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How Near-Field Communication Will Make Your Wallet Virtual

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You’re at the gas station. You want a coke. You don’t have any cash.

You could, of course, pull out a credit card, but that seems like such a hassle for a small transaction. What if you could swipe your iPhone and the $0.75 came straight out of your checking account? And, what if you also got a coupon on the screen for $0.25 off a package of Slim Jims to have with that Coke? And, what if by making that purchase, you earned points because you’re in the BP loyalty program? 

Expect situations like this to become a reality soon.

When Your Mobile Device Replaces Your Wallet

iPhones and iPads have changed the way we live. We have instant access to virtually all of the information in the world. We have thousands of low-cost apps for productivity, fun and education. But the evolution of the Apple devices certainly isn’t done. 

In the iPhone 5 and the iPad 2 — both expected to be released later this year — a technology called Near-Field Communication (NFC) will be introduced. NFC will allow users to make purchases simply by swiping their iPhone or iPad near a terminal.

NFC operates at a frequency of 13.56 MHz and can provide data transfers at up to 848 Kbits/second. It’s both a “read” and a “write” technology, so it can transfer information in both directions.  Because it requires close physical proximity, it provides a more secure transaction than WiFi or Bluetooth.

This isn’t the first time we’ve seen NFC on mobile devices: Google has installed the technology on some of its Android phones, but there’s never been a large enough base of customers to encourage merchants to invest in the readers. iPhone and iPad functionality would change that overnight.

How NFC Works

NFC transactions via iPhone may not sound very different from credit card transactions, but they are.  The biggest change? Now your transaction will be processed through iTunes. The implications of this are enormous.  

iTunes can bill your credit card, or more attractively, remove funds from your checking account. Apple is a master of making the transaction process pleasant for the consumer, and we can anticipate that they will follow suit on NFC. In addition, merchants may be able to enroll you in their loyalty program and let iTunes manage the details.

NFC may also enhance the “Genius” experience, the function at the Apple App Store and iTunes that makes recommendations based on your buying history. Now, through the combination of NFC, WiFi and 4G, you’ll likely be able to activate push notifications on your iPhone or iPad that alert you whenever you’re near merchandise you’ve shown a proclivity for. Love Vera Wang scarves? You’ll know if the department store you’re in has them.

The Apple-NFC Effect

Americans spend $6.2 trillion every year on goods and services, much of which is paid with credit cards. Currently, purchases on iTunes are made with credit/debit cards and Apple pays a fee on every transaction. If by using NFC Apple can convince you to use a method that costs them less — like taking the money straight out of your checking account — it will save (and make) a lot of money. This is the model that’s proven profitable for PayPal. 

The obvious worry is that just by coming into the proximity of an NFC reader, you could be charged for something you didn’t buy. However, due to standard electronic purchasing processes, this shouldn’t happen.

For example, say you wanted to use your iPhone to purchase train tickets. You would approach a ticket terminal, the NFC connection would be established and a list of destination options would show up on your iPhone screen. You would select your destination, your departure time and possibly your class of travel. The iPhone would produce a confirmation screen for you to complete your purchase. The ticket would then show up on your iPhone and you could proceed to board. At any point before final confirmation, you could cancel the transaction without being charged.

The remote control changed TV. Think of NFC as remote control for your wallet: the functionality remains the same but the interface changes dramatically.

Your Thoughts

Do you plan to use NFC-enabled devices to make purchases when they roll out? Will you replace your wallet with your phone?

EDIT: Since the post was published, Apple annuonced that the iPhone 5 will not be NFC-enabled.

Bill Cannon is Vice President of Business Development at MCPc, and an IT industry veteran with expertise in networking and telecommunications technology. Connect with Bill on LinkedIn.