NFC Payments: History as Our Guide
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
NFC (near field communication) is a technology that allows cellphones and other devices to communicate with each other wirelessly. There has been a lot of hype about the future of this technology as a contactless system for mobile payments. NFC prognosticators talk about the benefits for consumers and retailers, as well as the potentially-huge investment opportunities for payment service providers, wireless carriers and hardware manufactures. That sounds great, if it can happen as planned.
Apple’s Challenge to Everyone
Apple seems to have a different take on the future of NFC. Quoted in an interview after last week’s iPhone 5 announcement, Apple’s Senior Vice President defended their exclusion of NFC functionality by saying “It is not clear that NFC is a solution to any current problem.” While I believe that Apple will eventually jump into the NFC-game as early as next year, Mr. Schiller does present an interesting argument: does NFC actually solve any current problem? And if it does not solve any current problem, is the future of this technology really as bright as its prognosticators believe?
While we cannot know for sure about NFC’s fate until major attempts at wide scale implementation are made, we can look to history for clues. One of the companies thought to be a big beneficiary of NFC-implementation is VeriFone (NYSE: PAY). VeriFone hopes to cash in by convincing retailers around the world to purchase new point-of-same payment terminals with NFC functionality built-in (convincing those retailers to purchase new terminals far sooner than they normally would need to). This is not VeriFone’s first attempt at a forced upgrade march of contactless payment terminals, however. VeriFone tried a similar strategy with another contactless payment system.
An older technological-cousin to NFC, radio-frequency identification (RFID), is another form of wireless communication. RFID was also a promising payment technology, with several attempts at implementing it in the United States. Many of the same companies involved at NFC today were involved in RFID back in the day.
In the late 1990s, VeriFone was one of the companies involved in the first major attempt at RFID payments. VeriFone was the creators of the Speedpass system employed by Exxon (and later by McDonald’s for a short spell). The gas station payment system once had far grander aspirations. Once envisioned as a mainstream payment processing system to compete with the likes of MasterCard (NYSE: MA) and Visa (NYSE: V), plans for Speedpass called for it to be used by all manner of retail across the country. Today it is relegated to its current form as a gas station payment system, regarded as a failure in its originally lofty goals.
Speedpass would not be the only attempt at RFID payments in the United States. The previously mentioned MasterCard and Visa had their respective goes at RFID payments as well. For MasterCard it was their PayPass. For Visa it was their payWave. Each of these systems also called for the use of VeriFone’s payment terminals to help build-out the payment infrastructure. While both systems were many times more successful than Exxon’s Speedpass and are still used today for their intended purpose, neither payment service giants could make RFID payments a mainstream payment technology in the United States. The technology was there, but the consumers and retailers were not.
Fool Me Once…
Each of these companies, at the top of their respective industries, were unable to successfully make RFID a mainstream payment system in the United States. If VeriFone, MasterCard, and Visa (as well as Exxon) were unable to do it once before, why are NFC prognosticators so sure that these companies will be able to actually do it this time? Were RFID payments just too far ahead of its time? Were customers not ready for the technological jump? Have these companies learned from their past mistakes? What exactly would it take to make such a contactless payment system work in the United States?
While American consumers and businesses were less than thrilled about RFID as a payment technology, across the Pacific-pond is Japan, a country that has whole-heartedly embraced RFID as a mainstream payment system. It is fairly common for Japanese consumers to have a RFID payment card in their wallets or to have a cellphone with RFID functionality built-in the device. It is also very common for retailers to have compatibly payment terminals in their business establishments. And even more importantly, it is fairly common for Japanese consumers to actually use RFID payments at retailers as an everyday payment option. What makes Japan so different from America in this regard? Why have the Japanese embraced RFID as a payment system, whereas Americans have basically ignored the technology (despite the best efforts by our best and brightest US companies)?
Japanese consumers are often known as early adopters of new technology. Not just consumers, but also tech companies that sell products to those early adopting consumers. Before American companies came to dominate the smartphone space, Japanese companies were the ones innovating and moving the industry forward. And long before American consumers even knew what 3G phone service was, Japan’s wireless carriers were the first in the world to transition to 3G cell service. While American companies have literally had to pay customers to use the payment technology, transitioning relatively easily to the next major technology is a prevailing theme of Japanese consumer culture.
Despite being early adopters of technology, the same could not be said about payment services in the past. Seemingly contradictory for a technology-driven country, cash is still king in Japan. Japan is becoming less of a cash society with each passing year, but there are still many aspects of society that primarily deal in cash. This, in my opinion, is what made Japan so receptive to RFID as a payment system. Somewhat similar to how some emerging market countries skipped right over wired phone service infrastructure and went straight to wireless phone service, Japan has essentially skipped over traditional credit and debit cards and moved right to RFID payments. The same cannot be said of the United States, where even children have Visa debit cards in their wallets.
More similar to a rechargeable prepaid debit card than a traditional MasterCard or Visa credit card, RFID payments in Japan come with the added benefit of not requiring a bank or credit card account. Some RFID cards can be linked to a bank or credit card account if the user wishes, but many RFID cards can simply be obtained at a convenience store or a train station card-kiosk without an application process or credit check and are reloaded with money just as easily. This way the under-banked and those without access to credit have no issues obtaining and using any of the RFID services offered in Japan.
Over in the United States, payment service providers, wireless carriers, hardware manufacturers and retailers are still battling it out to see which NFC service will dominate and who will be in control of that service. MasterCard, Visa and the other traditional credit card service providers find themselves being threatened by eBay’s PayPal, Google’s Google Wallet and other internet-based companies. VeriFone is also finding surprising competition with the young upstart Square in the payment hardware space, as well as the recently announced entry of Groupon to the space. Not to be left out of all the fun, the US wireless carriers are also drawing-up their own battle-lines in the fight to control NFC.
Japan, on the other hand, solved that problem years ago. Back in 2006, Japan’s four largest electronic payment service providers agreed on a common standard for RFID reader/writer terminals. Somewhat similar to what VeriFone hopes to do United States with their NFC point-of-sale NFC payment terminals, Sony Corporation’s FeliCa platform was chosen by the four providers and it is this platform that makes up nearly the entirety of Japan’s RFID infrastructure. Japan's payment service spans from providers, to payment terminal hardware manufacturers, wireless phone makers and wireless carriers; all working under the same standards.
Much more so than the United States, Japan is reliant on its public transportation system. RFID’s popularity was born out of that reliance. One of the first mainstream uses for RFID payments was for train, subway, and bus passes. Known for its crowded train stations, Japan’s passenger railway companies introduced RFID train passes to significantly cut down on boarding times. Instead crowding around an automated ticket terminal to pay for train-fare, only to later crowd around an automated ticket gate to use that ticket, a quick wave of a RFID train pass or an RFID-enabled cellphone has train commuters passing through gates in no time at all.
RFID began its popularity as a public transportation payment system, but it would not be limited to that. Seeing the benefit of accepting the public transportation RFID cards as a payment type, retailers operating inside of these train and subway stations were among the first RFID retailers. From there it spread to retailers located nearby those stations. The convenience store operators, as one of the main shopping destinations in Japan, became big players in RFID payments, taking various systems nationwide (some even introducing their own very popular RFID payment systems).
Acceptance of RFID now includes shopping centers, department stores, grocery stores, hotels, fast food, casual-dining restaurants, pharmacies, consumer electronics stores and vending machines. RFID cards are even accepted as payment options by online retailers, like Amazon in Japan, through the use of a RFID card reader that plugs into a computer’s USB port. Many laptops sold in Japan today even have RFID readers built directly into the laptop. This retail infrastructure and at-home convenience provide another aspect that is currently lacking in America.
Solutions to American Problems?
While specific problems were addressed and solved by RFID payments in Japan, the same cannot be said about NFC in America. As Apple has inadvertently challenged companies to justify the case for NFC, it is incumbent on the industry players to make their case to consumers and retailers alike. While Apple will likely implement NFC in its iPhone 6 in 2013 despite its comments last week, in itself will not make or break NFC. As shown by previous attempts in the United States, technology alone without a purpose is no guarantee of success. It is important to remember our history, before getting too worked up about our possible future.
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