What the iPhone 5 means for NFC-based mobile payments

Apple’s decision to omit NFC in the iPhone is sure to slow adoption of the technology by consumers, retailers and mobile marketers, as my colleague Ryan Kim wrote last week. Instead of giving the emerging technology a much-needed kick in the pants at a crucial time, it means that iPhone owners won’t be able to use NFC-based payments services and marketing campaigns for at least another year (until an updated iPhone comes to market). And that could have major repercussions for all those companies hoping to cash in on mobile payments.

While NFC-powered payments have been dreadfully slow to gain steam in the U.S. primarily due to a lack of penetration of both NFC-enabled handsets and NFC readers at the retail counter. Those hurdles are finally being overcome, however: Shipments of NFC-ready point-of-sale terminals will increase at a compound annual growth rate of nearly 50 percent over the next five years, according to Berg Insight. And while only 5 percent of all mobile shipments were NFC-enabled in 2011, MarketResearch.com predicts that number will rise to 46 percent by 2016.

Other technologies, other solutions

While that foundation is being laid, though, other services using and more common technologies are actually gaining momentum. Perhaps the biggest beneficiary of Apple’s decision not to support NFC (for the time being) is Apple itself, which is included in the new iOS 6. Apple released the API for Passbook a few months ago, enabling businesses to create “passes” such as loyalty programs, boarding passes and coupons that are integrated into the app. And as BankNxt.com recently noted, the 100-plus million iPhones that will receive iOS 6 will create very fertile soil for Apple’s mobile wallet initiative.

But the fact that Passbook will work only on iOS devices leaves the door open for players who can offer payments services across platforms. PayPal Mobile, for instance, uses QR Codes, traditional barcodes and other familiar technologies to enable users to shop, receive mobile coupons and make transactions from their handsets. PayPal continues to lock up retail partners for its point-of-sale offering, which it expects to generate $7 billion in sales this year. Similarly, Square hopes to build on the tremendous traction of its mobile credit-card reader with an app that links to users’ credit cards to support mobile payments. Pay with Square is accepted at more than 7,000 U.S. Starbucks outlets, where it uses existing 2-D barcode technology – not next-generation technology that isn’t yet ready for prime time. Pay with Square’s retail footprint is still small, but it could grow in a big way fairly quickly.

NFC plods along

Meanwhile, the two most noteworthy NFC-based mobile payments initiatives in the U.S. continue to struggle. Isis, the joint venture between Verizon Wireless, AT&T and T-Mobile USA, recently pushed back the launch of trials in two cities due to undisclosed snags. And while Google has yet to discuss details regarding uptake of Google Wallet, the initiative appears to be struggling for a variety of reasons: It’s available on only a half-dozen phones, its fragmented ecosystem has led to security concerns, and carriers behind Isis aren’t rushing to support it. Most importantly, while 25 retail chains have partnered with Google Wallet only 200,000 outlets nationwide are equipped with the equipment to process the NFC transactions.

NFC’s challenges will eventually be addressed: The technology enjoys massive backing from a long list of major players in mobile, which ensures that the infrastructure for NFC-based payments will eventually come into place. The market for mobile payments will be a marathon much more than a sprint, and NFC may indeed emerge as the dominant technology in the next four or five years. Apple’s decision not to support NFC is a big speed bump, though, and it comes just as alternative payment systems are beginning to find an audience. The path for success for initiatives like Google Wallet and Isis just got longer.

Question of the week

Will Apple’s decision not to include NFC in the iPhone slow the market for NFC-based mobile payments?
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Colin Gibbs

Colin Gibbs

Founder and Principal Peak Mobile Insights

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