Apple Pay Looks To Be a Boost for NFC, But Creates a Question Mark for HCE

Apple Inc.’s new mobile-payment system may be a long-awaited shot in the arm for near-field communication (NFC), but it could also cool off an NFC variant that has caught fire since it emerged only 10 months ago.

Apple Pay, which the iconic computer giant unveiled to enthusiastic applause Tuesday, will rely on NFC chips, which Apple will embed in its new iPhone 6 and iPhone 6 Plus devices when they become available later this month. It’s the first time Apple has included NFC in its phones, though rival Android devices have had it for years.

With NFC, mobile devices can link wirelessly to merchant terminals to transmit payment data. In the case of Apple Pay, users will be able to select a payment card from their Passbook wallets and send payment credentials, masked by tokens and one-time cryptograms, to the point of sale. As with any NFC transaction, it all takes place in the blink of an eye.

But Apple will also rely on a secure element in the new phones to lock down and process the tokenized data. That means the iPhone 6 will not be available for a new form of NFC called host card emulation (HCE), which allows issuers to download tokenized credentials directly to phones, bypassing the device-based secure element.

HCE appeals to banks and other issuers because it lets them provision mobile devices without working out access arrangements on terms dictated by the organization—often the mobile carrier or handset maker—that controls the secure element.

Largely for that reason, HCE has become a popular variant of NFC since it first became commercially available last Halloween with Google Inc.’s rollout of Android 4.4, its latest mobile operating system, also known as KitKat.

Now, while the iPhone will finally be NFC-capable, it appears it will not use HCE, leaving issuers not willing to play by Apple’s rules on the outside looking in and keeping Apple devices off limits for issuers that want to leverage HCE. “Apple has opted to control the entire payments ecosystem on the Apple device,” says Doug Yeager, chief executive of SimplyTapp, the Austin, Texas-based company that developed HCE for KitKat, in an email. “Android is leaving it open.”

To be sure, Apple on Tuesday announced 11 large issuers its new devices will be working with, including Bank of America, JPMorgan Chase, Citigroup, American Express, Wells Fargo, Capital One, U.S. Bank, Navy Federal Credit Union, USAA, PNC, and Barclays. Together, these issuers account for 83% of all U.S. credit card volume, Apple boasted. But on the iPhone 6, these cards will be kept in Passbook, a wallet Apple introduced two years ago. Issuers will not have the option of loading their own wallets or indeed injecting their cards into other developers’ apps, a capability introduced this spring by Sequent Software Inc., a Mountain View, Calif.-based payments software firm that has developed solutions specifically to leverage HCE after several commercial deployments leveraging secure elements.

“One thing concerns our customers a lot more than the technology [a]nd that is the fact that Apple has chosen to launch a new mobile wallet instead of enabling their own banking and merchant apps to become wallets,” says David Brudnicki, chief technology officer and cofounder at Sequent, in an email message. “Our customers want to have control of their brand and have direct customer interaction with the consumer through their app. The last thing they want is to be intermediated.”

Still, some observers argue that while the new, NFC-capable iPhone won’t accommodate HCE, there are plenty of Android devices that will and plenty of issuer interest in keeping away from secure elements they don’t control.

“I think there is clear guidance now for NFC as being the next step for terminals, and if merchants respond favorably, that will benefit HCE,” says Cherian Abraham, global consulting practice analyst at Experian Decision Analytics, in an email message. “And certainly for issuers–onstage or not with Apple [Tuesday]–[they] will need a pathway to having their own credentials in their own mobile banking/wallet app. And Android and HCE will be the only route forward.”

For HCE pioneer Yeager, Apple Pay turns out to be a neutral development at best. “I think that because HCE was not on [iPhone] 5 or below, and continues not to be on [iPhone] 6, [Apple Pay] does not really hurt HCE,” he says. “But it doesn\'t boost it either.”