Now for Commerce: PayPal Embraces NFC

After long belittling near-field communication technology by joking that its acronym, NFC, stands for “Not for Commerce,” PayPal Inc. before the end of the year will launch a new version of its mobile wallet featuring, yes, NFC.

PayPal, which has been working with NFC in Australia, will replace its current digital wallet, an app that has been in the market for about 20 months and that has become one of the most popular.

“We’re bringing the NFC application from Australia later this year,” Brad Brodigan, vice president and general manager for retail at San Jose, Calif.-based PayPal, tells Digital Transactions. “We’re really focused on NFC.” PayPal also plans to introduce a card with an NFC chip later in the year.

PayPal’s current mobile app works as a native app as well as a payment application within other apps, such as the popular Uber car service. The company also allows users to pay at the point of sale by entering a PIN and a mobile number on a terminal at an undisclosed number of locations. Brodigan says this method does not account for a substantial number of transactions.

E-commerce kingpin PayPal clearly hopes NFC, which enables contactless transactions at enabled POS terminals, will breathe new life into its effort to penetrate the physical point of sale, a strategy that began unfolding in 2012 but has sputtered since then.

“The last three years has been a lot of testing and learning,” Brodigan said during a presentation delivered early last month at the Electronic Transactions Association’s Transact 15 payments-technology conference in San Francisco. “Our path forward is clear. Offline for us is mission critical.”

NFC’s value for PayPal lies in its ability to complement payments with offers and loyalty programs while drastically reducing transaction time. This appeals to consumers so strongly that the “tap-and-go” method becomes “habitual” for them, Brodigan told the audience at the conference.

Brodigan told Digital Transactions the new NFC-based app will cut anywhere from one to four steps out of the current app’s transaction process, smoothing out the user experience.

But enabling NFC broadly at merchants requires working closely with acquirers. PayPal has been making arrangements with independent sales organizations and merchant processors for several years, and now has deals with more than 60.

This number, however, omits one huge, and hugely critical, processor: First Data Corp., which in 2013 told acquirers it would block PayPal transactions at physical merchants after PayPal arranged to route new card-based payments on Discover Financial Services’ network.

Still, PayPal’s decision to adopt NFC represents a dramatic turnaround. It comes years after John Donahoe, chief executive of PayPal’s parent company, eBay Inc., famously dismissed it with the “Not for Commerce” jibe.

However, by last fall Donohoe’s assessment had changed dramatically. In an October earnings call, he predicted NFC would achieve “widespread adoption” in the U.S. within one to three years, faster than a former three-to-five year projection. EBay plans to spin off PayPal as an independent company later this year.

PayPal’s mobile wallet has enjoyed wide adoption. In 2014, its mobile volume climbed 70%, from $27 billion to $46 billion, partly on the strength of strong showings by its Braintree and Venmo mobile applications.

For all of last year, mobile accounted for one-fifth of PayPal’s dollar volume. “PayPal is the number-one most recognized and used digital wallet,” Brodigan boasted.

But PayPal and others face stiff competition from Apple Inc.’s Apple Pay wallet, which after more than six months in the market is proving popular with iPhone users and also relies on NFC.

And this summer major merchants belonging to the fledgling Merchant Customer Exchange are expected to launch a mobile effort called CurrentC, which will feature loyalty and rewards alongside payments.

Brodigan says that PayPal won’t rely on NFC alone. It will also support quick-response (QR) codes, for example. In March, PayPal agreed to buy QR-based mobile-payments specialist Paydiant Inc., though it remains unclear how Paydiant will play a role in PayPal’s new mobile strategy.

—John Stewart