Near Field Communication (NFC) is steadily making headway in the U.S. for sharing data and music among smartphones, but the technology faces years of slow growth as a replacement for physical wallets.
NFC will take a minimum of three more years to grab hold as a technology that enables so-called mobile wallets as a replacement for credit cards and cash in the U.S., according to a consensus of five analysts. And by "grab hold," these analysts mean being used by only 10% of mobile phone users to make digital purchases.
Gartner analyst Avivah Litan predicts that NFC payments will hit the 10% threshold in 2015, compared to the process of SMS (texting) payments that is expected to represent 50% of mobile payment volume globally in that same year. "We're still on the edge when it comes to NFC innovation," Litan says. "It will take a decade before it's mainstream across the globe."
(For an explanation of how NFC works, a short history of the technology and some information about alternatives in the U.S., see "A short history of NFC.")
iPhone 5 and the decision to omit NFC
Dozens of new smartphones that run Android, BlackBerry and Windows, and that include an NFC chip, launched last year. But Apple notably did not put NFC in its new iPhone 5 when the phone launched in September. That move "surely had a significant detrimental impact on industry adoption of NFC," Litan says, given Apple's influence in the mobile market.
Some NFC predictions
- Juniper Research: Global NFC mobile payment transactions will be almost $50 billion worldwide by 2014. Some 20 countries are expected to launch NFC services in the next 18 months. (Prediction made in June 2011.)
- Yankee Group: The 7 million NFC-enabled phones in 2011 will grow to 203 million in 2015. (June 2011)
- IE Market Research: NFC will constitute around a third of all global mobile payments -- estimated at $1.13 trillion -- in 2014. (July 2010)
- Frost & Sullivan: 863 million units, or 53% of new handsets, will be NFC-enabled in 2015. The total payment value for NFC globally will exceed 110 billion euros (around $145 billion) in 2015. (February 2011)
- Celent: There will be 169 million users of mobile contactless payment in China in 2013, making China the largest mobile-payments market in the world. (November 2010)
- IDC: Worldwide mobile payments via NFC are projected to grow from $600 million in 2012 to $273 billion in 2017.
- Juniper Research: Almost 300 million, or 1 in 5, smartphones worldwide will be NFC-enabled by 2014. (April 2011)
Apple justified the move by saying that consumers already could use its Passbook app, which shows barcodes on the display, instead of NFC. The barcodes contain information that can be scanned by optical readers to let users board planes and redeem movie tickets -- tasks that Apple notes are "the kinds of things consumers need today."
In other words, Apple implies, customers don't need or want an NFC smartphone for making credit card transactions -- yet. Barcode scanning is used by Starbucks nationwide -- and has been more recently adopted by Dunkin' Donuts -- to subtract dollars from a virtual card on a smartphone that was previously loaded with cash.
Starbucks has described its barcode approach as a success; as of December 2011, the company reported over 26 million mobile payments. The company cites the relative shortage of NFC-ready smartphones and NFC terminals compared with the abundance of optical scanners on terminals. Starbucks even integrates its digital payment cards with Apple's Passbook and invested $25 million in Square, a different smartphone payment application.
Some have criticized Apple for omitting NFC from the iPhone 5, which has led to a widespread reassessment of NFC's immediate future, especially in the U.S.
Still, nearly all analysts predict Apple will eventually include NFC in the iPhone 6 or beyond, noting that Apple is steadily acquiring technologies to do so, including a fingerprint and NFC identity recognition system from Authentec.
But even if Apple moves ahead on NFC in the next iPhone, its omission from the iPhone 5 has already delayed NFC adoption for at least another year, observers agree. And in the meantime, Rick Oglesby, an analyst with Aite Group, warns that while NFC can offer a superior user experience over barcode scanning, "that doesn't mean NFC is going to be the definitive winner. It's very possible that the situation could turn into a VHS vs. Beta thing, where barcodes are faster to market, become second nature to consumers and therefore consumers never move to NFC." He nonetheless believes NFC will become mainstream at some point.
This fall, Samsung took advantage of iPhone 5's omission of NFC, running TV ads to pitch the other big value of NFC: sharing data such as music, video and social networking information from one NFC-ready Samsung Galaxy S III smartphone to another. The ads show two people touching phones together, but don't specify how long it takes to transfer a large file (several seconds, depending on the file size). Nor do the Samsung ads note that the Android Beam application (called S Beam in Samsung phones, with added enhancements) that makes the transfer possible actually uses NFC to kick off a Bluetooth wireless transfer of the data.
A demonstration of the Google Wallet application during the company's press conference in May 2011. Credit: Shannon Stapleton / Reuters
Some online forums include comments by Android smartphone users that complain about confusion over how to use Android Beam and the NFC-related data transfer. Overall, it is difficult to know how often or widely Android Beam is used successfully, analysts note.
Google did recently reveal a tiny bit of insight about how well its Google Wallet cloud-based app, introduced in September 2011 on its Nexus S smartphone, has done. A Google official in October said that NFC transactions doubled in the first six weeks after the Aug. 1 launch of the app, which now runs on more than 10 different smartphone models.
Still, that Google official, Osama Bedier, said at the time that NFC is a "three-to-five-year game."
Why NFC has been slow to catch on for payments
NFC needs to be rolled out on more smartphones and installed in more payment terminals to catch on in the U.S., analysts and vendors agree, but public acceptance is probably NFC's biggest obstacle.
While Juniper Research and others put the percentage of smartphones containing NFC chips at 20% in 2014, the number of NFC-ready payment terminals that can communicate with NFC phones is still a tiny percentage of the total. Aite Group estimates that only 2% of merchants globally have NFC reader terminals, with even fewer in the U.S., the probable reason why Apple skipped putting NFC in the iPhone 5.
In addition to the sheer number of smartphones and terminals on NFC, the growth of NFC for payments is complicated by the jockeying of competing groups in banking, merchandising and wireless networking.
"The mobile payments ecosystem is extremely fragmented," observes Bob Egan, an analyst at The Sepharim Group. "Even Apple can't figure out how to control the ecosystem to maximize profits. There are lots of players and lots of ways to do it."
An even trickier question for credit card companies, banks and merchants is how to make consumers want to use a smartphone to make a payment when debit cards, credit cards and cash -- and even paper checks -- are so widely used already.
"There's a pretty significant behavior change that must take place to get people to pull out their phones versus plastic or cash," says Egan. "To make this really convenient for consumers, the technology has to be absolutely hidden from consumers, and the industry hasn't hit that technology point yet."
Using the Google Wallet smartphone app or the Isis Mobile Wallet by the Isis consortium of three wireless carriers is fairly simple. Nevertheless, a large number of customers still needs to be convinced that the technology is reliable, easy to use and secure, Egan argues. Google Wallet requires loading the app and activating it for each purchase by making a close swipe of the smartphone at an NFC reader in a retail establishment, followed by a PIN authorization.
There's also the embarrassment factor facing users -- not a trivial concern. "If you use the NFC phone and there are people behind you, the last thing you want is holding up the line," Egan adds. "Nobody wants to be embarrassed" about not knowing how to handle NFC apps correctly.
Google and Isis, among others, are still in the midst of making sure the technology works reliably for consumers of all skill levels. To succeed, an NFC payment must be simpler and more reliable than swiping a card and signing for a credit purchase or typing in a PIN for a debit purchase.
Where NFC may work best
Some NFC backers note that the smartphone technology has been used reliably in Japan and South Korea, mostly for smaller purchases and transit rides, but they also caution that it took nearly a decade from market introduction to its current level of acceptance. In comparison, NFC in smartphones has been available in the U.S. for barely more than a year.
Non-payment applications for NFC are gaining steam, including for Android Beam data sharing, social networking and physical access to doorways, as a replacement for proximity cards and access cards carried by workers. Samsung and other vendors are also hoping that more NFC tags (small NFC chips that can be attached to signs to transfer information) get used by consumers, and by kiosks and billboards as a quick way to get information on products and services -- replacing the QR codes that are becoming commonplace in many public places.
Time cards will go away as people punch the clock with their phones. Dion Hinchcliffe, chief strategy officer, Dachis Group
Some workplace applications for NFC are especially promising, notes Dion Hinchcliffe, chief strategy officer at Dachis Group, a social marketing software provider. "Time cards will go away as people punch the clock with their phones," Hinchcliffe says. Workers can already exchange contact information via NFC on their phones, although sometimes the set-up to do so is seen as too complex.
"Corporate ID badges will become superfluous," Hinchcliffe believes. "NFC makes it possible to just grant access to smart devices instead of issuing, tracking and updating physical badges. If a phone is lost, unlike a badge, it can be wiped, eliminating it from being used for access ever again."
Some typical consumer examples are already emerging, including using an NFC-ready smartphone to enter a car or a house, and to launch specific apps on a car's dashboard, such as the radio, notes Jack Gold, an analyst at J. Gold Associates.
"NFC offers a great deal more capability than optical scanning can, and NFC will evolve beyond the limited capabilities it currently has," Gold expects. Putting an NFC chip in a phone is already relatively cheap, adding $2 or less to the cost of materials for a vendor. This will soon be reduced to virtually no cost when embedded with other wireless radio chips in a phone, he predicts.
"We are just seeing the first stages of NFC," Gold says.
Next:A short history of NFC.
Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen, or subscribe to Matt's RSS feed . His e-mail address is [email protected].
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