Near Field of Dreams

Remember when NFC was a dead letter in payments? Well, it’s undergoing quite a resurrection, thanks to EMV and mobile wallets like Apple Pay.

When Apple Pay burst upon the payments scene 18 months ago, the way it allowed iPhones to connect instantly with point-of-sale terminals seemed like something fresh and original. Suddenly, it seemed, waving or tapping a smart phone to make a payment was hip.

But, while Apple Inc. has certainly ushered in plenty of cool technologies over the decades, wave-and-pay isn’t one of them. What Apple Pay managed to do was resurrect a 12-year-old, close-range radio-transmission technology that had been tried out repeatedly over the years for various payments applications without really catching on (see, for example, “Delayed Launch,” June 2010).

This was near-field communication (NFC), which lets chips embedded in plastic cards, smart phones, posters, or other media communicate instantly with other NFC chips within a range of about four inches. That’s why it works so well for in-store mobile payments. And that’s why Apple Pay, as well as Alphabet Inc.’s Android Pay and Samsung Electronics Co. Ltd.’s Samsung Pay, are using it.

“NFC never went away, it just went quiet for a while as the infrastructure was being built,” says Thad Peterson, a senior analyst at the Aite Group in Boston. “In a very short period of time, virtually all the terminals in the U.S. and virtually all the mobile devices are going to be NFC-enabled.”

That infrastructure is being built by the U.S. payments industry’s massive conversion to the EMV chip card standard. EMV has been in the works for several years but took on urgency last year when merchants faced an October deadline for adopting EMV or assuming the liability for counterfeit card transactions.

Along with virtually all EMV chip-reading terminals comes NFC built in. “Eighty percent of what we ship today is NFC-capable, and that will soon reach 100%,” notes Hitesh Anand, vice president of commerce-enablement applications at POS terminal kingpin VeriFone Holdings Inc. “NFC is becoming a stock requirement.”

Wolf in Sheep’s Clothing

But installing NFC-capable devices in stores is one thing. Actually performing transactions with Apple Pay or some other NFC-based mobile wallet is another. That’s because the merchant must first switch on the terminal’s latent NFC capability.

Nobody really knows how many have, according to the terminal makers, because the numbers aren’t reported outside the merchant’s own operations. “It’s hard to say how many have turned on NFC,” admits Greg Burch, vice president of strategic initiatives at Ingenico Group, a French terminal company with major operations in the U.S.

So far, the best estimate indicates the number of switch-ons is fairly low, around 1.5 million locations, according to Phoenix Marketing International, a Rhinebeck, N,Y.-based firm that follows the market. That number includes approximately 500,000 vending machines as well as a portion, maybe one-fifth, of the more than 750,000 store locations that Visa Inc. says have installed EMV.

“What we believe is that there are very large shipments of NFC terminals but there is not a large number turning them on,” says Leon Majors, a senior vice president at Phoenix. “The industry is shipping somewhere around 100,000 NFC devices a month but it’s got to be turned on.”

Activating NFC on new devices isn’t a complex procedure, according to industry experts. It mainly involves downloading an update with new settings that include NFC, according to Ingenico’s Burch. “For larger merchants, there’s a planned rollout, they’ll do it overnight with a memo from management,” he says. “For smaller merchants, it’s an update that happens after a batch settlement one night.”

These days, though, most merchants have several other priorities they’re working through before they get to NFC, or contactless as it is also known. “Number one is PCI compliance,” Burch says, referring to the Payment Card Industry data-security rules. “Number two is EMV compliance. Number three is contactless. If they haven’t turned on NFC, it’s because they’re still working their way through number one and number two.”

Then there’s a base of as many as 600,000 older contactless terminals that run on the mag-stripe protocol rather than EMV, according to Osama Bedier, president of upstart terminal company Poynt Co., Palo Alto, Calif. Retrofitting these devices to accept EMV-based NFC wallets is a more involved, and expensive, chore.

“Somebody has to go out [to the store] and make that update,” says Bedier. “That’s where the cost is involved.”

And at least some larger merchants may be balking at NFC because they fear a wolf in sheep’s clothing. The concern is that the technology could be used later on to usher in payment methods whose cost or other characteristics they may not be able to control, according to Barry McCarthy, an executive vice president at First Data Corp. and head of the processor’s security solutions unit.

“We continue to see adoption of NFC, though there is still significant resistance at major merchants,” he says. “The concern is that, once a merchant accepts NFC, they lose control of the payment type that is going to be distributed over NFC. That’s more than just a technology question, it’s strategic [for these merchants].”

‘Right in Our Wheelhouse’

Still, forces are afoot that should help propel NFC activations. One such trend has to do with moving NFC into the cloud via technology called host card emulation. HCE manages payments credentials in a cloud configuration, which bypasses the so-called secure element in the phone. This chip is usually controlled by mobile carriers or device manufacturers.

In bypassing the secure element, HCE frees up banks and retailers to offer their own wallets. That’s what Austin, Texas-based Mozido LLC, which creates mobile wallets on behalf of such clients, is counting on. Mike Love, Mozido’s president, calls this NFC 2.0 “The old NFC, secure-element based, that pretty much went belly-up,” he says. “We’re positioning ourselves as a global processor, 100% cloud-based. More capability in the cloud is right in our wheelhouse.”

With an eye on that “wheelhouse,” Mozido late in 2014 took a majority interest in CorFire, an Alpharetta, Ga.-based vendor of NFC and trusted-service-manager products and services. CorFire had been a unit of South Korean information-technology provider SK C&C.

On top of that investment, Mozido in February of last year paid $2.5 million for a stake in its Austin neighbor, SimplyTapp, which develops HCE software for NFC transactions.

For now, Apple Pay remains solidly wedded to NFC with a secure element. But another major wallet, Android Pay, is available with HCE, which allows users to configure cloud-based tokens that can control when and where transactions take place, and set dollar limits for each transaction. Observers figure flexibility like that will bring consumer pressure to bear on merchants to adopt NFC.

EMV’s Weakness

Another pressure point has to do with the clunkiness of EMV, which requires consumers to stick their card into a reader and leave it there for several seconds while the reader interacts with the chip. That frustrates both time-pressed consumers accustomed to fast swipes and cost-conscious merchants looking for swift throughput.

A contactless form of EMV is available, but most issuers, looking to get cards out the door to beat the fraud-liability shift, are starting out with contact cards.

For now, EMV is new enough that its pokiness isn’t bothering all that many consumers, says Ingenico’s Burch. Indeed, he says, at least some of these consumers have heard that EMV is safer than mag-stripe transactions and are willing to trade some of their time for better protection.

But he and others expect that to change as more and more locations deploy EMV devices. That may just give NFC activation the big push it needs. “The improved speed of NFC has some appeal [to merchants],” says First Data’s McCarthy. “NFC is much faster than [contact] EMV and even faster than mag stripe.”

That fact will matter more as more consumers walk into stores with mobile wallets. Experts say this could well be commonplace faster than you might think. “We’re reaching a point where there [soon] will be a significant base of folks out there with phones with wallets,” notes Randy Vanderhoof, executive director of the Smart Card Alliance, a Princeton Junction, N.J.-based trade group for companies involved in EMV and related technology.

 

NFC’s 35% Solution

How many point-of-sale terminals have to be enabled for near-field communication (NFC) before the technology becomes a must-have experience for consumers in stores? In the U.S., at least, the answer is 35% of the installed base, according to Osama Bedier, president of Poynt Co., a Palo Alto, Calif.-based startup that started shipping its app-driven Poynt terminal in November.

When slightly more than one-third of the “buying opportunities” become enabled for a particular payment method, Bedier says, that method acquires a semblance of ubiquity, converting the experience from rare and hard-to-find to common and expected. “That’s a lesson I learned at PayPal and at Google,” Bedier says. “That’s where the market starts to carry you.”

Before founding Poynt in 2014, Bedier headed up Google Wallet, the forerunner to Alphabet Inc.’s Android Pay mobile-payments service. Before that, he worked at PayPal for eight years.

Just how close the nation’s terminal base is to that 35% tipping point is hard to say. Visa Inc. revealed in January that 17% of all merchant-facing locations, or about 750,000 shops, had been enabled to accept chip cards, a 42% increase since the EMV rollout started in earnest last October. But no one has a firm fix on how many of these locations have switched on NFC.

Bedier estimates his 35% threshold will be reached when anywhere from 4.5 million to 5 million terminals have been activated for NFC. At the current rate of deployment, that point may be only a year or so away. “In the U.S., [the industry] deploys 3.5 million to 4 million terminals a year,” Bedier says. “We’re going to get to that tipping point fairly quickly.”

Bedier figures most merchants will want to activate the tap-and-pay NFC capability because the so-called contact EMV card experience, where the consumer inserts a card into a chip reader and waits several seconds for the reader to interact with the chip, will annoy more and more cardholders and merchants as the EMV rollout covers more locations.

“EMV is a horrible experience, and in the U.S. we’re the worst when it comes to patience,” Bedier says. “NFC is the light at the end of the tunnel. That’s why it’s getting propagated by default whether the merchant wants it or not.”

It’s hard to say whether Bedier will be proven right. On the one hand, new wallets like Apple Pay, which relies on NFC, have won adoption at many major chains. On the other hand, the 40 or so big merchants that back the Merchant Customer Exchange LLC consortium and its CurrentC wallet have pointedly eschewed NFC in favor of barcode technology. One MCX merchant, Wal-Mart Stores Inc., in December announced Walmart Pay, a new wallet that will also use barcode technology.

And so far consumers don’t appear to be all that much bothered by the extra time EMV takes at checkout, though that could change as the EMV rollout progresses and as contactless versions of the chip cards start to become available.