What is NFC? What is the smartphone mobile payments technology known as Near Field Communications? March 6, 2011

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It has been several years now that I have been reading and hearing about mobile phone toting consumers being able to purchase soft drinks from vending machines through the use of SMS texts to the vending machine.

The possibilities of a mobile digital wallet, a North American equivalent of European Smartcards and mobile SMS payments systems, to be used as a payments service for smartphones, certainly include the hypothetical future displacement of the cash register as the payment method of choice for consumers on the go.

NFC, or Near Field Communication, may perhaps have such a potential.

Since the middle of December, in and around Portland, Oregon, Google has been handing out hundreds of NFC kits to local businesses as part of an NFC trial they are calling “Hotpot”.

The Google Hotpot kits include special NFC-capable window decals. NFC is a low power technology that beams and receives wireless information from up to four inches away. When consumers with NFC-equipped telephones such as the latest models of Android operating system cellular phones, scan a NFC-equiped window decal, they will be presented with information on their mobile device such as business hours, reviews, and more.

The hope is that the increasingly mobile consumer will willingly engage with local merchants using this new technology, allowing merchants to interact with the generations of consumers growing up with texting and mobile smartphones in their pockets.

2011 is really shaping up to be the year of NFC, with Google considering building an NFC-based payment service in the U.S. that could make its debut later this year. The technology would let customers pay for items by passing their smartphone over a small reader. A single NFC chip would be able to hold a consumer’s bank account information, gift cards, loyalty cards, and coupons, say the two people, who requested anonymity because the plans aren’t public. Google’s NFC scheme includes an advertising component that would allow merchants to beam a coupon or other reward to customers while they are shopping.

Of course, advanced smartphone owners can already complete mobile transactions by downloading payment applications. Paypal’s iPhone iOS application, for example, lets PayPal users transmit funds to other PayPal account holders. But NFC technology could potentially streamline such transactions. Users of advanced smartphones equipped with NFC technology don’t need to launch an application; they simply wave or tap their smartphone against a small reader device and enter a PIN number on it to authenticate their purchases.

A Google NFC network offering would encounter stiff competition from the start from the likes of companies such as Verizon, AT&T and T-Mobile, the three of whom in November 2010 formed a joint commercial venture called ISIS that plans to launch an NFC-based payments service by 2012. Visa is also field testing several mobile payment technologies, including NFC, and plans a commercial rollout later this year. It is rumored that PayPal, a division of eBay, may test an NFC service in the second half of 2011 as well.

Silicon Valley is hard at work on NFC technology too, with Apple having filed a patent for a process to transmit money between cellular telephones using NFC. Apple recently hired NFC expert Benjamin Vigier away from mFoundry, a startup that helps banks build mobile payments applications. If the next iPhone does come equipped with an NFC chip, then perhaps Apple will process mobile payments through Apple’s iTunes store.

The increased competition and jockeying for position in the NFC space is undoubtedly due to the high stakes involved, as the prize for whoever wins the NFC race is a dominant position in a small but fast-growing market that could displace the cash register in time. A leading market research firm, IE Market Research, estimates that by 2014, NFC-based payment systems will account for a third of the $1.13 trillion in worldwide mobile transactions.

In mid-December, Google, whose former CEO, Eric Schmidt, has said that NFC will “eventually replace credit cards”, in December 2010 bought Zetawire, a Canadian startup with several NFC patents to its name, including a novel method for diners to split up and pay a restaurant bill using their smartphones. If Google does decide to launch an NFC payments network, they would have the built-in advantage of its very large and rapidly expanding installed user base of Android smartphone owners. Every single day, around 300,000 people activate Android telephones, and they accounted for more than 25 percent of the new smartphones shipped in the third quarter of 2010, according to the Wall Street Journal.

The latest version of Google’s smartphone operating system, Android, capable of reading NFC tags is dubbed Gingerbread. Later this year, software updates to Android will let Android smartphones transmit information using NFC as well. In December 2010, Google introduced its Nexus S smartphone, based on Android Gingerbread and carrying an NFC chip onboard. In January 2011, Starbucks announced that customers would be able to start using a bar-code application on their smartphones to purchase coffee in some 6,800 of its stores.

There are obstacles to widespread consumer adoption, however. For an NFC-based payments network to really work, Google needs to convince not just Android smartphone owners but also local merchants who must install NFC readers to process mobile payments. Hotpot, which Google has been promoting heavily, introduces merchants to the NFC technology. NFC is already in heavy use in parts of Asia and Europe.

Related Articles

• Verifone: All New Point of Sale Terminals Will Get NFC (gigaom.com)
• Verifone to include NFC technology in all new point of sale terminals [The chicken or the egg] (intomobile.com)
• Mobile NFC payment ready to take off (v3.co.uk)
• Near Field Communication: What You Need to Know (pcworld.com)
• Near Field Communications: a technology primer (thefutureofmoney.wordpress.com)
• Smartphones To Be Smarter (3ghomepage.wordpress.com)
• New NFC-Enabled Phones to Hit Europe (nytimes.com)
• New NFC-Enabled Phones to Hit Europe (readwriteweb.com)
• Digital Marketing Guide: Mobile Payments (adage.com)
• BOA Trialing Mobile Wallet, Using NFC-Enabled BlackBerry (pocketnow.com)

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About the author.

I’m Paul Seibert, Editor of Boston’s Hub Tech Insider, a Boston focused technology blog. You can connect with me on LinkedIn, follow me on Twitter, even friend me on Facebook if you’re cool. I own and am trying to sell a dual-zoned, residential & commercial Office Building in Natick, MA. I have a background in entrepreneurship, ecommerce, telecommunications andsoftware development, I’m a Technical PMO Director, I’m a serial entrepreneur and the co-founder of TwitterMiners.com & Tshirtnow.net.

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