Juniper: NFC can be at the heart of retail, but don't forget cash
It may not have escaped your notice that, in recent weeks, NFC--near field communications--has received a lot of press: all points of sale at the London Olympics are equipped to handle contactless payments, all UK Post Offices NFC are enabled; Microsoft has unveiled a mobile wallet with SIM-based NFC. In short, NFC is busy, busy, busy.
As far as it applies to contactless payments completed using the mobile handset, NFC has only recently begun to move beyond the early adopter markets of Japan and Korea, where it racked up well over $20 billion in transactions last year. But such is the scale of activity that is now occurring amongst handset vendors, carriers, financial institutions--and indeed merchants--that the question is increasingly being put to analysts: given these dramatic moves to embrace NFC, at what point will NFC replace cards? Or cash?
At which point, the analyst feels obliged to put everything in context.
Back in February at the Mobile World Congress in Barcelona, John Donahue, the CEO of eBay, observed that we would see more change in how we will pay in next 3 -5 years than in the last 10-20 years. I don't necessarily disagree; but--regardless of the plethora of admittedly remarkable statistics trotted out by Donahue including 5 billion in transactions via eBay on mobile devices and with $8 billion expected this year --what I would say is that at the current time, and probably for many years to come, cash will be king.
A few more statistics may help here. The global retail market is currently worth more than $16 trillion dollars; in the US alone, in the region of $4 trillion. According to the US Census Bureau, online accounts for little more than 5 percent of all retail, a figure which on the surface seems extremely small--particularly when you think how often you're on Amazon--but then you think of those other activities for which you have to engage with the physical world--filling the car with petrol, shopping at the local store, paying for a meal at a restaurant--and the everyday, mundane expenditures start to add up.
Furthermore, there are many establishments where, should you attempt to pay with anything other than folding money, the proprietors will look at you askance. There are at least two key reasons for this. The first is that, for each card transaction, they will be obliged to pay a handling fee plus a percentage of the transaction value to a third party, which--when the person in front of you only wishes to buy a Mars bar--leaves you about a cent up on the deal, and wondering whether the game's actually worth the candle. The second (and I would venture to suggest that this is particularly true of such worthies as your local handyman and a good many market traders) may have something to do with the fact that credit cards, most inconveniently, leave a trail which further down the line may be of interest to the taxman, whereas folding money transactions don't necessarily have to go through the books and can go straight into your back pocket.
This situation is not going to change, at least not for local handymen and market traders, who will continue to demand greenbacks for their hot dogs, their strawberries, their honest-sir-it's-a-genuine-Rolex. And good luck to them. In such environments, neither credit cards, nor NFC-enabled handsets, will win out. But clearly there are other opportunities in this $16 trillion marketplace for NFC to gain traction; equally, other challenges.
Regardless of the industry momentum behind NFC deployments, it is critical that consumers are educated about NFC (in both cards and handsets) if it is to gain said traction: a recent survey by YouGov suggested that just 12 percent of UK consumers believed that they owned a contactless card, at a time when over 20 million such cards were already in circulation: of those that did, just 13 percent recognised that McDonald's restaurants (the most recognised brand in the survey) were NFC-ready. Likewise, the merchants need to be convinced that their initial investments in NFC payment terminals will be justified by myriad customers charging down the aisles, filling their trolleys and triumphantly waving their Samsung Galaxy Nexuses at the checkout.
Above and beyond the problem of people understanding the basics – I have an NFC-enabled handset, I know how to use it, I know where to use it – there lurks that final question: will they use it? One of the problems here lies in the payment limitations imposed on such transactions, currently around the twenty dollar mark in many territories: by the time Joe Public has reached the checkout, complete with his bottle of wine, ready meal and packet of crisps, he's hovering precariously near the NFC spending limit and--since he's got better things to do than a spot of mental arithmetic--will opt for an alternative payment mechanism instead.
This may seem as though I've come to bury NFC, rather than to praise it; far from it. The fact that we have this activity across the value chain; the fact that the standards are in place to create a solution accommodating the requirements of all the participants in the NFC payments ecosystem; the fact that the security concerns have largely been alleviated; the fact that an increasing proportion of handsets are NFC-enabled; the fact that NFC payments can be fast and straightforward: all these are creating an environment where NFC transactions have the opportunity to flourish. More than that: by using NFC, retailers can create situations whereby consumers actually discover the physical content. For example, interacting with an NFC Smart Poster will push discount coupons relating to that content following an interaction with an NFC tag at the storefront entrance; ideally, the consumer then also purchases that content via NFC. It is a technology which can place mobile at the heart of the retail experience.
But cash is still out there. And it isn't going anywhere just yet.
Dr. Windsor Holden is Research Director with Juniper Research. He has authored more than 40 full length reports for Juniper Research, including four editions of its much heralded Mobile Entertainment series: his recent reports include NFC Mobile Payments & Retail Marketing, Mobile Entertainment Strategies: Business Models and Forecasts and Mobile Gambling: Casinos, Lotteries & Betting. Windsor has a PhD from the University of Leeds and is also a former Research Fellow of the Institute of Communications Studies, University of Leeds.