The theory of network externalities suggests that a good increases in value when more people use the good (Economides, 1996; Shapiro, 1998; Varian & Shapiro, 1999). The phenomenon can typically be explained by the use of mobile phone. If only one person has a mobile phone, it is not much worth. As more and more people get a mobile phone, it becomes increasingly valuable. A parallel can be drawn towards NFC mobile payment, in terms of customer and merchants who can pay and accept payment using NFC technology. Goldenberg el al (2010) point at the numbers of adapters of NFC mobile payment drives the utility directly. If a customer has a NFC mobile payment service on his phone, it becomes increasingly valuable for the customers when more merchant accept such payment. Equally the opposite way around, having a NFC payment terminal becomes more valuable for the merchants as more customers use NFC technology to pay for goods. NFC mobile phones, and NFC payment terminals relate more to compatible goods, but as Farrell & Saloner (1985) states, positive network externalities can be achieved through compatible goods. Varian and Shapiro (1999) noted that standards and compatibility are the key elements in network externalities. . Skjelbred (DNB) points out the value of a large network of NFC compatible payment
terminals and mobile phone. The technology becomes more widespread, the more valuable it will become for both customer and merchants. If all merchants accept NFC payments, the customer no longer needs a wallet or a plastic payment card. Hence, network effects increases customer value for NFC mobile payment.
Another way of seeing the value of network externalities is through the transaction price. Currently, NFC transaction can be considered expensive (high transaction price) compared to other transactions, which also were confirmed by several of the interviewees. As the network of NFC payments grows, operational cost per user can be expected to fall. If that is the case, transaction price might be reduces to a level equivalent to other payment transaction.
Economides (1996) used a similar illustration on network externalities, but uses it in relation to the financial market. As more traders‟ trade, the expected utility of all participants
increases. In Economides (1996) example, it is worth pointing out that the point is the reduced price variance in a trade. In NFC payment transaction, the price variance is not present
- 92 - directly. However, it still might be present indirectly due to the merchant price adjustment of goods sold due to high or low transaction costs. Hasleengen (Teller) mentioned that the high transaction price today are mainly because of all transactions pass through VISA (payment scheme owner). She further mentioned that for NFC transaction to become less expensive, it should probably have to be through a debit card solution. Most debit card transaction runs through BankAxept, which has an exceptionally low transaction price.
When compatibility of goods increased value for the customer, incompatibility might lower the value of a good. For example, the incompatibility of a NFC service on a mobile phone that does not have NFC technology, like Apple‟s iPhone. Technically, a NFC service will have no value for an Apple user. Hence, it cannot reduce the value additionally. On the other hand, incompatibility can lower value for all other users in the network. A NFC payment terminal will not be as valuable for a merchant if he cannot receive payment for all Apple iPhone users, opposite to if he could receive payment. Grüner-Hagen (NorgesGruppen) pointed out Apples market share for mobile phones especially as a challenge for NFC mobile payment in Norway. Because NFC technology is not available in Apple products, a large part of the population will not be able to use the NFC payment service. At least not until Apple introduces NFC technology to their mobile phones, or another solution solves the problem. For a merchant who accepts NFC payments, or consider installing NFC payment terminal, might find the reach of NFC technology to be to narrow. The incompatibility might lead to a lower value of the NFC payment terminal.
Hasleengen (Teller) pointed out a different NFC product that might help to increase Network externalities also for NCF mobile payment. She explained that NFC enabled contactless payment cards might lead to positive network externalities in more than one way. Even dough NFC based contactless payment cards are not the focus of this thesis they still bring inn relevant (potentially positive) synergies for NFC based mobile payments. NFC contactless payment card works similarly as NFC based mobile payments. When NFC contactless
payment cards get introduced to the market, also people without a NFC enabled card can also see the benefits of NFC payments. In doing so, possibly also removing some of the fear people have surrounded security of the new technology. This can potentially increase the value of NFC mobile payment. In addition, merchants will see more customers that are able to pay using NFC technology, which increases the value of having the ability to accept NFC payment. Kauffman & Wang (2002) found evidence of banks who shared ATM network
- 93 - increased value for customers. Given their findings, NFC payment terminals which are
compatible with both NFC mobile phones and payment card, is also likely to increase
customer value. This would fit with the finding of Varian and Shapiro (1998), who found that standards and compatibility was the key ingredients in network externalities.
Conclusive summary of section
Products with network externalities can experience an advantage compared to other products because the presence of one will increase the value of the other. It increases the value for the customer using the product, as well as participating members of the network. According to Varian and Shapiro (1998), standards and compatibility are the most important elements for networks externalities. For NFC based mobile payments, it would involve a common standard for the NFC technology itself, and compatibility between NFC devices. Varian and Shapiro (1998) argued that in order to achieve standards and compatibility it requires key stakeholders to unite in an alliance. This statement indicates that participants of the NFC ecosystem could gain on a good cooperation in several areas of NFC mobile payment. Skjelbred (DNB) underlined the importance of uniting with other stakeholders in NFC ecosystem. Berbusmel (Telenor) pointed out that the Norwegian market is smaller than other markets because Norway is a small country. The advantage of that is the close relationship between stakeholders because stakeholders in Norway already know one another. Grüner- Hagen‟s (NorgesGruppen) argument regarding incompatible mobile phones poses a different challenge. For the Norwegian market, participants “directly involved” might have a limited influence on the “indirectly involved” stakeholder in the NFC ecosystem. A challenge can be mobile phone manufacturers with a large market share in Norway, who chose not to
implement NFC technology into their phones, like for instance Apple.