Near-Field Communication was dead until resucitation from Apple pay

Not more than two years ago many in the payments industry declared NFC dead. Then Apple Pay came along, which resulted in the resuscitation of NFC!

A set of protocols that enables smartphones and other devices to transfer bytes via radio communication, Near-Field Communication (NFC) was designed to work in three modes:

1. NFC reader/writer mode: NFC-enabled devices read information stored on NFC tags embedded in labels or smart posters. This mode offers numerous applications spanning from hotel keys to park tickets, plane tickets to advertising. Imagine how simpler it is to just holding your phone close to an ad or a poster compared to the rather clumsy QR code scanning procedure (for which you need to have a barcode scanning app, have enough light to scan, and capture the QR Code properly).
2. NFC peer-to-peer mode: NFC-enabled devices communicate with each other to exchange data and information such as pictures, videos, virtual business cards and more. Because the same format is used for both tag reading/writing and peer-to-peer, information collected from an NFC tag can also be exchanged with other NFC phones. A coupon, special offer, or links to promotional trailers, games or other marketing material stored on a smart poster could be passed virally from one consumer to another by simply bumping their two phones together.
3. NFC card emulation mode: NFC-enabled devices such as smartphones act like smart cards, allowing users to perform transactions such as payment or ticketing using their mobiles in place of credit cards, debit cards, transit cards, access cards and so on.

Despite the many examples of consumer and industrial applications, NFC struggled for many years to find any that was sexy and practical enough to make it widely adopted. In June 2013, the peer-to-peer mode reached what I think was the pinnacle of its endeavour to find a valid consumer application: Apple aroused the WWDC audience’s hilarity while showcasing a new iOS 7 feature that did the job of NFC without any of the clumsiness of NFC – bumping phones to exchange data.

The other mode for which many considered NFC dead was the card emulation one. Although the NFC standard was jointly defined in 2004 by phone manufacturers, card schemes, some of the largest banks, payment services and telecommunication companies in the USA, the industry waited till May 2011 to see the first large scale NFC enabled payment application: Google Wallet. But it was still too early…

First mover vs. Seamless execution follower

Only in October 2014, 10 years after the NFC standard was defined, the payments industry welcomed Apple Pay and NFC regained popularity.

In the pursuit of a neat follower strategy, Apple delayed the release of its NFC enabled phone till they thought the US market was ready, there were enough NFC enabled Point-of-Sale terminals, and smartphone users were sufficiently savvy and comfortable to trust their mobiles for payments. Apple also capitalized on the big learnings from the initial struggles of the likes of Google Wallet and SoftCard, and improved the overall value proposition by focusing on what Apple does best: the customer experience.

Apple removed the Google-self-imposed limitation of being tied up to one bank only (Citibank) and one scheme only (MasterCard), and offered the biometric authentication as an additional checkout option. These two enhancements alone greatly improved the customer experience by:

• Allowing cardholders to draw funds directly from almost any credit card, without the need to regularly top up their Google Wallet account to get discounts only available at Citibank and MasterCard’s merchant partners and to Citibank and MasterCard’s cardholders; and
• Letting cardholders pay in a faster, easier, safer and even cooler way.

Benefits to the ecosystem, not only to Apple

Apple Pay educated the market almost overnight and restored shine on NFC as enabler of great benefits for the entire payments ecosystem:

• Banks: Expanded acceptance in more merchant categories, new revenue streams (albeit the 15bps they need to pay Apple), maybe longer-lasting customer stickiness, and more customers’ behavioural data;
• Schemes: Improved acceptance in low ticket value transactions, usually being paid cash, thanks to Apple’s strategy to work with the schemes rather than disintermediating them;
• POS manufacturers: Increased revenue by upgrading existing terminals to contactless ones, both traditional and mobile (mPOS);
• Payment Solution Providers: Increased revenue from more solutions to launch, upgrade, deploy on behalf of their clients;
• Consumers: Improved convenience, security and speed at checkout, coupled with that sense of coolness that the user experience is designed to deliver;
• Merchants: Increased cost savings generated by faster checkouts and shorter lines, and reduced cash to handle, process, reconcile and deposit;
• Governments: Expected increased speed at which consumers will drive away from expensive cash transactions to cheaper electronic ones.

A long journey ahead

Although NFC has gained tremendous coverage in the news and got traction in a new promising payments consumer application, it is far from becoming mainstream. Besides considerations related to the iPhone’s 6 penetration in a market, a proxy to measure the actual size of the NFC opportunity, I’d look at this from three angles: