As if the payments business wasn’t enough of an alphabet soup, QR codes are now vying with NFC for dominance in mobile payments. Which technology will win out at the point of sale?
In the United States, unlike many other parts of the world, near-field communication has been the favored technology for linking mobile wallets to point-of-sale equipment. And NFC may be almost assuredly on the cusp of adding to its U.S. dominance.
But with the arrival in the U.S. market of China’s huge Alipay wallet and its technology based on Quick Response codes, it may be imprudent to dismiss QR systems as a basis for mobile payments.
The two technologies are engaged in a see-saw battle worldwide. Depending on the day of the week, payments professionals may think that mobile-payments services using NFC are taking over the industry, while on another day it may appear that Quick Response codes are positioned to dominate.
That could be easy to assume, given that QR code-based payments are favored by tech giants Ant Financial Services Group, parent of Alipay, and WeChat, operator of WeChat Pay, both of which are used by millions of Chinese consumers, with merchant acceptance expanding around the world (“China Calling,” September 2018).
At the same time, though, NFC technology appears to be dominant, especially in developed markets where Apple Pay, Google Pay, Samsung Pay (collectively known as the “Pays”), and contactless cards are widely used.
Reinforcing that idea is that U.S. banks and credit unions are about to issue millions of contactless EMV cards that will use NFC connectivity to communicate with POS terminals. Visa Inc. expects more than 100 million such cards in issue by the end of 2019.
In the United States, at least, the distinction between NFC and QR codes generally depends on whether the mobile-payment service is designed for a single merchant or for multiple merchants.
Typically, the retailer mobile wallets favor QR codes for their proprietary systems. That’s because they can control these wallets, incorporating payment methods that can be less expensive than the card networks or that entice consumers to share more shopping information. The most recent entrant is the big grocery chain Kroger Co., which rolled out its own rewards-laden mobile wallet last month.
Other examples include the Kohl’s Pay app from retailer Kohl’s Inc., which requires a Kohl’s charge card. Still others, like the highly popular mobile-payments service from Starbucks Corp., demand that consumers load funds into the app, though they can choose from a variety of sources, even Apple Pay and Chase Pay, the JPMorgan Chase & Co. service.
Generally, NFC works best where there exist networks supporting general-purpose card brands. “NFC is the solution for the world that is built on network payments,” says Thad Peterson, senior analyst at Boston-based Aite Group LLC.
“It is well-suited to markets that are primarily network-based, such as the United States,” he adds. “I say that because NFC is a linear extension of the existing infrastructure.” On the contrary, QR codes exist where there aren’t network-based systems, he says. “They don’t require a central processing network to run.”
In 2018, 84% of North American smart phones supported NFC technology, says ScientiaMobile Inc., a Reston, Va.-based mobile-device intelligence firm. By 2020, 2.2 billion NFC-enabled handsets will be online globally, says the NFC Forum, a Wakefield, Mass.-based trade organization.
NFC, which is an essential technology in the payments industry but unknown to most consumers, has distinct advantages and use cases where it makes sense. It also stands to gain even more advantages as dual-interface cards with contact and contactless EMV capability enter the U.S. market.
The next generation of dual-interface cards—contactless cards based on magnetic-stripe technology were introduced in the mid-2000s but failed to catch on—stands a better chance of success because of the proliferation of point-of-sale-acceptance equipment and consumer ease with tap-and-go payments, says Randy Vanderhoof, director of the U.S. Payments Forum, an industry-advocacy organization based in Princeton Junction, N.J.
Given the experience in other countries, consumer adoption of NFC-based EMV cards may accelerate once consumers realize that tapping means not waiting for an audio cue to remove the chip card from the reader, Vanderhoof says.
While it may take a bit of time for consumers to catch on, Vanderhoof is optimistic. “We never had the levels of concentration of consumers being able to pay using the NFC or contactless interface before,” he says. “Clearly, the payment brands are very excited about this and more proactive in marketing their capabilities.”
And that could boost NFC even more in the U.S. payments market. “The dual-interface cards, both EMV chip and contactless, is expected to have an effect on the demand of new products and services, but issuing cards is not the greatest indicator,” says Krista Tedder director of payments at Pleasanton, Calif.-based Javelin Strategy & Research.
“Merchant acceptance of NFC needs to reach much higher levels before the demand is present,” she says. “For example, I purchased gas and was able to use NFC technology. At the same brand of gas station [a day later], I could not use the NFC payment because they only accepted swiped/dipped transactions at that gas station. Until there [are] consistent experiences for the consumer, the consumer will revert to what they know works and will stop attempting to use NFC.”
Such inconsistency could bedevil greater NFC acceptance, especially because a consistent experience across all points of sale, along with supportive issuers and willing consumers, form the three necessary components for payment acceptance to become widespread.
“We always see the chicken-and-egg scenario,” says Ammar Faheem, vice president of digital payments at Gemalto NV, a smart card maker and security-software provider. Having been posted internationally for Gemalto, Faheem has observed how different markets react when new NFC-based technology is introduced. Gemalto has headquarters in Amsterdam and France.
“When I was in Dubai, it was mostly contact-only EMV,” Faheem says. “Then Samsung Pay and Apple Pay came in and flipped how people buy. Consumers there got used to tap-and-pay. That drove acceptance. Eventually, banks started issuing dual-interface cards. I saw the same in South Africa.”
In the interim since the mid-2000s, mobile phones with tap-and-go capabilities using NFC chips have stepped in, relying on the same infrastructure as contactless cards. Apple Inc.’s Apple Pay, Google Pay from Alphabet Inc., and Samsung Pay from Samsung Electronics Co. Ltd., all have spent millions educating consumers about tap-and-pay. This may well aid contactless card adoption, some suggest.
“They’ve played an important role in shaping consumer behavior in terms of payment habits,” says Faheem. The Pays have also filled a “crucial role in marketing and promoting contactless technology as well as acceptance,” he adds.
‘Flipping a Switch’
While overall U.S. consumer adoption of mobile wallets is low—only 12% of all Apple Pay users are in the United States, says researcher Loup Ventures—adoption of contactless cards should be higher, says Vanderhoof.
The difference, and why there might be more NFC chips in use soon, is that the Pays generally only offer a payment function with limited rewards and offers, he says. Retailer mobile wallets often offer more.
“Mobile wallets without mobile offers will continue to struggle except in places where speed and convenience are of utmost concern,” Vanderhoof says.
One card issuer, JPMorgan Chase & Co., may recognize this. In November, it launched Chase Offers, a rewards program for its credit and debit card holders.
Another factor that may aid NFC use is that the cost of chip cards has dropped since the U.S. market shifted to EMV in 2015. A non-printed, non-personalized contact-only EMV card may sell for less than 50 cents, Vanderhoof says. A dual-interface card may be approximately $1, or less with volume orders.
“We were talking about multiples of $2 and $3 a card just a few years ago,” he says, adding that there are more than 1 billion EMV cards issued in the United States now.
QR codes, however, can be very inexpensive. Many companies provide QR-code generation online for free. Getting a code into a payments app, however, takes expensive developer time and integration into POS systems, especially if the mobile-payments program is captive to one retailer.
QR codes are not without a place in payments, as systems like Alipay have shown. “QR codes have a downside and an upside,” says Kilian Thalhammer, vice president of product management, payment, and risk at Wirecard AG, a Munich-based payments provider. “It could work without any additional infrastructure, but on the other hand it must be implemented in some way on the merchant side.”
That’s not an issue with NFC. “With NFC built into the POS terminals, it’s very similar to flipping a switch,” says Aite’s Peterson. “All of the processors have the capability to accept it. QR codes can require a whole new layer of software to accept the payment. It’s not a hardware change, but it’s not an insignificant software change.”
Will one win out over the other? Most observers contend there’s room for both technologies in mobile payments, but it depends on the use case.
If offers are paramount and of enough perceived value to overcome any reluctance to use a QR code, that technology could be the choice. But if flexibility, ease of use, and advanced security are critical, then NFC may be the way to go.
“NFC capability requires merchants to rely on factors outside of their control,” Tedder says. “The consumer must have an NFC device (either card or phone). This leaves out a large population of consumers who do not have access. With QR codes in mobile wallets hosted by merchants, the threshold of usage is much less—the consumer needs a mobile device which can take a picture.”
What’s Become of Host Card Emulation?
Host card emulation (HCE) is a technology that can be used to create an NFC wallet without using a chip, usually on mobile phones. Instead of storing payment credentials on a chip called the secure element, the data is managed in a cloud configuration controlled by the card issuer.
For a time, it was highly publicized and used in the United States, but lately it isn’t as prominent as it once was. Google Pay is perhaps the best-known user of HCE technology in the United States. The technology is used more internationally, especially in developing markets where banks have more direct control of the mobile-payment experience.
“Host card emulation started to take off in 2014 and has provided significant benefits in mobile wallets,” says Krista Tedder, director of payments at Javelin Strategy & Research. “HCE enables the mobile wallet to display the card on the device, including the logo of the bank/merchant to indicate which card it is. This provides consumers a comfort level that the product they are selecting is the one they want.”
“For example,” Tedder continues, “I have personal and business credit/debit cards, prepaid gift cards, and merchant-rewards programs loaded into my mobile wallet. I also have Walgreens prescription prepaid and airline QR codes. Knowing which product I am selecting makes the mobile wallet similar to a physical wallet.”
Yet, the technology has some limitations.
“Every bank had a different kind of implementation,” says Ammar Faheem, vice president of digital payments at Gemalto NV, a smart card maker and security software provider. “The other challenge with HCE is that it was limited to Android phones only.”
Faheem says HCE-based wallets are still in use where the Pays have not yet launched, such as in many countries in Africa and the Middle East.
In the United States, the Pays are too far ahead for banks or other organizations to disavow NFC in favor of host card emulation. “It’s about the user experience at the end of the day,” Faheem says. “It’s so much easier to click the button on my phone instead of going and finding a bank’s application.”