NFC: Yes, No or Maybe?
Industry experts air their opinions in the ongoing debate about whether NFC will dominate mobile payments.
By Kate Fitzgerald, Emerging Payments Editor
From the moment near field communication (NFC) popped onto the payments industry radar about a decade ago, debate has sizzled around if, when and how it could revolutionize payments—adding a powerful stream of data to transactions, while speeding and simplifying the checkout process with a phone tap instead of a card swipe. Back then the main question was how long it would take for handset manufacturers to flood the market with NFC-ready devices and who would lead the way, but it just seemed like a matter of time before the answers would come. Many experts believed NFC eventually would take root and spread in the U.S., if not the world.
But as time passed and as NFC failed to materialize on a broad scale, skeptics and debate grew about its future. While Visa, MasterCard and Discover threw their weight behind several high-profile NFC pilots, merchants generally seemed reluctant to commit to the technology. Fast forward to 2013 and mobile phone manufacturers are beginning to crank out NFC-equipped models; yet, Apple, an indomitable influencer of market trends, remains mute about plans to support NFC phones.
Meanwhile, new approaches to mobile payments technology are gaining popularity, particularly two-dimensional barcodes as a relatively simple way for merchants to enable payments through handsets at the point of sale. Although barcodes lack the two-way data-exchange feature touted as one of NFC’s greatest advantages, a growing number of retailers are following the model of Starbucks Corp., which relies exclusively on barcode technology for its highly successful mobile payments operation.
Even as phone industry forecasters say millions of NFC-ready phones will hit the U.S. market in the next 12 months and various NFC pilots—including Google Wallet (which also uses cloud-based technology), and Isis—are gaining steam, doubts persist. PayPal President David Marcus went so far as to forecast late last year that NFC in 2013 will “slowly die” because it lacks the allure to change consumer behavior. But Visa continues to demonstrate its commitment to NFC, inking a deal in late February with Samsung to include Visa’s payWave contactless payment technology in all new NFC devices the Korean handset maker produces.
Paybefore asked a variety of industry experts where they stand on NFC eventually becoming the dominant mobile payment technology in the U.S. and elsewhere in the world. Their answers span the spectrum from definitely not to absolutely.
NO: NFC at Risk of Being ‘Passed Over by Competing Technologies
“NFC is all but dead where it relates to retail POS. … The industry’s ability to do cloud-based mobile payments suggests NFC will struggle to take off.”
—Dave Elting, InComm
“There’s no private equity funding following NFC because they don’t believe, nor do we, that it’s a payment technology that can be adopted in the market before it’s passed over by competing technologies,” says Mike Cook, senior vice president of finance and assistant treasurer for Walmart. Cook adds that there’s a possibility some other form of technology might leapfrog NFC before it’s widely implemented. The difficulties implementing NFC-enabled payments, according to Cook, include the few handsets in the market embedded with NFC technology and the challenges of embedding the payment credential in a secure element.
“NFC is all but dead where it relates to retail POS,” says Dave Etling, vice president of business and product development, InComm. “I don’t think that within the next three to five years we’re going to see very pervasive NFC retail payments. The industry’s ability to do cloud-based mobile payments suggests NFC will struggle to take off. Apple so far is not going the NFC way. And it’s highly doubtful that retailers will want to spend what it takes to make NFC happen at the POS.”
Matthew Witheiler, principal, Flybridge Capital Partners, which invests in payments companies, also is doubtful of NFC’s chances to dominate the POS. “I am incredibly skeptical of domestic NFC adoption,” he says. “From the venture perspective, people have been saying NFC is coming for the past 10 years.
It still hasn’t come. In the U.S., the market on the handset device side and payment adoption side is so fragmented that it just feels like it’s a very difficult nut to crack. To say NFC is going to happen … feels like a big stab in the dark.”
MAYBE: No Single Technology Will Dominate
Others are less willing to dismiss NFC for the long haul but also see the landscape evolving to include multiple technologies rather than one that wins.
“NFC is one of the many technologies that we’re watching closely; in fact, we have tested in-store NFC payments in the U.S. and in Sweden,” says Patrick Gauthier, PayPal’s head of product strategy and business operations, retail services. “NFC certainly provides a simple, gesture-based experience to consumers. However, in today’s retail environment, many sellers don’t have NFC-enabled POS systems and most buyers don’t have NFC-enabled phones.
“If NFC continues to be at a stalemate in the U.S., other forms will supersede it, [but] as merchants roll out EMV terminals this year, a significant number should have NFC capabilities. And, the vast majority of mobile handsets sold worldwide in 2013 will have NFC technology inside. With these rollouts, one side of the equation is being solved.”
—Troy Bernard, Discover
At PayPal, we’re addressing the friction points that exist in commerce today by ensuring PayPal’s digital wallet works with retailers’ existing POS systems and on devices that consumers already own … and in a world of connected commerce, no single technology will dominate in payments.”
PayPal therefore is leveraging its digital wallet in the cloud to enable a variety of delivery methods to ensure consumers’ wallets evolve “from a physical thing to a seamless, connected experience that is accessible anywhere you go, whether you’re online or in-store,” Gauthier explains.
Discover has been actively supporting NFC development and terminal deployment for more than six years, including conducting a Chicago-area NFC pilot with Motorola in 2007, a contactless sticker pilot in 2010 as well as participating in the NFC elements of Google Wallet and helping develop much of the technology used in Isis, according to Troy Bernard, director of product management at Discover.
The Chicago-based payments network has certified more than 50 NFC handsets and its Zip NFC technology is built into contactless terminals sold in the U.S., Bernard tells Paybefore. While adoption of NFC has been “slower than originally forecasted,” multiple payment forms—including checks, cash and magnetic stripe cards—have existed for decades and will continue to do so “for the foreseeable future,” he adds.
“This is why we continue to partner with multiple players and technologies in the commerce ecosystem. It ensures Discover has a nimble model and allows us to react when and how we need to.
“If NFC continues to be at a stalemate in the U.S., other forms will supersede it,” Bernard continues. But 2013 could be a turning point for NFC domestically. “As merchants roll out EMV terminals this year, a significant number should have NFC capabilities. And, the vast majority of mobile handsets sold worldwide in 2013 will have NFC technology inside. With these rollouts, one side of the equation is being solved,” he says.
“I do not believe NFC will win or lose. The technology will be deployed over the next five years and become one part of the new payment ecosystem,” predicts Gil B. Luria, managing director, equity research, Wedbush Securities. “I believe other mobile payment technologies, such as geo-fenced payments, will grow exceptionally fast over the next few years based on specific, compelling use cases.” Geo-fencing technology, which enables consumers to use mobile devices to scan product, pricing and promotional information from inside store aisles, “will make the most sense in a coffee shop and fast food context, and ‘in-aisle buying’ will be integrated into grocery and drug stores,” he says.
Luria believes NFC is on track to become a significant part of the payments landscape, largely because of the payment networks’ commitment to the technology.
YES: In Time
“NFC is an international standard and is supported by many organizations in the major payments ecosystem … [but] the key challenge is that it does not in and of itself transform the consumer or merchant experience.”
—Ginger Schmeltzer, Fiserv
“While NFC is not the only option, it is one that is well-tested in other countries and uses available technologies that are being integrated into retail point-of-sale devices and mobile phones at an increasing rate,” says Dominic Venturo, chief innovation officer at U.S. Bank Payment Services. “Industry analyst research shows the potential for rapid growth of NFC on a relative basis (starting from a small base) and—as we’ve long believed—mobile devices will become an extension of how our customers do business with us. The growth of mobile payments is an extension of this belief.”
The fact that contactless payment so far has been slow to catch on is “a hurdle” for widespread NFC adoption, Venturo says. “As such, 2D barcodes, cloud credential storage and myriad other solutions have come to market. While they may solve one problem, they have limitations of their own and no one, clear winning solution has emerged.”
The networks’ 2015 EMV liability shift deadline has the potential to speed NFC adoption as merchants upgrade their terminals to new NFC-compatible equipment, he adds. And it’s clear that when a U.S. Bank customer buys something using his NFC-enabled phone, it’s a certified, card-present payWave transaction that runs within the existing infrastructure, which provides many operational advantages, according to Venturo. “That said, we continue to experiment with and test alternative approaches to be prepared for other future scenarios.”
Bank technology providers like Fiserv are preparing for the likelihood that NFC will take hold eventually. “NFC is an international standard and is supported by many organizations in the major payments ecosystem, such as Visa and MasterCard as well as Google, Isis and others,” says Ginger Schmeltzer, Fiserv’s senior vice president, emerging payments. The bank technology provider actively is working on enabling mobile payments via NFC, but NFC is likely to be one of many competing models for the foreseeable future, including QR codes and cloud-based wallets, as well as other mobile payment types like P2P payments, she says.
“The key challenge faced by NFC is that it does not in and of itself transform the consumer or merchant experience,” Schmeltzer says. “That combined with the other hurdles facing NFC, including getting the technology into merchants’ terminals and consumers’ mobile devices, indicates that it will still be some time until we see if NFC will emerge a winner in this space.”
Integrating mobile payments with mobile banking will drive adoption of new consumer habits, Schmeltzer suggests. Consumers routinely using mobile banking platforms also provide a base of 30 million-plus users primed to adopt mobile payments.
Randy Vanderhoof, executive director of the Smart Card Alliance, a trade group dedicated to EMV adoption, is bullish on NFC but not just for its payment capabilities. “I strongly believe NFC adoption is going to continue at a steady pace, and within the next several years it will be a technology much bigger even than payments,” says Vanderhoof. “Like Bluetooth, which took a decade to catch on and had plenty of skeptics, NFC is going to change the way people interact with many things, from social networking to gaming, PCs, hospitality, access, storing membership and loyalty cards, and, certainly, payments,” Vanderhoof explains.
“The promise of NFC to securely exchange data in real-time is much better than what QR codes and other, lower-tech approaches can accomplish. Merchants using QR codes for mobile payments now are paving the way for what NFC will ultimately deliver.”
—Randy Vanderhoof, Smart Card Alliance
While NFC-based payments may take “at least three to five years” to get a broad foothold in the U.S., “the promise of NFC to securely exchange data in real-time is much better than what QR codes and other, lower-tech approaches can accomplish. Merchants using QR codes for mobile payments now are paving the way for what NFC will ultimately deliver.” Getting payment type issuers aligned with the merchant side for NFC is a significant barrier to adoption because of costs and timing uncertainties, Vanderhoof suggests. But the networks’ EMV liability shift deadlines, which go into effect in the fall of 2015, “will likely help to drive NFC adoption,” he says. “Issuers and merchants are making decisions this year that will position themselves in relation to the 2015 deadline, and NFC will ride on that wave of change.”
In the meantime, the growing number of significant NFC-based pilots, including Isis, and schemes like Google Wallet, will help accelerate NFC adoption by opening up more regions, laying down investment and giving incentives to consumers, Vanderhoof says.
“NFC has a bright future as a technology for two devices to communicate,” notes Zilvinas Bareisis, senior analyst, Celent, but the success of NFC’s secure element-based payments remains uncertain and different markets will likely evolve “at different speeds” in various global regions. “European markets are more likely to adopt NFC than the U.S. at this point,” says Bareisis, who is based in London. And while the industry participants are trying to iron out various challenges posed by NFC payments, “cloud-based payment solutions are threatening to steal market leadership not only for remote but also proximity payments.”
While NFC may prove its promise in time, patience is wearing thin. “A growing number of people think NFC may never happen, but I’m not one of them,” says Todd Ablowitz, president, Double Diamond Group. “NFC remains the best way to connect a phone with an acceptance point quickly, reliably and securely. It’s just going to take longer than many had hoped and planned. QR codes continue to hold their own and are gaining substantial traction. Since QR codes appear to be the technology of choice of Apple Passbook and others, for example, I expect the technology to be the go-to for mobile payments for the short term, but I’d be surprised if it’s the primary technology for the long run [due to the] relatively slow speed and mediocre customer experience,” he suggests.
The clock is ticking for NFC to fulfill the vision it promised. If NFC fails to catch on widely within the next few years, its moment may pass.