Will mobile NFC ever take off?

Paying for a coffee or a newspaper could not be easier. Simply tap your mobile phone against the reader and it is done. For the consumer it is easy, but behind this simple alternative to cash is a complex ecosystem of players that have been working for years to make tap-and-go payments a reality. 

But near-field-communication (NFC) technology, which enables cards or phones to be tapped against a reader for payment, has not yet reached a tipping point of mainstream use. And as other technologies and solutions are being trialled in the marketplace, some are questioning whether NFC is even necessary for mobile payments in the future. 

Mainstream take off

When asked if NFC will ever take off, Gary Greenwald, head of digital money services at Citi Enterprise Payments, says “yes, but”. He elaborates: “NFC, particularly when tied to a smartphone, can underpin a very powerful consumer experience for commerce.” The “but”, though, is that the technology needs to be made easier. “NFC has much technical complexity to implement, including for bank issuers who must learn the new lingo of secure elements, trusted service managers, and payWave and PayPass applets [Visa and MasterCard’s contactless payment technologies],” he adds. 

Also, says Mr Greenwald, the business model remains unclear. “NFC payments bring additional parties into the ecosystem, including mobile carriers, original equipment manufacturers and SIM manufacturers, all of whom are looking for economic return on these investments. Without new economics, banks may see NFC simply as an additional expense with an unclear return,” he says. 

It is this ecosystem that has been the reason why NFC has not reached its tipping point, according to Reed Peterson, head of business and market development at GSMA, the global industry body for mobile operators. He explains that this ecosystem includes the device manufacturer, mobile operator, the issuing bank, the merchant acquirer, the retailer and the consumer. “It is a complex ecosystem that needs to come together in order to make it work,” he says. Mr Peterson is confident, however, that this ecosystem is coming together. 

Infrastructure upgrade

Once the NFC payment is captured on the terminal, it travels in the same way as a card payment. But for that to happen, the acceptance infrastructure first needs to be upgraded so that all the terminals at retailers are able to accept mobile NFC payments. Samee Zafar, a director at consultancy Edgar, Dunn & Company, believes that that process is under way. “Most new terminals come with contactless pads anyway. All terminals will have them in four or five years,” he says. 

And on the device side, there are now more NFC-enabled phones being put in the hands of consumers. GSMA’s The Mobile Economy report projects that 50% of all smartphones will be NFC-enabled by 2015 and 1 billion SIM-based NFC handsets will be sold by 2016. 

Samsung has introduced NFC to its phones and in February 2013 it announced that it would load Visa’s payWave applet – which enables the mobile tap-and-go payments – onto its NFC smartphones. “Samsung devices enabled with Visa payment functionality will no doubt be a powerful product offering – especially in markets where paying with a mobile device is becoming commonplace,” said Jim McCarthy, Visa's global head of product at the time of the announcement. 

While Samsung has introduced NFC, Apple has not, an obstacle that is preventing NFC being available to all smartphone users. With each release of the latest iPhone, there is always speculation about whether Apple will include NFC capability and the company remains tight-lipped about its plans. 

John Conlon, global head of innovation for mobile at Barclaycard, says that what Apple does will have an impact “but I do not think the world is waiting for [Apple] on NFC”, he adds.

Asian market 

Of the handset market, Mr Zafar at Edgar Dunn says: “Asian device manufacturers are more appreciative of the NFC advantages.” Samsung’s home market of South Korea was one of the first markets to use mobile NFC. Likewise, Japan adopted mobile NFC before the US and Europe. However, while these Asian markets are cited as pioneers in NFC technology, usage is not widespread. 

“At this moment, it is hard to say that mobile payments in Japan and South Korea are very successful,” says KyongSun Kong, a Seoul-based analyst at Celent. She explains that in Japan 180 million NFC cards and chips have been issued. While there are 73 million NFC-enabled phones, only 33 million mobile NFC chips have registered users. “The monthly transaction volume of NFC payments, including not only mobile NFC but also plastic-based NFC payments, recorded 260 million in July 2012,” says Ms Kong.

That means that the average monthly transaction volume per card or chip is only 1.5 transactions. “This is not a very active user base. The best one can say about this result is that the significant spending on building out mobile NFC in Japan and on advertising to promote the services has been an investment for the future when consumers may eventually take to the technology,” adds Ms Kong.

Another form of NFC technology is the tag payment, an NFC sticker that can be activated with consumers’ account details and then stuck onto a phone or another object. Ms Kong explains that tag payments do not need the same upgrade to the payment terminals as mobile NFC technology. “While the costs and time associated with deployment are low, the spread of the tag approach has been sub-par. Nevertheless, industry insiders expect that when the tag payment approach takes off, it will do so rapidly,” she says. 

These NFC stickers have been one way to migrate consumers from contactless card payments to mobile payments. Barclaycard is one issuer that has launched the PayTag, which is similar to a smaller version of a contactless credit card that can be stuck to a phone. In the same way as a contactless card, this sticker can be tapped against the retailer’s payment terminal. Mr Conlon at Barclaycard describes PayTag as a bridging technology, which is part of the issuer’s “journey to mobility”. “It allows the consumer to pay with their handsets because NFC is not in all handsets at the moment,” he says. He adds that he does not foresee that there will be a need for PayTag in a few years’ time as he anticipates that NFC-enabled phones will be more commonplace. 

NFC sceptics

There are, however, sceptics who argue that NFC technology is not necessary for consumers to make mobile payments in the physical world. In its bid to move from online to physical-world payments, payments firm PayPal has introduced a solution at the point of sale (POS) that does not require the mobile device to make contact with a terminal. The cloud-based solution, which was first introduced to US retailer Home Depot in 2012, asks consumers to enter their mobile phone number at the checkout and then enter a passcode to authorise the payment. 

PayPal president David Marcus predicted that NFC payments would fail to gain mass adoption in 2013. “The NFC payments debate will slowly die in 2013. Is tapping a phone on a terminal any easier than swiping a credit card? I don’t think so – it’s not solving a real consumer problem and it’s not providing additional value to encourage me (or anyone else for that matter) to change my behaviour,” he wrote in his blog at the end of 2012. 

Mobile NFC payments could be viewed as the next stage in the evolution from card payments and contactless cards as it builds on the existing electronic payments infrastructure at retailers. And with mobile NFC in physical stores, the tapping at the checkout terminal provides a way for the retailer to verify payment.

Mr Marcus at PayPal, however, jumps ahead and envisions a world where there is no need for there to be terminals at the checkout. He argues that the cash register will also go mobile. “In the old retail model, customers browsed in the aisle and paid at the register. This was partly because the registers were hard-wired to phone lines to gain the necessary authorisations. As we move to a world where even the transactions in a shop are transmitted on the back end via the internet, sales associates will be free to roam the stores and help their customers check out and pay from the aisle or even the changing room… and if they don’t have the right size or colour in stock, they’ll order it for you on the spot to be delivered direct to your home,” he writes.

Alternative technologies

While PayPal demonstrates that there is no need for the mobile device to actually make contact with a terminal, there are other solutions being introduced to retailers. One solution is the Quick Response (QR) code, a bar code of square dots that can be scanned. 

Ms Kong explains that one advantage of QR code and bar code payments is that not all smartphones have NFC technology, but they all have cameras. “Moreover the burden for stores is minimal because only the QR code must be supplied and the customer’s smartphone will act as the payment terminal doing all the rest. Of course, there will be the deployment costs associated with a QR code-generating POS system, but such systems are already rapidly being adopted and attracting interest as a novel approach to mobile payments,” she says. 

Mr Conlon at Barclaycard adds: “We are strong believers in NFC, but we do not see it as the only technology.” He explains that Barclaycard has tried different technologies and has been trialling QR codes in the US. QR codes suit certain retailers and the implementation is relatively simple for QR codes, whereas NFC requires a larger roll-out, says Mr Conlon.

Coffee chain Starbucks in the US has also introduced QR codes so that customers can scan the code with their smartphone and pay for their coffee through a wallet app. Mr Zafar, however, is sceptical about how this technology can be taken from a closed-loop environment and scaled up into a serious global network. “[QR code technology] just does not have the power of NFC. You cannot really classify [QR codes] in the same league as NFC. The security is not comparable,” he says. 

Time factor

Mr Peterson at GSMA argues that QR codes have been successful in certain situations. Delta Airlines, for example, sends passengers a link to download a QR code on their iPhone, which is then scanned instead of a paper boarding pass. However, Mr Peterson argues that it is quicker and more convenient to tap a phone than it is to hold a phone and wait for the QR code to be scanned. In environments where queues need to be kept to a minimum, such as passing through subway turnstiles or boarding buses, Mr Peterson argues the seconds that NFC saves really count.

The same argument applies to other alternatives to NFC, such as fingerprint or voice verification solutions. Also, argues Mr Peterson, NFC is more user-friendly: “There is something very simple and understandable about tapping or paying by touching something,” he says.

Ms Kong argues that NFC is necessary for mobile payments. When asked if NFC will ever take off, she says: “Yes, I believe so.” However, she adds that there are five conditions that will pave the path for growth in the mobile payments market. These are: differentiating mobile payment services from plastic cards; increasing acceptance; promoting the use of mobile payments among consumers; rolling out multifaceted service offerings; and offering international mobile payments services. 

There are also other advantages to NFC, as Mr Greenwald at Citi explains: “NFC is a great technology for POS physical-world payments and is likely to extend in the virtual world as PCs and tablets themselves become NFC readers. Imagine taping your NFC phone to your tablet to securely authenticate an e-commerce purchase.”  

There are other uses of NFC, such as being used as a replacement for hotel access cards or as a replacement for paper tickets. But NFC is not the only way to provide the consumer with a more convenient and enjoyable experience. Mr Greenwald says: “Whether [NFC is] the best technology remains to be seen, and it’s definitely not necessary. As innovations such as secure cloud credential storage take off, multiple ‘last mile’ payment protocols will evolve more easily, whether QR codes, dynamic tokens or software-based NFC. In many ways, the payment mechanism is incidental. If you have a powerful mobile commerce application bringing value to the consumer, payment can even happen on good old plastic.”