NFC Contactless Payments And The iPhone 5

iPhone 5 nfc

Citibank, Visa, and Google's NFC-powered Google Wallet have introduced the world to wave-and-pay systems using Near Field Communications (NFC). But, for now, the broad adoption of NFC has been limited by spotty distribution of hardware and compatible phone tech. On Tuesday, Apple could change all that by including or at least revealing plans to include NFC in its next iPhone or iPad. The company could instantly bring the system to the pocket of tens of millions of consumers around the world, and turn the mobile payments market on its head. How likely is this, now?

Apple's hinted about coming NFC with specific job postings and a growing list of patents for the tech that would reinvent how you interact with stores' cash registers or withdraw money from an ATM. Some of these patents describe using the devices' motion sensors to capture how consumer's "write" a signature with the corner of their iPhone as an alternative to a PIN during NFC payments.

This is not the first time the industry spread rumors about a possible Apple dive into NFC, however. The company didn't bolt NFC onto the iPhone 4, as many expected, nor the iPad 2, which arrived earlier this year with another pulse of hype. 

The technology isn't terribly complex or expensive from a manufacturing point of view— it's basically a simple wire loop inductive antenna and a tiny cluster of radio amplifier and encoder-decoder chips. Disagreement about a global standard to approve NFC payments remains, though. By contrast, there are industry and regulatory standards governing the way that user data is encoded in the magnetic strip or chip of your current credit and debit cards.

NFC can be used to share much more than a simple string of 16 credit card numbers. Standards for sharing additional peer-to-peer data over NFC, including things like your contact info, or game data from within an app, also remain hazy.

On the one hand, Apple is not likely to step into this battle with unproven, and potentially unsuccessful tech at the risk of disappointing users. It's the same reason the original iPhone lacked 3G. On the other hand, some of these barriers have begun lifting slowly.

A handful of market players, none with the consumer-influencing force of Apple, have settled on some NFC standards. The NFC Forum agreed on a specification for peer-to-peer data sharing, in recent weeks, meaning that smartphone owners (customers of Apple, HTC, Nokia, or any other phone maker) will soon be able to simply hold their phones near to each other to swap all sorts of information from cell phone numbers to photos. But again, the standard is brand new and doesn't cover everything that NFC technology can do.

When NFC hype about the iPhone began in earnest, there really weren't many field experiments to prove how consumers use the tech, either. There was a lack of NFC hardware support from businesses like Verifone, which makes many of the credit card reading mobile machines used from stores to taxi fleets, in the U.S. If Apple had tried to enter this market just two years ago, it would've had to spend billions—likely in secret—with banks or other manufacturing partners to push the tech into existence by building a whole software, hardware, security, and communications network—a massive uphill struggle.

Now, however, several players are working on NFC payments tech: there's Google's attempt to bring wireless payments to reality, and huge international players like MasterCard and Visa, along with cell phone companies in cooperative agreements such as ISIS. Given their support of NFC, Apple seems much more likely to sweep into the field, and show support for NFC soon if not immediately.

It's plausible, at last, that Apple's iPhone for 2011 could include a smart implementation of NFC—alongside a competing, and in many ways broadly similar standard with Bluetooth 4 chips. That's why pundits like Nick Bilton in the New York Times are mentioning NFC again alongside other iPhone 5 rumors, and other voices like Rachel King at ZDNet feel able to discuss the pros and cons of the tech as if the iPhone 5 really did support it.

Other people are saying "no," however. Firms like Bernstein are suggesting that Apple will retain its caution about NFC tech because it's not quite mature enough yet, even though they agree that Apple could see an upside of between $4 billion and $9 billion by including such wireless payments in their devices.

PayPal, just this week, loudly shouted down the entire idea, saying that even with Google Wallet mass adoption of the technology is years away (even though they've attempted a few of their own experiments as recently as the middle of this year). Square's COO, Keith Rabois, speaking just last week at the Mobilize conference, was even firmer: He suggested that there was "no value proposition" for consumers or vendors in NFC tech.

But it's easy to see that both PayPal and Square have their own agendas. PayPal transformed the world of online payments years ago, and is trying to gain similar dominance in smartphone payments with its own non-NFC system. If Apple pushed NFC tech out to millions of users, and worked with existing financial institutions like banks and credit card firms, this would neatly circumvent PayPal's hopes.

PayPal is also missing the story about chip-and-PIN tech in Europe, and the fact that it's a more secure technology than previous magnetic strip cards. When Britain embraced chip technology, about 10 years ago, there was a fast and pretty flawless changeover that really only took a year or two. There's no reason to expect that NFC payments in their simplest form—a direct swap-in for the chip or magnetic stripe when paying for goods at a store—wouldn't be embraced as swiftly, because it's only a minor adjustment to the existing credit card readers.

Square is similarly conflicted—its tiny iPhone dongle is making waves in mobile payments in the U.S., but it relies on current magnetic stripe tech which is decreasing in popularity outside the U.S., in nations where chip-enabled card payments for items as cheap as a newspaper or a coffee are absolutely routine already. This limits Square's growth potential, despite its innovative loyalty card deals with a small list of stores; ubquitous NFC tech on iPhones would deal it a critical blow.

Meanwhile Square seems completely oblivious to the value proposition of NFC. Even for the simplest form of NFC (wave-and-pay) consumers benefit from swifter payment interactions at the store—especially if Google's idea of not having payments below a certain threshold require a PIN is embraced. This benefits stores too, eager to increase throughput and reduce time spent at the cash register.

In their full-on high-tech implementation, NFC payments have the power to completely change how consumers think about spending their money in stores, and to deliver a wealth of valuable data to store owners. We've written extensively about this. Imagine that you're paying for something by NFC with your iPhone, and you've already consented by ticking a box in the digital store loyalty "card" in an app form, allowing the store to share and transmit data to you. When you pay, you get an instant 1% discount because you allowed the store to upload a screensaver advertisement to your phone. Loyalty points are granted to you, and the store gets an anonymized puff of data about your recent purchase habits. Then, through an agreement with partner stores in the nearby area, a location-aware pop-up appears suggesting a different purchase that complements the one you've just made, with an incentive of a free gift if you buy it inside the next hour. 

If Apple wound NFC payment APIs throughout the iPhone's operating system and intertwined itself intimately with the entire payments process—managing some advertising, security, customer data collection and even, perhaps, payments— Apple could reap huge revenue through charging a commission for its services. With hundreds of millions of iTunes customers already on record, Apple's repository of credit card data is already astonishing and market-leading. But most importantly, it could offer users an easy, better-designed shopping and mobile experience. 

NFC payment technology is exciting. It is coming, by hook or by crook, and it will change commerce forever. That's something Apple loves to do. The company Apple is perfectly positioned to overturn the current payments system, and build a whole new mode for shopping. 

[Image: Flickr user tribblepuppy]

Chat about this news with Kit Eaton on Twitter and Fast Company too.

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  • Greg

    The reason it is taking so long for EMV cards to come to the U.S. is that credit card companies have been willing to tolerate mag-stripe related losses. Switching to EMV would cost U.S. issuers about $3 billion, according to one estimate, and merchants would have to pay not much less to upgrade their point-of-sale equipment.

    Now that Visa has made it mandatory for all U.S. processors to support acceptance of chip-based transactions by April, 2013 (http://blog.unibulmerchantserv..., the dynamics have changed completely.  The banks have no option but to build the infrastructure, so once that's done, they might as well start using it.  After all, if the U.K. chip-and-PIN experience is anything to go by, switching to it would result in hundreds of millions of dollars in savings from lower fraud losses. U.S. banks would certainly take the windfall if it comes their way.

  • James Wester

    Nancy - I agree that payment experience is key, and most stories about mobile payments is filled with assumptions about the payments industry that are simply not true and never will be true. However, with Apple, they already have a closed-loop system for digital goods in iTunes. Turning that into an offline POS payment method at the Apple stores would be possible since their POS systems are all proprietary. It would be a repeat of what Starbucks did and that has been extremely successful. Linking back to accounts already on file through iTunes would mean no need to build out any of the financial services.
    My one big quibble with this article is that Square is irrelevant to this discussion as it regards to consumers paying with NFC at the POS. Square is a POS vendor (and a POS vendor wedded to the mag stripe).Plus, the comment about lack of NFC support by VeriFone is just wrong.

  • linda

    Great Article Kit. There are just too many players and many Mobile Payments options right now to know for sure what company is going to come out ahead.  It's explained well in this mobile payments infographic.... http://www.mobilepaymentstoday... 

  • Nancy Greenaway

    Apple is never going to become a financial services company. If they would utilize the credit cards on their books to make universal payments they would need to take chunks of the banking/financial services functions in-house to be effective players in the otherwise zero margin NFC payment game. Building out credit/fraud/chargeback functions are prohibitive for a company never been in that space.

  • Sam J

    Good article, it just seems that a more balanced article would cover the importance that Nokia is placing on NFC - including it in all its new products. I know Nokia isn't particularly the 'wow' mobile phone company, but it is still a very important competitor to Apple and the emphasis its placed on the technology should be worth a paragraph, I would have thought.