Host Card Emulation, the technology that allows contactless mobile payments without access to a phone's secure element, could bust the barrier that still lingers between mobile payments and loyalty.
Apple Pay may be one of the more prominent mobile wallets, but it lacks a built-in loyalty program. Other mobile wallet makers that attempted to mix in a loyalty program have had trouble making the model work.
The key to solving this dilemma is transforming the Near Field Communication-based payment process from a one-way system into a two-way system, allowing consumers to not only earn loyalty points but spend them as well, experts say.
"HCE could either receive the coupon from the [point of sale] or push the coupon to the POS from a mobile device," said Richard Oglesby, senior analyst at Double Diamond Payments Research. "All of that stuff is very feasible. The complexity is that there are so many different ways it can be accomplished, but nobody knows how to accomplish it yet."
The relationship between mobile payments and loyalty is somewhat rocky. An early mobile wallet, Bling Nation, failed after merchants balked at being required to also use the company's loyalty program. When Google launched Google Wallet, it launched Google Offers the same day but as a separate program with its own app.
But Starbucks, one of the few clear success stories in mobile payments, says the appeal of its app is rooted firmly in customers' commitment to its loyalty program. However, Starbucks' system is almost entirely software-based; it does not use NFC or HCE to execute the payment. Instead, its app displays a bar code to scan at the point of sale.
Shifting this process to NFC might limit its potential, but new possibilities open up when this becomes a two-way interaction, said Sanjay Malhotra, chief technology officer for Toronto, Canada-based Clearbridge Mobile.
"The next step is that loyalty will be built into those transactions, which it can't do today," Malhotra said. The evolution of HCE will result in a better interaction between the merchant and the customer by enabling the redemption of loyalty points, Malhotra said.
"If I am a regular at Tim Hortons and there is a loyalty program option there, having that type of payment solution gives me a better experience in the store," Malhotra added.
Clearbridge developed the HCE apps that power the mobile payment system at Tim Hortons, which added the technology in late 2013. Royal Bank of Canada followed suit by introducing a bank-branded HCE-powered mobile wallet. Google Wallet also uses HCE to overcome a longstanding block imposed by most U.S. mobile carriers (the carriers have since agreed to distribute Google Wallet as a pre-installed app on their phones).
Advancements in HCE will also help merchants understand what the technology can provide, said Deepak Chopra, CEO of Clearbridge Mobile.
"In the U.S. marketplace, there is still an education process regarding HCE," Chopra said. "The credit card infrastructure is older, and the chip-and-PIN and NFC tap-and-pay are just now coming on the scene."
Merchants in Canada have been accepting NFC payments for more than five years, so the country's wallet providers and merchants understand the benefits of HCE, Chopra added.
While HCE can help U.S. merchants establish branded mobile payment systems without bartering with the carriers, it should not be mistaken for an alternative to continuing the migration toward EMV-chip cards at the point of sale, Malhotra said.
"It is possible to bypass EMV, but ultimately you would put a lot of obstacles in front of your customers in saying you only accept mobile payments," Malhotra said.
Visa and MasterCard adopted HCE technology a year ago to support contactless payments through smartphones.
In addition to Tim Hortons, Clearbridge provides mobile strategies and technology for Disney, ABC, NBC, USA Today, Microsoft, The Wall Street Journal and The New York Times, among others.