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3 Reasons Why NFC-based Payment is Overhyped

By Martin Schuppelius
The official NFC-Logo

Without a doubt, there is a huge buzz around NFC in the mobile commerce ecosystem these days. Near Field Communication (NFC) is a standard for transferring information between two devices via radio communication at a very short range. The technology can be used for a wide range of services; one of the most talked about applications is mobile payment. NFC-based contactless payments are expected to supplement or even replace existing payment methods.

How NFC works (graphic by G+)

Today, NFC-based payment is still far from being mainstream and there is reason to believe that NFC will not be successful in the near future. Here is why:

Lack of adoption

The biggest problem of NFC is the low penetration rate of NFC-enabled devices and POS (point of sale) terminals. On the one hand, only very few consumers already own a NFC-enabled device and only a minority of new devices will support NFC. On the other hand, merchants need a motive for investing into new technology and replacing their existing POS systems. It’s a chicken-and-egg dilemma. Most of the new POS terminals can be upgraded to support NFC or to include NFC. But still, merchants (especially smaller ones) won’t invest into a technology their customers can’t use.

Security issues

Security is certainly one of the most important topics when it comes to payments. NFC as contactless transaction technology has to be proven to be secure before customers will adopt it for payments. NFC is just an extra layer to existing payment methods that adds possible security issues. Just recently two major security issues have been revealed that certainly will not help to increase the trust in NFC-based payment services:

Business case

It is important to keep in mind that NFC is just a technology, not a payment method. Adding NFC as contactless transmission technology does not automatically create additional value for customers or merchants. Companies have to invest in a NFC-payment ecosystem (POS terminals, end-user devices, software, fraud detection, customer service) to break the chicken-and-egg dilemma. Firms that have created an NFC ecosystem will then try to keep their “chickens” and protect their business case. The problem is that there are different solutions how to build this NFC ecosystem that are not necessarily compatible with each other. There is a high risk that different incompatible solutions arise that each will not reach the critical user base.

NFC is certainly a powerful technology for mobile payments. There are some promising trials and solutions that create value like for example Google Wallet that combines NFC payments and couponing. This makes it attractive to customers because they don’t have to carry their coupons and loyalty cards anymore.

For NFC payments be successful the obstacles described above have to be solved. In theory NFC solutions could break through immediately as the technology is available. In practice this will not happen in the near future, certainly not in the next two years.

One Response to “3 Reasons Why NFC-based Payment is Overhyped”

  1. Sundancer380

    Why would these companies wait till NFC devices are ready? I have a patent pending process that will allow any smart phone owner to perform a financial or non financial transaction with any vendor that has a barcode scanner connected to their POS system. I am confident this is more secure than having an NFC device that restricts the user to a specific financial institution, credit or debit card, and phone. With a system like mine the retailer will not be restricted to a specific financial institution and the owner of the smart phone can use any existing credit or debit card they currently have. I can’t provide more details at this time, but I find it interesting that the same old issue seems to be holding back this whole concept. The banks and the Google’s of the world are trying to control the transactions of the individuals that are buying the products and paying the bills.