Endpoint: To NFC Or Not To NFC? That Is Not the Question!

If you think NFC is the future of in-store mobile payments, think again. NFC is a technology, not a solution.

The idea that mobile payments should replicate the old card-payment model is all wrong, says Rick Oglesby.

Rick Oglesby is a senior analyst at Aite Group LLC, Boston. Reach him at roglesby@aitegroup.com.

Since the iPhone’s introduction in 2007, the world’s consumers have become obsessed with their mobile devices, and it’s abundantly clear that the consumer love affair with the mobile device includes using it to shop. Where there is shopping, there is payment, so the inevitability of mobile payments at scale and in all channels is clearly upon us.

This inevitability has the payments industry asking a simple question: “In a mobile-shopping environment, how will consumers and merchants exchange payment information at the point of sale?” The iPhone came along nearly seven years ago and we still do not have a clear answer. Why? Because it’s not the right question.

In their quest to demonstrate how to exchange payment information via mobile devices, a variety of companies have selected near-field communication (NFC) technology. NFC stores payment card information in a secure memory chip within the mobile device and at the appropriate time transmits card numbers and associated data via an NFC radio to an equipped payment terminal. By doing this, the mobile device can seamlessly step in for the payment card, enabling consumers and merchants to transact via phone with minimal disruption.

Initially, this seems like a good answer to the question of how payment-data exchanges will be completed in a mobile world. But the narrow focus on how payment data can be transferred from consumer to merchant has caused many in the payment industry to completely miss the far more important questions that need to be answered.

Any Time, Anywhere

In reality, digital and/or digital-assisted shopping is quite different from traditional retail shopping, so finding a way to shoehorn traditional payment processes into non-traditional shopping processes does not meet the need. We should be asking entirely different questions. Such as:

1. What? What information will be exchanged? Does payment information need to be exchanged at all?

2. Where? Where will information exchanges take place?

3. When? When will information exchanges take place?

4. Why? Why are the merchant and consumer interested in transacting by phone?

Payment cards were originally developed in 1946, when digital-communications infrastructure did not exist. Without digital communication, consumers and merchants lacked ways to easily exchange payment data. So the card was designed to enable a physical exchange at the only available point of communication—the point of sale.

In a digital-shopping environment, the consumer and merchant can be engaged in ongoing communication whether or not the consumer is inside or outside of the store itself. Any type of information can be exchanged at any time during that communication, and it can happen anywhere, not just at the point of sale.

Different types of information can also be exchanged at any time during that communication. So if the truly relevant questions relate to what information will be exchanged, and when, where, and why the exchanges will take place, then you must consider that there is no reason that payment information needs to be exchanged at the point of sale at all.

‘How’ Comes Last

While the payment industry works to encrypt and tokenize payment information to make transactions more secure, Amazon, Apple, Dunkin’ Donuts, Google, Groupon, LevelUp, PayPal, Square, Starbucks, Uber, and many others have devised solutions that exchange only identity information at the point of sale. They do it with payment information that was exchanged months or even years earlier, and in many cases a key component of their overall value proposition is the elimination of the payment-data exchange itself.

Merchants love identity information. The ability to communicate on an ongoing basis with previously anonymous customers is transformational for them, as is the ability to understand more about their customer base. Ask any merchant if they are interested in customer-identity information, and please let me know if you find one that says “no.” Those that have or can bring customer-identity information can also bring demand-generation and loyalty solutions.

Merchants also love payments, but they hate securing payment card data. Look no farther than the recent breach at Target to find an example of why merchants would be interested in any possible way to replace reusable payment card data with identity information and one-time-use tokens.

When you consider the future of mobile payments, consider all of the questions: What? Where? When? Why? How? Remember that “how” comes last. The successful mobile-payments solutions will:

1. Help merchants get to know their customers better by providing identity information and communications channels;

2. Enable demand generation and loyalty by facilitating online conversations between consumers and merchants that transcend location;

3. Collect payment and identity information at the earliest possible point in the customer relationship, enabling the merchant to maximize the benefit of the customer relationship and minimize the impact of payment processing on sales and data-security processes;

4. Leverage mobile technology not to facilitate payment but to facilitate relationships and sales. Merchants dream of putting virtual customer-service representatives in the hands of every in-store consumer, and also making that representative available regardless of the consumer’s location;

5. Perform all of the above in a seamless way, using various technologies as tools to deliver the above four component parts.

So if you think that NFC is the future of in-store mobile payments, think again. NFC is a technology, not a solution. It will be a part of the solution, but it is not a solution on its own.

And if NFC is at the forefront of your mind when considering the future, please move it down the priority list. There are far more important questions to be pondered.