Introducing PYMNTS Primer, a new series where we attempt to take the biggest topics in the industry and break them down for all to understand, or maybe just catch up on. First up in our series is NFC: a technology that some say is the future of payments and others say is merely a gimmick. Who provides the more compelling case? We’re not here to take sides – we’re just here to present you with the information and let you decide for yourself.
NFC is to payments what religion and politics are to family parties: if you don’t want to get into a debate, don’t talk about it.
NFC lovers will tell you it’s the best thing since sliced bread – or at least the credit card – and that it’s going to revolutionize the way we pay, redeem and interact with the world around us.
NFC detractors will question your sanity if you’re a fan of the technology, and ask what possible benefit you can derive from tapping instead of swiping. Not only will NFC fail to take over, they claim it will flop all together.
The truth likely lays somewhere in between. In our inaugural PYMNTS Primer breakdown, we’re simply looking to present you with the basics, and let you decide for yourself whether NFC is the way of the future or a distraction for the present.
We could spill tens of thousands of words on the subject, but we’re not looking to hit every single point and counterpoint here. We’re looking to break the NFC argument down into its simplest components, pair those opinions with expert voice, and give you some background information on the technology to boot.
Whether you’re an NFC newbie or you made up your mind a long time ago, give this primer a read: you might just learn something new.
NFC, or Near Field Communication, is a form of radio-frequency identification (RFID) that deals only in shorter ranges for security purposes. RFID traces its roots back to 1983, but NFC began to take the form we’re familiar with today in 2004, when Sony, Philips and Nokia established the NFC Forum: a group “dedicated to promoting the security, ease of use, and popularity” of the technology.
While Nokia launched the first NFC phone back in 2006, its payments potential began to emerge in the end of the 2000s, and Android launched its first mainstream NFC phone, the Samsung Nexus S, in 2010. Since then, the technology has become quite popular in certain European and Asian markets and has seen some adoption in the U.S. as well.
NFC now exists within smartphones in a variety of ways, which Marianne Crowe, vice president, payments strategies group at the Federal Reserve Bank of Boston, broke down on PYMNTS.com here.
NFC By The Numbers
On one hand, NFC supporters can point to these promising forecasts:
100 million NFC-enabled phones predicted to be sold in 2012 – Berg
50 percent of smartphones to be NFC-enabled by 2015 – Gartner Research
On the other hand, NFC detractors are likely to point to these current numbers:
1 percent of US merchants accept NFC – The Yankee Group
8 percent of merchants worldwide accept NFC – Berg
$640 million in U.S. 2012 mPayment Transaction Volume, only a portion of which came from NFC – eMarketer
Forecasts for NFC’s adoption – both from a consumer and merchant standpoint – vary widely from study to study.
The Pro-NFC Argument: The Fundamentals
An over-simplified breakdown of the argument for NFC as a payment tool would cite it’s ease of use and speed; it’s appeal as a “cool” technology; its potential ability to solve card-not-present fraud; and, above all else, the value-added information gained by retailers, consumers and FIs alike when the technology is used.
According to Debbie Arnold, director of NFC Forum, the biggest advantage NFC has over traditional or alternative payments methods is its ability to benefit all who transact with the technology.
“If you look at the three parties involved in any payment transactions, they all get a big benefit,” Arnold told PYMNTS.com.
Arnold said that it’s not just NFC’s ability to complete transactions that should give it consumer appeal, but also it’s ability to harness information selectively and in real-time. “We often talk about NFC being the Internet in the real world, because it allows the consumer to pick and choose what they want to interact with,” she said. “It’s not ‘oh, I have my phone in my hand, I can touch and pay,’ that’s not exciting. The touch and pay and get something? That’s a little more intriguing. Walk around the store and touch a poster and get a coupon? That’s interesting. Being able to redeem that at the POS with that same device? That gives you a little more power.”
From the standpoint of the retail community and payments players, Arnold cited one-on-one engagement with consumers is key to NFC’s allure.
“To be able to know what your customer is interested in and not just have to spam offers, to be able to interact with them on a very personal basis … that’s a huge marketing advantage that this technology brings to them, and it’s a real game-changer.”
In another recent interview with PYMNTS.com, Oliver Piou, CEO of Gemalto, cited NFC’s foreign success as a reason to be optimistic about its US success.
“The proof of popularity is with NFC, simply that it’s broadly adopted and conveniently judged by consumers in Europe and Asia,” Piou said, citing studies with consumer satisfaction rates of 92 percent and 98 percent. “NFC capabilities will soon become ubiquitous in the same way that all mobile phones have a built-in camera, because it’s so cheap and easy to use.”
The Anti-NFC Argument: The Fundamentals
The oversimplified argument against NFC as a payment tool would cite its minimal current availability, inability to motivate consumers, and cost barriers to retailers. For the technology to really take off, enough consumers must be willing – and able – to use NFC at a variety of retailers interested – and willing – to accept said payments.
Essentially, the argument against NFC is that it solves a problem that doesn’t exist.
David Marcus, president of PayPal, addressed NFC adoption issues in regards to why it may not appeal to consumers in a blog post in December.
“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 its not providing additional value to encourage me (or anyone else for that matter) to change my behavior,” he said.
Market Platform Dynamics CEO Karen Webster, who said in her September prediction that the iPhone 5 would launch without NFC capabilities, summed up the technology’s adoption issues from a merchant perspective.
“The consumers who buy those phones still wouldn’t be able to use them to buy stuff at the physical point of sale because less than 1 percent of all merchant POS devices in the US are NFC-enabled today. Merchants would still have to do whatever integration is necessary to accept whatever form is payment is enabled via that NFC chip. And someone would have to come out with an NFC-enabled mobile payment solution that consumers want to use. So, it’s hard to see why, if you’re Apple, you would want to spend the money to adapt its phones to support NFC when there is no clear benefit to consumers on day one,” she wrote.
“Why bother to ignite something that isn’t in its financial interest or of value to its consumers right now? Why should [Apple] be THE ONE to invest in igniting NFC for mobile payments when it really isn’t clear what financial or customer benefits it gets from doing so? “
The NFC Timeline: Will EMV Be A Factor?
Predicting exactly when, or if, NFC will become the predominant or a predominant technology in the payments industry elicits a wide variety of answers, even from those on the same side of the argument.
One argument posed by NFC supporters is that if NFC is really going to take off in the U.S., it will likely coincide with the country’s EMV migration. While the final EMV fraud shift date has been set for October 2015, retailers are already weighing their options when it comes to POS overhauls.
“Payment is obviously the most complicated use case for NFC … it’s not a technology problem,” Arnold added. “You’ve got all the different players that have got to come together. You’ve got the business cases that have to be worked out; you’ve got software upgrades to enable this on-to-one marketing. It’s very complicated to be able to do that.”
“There’s a big change coming in the U.S. with the mandate to EMV, and that is going to be a major game-changer because any time that retailers touch their POS systems, it’s going to be very logical to add this technology to it,” said Arnold.
However, in an article predicting payments trends for 2013, Webster dismissed EMV’s relevance to NFC, citing the technology’s additional problems in addition to POS adoption.
“Until NFC delivers a value proposition to merchants and consumers that moves beyond ‘tapping is better than swiping,’ NFC will remain on life support just about everywhere in the world,” Webster wrote. “There might be exceptions, of course. In Poland, for example, NFC has better prospects because paying with plastic is pretty new for consumers and banks are making contactless their first cards, merchants are buying terminals for the first time and consumers are being given devices (cards + phones) with chips.
But, in most other places where rip and replace is the path to NFC, and everyone has gotten comfortable with swiping or dipping, watch for merchants to sit on the sidelines and wait it out — EMV-mandate and terminal refresh cycles and all — and consumers to yawn or just ask what the fuss is all about.”
Our conclusion? Both sides of the NFC arguments make compelling points, and both have examples to support their cases.
There are more extreme opinions on each side as well: some see NFC becoming <i>the</i> predominant payments technology in time, rendering cash, competing technologies and physical wallets as obsolete. Others believe NFC should be left out of the transaction all together, and left to fulfill value-added tasks such as log-in, ID verification or other tasks.
But we’re interested in hearing what you think. Are you an NFC payments supporter? Will the EMV mandate affect the technology’s U.S. prevalence? Does tap-and-pay interest you in and of itself?
Listen to our full podcast with Debbie Arnold, NFC Forum Director, below. If you have trouble with the audio player, click here for the audio file.
Debbie Arnold, NFC Forum Director Debbie Arnold has been involved in NFC since 2002 and was a founding member of the NFC Forum while at Visa. She has supported the marketing and strategic planning efforts of the Forum since 2006 and is now director of the organization. Previously Ms. Arnold was vice president for global consumer strategies at Visa International. While at Visa, she headed the global smart card migration effort and developed a new payment product, Visa Horizon, for emerging markets. Prior to joining Visa, she worked in various capacities in the telecommunications and financial services industries.