Five Key Hurdles Before NFC Goes Mainstream
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the future, Near Field Communications (NFC) may be part of our lives in a big way. It has the potential to change our lives by making shopping, public transportation, sharing data, and overall life more convenient.
It can act as a gateway to the future by officially placing the smartphone at the center of our daily lives. No more IDs, credit cards, bus tickets, boarding passes, car keys, house keys, or employee passwords. Advertising will become more personal and targeted. Imagine walking around, activating your shopping app, and having nearby promotions sent directly to your smartphone.
Players like Google (NASDAQ: GOOG) are betting big on the future of NFC. Offline localized shopping experiences are a big prospect for them; it’s the how behind Project Glass’s profitability. Before this great leap in convenience reaches mainstream, there are hurdles for the industry to overcome. Below I’ve laid out five key hurdles that NFC has to overcome before it’s welcomed.
NFC is inherently secure because it only works when two devices are within a few centimeters of each other. It would be quite obvious if there was a third device in between you and the trusted recipient. This doesn’t rule out what is known as a man-in-the-middle attack where both parties believe they are on a secure line, yet a rogue third-party is busy intercepting information. It would likely be facilitated by delivering some sort of virus either to the smartphone or the terminal. A physical device that is added to the terminal could also be utilized, much like the way ATM skimmers make their living.
As a merchant, figuring out which platform to adopt is difficult because there is no clearly established leader. The market is very fragmented with Visa (NYSE: V), MasterCard (NYSE: MA), and Google all offering wallet solutions, and each work with specific payment infrastructure. The merchant must also make an investment in hardware to be installed at checkout bays. For a merchant that wants to adopt this technology, VeriFone (NYSE: PAY) has defined itself as the one-stop shop. All of their new point-of-sale terminals come with NFC compatibility as a standard feature, and it works with all apps, platforms, and digital wallets. It’s a gamble for merchants to upgrade their systems before natural cycles because NFC is not greatly in demand by consumers yet.
Lack of Understanding
When I first learned about NFC, I began to question why NFC over Bluetooth? Nearly all modern smartphones already carry the capacity to transmit data wirelessly. Not to mention we are already familiar with Bluetooth. Well, there are a number of reasons. Here are the top four:
- Less power. Overall, NFC uses less power versus Bluetooth.
- Less interference. The closer proximity required for NFC lowers the chance of interference.
- Easier to use. No manual setup is required like Bluetooth to connect devices.
- Near instantaneous connection. NFC connects within a fraction of a second where Bluetooth takes several. This reduces checkout times, saving big money to companies with large retail footprints.
NFC marketers need to better educate users of the differences between the two. Otherwise consumers may fail to see the added benefit of this technology.
As easy and intuitive technology is for some, for others new technology is downright scary. Paying for something by “tapping” your phone to a payment terminal may prove difficult for the less tech inclined. A lot can go wrong from the time you pull out your phone, unlock it, pull up the app, pick the right credit card, tap to pay, and wait for the confirmation by staring intensely at your phone. How long do you stare before it’s awkward? At what point do you start getting nervous if the payment was accepted? Call me old fashioned, but for the less techie, it seems easier to just pull out your wallet, hand the cashier a card and sign. It’s three steps and it’s proven.
As the use of smartphones expands in more areas of our everyday lives, it’s their batteries that cry uncle. This direct correlation increases the chances that our “wallets” may run out of batteries. Until we get some seriously improved battery life, consumers aren’t likely to feel secure enough to leave their physical wallets at home.
Investing Ahead of the Curve
One of my investment philosophies is finding the “pickaxes” during a gold rush trend. In the case of NFC and where to invest, there are two prominent companies to benefit. The first is VeriFone, which sells the NFC terminals for all apps, platforms, and digital wallets. Sentiment is weak right now because Square has been cutting into their turf with a big contract win with Starbucks. VeriFone commands over 70 percent of the retail market and Starbucks wasn’t even one of their customers.
Shares are well off their highs, providing a great entry for those investors taking a long-term view. In the last 5 years, annualized growth rates are as followed: revenues +17.5%, earnings +27.6%, and cash flow +34.9%. For a company currently trading at 16 times trailing earnings and 13 times forward earnings, shares offer a great value compared to historical growth.
The second company is NXP Semiconductors (NASDAQ: NXPI), based out of the Netherlands. They are a leading manufacturer of NFC smartphone chips, and essentially the only standalone way to capture NFC growth in smartphones. Out of the last four years, they only profited one year, perhaps because NFC is the tail that wags the dog. This company is not as financially proven as VeriFone. In that lack of track record comes much greater share potential. If NFC smartphones become an explosive must-have feature, this small $5 billion company has a lot of room to grow. One hundred million NFC-enabled smartphones are estimated to ship this year.
The question isn’t whether NFC technology has the potential to make the lives of smartphone aficionados more convenient. It certainly does. It’s more a question of when, or, if this is the next evolution in consumer behavior. The hurdles it has to overcome are certainly challenging, but far from impossible. Those who believe NFC is here to stay can position their portfolios ahead of the coming. Until this time comes, carrying around a wallet isn’t that terrible – unless your name is George Costanza. And when was the last time your wallet broke after you dropped it?
TopDownTrends has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, MasterCard, and VeriFone Holdings. Motley Fool newsletter services recommend Google, NXP Semiconductors , and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.