NFC – what is it and how can it help retailers?

With more NFC-enabled smartphones appearing in the marketplace, the payments industry will undergo a considerable change. Is this yet another technology expense for retailers or can it deliver tangible benefits?

The technology behind Near Field Communication (NFC) was developed in the 19th century but, along with RFID chips, has taken a long time to appear in practical applications. NFC-enabled devices carry a chip which can read (and in some cases transmit) radio frequencies within a range of 10 inches. These radio frequencies transmit data from one device to another, allowing for payments to be processed. One of the most successful uses of NFC has been in public transportation. London’s Oyster Card and Hong Kong’s Octopus Card both employ NFC technology so that passengers can pay for travel without removing their cards from their wallets.

The industry, however, is set to undergo a massive change as mobile devices have begun to emerge with NFC chips. These smartphones have the potential to act like ‘electronic wallets’ and allow consumers to quickly pay for items totalling around £15. Among NFC-enabled handsets is the Samsung Nexus S, built in collaboration with Google, and released in December 2010. Apple’s next iPhone, which is slated to be released this summer, is also rumoured to include an NFC chip, bringing mobile phone payment to millions across the globe.

Impact on retailers

NFC technology should be a big boost for retailers that are prepared to make the initial investment in their POS infrastructure. The most important benefit for retailers is time. Currently, cash payments are the most problematic for retailers. Counterfeit bills, employee theft and running out of small change are day to day concerns for most small retailers operating cash tills. However, cash transactions can also be quite lengthy, taking in excess of one minute in some cases. Card payments represent a major improvement for retailers as they remove the major problems associated with cash payments. However, contact card payments require signatures and/or pin verification. This tends to slow down transaction time.

NFC technology would allow customers to pay for items under a certain value without additional verification. This would significantly improve transaction speed and enable retailers to take a higher number of transactions at a given time. This would largely benefit convenience stores in areas of high footfall which struggle to serve high volumes of consumers during peak periods. The technology is not for all retailers, however, due to the maximum transaction limits imposed by payment providers. NFC payments are also expected to incur a higher transaction fee compared to existing payment methods and so retailers will need to weigh up the potential benefits against the additional costs of NFC.

Impact on manufacturers

The effects on manufacturers will be marginal as the main benefit of this technology is largely realised on the retail side of operations. Manufacturers, however, may benefit from increased volume sales if they ensure that their products remain below NFC price limits. In the UK, for example, Barclays Bank issues contactless cards which can take payments of up to £15 per transaction. Manufacturers whose products retail for higher than this should investigate the possibility of developing lower-priced products by offering smaller sizes to sell through NFC-enabled convenience store retailers.