Everything You Need To Know About NFC Technology & Why NFC Payments Are The Future
Apple’s announcement of its then-new Apple Pay feature back in September 2014 was easily one of the most exciting developments in mobile payments in years. Over five years later, it’s still a big deal, having ushered in a new era of secure and convenient payments for both consumers and businesses. By adding near field communication (NFC) technology, Apple enabled iPhone users (those with the iPhone 6 and later models, at least) to ditch their wallets and go entirely 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 smartphones (and, later, smartwatches) rather than fish credit or debit 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 the technology behind NFC payments and all its implications for businesses trying to compete in today’s tech-driven market.
Table of Contents
What Is NFC?
“Near field communication,” usually referred to simply as NFC, uses small chips to create a link between two devices and transmit data. NFC is a wireless technology similar to Bluetooth, Wi-Fi, and RFID. It uses radio waves to send and receive digital data, and operates on the same frequency as RFID chips (13.56MHz).
Unlike Bluetooth, Wi-Fi, or cellular networks (such as 4G, LTE, or the recently introduced 5G), however, NFC operates at extremely short range. NFC-equipped devices need to be within about two to four 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.) NFC can also transmit data faster than Bluetooth, making it ideal for mobile payments.
How Does NFC Work?
NFC technology can be deployed in one of three forms: (1) tag reader and writer, (2) device-to-device, and (3) card emulation. Here’s how each of these methods works:
Tag Reader & Writer NFC
NFC technology doesn’t require a power supply for some applications. It’s actually possible to place small stickers with embedded NFC chips (i.e., NFC tags) on printed materials or other surfaces. Your smartphone can then read the “tag.” While the concept is similar to a QR code reader, NFC devices use a lot less electricity than your smartphone’s camera. Tag reader technology can be used to create a tag to connect devices to your Wi-Fi network, enable “smart” business cards, and even control lights remotely.
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 back in 2011 (though it was only on select models; the S III saw NFC become standard). Android Beam, which also uses NFC, 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, Bluetooth, and Wi-Fi Direct 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 essential aspect of the card emulation process is, of course, securing the card data in the transaction.
With card emulation, the NFC chip itself never stores or handles the actual card number. Instead, a separate component deals with the data.
How Does NFC Payment Technology Work?
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. Eventually, Android Pay and Google Wallet were merged and rebranded as Google Pay.
But those aren’t all of the “Pay” apps available. Samsung launched its own app, Samsung Pay, and even Chase Bank has 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. Both Google Pay and Apple Pay have an additional authentication step – scanning a fingerprint or entering a passcode to verify that you are the authorized user of the device.
Plus, 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 cannot be accessed. Remember card emulation, from above? Initially, there were two ways to go about this, depending on the phone’s cellular network: 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 a Secure Element 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 feature 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 can 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 payment card is added to a mobile wallet, the secure element replaces the actual card number 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 need to worry about whether an app or device relies on a Secure Element or HCE. Still, it’s good to understand that mobile wallets have built security measures into their systems to make NFC much safer than just swiping a card with 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.)
Thus far, we’ve focused on mobile wallets that use NFC. You should also be aware of several other closely related payment technologies, including the following:
Samsung Pay & Magnetic Secure Transmission (MST)
Samsung Pay offers NFC payments as part of its wallet services. But, if the merchant’s payment terminal isn’t NFC-capable, Samsung has added in an alternate payment method: Magnetic Secure Transmission, or MST. Essentially, MST allows a smartphone to emulate a magnetic swipe transaction. Just like NFC-based methods, customers need only place their devices against the terminal to complete the transaction.
MST is far from widespread technology. At the time of this writing, 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, don’t have an NFC terminal, customers can still make payments with their Samsung phones.
How NFC Payment Technology Protects User Information
In addition to the convenience that NFC-based payment methods offer consumers, they’re also currently the most secure means of making a payment that’s available today. As we’ve mentioned above, NFC payment methods use tokenization to keep sensitive payment card information from being stored on or transmitted by your NFC-enabled device.
Other security features are built into the devices themselves and are designed to prevent the user’s personal information from being compromised if they lose their device. For example, biometric security methods such as fingerprint readers and Apple’s FaceID feature (introduced with the iPhone X), make it significantly more difficult for a thief to unlock your phone. These methods protect not only the digital wallet features of your device, but also any sensitive information you might have stored on it. Of course, smart devices can also be accessed through passcodes. If a thief obtains your passcode, he or she can bypass biometric security measures and unlock your device easily. However, passcodes have proven remarkably effective by themselves at limiting access to authorized users – to the point that law enforcement agencies are now pressuring manufacturers to include a “backdoor” access feature that would allow them to unlock a suspect’s phone. The potential for misuse of such a feature has lead most manufacturers to resist incorporating this option – so far.
Another security feature – which we hope you’ll never have to use – is the ability to reset your smart device remotely. Using this feature will, naturally, erase everything that’s currently stored on your device. You did back it up, though – right?
Challenges & Concerns With Adopting NFC Payments
Experts in the payments industry agree that the introduction of NFC technology is a net positive for merchants and consumers alike. Customers like the speed and convenience that paying with their phone or their watch allows. Merchants appreciate the enhanced security afforded by NFC payments, dramatically reducing their risk of fraudulent transactions. However, there are a few potential downsides and hurdles to overcome on your way to a contactless future.
The initial cost of adding NFC processing equipment can be daunting to a small business owner, particularly if you’ve recently spent a lot of money upgrading to EMV-capable machines. It’s an ironic coincidence that NFC-based payment methods first became available in the United States at about the same time that the EMV liability shift occurred in 2015. If you were one of the early adopters who replaced all your old, magstripe-only card readers with EMV terminals right away, you might now have to incur another significant outlay to replace them again with machines that also support NFC. Don’t despair! Most modern EMV-compatible terminals also include NFC capability.
In many cases, it’s merely a matter of coordinating with your merchant services provider and having the NFC processing functions turned on and added to your merchant account. You’ll need a new software load for each terminal, and there might be a reprogramming fee charged for this service. However, many providers will take care of this for free if you’re an existing customer. Remember, providers want you to have NFC capability, as those transactions are more secure, less likely to be fraudulent, and generally present a lower risk to process.
In some cases, your current terminal might require the addition of a separate PIN pad to enable NFC capability. While this can be a significant expense if you have multiple terminals and need a PIN pad for each one, it’s still much less expensive than replacing all of your terminals and starting from scratch. Also, the savings in PIN debit fees will more than compensate for the initial investment over time.
There is also some concern within the industry that the major credit card associations will impose an “honor all wallets” rule that would be similar to the current “honor all cards” rule that’s currently in place. In case you’re unfamiliar with this rule, it basically means that if you accept one brand of credit or debit card, you have to take all other cards as well. In theory, an “honor all wallets” rule would force retailers to accept all contactless payment methods, including proprietary methods used by their competitors. The classic example is a theoretical rule that would require Target to accept Walmart Pay, and vice versa.
While the real underlying concern is that such a rule would allow access to competitor’s customer data, we think this concern is overblown and won’t actually lead to the kind of problems discussed above. For one thing, Walmart Pay doesn’t even use NFC technology, relying instead on QR codes and smartphone cameras to process a payment. We could, however, envision a more limited “honor all wallets” rule. For example, if you accept Apple Pay, you might be required to accept Google Pay and Samsung Pay as well. Obviously, you’ll probably want to do this anyway, rather than locking yourself out of half the market share by only accepting one or the other.
Credit Cards With NFC Payment Support Are Coming
NFC-embedded payment cards have been available for several years in many countries around the world, particularly in western Europe and Canada. However, they haven’t quite made it to the United States yet. As NFC-based payment methods become more commonplace here in the US, you can expect to see NFC cards being introduced here as well.
Because of NFC’s small form factor and ability to function without an onboard power source, it’s possible to embed NFC chips directly onto payment cards themselves. This feature might not seem particularly useful to most people, as it kind of defeats the purpose of not having to hunt through your wallet or purse for the right card. However, there are quite a few people out there who still don’t have a smartphone, and will probably never have a smartwatch. NFC-embedded payment cards allow these customers to benefit from this technology without having to invest hundreds of dollars into a smartphone or other device. To use such a card, the customer simply holds it within several inches of the NFC-capable payment terminal until a connection is made. This method is much quicker than dipping an EMV card, and will probably benefit that segment of the population that is still struggling to figure out how to use EMV cards in the first place. The other consideration is that tap-to-pay with NFC cards is mostly meant as a convenience — that is, the issuing banks place limits on the transaction size for any NFC card payments. This payment method is mostly meant for low-risk, small-ticket transactions rather than big purchases.
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.
It’s Time to Start Accepting NFC Payments
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. New hardware, in particular, can be an expensive 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.
For the moment, “future-proof” means having a terminal, mobile card reader, or POS system that accepts both EMV and NFC payment methods. Both of these technologies are far more secure than simple, old-fashioned magstripe payment processing. Liability for fraudulent transactions where an EMV card is processed using the magstripe shifted onto merchants back in 2015, so it’s well past time that you upgrade to an EMV card reader. With most modern terminals having NFC capability built-in, there’s no reason not to add both EMV and NFC at the same time. For some specific hardware recommendations, see our article, The Best Credit Card Machines & Terminals.
While some people might refer to NFC technology as “the future of payment processing,” we’re inclined to believe that the “future” is already here. Consider this quote from Randy Hayashi, the COO of Payment Depot (see our review):
“Most newer terminals have NFC and we think that with the popularity of wearables, it makes sense to have that capability. As more and more customers get smartwatches, they will start to expect to be able to use them to make payments. When I got my first smartwatch, I was surprised that the feature I used the most was contactless payments.”
“Here at National Processing, we are definitely proponents of NFC payments and believe it’s a great way to future-proof your payment processing hardware. Although we’re not there yet, we believe NFC will become a necessary payment method to accept in the near future. Most of the hardware we sell is NFC equipped.”
With practically everyone carrying a smartphone these days — and the sales of smartwatches soaring –, it’s definitely time to add NFC payment acceptance to your business. It may not be absolutely essential, as EMV equipment is more than adequate for day-to-day use. However, if a significant portion of your customer base is younger or particularly tech-savvy, adding NFC payments to your business will undoubtedly appeal to them. With more and more major retailers adding NFC capability every day, customers are gradually coming to expect this level of convenience, and it’s to your advantage to give it to them. Adding NFC payment acceptance will also mean that you probably won’t have to upgrade your equipment again anytime soon. While it’s inevitable that eventually, some new payment technology will come along that’s even more convenient and secure than NFC, there’s really nothing out on the horizon at the moment.
What are your thoughts about NFC payments? Are you excited to see this technology come into its own, or are you a bit skeptical? Check out our comment guidelines and leave your thoughts below!