Regarding NFC, the question on everyone’smind is “when?”
We’ve all been hearing about NFC for many years, and the hype hasbegun to reach the mainstream. Recent ads for the Samsung Galaxy S3mobile device have held up NFC as a major competitivedifferentiator between the S3 and the iPhone 5. NFC solutions havebeen trialed and launched by big names, including Google and thethree mobile networks behind Isis (AT&T, T-Mobile, andVerizon). Despite this, actual NFC use has barely begun.
Mercator Advisory Group estimates that less thanone-ten-thousandth of a percent of retail sales in 2012 wereconducted using NFC. So what is still missing from the picture,preventing NFC’s success? What do consumers and merchants needbefore adopting NFC payments?
For consumers, there are likely four phases leading up to theadoption of NFC payments:
- Market saturation with NFC capable devices.
- Consumer introduction to non-payment NFC functions.
- Consumer introduction to NFC payments.
- Consumers gaining confidence in the effectiveness, security,and additional value of NFC payments.
Currently, the U.S. market is nearing the end of the first phase,and beginning to enter the second. The aforementioned SamsungGalaxy S3 has shipped more than 40 million units worldwide, and itis only one of many Android, Windows and BlackBerry devices thatsupport NFC technology (iPhones do not support NFC, but that is atopic worthy of its own Perspective). Today, the vast majority ofnew devices released contain NFC capability; with mobile deviceshaving a typical lifespan of 18-24 months, it is only a matter oftime before NFC is considered a common feature.
The next step is introducing consumers to the non-payment uses ofNFC. This is because, as with any new payment technology, consumersare hesitant to change their habits when it comes to mattersinvolving their finances. Think about how many people you know whofought kicking and screaming against the convenience offered byATMs (I personally still know a few people who insist on conductingall of their banking transactions in person at a branch). Consumershave developed a trust that by swiping their plastic card through aPOS terminal, the intended amount of money will be quickly andsecurely transferred from their credit or debit account to theaccount of the merchant. If this works, why bother trying anythingelse?
This is why the S3 commercials currently being aired show consumersusing NFC to transfer videos and MP3 playlists from one device toanother, rather than showing them making payments. Beforeencouraging consumers to use NFC for payments, they need to getused to the idea of using NFC to transfer less sensitive data. Onceconsumers realize that NFC enables safe and quick transfer ofthings like pictures and URLs from one device to another, they willbecome more open to the idea of using NFC for payments.
Once consumers possess NFC devices and know how to use NFC for bothnon-payment and payment-based functions, the final step will beenabling them time to become comfortable with making payments fromtheir mobile device. Consumers will likely begin by making smalltransactions. Once they see that those transactions were settledsecurely, and they see the additional features of NFC (integratingcoupons and loyalty into the payment, social media based functions,and other customer experience enhancing features), they will slowlybegin to adopt NFC as their standard form of payment.
For merchants, the process appears simpler. In order to accept NFCpayments, merchants only need to integrate a contactless receiverinto their POS system. While this does represent an additionalcost, merchants are already being heavily encouraged to adoptcontactless acceptance by the EMV roadmaps issued by the four majorpayments networks.
At the time of the original Visa press release, although merchantswere able to avoid the fraud liability shift by adopting onlycontact EMV acceptance, relief from PCI compliance validation wasonly granted to merchants accepting both contact and contactlessEMV. If this hasn’t changed yet, it is conceivable that theliability shift requirements could change to include contactlessacceptance by the time they go into effect in 2015. Regardless, itis likely that, for a significant number of merchants, the EMVadoption process will include contactless EMV. At the very least,enough merchants can be expected to adopt contactless capabilitiessuch that it will be possible for consumers to regularly use NFC.
Clearly, there is more to successfully implementing an NFC-basedpayments system than simply developing the technology. This processrequires consumers to change their long ingrained habits as agroup, and merchants to invest in additional hardware for their POSsystems. Mercator Advisory Group predicts that, regardless of thesolutions put on the market, NFC will not reach critical mass foranother 3-5 years. This is a long, drawn out process. Even with thesignificant investments behind NFC, consumers need time to make thechange, and merchants need motivation to make the investment. NFCis coming; we just have to be patient.