Components: What NFC’s Uptick Means for Payments

Peter Lucas

The availability of NFC-enabled smart phones is finally ramping up in the U.S. But handset makers are promoting the snazzy other stuff that NFC delivers, not payments.

For years, champions of mobile wallets based on near-field communication (NFC) technology have evangelized how their applications will revolutionize the way consumers pay by providing a bridge between the physical and digital worlds.

NFC is a short-range wireless communications technology that is the backbone of several digital-wallet initiatives, including the carrier-backed Isis joint venture and Google Inc.’s Google Wallet. At the center of the promised land lay NFC-enabled smart phones, which are the linchpin of this new payments model.

After loading the wallets—which provide links to their bank or credit card accounts—onto their phones, consumers need only wave the phones in front of the register to pay for a purchase. At the same time, merchants can upload digital receipts, rewards, and coupons from the register to the customer’s wallet.

Just as enticing is the ability of NFC phones to facilitate person-to-person payments simply by touching one phone to another. Consumers can also use their phones to scan NFC tags embedded in billboards, posters, and in-store signage to upload product information and merchant promotions.

For consumers who put a high value on convenience and crave the latest technology, NFC-enabled phones are a slick piece of technology.

Despite all the cool things they can do with NFC phones, consumers have only started to adopt them in earnest. In 2012, there were 40 million NFC handsets in the United States, up from about 6 million in 2011 and only a trace few in 2010, according to Oyster Bay, N.Y.-based ABI Research Inc.

By the end of this year, ABI projects more than 100 million NFC-enabled phones will be in use in the U.S.

‘Down the Line’

The recent growth spurt in NFC phones is good news for digital-wallet providers betting on the technology. In 2012, 34 million NFC phones shipped in North America or about 15% of the total 227 million handsets shipped, according to ABI.

By 2018, the research firm projects more than 90% of smart-phone shipments in North America will be NFC-enabled phones. About 30 phone makers are producing NFC-phones worldwide, including such heavyweights as Samsung, Nokia, Motorola, LG, BlackBerry, and Acer.

But while the uptake of NFC-enabled devices in the U.S. has passed the tipping point, according to John Devlin, a practice director for ABI, little of the activity and adoption is related to payments.

“OEMs [original-equipment manufacturers] and other companies, vendors, and app developers are using NFC in a variety of interesting ways other than payments. Payments remain the end goal, but it has moved back down the line,” he says.

Handset makers, such as market leader Samsung Electronics Co. Ltd., are attempting to differentiate their NFC phones by playing up the enhanced user experience the phones deliver, but they’re not talking much about payments, at least for now.

Samsung, for example, has emphasized such functionality as photo and content transfer between NFC phones. Samsung had a 53% share of the global smart-phone market during 2013’s first quarter, according to research firm Strategy Analytics.

Samsung’s promotion of NFC features and functionality other than payments was on full display with the recent launch of its Galaxy S4 model. Although the phone has the latest-generation NFC chip integrated into its circuitry, which is smaller and lighter than the previous generation of chips attached to an NFC phone’s outer casing, Samsung is not drawing attention to that technical feature.

Instead, it is touting the ability for users to view missed calls and messages and accept incoming calls by waving a hand over the phone’s front sensor, among other non-payment capabilities.

‘Removing the Friction’

“The smart-phone wars are highly competitive and the battle between handset makers is to be the first to add new features and functionality that will excite consumers. That’s what handset makers are doing with NFC phones by playing up the capabilities beyond payments,” says Brad Green, head of mobile NFC for Visa Inc. “What we are seeing as a result is an increase in the availability of NFC-enabled handsets.”

Eighteen months ago, Visa had certified only two NFC handsets for use on its network. Today it has certified about 75 NFC phones and tablet computers. MasterCard Inc. has certified 140 NFC devices globally.

With more models of NFC phones being certified for use on the payment networks, the next step is to expand interoperability of digital wallets across a variety of phone platforms.

In February, Visa and Samsung struck a deal to allow wallet providers to use Visa’s Mobile Provisioning Service to securely download payment-account information to NFC-enabled Samsung devices. While it is not a wallet app, Visa’s provisioning service allows NFC phones to be switched on for payments through an over-the-air activation process.

Developed by Oberthur Technologies, the provisioning system also allows for Visa’s payWave contactless payments technology, and other payment-related applications, such as loyalty and transit apps, to be deployed over the air to NFC phones.

“The intent of the alliance with Samsung is to grow the ecosystem for digital wallets by removing the friction to load and activate them on a phone, regardless of the type of phone or the wireless carrier that supports the phone,” says Green.

To that end, Visa’s deal with Samsung is not exclusive.

“We are looking to bring as many handset makers on board as possible so banks can securely and more easily activate their digital wallets on smart phones,” he says.

For its part, MasterCard says it is open to forging similar alliances.

“There will be opportunities for other payment networks to strike deals like Visa-Samsung in the future,” predicts MasterCard’s James Anderson, senior vice president, converged product development.

A Partial Catalyst

Whether or not its pact with Visa will give Samsung an edge when it comes to putting more NFC phones into the hands of consumers remains to be seen. Payments experts point out that while such deals may help promote the handset maker’s brand, sales will be determined by their features and functionality.

“[The] consumer appeal of this deal will largely depend on the service partners brought on board, which to date remains to be announced,” says ABI’s Devlin. “It could also have a bearing on the development of a global mobile-payments platform, although again, this depends on which card issuers and [financial] service providers are involved.”

Competing phone makers also see the Visa-Samsung deal as at least a partial catalyst for putting more NFC phones into the hands of consumers.

“On paper, the deal should give a boost to the broader market, given the size of the partners,” says a Nokia spokesperson. “Having said that, it’s not enough for a device to simply have an embedded technology like NFC—it’s how the technology is used that’s crucial.”

Finland-based Nokia has installed NFC chips in the majority of its Lumina line of phones, including its flagship Lumina 920 and the less expensive Lumina 620. The company says it will continue to look at NFC as a key technological component for future models as long as it can enhance the consumer experience.

“It’s also a question of striking the balance between features and affordability,” the Nokia spokesperson adds.

While getting NFC phones into circulation is key to the success of NFC-based digital wallets, payment experts agree that educating consumers about wallets’ non-payment features so they actively make use of them will unlock the real value of the wallet.

“If NFC was strictly a payments play, there would be far fewer phones in circulation,” says Randy Vanderhoof, executive director of the Princeton Junction, N.J.-based Smart Card Alliance, an industry trade group. “From a marketing standpoint, there are a lot of things merchants can do to interface with consumers using the technology, such as scanning NFC tags with a phone to instantly receive an offer.”

Apple’s Plans

Marketing through NFC phones represents the easiest path to monetizing NFC payments and getting consumers to embrace digital wallets, experts say.

“NFC tags have the potential to be a more effective interface with consumers than QR codes because consumers don’t need an Internet or Wi-Fi connection to scan them,” says Vanderhoof. “This creates a lot of possibilities for merchants.”

But delivering such gee-whiz marketing experiences through NFC devices is not a slam dunk. Merchants looking to leverage NFC phones as a connection point with consumers may need to assemble a dedicated team of marketing professionals who understand how best to interact with consumers through this channel.

“The marketing aspects of NFC are very complex, and merchants need to educate themselves thoroughly about the opportunities available and how to effectively use them,” says Debbie Arnold, director of the Wakefield, Mass.-based NFC Forum, a non-profit that promotes NFC adoption.

Despite the bright prospects for accelerated consumer adoption of NFC phones, one of the great unknowns remains Apple Inc.’s plans for its iconic iPhone. For years, speculation has swirled around the secretive consumer electronics company concerning if, and when, it would launch an NFC phone.

While Samsung has surpassed Apple as the smart-phone leader—Apple’s global market share fell in the first quarter to 17.9% from 22.8% for the same period in 2012, according to Strategy Analytics—Apple users are fiercely loyal to the brand and the company’s user-friendly and intuitive iOS mobile operating system.

Payment experts agree that if digital wallets and NFC tags are to achieve optimal success, reaching Apple users is a must.

Apple’s slipping market share has given rise to speculation that if the company harbors any hope of becoming a heavyweight in the mobile-payment space, it must introduce an NFC phone, and soon. Apple, however, has a history of dancing to its own tune and introducing products only when management believes the timing is right.

Indicating he’s in no rush to get into the mobile-payments business, Apple chief executive Tim Cook briefly addressed the topic April 23 in response to a question during Apple’s quarterly earnings call. Cook said mobile payments are “in its infancy” and “just getting started.”

Some payment experts, however, feel that the right time for Apple to launch an NFC phone is fast approaching.

“While Apple has previously stated it did not see the market as ready for NFC and that acceptance infrastructure was lacking, the situation is changing,” says Devlin. “I believe Apple will move to introduce an NFC iPhone. It would be a great fit for them from both a hardware and software-services standpoint.”

The Google Question

Another potential monkey wrench that could affect consumer adoption of NFC phones is whether search-engine giant Google will continue to support the technology. The company’s wallet app has struggled to win acceptance with both consumers and mobile carriers.

Last month, Mountain View, Calif.-based Google disclosed that Osama Bedier, vice president of Google Wallet and payments, was leaving the company to pursue other, undisclosed opportunities.

Last year, Google launched a cloud-based version of its digital wallet, which payment experts saw as a hedge against persistently slow adoption of NFC phones. Bedier also hinted that something big might be coming to Google Wallet, in a month or so, but nothing happened. Shortly after his departure, Google announced several enhancements, but nothing amounting to a major overhaul.

Aaron McPherson, practice director of worldwide payment strategies at IDC Financial Insights in Framingham, Mass., told Digital Transactions News that while it’s unclear what Google’s current position about NFC is, “I still expect them to be a major player.” (McPherson recently left IDC for a position with payment processor Fidelity National Information Services Inc.)

In the meantime, look for handset makers to continue expanding their NFC phone models because many mobile-phone users buy a new phone when their contract with the carrier expires, and U.S. carriers typically subsidize a portion of the upfront cost.

As more NFC phones get in the hands of consumers, expect digital-wallet providers to ratchet up their marketing campaigns to gain traction for their apps. The payoff from such marketing campaigns, however, could be some distance down the road.

“NFC is happening now, but the majority of activity and adoption is not related to payments,” says ABI’s Devlin. “Payments have always been a very complicated proposition and would not happen overnight. Other use cases seemed more suitable and in turn improve consumer awareness and familiarity with NFC ahead of any major payments push.”