What is near field communication?
Credit card processing technology is always changing, which means merchants and customers alike frequently need to learn new terms. Near Field Communication (NFC) is a term that has been popping up frequently in the payment processing industry. It is a technology that allows smartphones and other tools to communicate with other devices in close proximity. NFC technology powers Apple Pay, Android Pay and other touch-to-pay services that have been growing increasingly popular.
How it works
Essentially, NFC allows enabled devices to set up a network through which they can share data. This technology evolved from Radio Frequency Identification, or RFID, a tool that many shipping companies used to keep track of inventory. Scanning an RFID tag enables employees to quickly learn important information about products.
While NFC can certainly be used to make payments, that's not all this technology can accomplish. For instance, a mobile user could also use their NFC-enabled device to gain more information about an exhibit they're viewing or an advertisement. In this way, near field communication can operate much like QR codes do. Bluetooth technology also has similar capabilities. However, NFC uses less power than Bluetooth. Since most consumers will use mobile devices for contactless transactions, battery conservation is an important consideration.
Altogether, NFC can be used three different ways:
- Peer-to-peer: Two NFC-enabled devices can establish a connection and share data.
- Read/write: An active device, such as a phone, picks up data from a passive device, which does not have the capability of reading information itself.
- Card emulation: An NFC device can be used like a contactless credit card.
The final use is the one that most concerns merchants - NFC's ability to support contactless payments.
NFC and mobile payments
While adoption of NFC has so far been slow, many experts believe it will increase dramatically over the next few years as electronics companies release more NFC-enabled smartphones, watches and other mobile devices. Adoption may also increase as customers realize using NFC mobile payments will eliminate their need to carry credit and debit cards with them on a daily basis.
To use NFC to make a payment, consumers need to first open the payment app on their smartphone or other mobile device (Apple Pay or Android Pay, for example) and tap it onto the card terminal. Customers may also need to scan their fingerprint or enter a unique passcode to approve the transaction. The process is similar to using contactless credit and debit cards that are now in wide circulation.
Payment security is top of mind for both customers and merchants. Like with EMV, NFC payments are more secure than traditional magnetic stripe payments. All sensitive cardholder data, such as account number and expiration date, is stored in an area in the phone called the secure element. This information is all encrypted so the actual numbers are not stored or transmitted. These systems generate a one-time code that would be useless to thieves if obtained. Since the payment process doesn't rely on the use of a magnetic strip, it is more difficult for fraudsters to pull sensitive information and use it to conduct illegal transactions.
Merchants can also benefit from NFC because it provides an opportunity to more effectively integrate customer loyalty programs into payment processing. For instance, consumers can redeem a coupon immediately with the tap of their phone. NFC loyalty programs can also help merchants gather useful analytics on their customer base and locations. Based on where coupons are used, merchants can determine most profitable times of day, or the locations that receive the most traffic.
At this stage, merchants should seriously consider implementing NFC-enabled technology to be able to accept contactless payments. Doing so will set them ahead of the curve and will likely impress customers. NFC is a technology that is important for payment processing, but it will also help merchants more successfully engage their customers with promotions and marketing campaigns.