NFC Not Likely to Make Near-Term Gains

CU360
June 4, 2010 | COMMENTS

Mobile phones equipped with near-field communication (NFC) chips are unlikely to become widely used payment tools for at least five years, according to a report from the Federal Reserve Bank of Boston.

The report, released in May, highlights numerous hurdles that must still be overcome, notably the lack of a business model that would benefit card brands, issuers, mobile operators and handset manufacturers. This has made it difficult for any one company or group of companies to take the lead in promoting NFC mobile payments.

Another adoption barrier is cost. The report estimated that NFC chips would add $10 to $15 to the price of a mobile phone. With consumers typically replacing their mobile phones roughly every two years, carriers and manufacturers would have limited time to recover the higher costs associated with offering NFC phones.

An even bigger issue is the lack of contactless readers at U.S. merchants. While some merchants have installed them, widespread adoption has stalled, according to the Boston Fed. It estimates that each terminal costs about $200, and many merchants will opt to not upgrade their point-of-sale systems until it's absolutely necessary.

Payment executives discussed mobile payments recently at the Federal Reserve Bank of Chicago 's 2010 payments conference, with some executives questioning whether consumers are even interested in NFC-enabled phones.

"Consumers in the U.S. don't see a burning need for it," Jeff Semenchuk, head of growth ventures at CitigroupInc, told conference attendees. "They want it but are not clamoring for it."

Despite the severe barriers to adoption, the Boston Fed said it believes the potential long-term benefits that mobile payments could bring to consumers are hard to ignore. Those benefits include the possibility of a "fully enabled digital wallet" that covers payment accounts and health records.

Some companies are trying to introduce mobile payments applications that don't require NFC chips, reports American Banker . Starbucks and Target both accept payments charged to prepaid accounts with phones that display software-based bar codes on their screens. The images can be read with scanners at the point of sale.

The Boston Fed holds out hope that a public transit system eventually could lay the foundation for mobile payments in the U.S. That's been the case in Hong Kong , Japan , and the U.K. , where consumers can pay transit fares with their mobile phones. A closed-loop transit environment might be the first opening for NFC in the U.S.

This article was orginally published online by CU360, an online portal for benchmarking tools, market insights, industry data, and analytical information at cu360.cuna.org. Reprinted with permission.