Analysis: Who needs NFC anyway?

Matt Hamblen, Computerworld (US)
17 June, 2011
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Starbucks says it has done just fine using basic barcode scanning technology for its successful US smartphone payment system, which raises the question: Who really needs Near Field Communication wireless technology for mobile payments?

Interest in NFC has surged in recent months, with Google recently joining a throng of wireless carriers, banks and credit card companies planning a number of sometimes competing schemes to use the technology for mobile payments in the US

With an NFC -based mobile payment system, a user could wave a smartphone over an NFC reader, or tap it, to complete a transaction. The system would only work with smartphones that have special NFC chips, and merchants that use the system would need NFC readers.

NFC technology is being rolled out in some European cities and is widespread in Japan and South Korea, but analysts said it may take five years for the technology to become mainstream in the US.

On Tuesday, Starbucks executive Chuck Davidson announced that the coffee giant’s mobile payment system would be expanded from the iPhone and BlackBerry smartphones to include phones running Google ‘s Android 2.1 operating system or higher. Since Starbucks has had success with barcode scanning technology, he said, it doesn’t make sense to switch to NFC and wait three years or more for that technology to go mainstream.

One obstacle facing NFC is that there have to be enough smartphones equipped with NFC chips before NFC payment systems can become widespread, Davidson said. The Starbucks barcode-based smartphone payment system, has shown that Americans are willing to pay for food and drinks with their phones, he said. “We’re it, we’re the test case and we’re seeing tremendous value.”

Some smartphones are already equipped with NFC chips. One is the Nexus S sold by Sprint in the US, which is partnering with Google, Mastercard and a slew of retailers on the Google Wallet concept that is expected to be released this winter. But the number of NFC-ready smartphones is limited. And because of that and other factors, mobile payments analyst Bob Egan of Sepharim Group said the US is “upwards to five years away before we see wide rollout of NFC point-of-sale payment adoption.”

Egan defined wide adoption as the point when mobile payment solutions are available to, and used by, at least 10 percent of the people who carry mobile  phones. Currently, there are 303 million mobile phone owners in the US and 68 million of them have smartphones, he said. Under his definition of wide adoption of NFC, he said 30 million mobile phone subscribers would need to own a smartphone with mobile payment capability, and they would need to have access to merchants with NFC-compatible point-of-sale systems.

On top of that, for NFC to truly enjoy wide adoption, those users would have to make multiple mobile payments each week – and that “is a very tall order,” Egan said.

The number of US consumers who use NFC on smartphones over the next three years will be “quite small” – fewer than eight million customers making less than one transaction per week, he said. Those eight million will be making mobile payments primarily at fast food restaurants or sporting venues, Egan predicted. At those types of locations, the point-of-sale systems (including hardware and software for NFC readers) will likely be subsidised by Google, Mastercard, Visa and First Data, among others, he said.

Jack Gold, an analyst at J.Gold Associates, said Starbucks’ Davidson is “right on” in his estimate that it will take three years for NFC to be widely used in the US “NFC is just now being put into some phones and … it takes time to build a critical mass,” he said. “In the meantime, displaying a barcode on a device’s screen is relatively trivial and can be done on almost any smartphone, and no hardware upgrade is needed. No special chips are required and it’s almost as convenient for the end user.”

“Long-term, NFC will be important, but I don’t see anyone betting the farm on NFC for the next couple of years,” Gold added. “The NFC reader at the point of sale is not the issue. It’s getting the critical mass of enabled phones that’s going to determine how quickly NFC becomes an important payment method. That takes time.”

Egan said NFC is getting too much hype, especially because few retailers want to invest in point-of-sale systems that essentially speed up checkout lines, which equates to “pushing customers out of their stores faster” when most retailers want customers to stay and shop more.

Retailers will get excited by NFC when it helps customers “check in” instead of check out of a store, he said. “Retailers get excited by technology when, and only when, it can enable at least one of three things: Reducing fraud, raising sales or lowering costs,” Egan added. “Bottom line, NFC isn’t going to matter much until retailers understand how to create value.”

As for smartphone users, Egan added that until retailers get on board with NFC, “owning an NFC phone is like owning the only fax machine.”

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