Introduction

Near Field Communication (NFC) has long been hailed as the future of mobile payments. Despite its potential, NFC has yet to break through as a mainstream technology in many regions, including the U.S. This article will explore why NFC remains in a state of 'purgatory,' and what we can do to change this.

The Current State of NFC

As a wireless standard, NFC is similar to Bluetooth and WiFi, serving as a radio signal rather than a payment technology in its own right. Its security was traditionally tied to the SIM card in the phone, which meant it was under carrier control. This arrangement was not ideal for banks, as it abstracted ownership to the carriers. As a result, NFC has existed in a limbo, unable to fully realize its potential as a mobile payment solution.

The Host Card Emulation (HCE) Solution

The Host Card Emulation (HCE) technology represents a significant advancement for NFC in mobile payments. HCE provides a standards-based method for storing encryption keys and tokens on the phone, thus allowing banks and wallet providers to develop without being tied to the SIM. This development has the potential to make NFC a more attractive and secure option for both consumers and merchants.

Merchant Value Proposition

When considering the merchant perspective, the fear of network involvement extends to concerns about the potential impact on payment categories and fees. There is a prevalent belief that mobile contact-less payments could be categorized as a "Card Present Plus" service, leading to higher fees. However, as networks have not indicated any such plans, this fear is largely unsubstantiated. Nevertheless, merchants might still reject NFC due to the perceived entrenchment of networks in the payments value-chain.

Theoretical Concerns and Practical Issues

Some merchants view NFC as a Trojan, entrenching the network's role in the payments value-chain for the long term. These fears, coupled with a mistrust pervasive in the ecosystem, make it challenging for NFC to gain widespread adoption. Additionally, the complexity of current NFC systems, including costly provisioning procedures and a nine-party network (two TSMs included), adds to the reluctance of merchants to embrace NFC.

However, with the advent of Host Card Emulation (HCE), these negatives are now gone. HCE allows for more secure and efficient deployment of NFC in a way that does not tie it to the SIM. This represents a significant step forward in making NFC a viable and attractive proposition for merchants. Nevertheless, the fear factor is still amplified in the digital age, highlighting the need for clearer communication and education within the ecosystem.

Global Examples: Japan and the United States

While Japan has been a bastion of NFC adoption, with a dense population and widespread public transportation systems, the U.S. has lagged behind. As of now, only about 500,000 NFC units are installed across the entire country. Consumers in the U.S. are still grappling with security concerns, and there is a lot of confusion regarding fees and their impact on the convenience and cost of transactions.

Moreover, the concern of seeing price increases for a premium payment service, despite the convenience, is a significant deterrent for both customers and retailers. The complex fee structure involving banks, technology companies (like Apple and Samsung), and cell phone carriers further adds to the confusion and hesitation.

The Future of NFC

Given the current state and challenges, it is clear that NFC still has a way to go to become a mainstream mobile payment technology in the United States. However, the landscape is evolving, and significant changes may be on the horizon. The adoption of HCE represents a crucial step in simplifying both the technical and ethical concerns surrounding NFC. By addressing these challenges and providing clear communication, we can make NFC a more attractive and secure option for consumers and merchants alike.

While 2012-2013 saw a shift in payment methods in Japan, it is likely that similar changes will be observed in the U.S. in the near future. The key to achieving widespread adoption lies in overcoming fears, providing clear and consistent communication, and addressing the practical and theoretical concerns that currently hinder the technology's growth.