Near Field Communication (NFC) will enable contactless mobile payments at the register
Once NFC systems become widespread, which could happen as soon as next year, consumers will be able to pay for purchases at the checkout counter by simply tapping their cell phones, rather than digging out a credit or debit card and swiping it. So, what’s the big difference? The idea behind contactless payments is not necessarily to make things faster or more convenient for the consumer, it’s actually a way for retailers to be able to deliver advertising messages, coupons, promotions and loyalty programs directly to your cell phone. If that prospect appeals to you, stay tuned. Most of the new smartphones coming out will be ready for contactless payments by dint of being equipped with the NFC chip, and a second chip, the “secure element,” for the payments themselves. And the manufacturers who make the check-out terminals are busy adding NFC capability to all these point-of-sale devices, so that as stores upgrade, they’ll become ready to accept NFC payments.
Multiple moving parts
In order for contactless mobile payments to become a reality, several pieces have to come together. Consumers have to have NFC-capable phones. Retailers have to have NFC-enabled checkout terminals. Cellphone manufacturers have to install the NFC chips. Banks and other financial institutions have to support the NFC payments. And the cell phone companies are in the game as well, looking for a slice of the payments pie. Normally, this would create a huge chicken-and-egg bottleneck. But, this time, all the major players seem to be moving in the same direction, even though they’re not all taking the same roads to get there. Several mobile carriers, for example, have banded together in an attempt to control NFC payments. AT&T, Verizon Wireless, and T-Mobile USA are backing the Isis payment platform, and have already received the support of most of the top handset manufacturers and major credit card companies. According to Jeff Miles, vice president of mobile transactions at NXP Semiconductors, the company that makes almost every NFC chip, there are now more than 130 different phone and tablet models in various stages of NFC deployment, totaling more than 40 million devices. “We’re seeing the beginning of the hockeystick to the phones out there,” he says. Google Wallet, a competing NFC payments platform, is already available on the Nexus S mobile phone on the Sprint network, and can be linked to Google’s own prepaid payment card, or to PayPass-eligible MasterCard credit cards from Citibank. It’s likely that Apple will soon come out with its own payment platform for the iPhone. And some banks – including Citibank and Bank of America – are getting a jump-start on the process as well, handing out NFC chip-based mobile payment tags that their customers can simply stick to their phones. We won’t be seeing a repeat of the 1970s, however, where you’d have to check the stickers on the door before walking into a store to see whether they take your payment method. All of the NFC schemes currently under development will be compatible with the others — at least on the payment level. The future of money That’s because the use the technology based on MasterCard’s PayPass, which the company licensed to both its partners, and its competitors. “The majority of terminals out there accept pretty much all of the contactless standards,” says MasterCard’s Mario Shiliashki, the senior vice president responsible for U.S.-based development and commercialization of payment products including PayPass. “We’re very focused on making sure that it’s a good experience for the merchant and the consumer,” he says. “If I walk up with a card that’s PayPass enabled from three years ago and the latest Google Wallet, I’ll be able to transact with the same terminal. So we don’t go back to the future where you have various devices sitting on the merchant counter and depending on the method you pull one out and put the other one back.” More Google Wallet follies Loyalty programs and coupons are a different story, however. For example, in my area in Massachusetts, if I have Google Wallet on my phone, I can make purchases at my local CVS, Home Depot, Best Buy, and Hess and Gulf Oil gas stations. But only a handful of merchants have loyalty programs on Google Wallet. They include Bloomingdales, Old Navy, ToysRUs, Macy’s, OfficeMax, American Eagle Outfitters, and the Gap – but only in select locations. “It’s all very dependent on where you are,” says John Devlin, a research director at ABI research and author of the recent report, “What Can I Use my NFC Phone For Today?” (His answer: “Not much.”) He pointed out an interactive map from Google that shows a lot of activity in and around New York City, Washington, D.C., Chicago, Los Angeles and San Francisco, but only a smattering of outlets elsewhere – and nothing at all in New England. Plus, there are application developers that offer cloud-based loyalty programs completely independent from NFC payments – a typical consumer might need several applicationson his phone, depending on which loyalty programs they belong to.
How secure are NFC payments?
In order for a payment to occur, the NFC chip has to be within four centimeters — less than two inches — from the reader. Purchases of more than $50 also require a PIN or a signature. And the payment only goes through once, even if you tap the reader twice by mistake. In fact, mobile NFC payments are more secure than the card-based alternative, says Calvin Grimes, manager of mobile solutions at financial technology vendor Fiserv. “With PayPass and PayWave you can tap and go, but they’re not actually secured with a PIN the way that your phone might be,” he says. “Moving it over digitally to your mobile device, you have the opportunity to provide an additional layer of security.” In addition, cell phone users can turn off the NFC functionality, just like they can turn off WiFi or Bluetooth, says NXP Semiconductors’ Miles. But it will take some effort to convince the actual users, says Soumen Ganguly, a director at Boston-based strategy consulting firm Altman Vilandrie & Co. “Consumers tend to be a lot more conservative about trying new financial tools,” he says. “People look at their phones, and say, is this as safe as my credit card?” To overcome ingrained habits and worries, merchants and mobile payment providers will have to give customers good reasons to switch over. “The industry has to do a lot better job on coming up with a value proposition and educating customers,” he says. As a result, he says, he doesn’t expect NFC mobile payments to become mass market until 2014 or 2015. “I think we’ll see some early activity in 2013,” he says. “But five years from now,
I hope to not be carrying my wallet around anymore.”
A cellphone doesn’t have to be NFC enabled in order to do payments. For example, many phones allow their users to do mobile banking. There are apps that let you buy movie tickets. And Amazon will happily take your money whether you order from a computer – or from a phone. Starbucks has apps for iPhone and Android phones that allow customers to make payments and earn loyalty points – the company said it processed more than 26 million mobile payments last year. The app shows a bar code on the phone screen that can be read at the checkout counter. Many Starbucks customers use PayPal to top off their mobile wallets. And they’re not alone – PayPal has reported nearly $4 billion worth of mobile payments in 2011, up from $750 million in 2010 and just $141 million in 2009. There are a couple of advantages to non-NFC payments, or “payments in the cloud.” One is that consumers don’t have to be next to the payment terminal to make a payment. For example, you can pay your parking meter while standing next to it, but it would also be nice to top it up from wherever you are if you’re running late getting back. In addition, since mobile carriers control the security chips on their phones, third-party vendors will have to pay to access them, raising costs. On the other hand, a payment made through the NFC chip by tapping against a card reader counts as a “card present” payment, which is less expensive to the merchant than Internet-based “card not present” transactions. Whether the cost savings of cloud-based payments make up for the increased cost of “card not present” transactions will depend on the details of the specific deployments.
Can Asia give us a peek at our future?
At a farmer’s market in Dongguan, China, shoppers make payments by tapping their phones, equipped with SIMpass cards, against the point-of-sale terminals of the fish and vegetable vendors. According to Beijing-based Watchdata System, the Singapore-based company behind the SIMpass technology, there are over 20,000 such terminals at the Dongguan markets. In Hong Kong, an estimated 95% of adult residents use the Octopus Card for all public transport, as well as at most fast-food restaurants, supermarkets, convenience stores, parking meters, parking lots, and service stations, according to the Octopus Holdings, the company that produces the card. Launched in 1997, there are now more than 20 million cards in circulation, with over 11 million daily transactions, totaling around $12 million a day. Japanese commuters also pay for transportation using NFC-enabled cards and cellphones – based on a proprietary, non-compatible version of NFC – to pay for transport and to shop at many convenience stores, restaurants, retailers and vending machines. According to Natsumi Nakamura, a marketing manager for PFU Systems, a Japanese technology-solutions company, almost 60% of cell phones in Japan are NFC-enabled. The country is currently in the process of switching over to the global NFC standard. “Asian countries, like Japan, South Korea, China, Taiwan, Singapore and Malaysia, are at the front of the smart card integrated chip technology,” says Jafizwaty Ishahak, research director at Frost & Sullivan, a market research firm. “In addition, these countries have also taken the lead in implementing the smart card IC contactless interface, which then leads to the adoption of NFC,” says Ishahak. “Then there is the ‘early adopter’ mentality in Japan and Korea which has also helped rapid deployment from the user side,” says David Snow, an analyst at U.K.-based Juniper Research. But the Asia deployments are isolated systems — and the existence of those systems might actually hinder those countries from moving forward quickly. “We think that the future of NFC-based commerce is actually going to be here in the U.S. initially rather than in the rest of the world,” says Stuart Taylor, vice president of systems product management for ViVOtech. ViVOtech is the technology company behind the Google Wallet and nearly every other major player in the NFC ecosystem, including 45 other NFC pilot projects in around 30 countries. But most of the international projects have involved the older feature phones, he says. “In the mobile world, we tend to look negatively at the U.S. as far as mobility is concerned,” he says. “We tend to see Europe as being ahead. But one of the things that’s changing is when you look at smartphone purchases and deployments, the U.S. is far ahead of the rest of the world.” In addition, overseas mobile payment systems operate in very different environments, says Mahesh Makhija, head of the cards and payments practice at Infosys, a global technology services and consulting firm. Many emerging countries didn’t have existing payment systems in place, for example, nation-wide transit systems, or had strong government intervention, he says. Adoption in the U.S., however, will be driven by different factors. “The path in the U.S. will be through applications that sit on the smartphones, killer applications that people will not be able to live without,” he says. “The U.S. is pretty unique. I don’t think there’s any country where you can go and see what’s happening, and see the future of what will happen in the U.S.”
Alexander Gladstone in Shanghai contributed to this report.
Article originally appeared in Securities Industry News, which has since closed down.