What Is NFC & Why Should You Care?
When Apple announced its new Apple Pay feature in September 2014, it was easily one of the most exciting developments in mobile payments in years. And a few years down the line, it’s still a big deal. By using near field communication (NFC) technology, Apple essentially enabled iPhone 6 and iPhone 6 Plus users — and owners of all subsequent models — to ditch their wallets and go digital for payments. Apple Pay did what Google Wallet had failed to do (despite being first on the scene): Convince merchants to start implementing support for NFC payments, so customers could pay with their phones rather than fish cards out of their wallets, pockets, or purses.
But how does NFC work? And what does it mean for you, if you haven’t started accepting NFC payments? Let’s take a look at this technology and all of its implications for businesses.
What Is NFC?
“Near field communication,” usually referred to as just NFC, uses small chips to create a link between two devices and transmit data. Like Bluetooth, WiFi, and RFID, it’s a wireless technology, and you’ll see that these technologies are closely related, particularly where mobile devices are concerned. NFC actually evolved from RFID and uses radio waves to transmit data.
NFC takes on three forms:
- Tag Reader and Writer
- Card Emulation
We’ll take a closer look at all of these forms in a bit. But first, let’s talk about how NFC fits in with other mobile technology.
Unlike 4G, Wi-Fi, or even Bluetooth, NFC is short range. Devices need to be within a few inches of each other, at most, for the chips to communicate. That does mean that security is less of an issue than with connections that work over longer ranges. NFC also has some significant advantages over Bluetooth. First, it requires far less energy. Second, because NFC can be one-way or two-way, you don’t always need a power supply for both components. (We’ll get into that later.) Also, NFC can also transmit data faster than Bluetooth, which makes it ideal for mobile payments.
Tag Reader & Writer NFC
NFC chips don’t require power supplies for some applications: It’s actually possible to place small stickers with NFC chips on printed materials and other surfaces. Your smartphone would then be able to read the “tag.” Sure, the concept is similar to a QR code reader, but smartphone cameras use a lot more battery juice than NFC. Some of the more interesting applications of this technology include creating a tag to connect devices to your WiFi network, smart business cards, and even the ability to turn lights on and off (with the right equipment, of course).
With Device-to-Device NFC, you can exchange files between two devices. That includes photos, videos, and even contact information. Samsung has been using NFC in its phones since it launched the Galaxy S II (though it was only on select models; the S III saw NFC become standard), and Android Beam is now standard on all Android devices, too. (Apple allows apps to use the NFC chip in its devices, but only for tag reading, and not for data transfers between devices.)
NFC and Bluetooth (and WiFi Direct) actually play nicely with each other, so it’s possible to use NFC for pairing speakers, headphones, and other Bluetooth accessories. It actually makes the process much simpler because you merely need to place the two devices next to each other — no need to sift through a list of available devices to pick the right one, which can make pairing a pain in tech-laden households or public spaces.
Card Emulation NFC
Card emulation is where NFC shows the most promise. It’s the driving force in mobile payments, used in both Apple Pay and Google Pay, as well as many of the other “Pay” apps that have emerged since Apple embraced mobile wallets. An important aspect of the card emulation process is, of course, securing the card data in the transaction.
The NFC chip itself never actually handles the card number in the emulation process. Instead, a separate component deals with the data. Initially, there were two ways to go about this, depending on what kind of cellular network the phone operated on: a Secure Element (SE) chip embedded in the phone, or a Secure Element built into the SIM card.
However, with the release of Android 4.4, Google also presented another option: Host-Based Card Emulation, or Host Card Emulation (HCE).
Whereas NFC transactions using an SE rely on hardware and the data is never passed through the operating system or an app, HCE passes data through the operating system and apps. This allows for NFC-based interactions that can run in the background, rather than launching an app. This makes it easier to build NFC into transit apps or loyalty programs where being able to tap to pay would be beneficial. It also means that the actual card data is stored in the cloud and the device keeps a virtual card number on file instead. The payment networks are able to link the virtual card number to the actual card number and therefore verify the transaction.
Secure Elements rely on tokenization. Once again, the card number is never stored in an app or anywhere on the OS. Instead, when a card is added to a mobile wallet, the secure element replaces the data with a “token” — essentially a secret code or a one-time use number. When an app requests to transmit the payment data via NFC, the secure element issues the token to the payment networks.
Unless you’re an app developer, you don’t really need to worry about whether an app or device relies on a Secure Element or HCE, but it is good to understand that mobile wallets have built security measures into their systems to make NFC often safer than just swiping a card at a magstripe reader. (EMV chip card transactions are also more secure than magstripe transactions. If you haven’t upgraded to a chip card reader yet, it’s high time you got one.)
How Do Mobile Payments Work With NFC?
Let’s take a closer look at both Apple Pay and Android Pay (formerly Google Wallet), both of which use NFC in mobile payments. Google Wallet came first, but it never really found its foothold. Then, Apple launched its own NFC payments app, Apple Pay, in 2014. In 2015, Google launched Android Pay and rebranded Google Wallets as a peer-to-peer payments app in the same vein as PayPal…and then decided to merge them all under the auspices of Google Pay.
But those aren’t even all of the “Pay” apps available. Samsung launched its own app, Samsung Pay, and even banks have gotten in on the action with Chase Pay. Microsoft had its own failed Pay app.
Again, I want to reiterate that NFC-based mobile payments are a secure option, which makes them appealing to tech-savvy consumers. After all, any business could be targeted for a data breach, and even some of the biggest names have had it happen. In addition to NFC’s limited range to transmit data, card data is never actually stored on the user’s device so even if the device is compromised, the card number can’t be accessed. Plus, both Google Pay and Apple Pay have built in an additional authentication step — scanning a fingerprint or entering a passcode on your device to verify that you are the authorized user of the device.
Thus far we’ve focused on mobile wallets that use NFC. But there are a couple of other closely-related payment technologies you should be aware of.
Samsung Pay & Magnetic Secure Transmission (MST)
Samsung Pay does offer NFC payments as part of its wallet services. But in the event that the merchant’s payment terminal isn’t NFC-capable, Samsung has built in an alternate payment method: Magnetic Secure Transmission, or MST. Essentially, MST allows a phone to emulate magnetic swipe transaction — similar to NFC, you need only to place the device against the terminal.
MST is far from widespread technology. At the time of writing this, Samsung is the only mobile wallet with this feature. (Samsung acquired a company called LoopPay back in 2015, which had pioneered MST technology. It used LoopPay as the foundation for its own mobile wallet.) However, it’s good to be aware of this option — because even if you, the merchant, doesn’t have an NFC terminal, customers can still make payments with their phones.
NFC Chip Cards
NFC technology (and even EMV) might seem new because they’re just emerging in the US, but other countries around the world have been using both NFC and EMV for a long time. In Canada and Europe, most EMV chip cards are also built with an NFC chip that allows users to tap their card to pay, rather than dipping it in the card reader. NFC is faster than EMV, which is why it’s often presented as the most convenient payment option. However, banks do place some limitations on tap-to-pay cards, specifically on the size of the transaction. Generally, tap-to-pay is meant for small transactions: paying for your train ticket, buying a bottle of soda at the convenience store, and other places where you just want to get in and out. For high-volume transactions, you still need to dip the card and use EMV to complete the transaction.
Why do I bring this up? Because the US is about to see similar NFC-enabled cards start coming into the market. While they certainly won’t be widespread immediately, it’s a good reminder that NFC (and EMV) are here to stay as payment technologies.
Is It Time To Adopt NFC?
As a merchant, payment processing can feel a bit like a minefield. There’s a lot to consider — the costs of processing transactions, the costs of the software, and yes, the costs of the hardware. Believe me, I know. New hardware, in particular, can be a costly proposition, especially if you have multiple registers or worse, multiple locations. But it’s well worth investing in new, future-proof hardware if you haven’t already.
What do I mean by future-proof? I mean a terminal or card reader that accepts both EMV and NFC. Both technologies are much more secure than simple magstripe payment processing. And in 2015, the card networks and banks shifted liability for some kinds of transactions onto merchants who don’t accept EMV — meaning that you could end up absorbing the cost of a fraudulent transaction, plus any lost merchandise, plus any fees charged by your payment processor. At the very least, you should have a chip card reader.
But do you need to accept NFC payments? As much as I love the technology and I love how secure it is, I also have to admit that NFC isn’t absolutely essential (yet). However, most hardware makers have built NFC technology into their EMV readers, and it usually doesn’t cost all that much more to get an EMV/NFC-capable reader versus just an EMV-capable one.
It really comes down to understanding whether your customer base wants to use mobile wallets. If a significant portion of your customer base is younger or particularly tech-savvy, adding NFC payments to your business will probably appeal to them. However, if your customer base is the sort that finds using a chip card to be too overwhelming, you don’t really need to be queuing up for an NFC reader…yet.
What are your thoughts about NFC payments? Are you excited to see this technology come into its own, or are you a bit skeptical that it might be some crazy fad? Check out our comment guidelines and leave your thoughts below!