telcos no longer play an inherent role in NFC payments, so they risk facing disintermediation and insignificance in the mobile payments space. Technology and security issues persist, for the time being, but given Android’s enormous smartphone OS market share, the place of major telcos in any future NFC mobile payments value chain suddenly appears to be under significant threat."

The majority of NFC payment solutions today utilize card emulation for NFC operations. With card emulation, the NFC device is loaded using the secure element with the information needed to emulate a card. That is, a POS device can interact directly with the mobile NFC device with no information communicated to the mobile device. It’s as if a physical NFC chip, just like the ones on a card, had been embedded into the smartphone. Once set up through the secure element, the NFC chip presented at the POS is totally self-sufficient.

In the new KitKat host card emulation mode, the transaction initiated at the POS will be relayed by the service manager to the KitKat OS for servicing. This approach enables a range of services, including cloud authorization and payment services. So for example, a merchant with a closed-loop gift card product could now enable that gift card to be presented at the POS using NFC. It would seem apparent that Goggle Wallet will soon adopt this approach to enabling NFC and given an open platform, so the two big questions are these:

1. What will Apple do? Will Apple also implement support for NFC or go its own way, further complicating the payments market for NFC proponents? That said, the most recent data from IDC indicates that Android has 80% of the smartphone market globally.

2. Which of the other alternative payment solutions will also decide to utilize this approach? It seems likely PayPal will jump on this opportunity as long as it can integrate the NFC chip in a way that embraces all of its value – add features. But it is less certain how Isis and MCX will respond to this opportunity to enable cloud-based payments using NFC.

So KitKat’s adoption of Host Card Emulation establishes a new open playing field for alternative payments on Android, a playing field that may or may not be replicated in iOS from Apple. The playing field just got much larger and new rules have been introduced, which will force payment providers to reformulate their strategies.

We live in interesting times!