The hidden brilliance behind the timing of Apple’s adoption of NFC
There’s a brilliance to the timing of Apple’s adoption of near field communication (NFC) technology. For years, it was assumed that the company would never incorporate the short-range radio protocol into its devices, as they had seemingly opted-instead for Bluetooth LE – even as many Android manufacturers added it to their newest devices, with little impact on adoption. But, to many people’s surprise, the newly introduced iPhone 6 and iWatch product lines include NFC, in part to facilitate Apple’s intriguing new payments platform, Apple Pay.
But about that timing -- Why did Apple decide that 2014 was the year to roll out the now decade-plus-old technology?
The answer to that question has to do with the difficulties of driving market adoption around new hardware standards. Like most communications standards, NFC requires that two parties have access to the technology in order to work. For example, if one user has a new iPhone 6 with NFC, but another has an older iPhone 5, no dice when it comes to beaming data back and forth over the protocol. The same is true for merchants and consumers, which is where things get particularly sticky for Apple Pay.
For Apple Pay or any other alternative payments protocol to work -- and by work I mean achieve mass adoption and challenge payment standards like physical credit and debit cards or cash -- it needs to function nearly everywhere that consumers spend money. (Think grocery stores, gas stations, convenience stores, retail shops, restaurants, and dozens of other categories). There are just 220,000 NFC-enabled merchants in the US today, out of the roughly nine million total merchants in the country. This could present a big problem for Apple Pay adoption.
But here's the twist. There’s another major change set to occur in the payments landscape that will require the majority of these nine million merchants to deploy new hardware in their stores in the next year.
As of October 2015, any merchants that do not support EMV credit cards – smart cards with integrated circuits that enable point of sale authentication and help prevent fraud – will be liable for the fraudulent use of counterfeit, lost, and stolen cards. EVM cards are read at the point of sale by inserting the end of the card featuring the chip into a payment terminal, rather than swiping the familiar magnetic stripe on the back of the card. Consumers then enter a PIN to authorize the transaction. (If you’ve traveled internationally, you’re likely familiar with this system).
These EMV cards and the resulting transactions are far more difficult to counterfeit than what Americans consider "standard" credit cards. While EMV is the norm around the world, only about 14 percent of US merchants support this technology today and very few consumers own credit cards incorporating these chips.
Why does this matter to Apple Pay? Because millions of merchants will be required to purchase and install new card-reader hardware in the next year in order to comply with this standard. And when these merchants shell out for new card-readers, something they might do at most once or twice per decade, there’s a good chance they’ll opt for all the “bells and whistles.” Following Apple’s announcement, NFC is right at the top of the list of must-support technologies. Hence we could see a dramatic spike in NFC support in this country. (Big h/t to Wealthfront CEO Adam Nash for pointing out the brilliance of this timing.)
Even with its incredible marketing might and its ability to drive hardware trends among consumers and enterprises, Apple surely would have had a tough time forcing NFC down the throats of slow moving and cash-strapped US merchants without the help of these regulatory changes. But with the US market already obligated to catch up to the rest of the world around physical card security, it’s a much easier sell to support touchless mobile payments as well. I’m sure this timing is just one big coincidence, right?