Is NFC a Game Changer for the Payments Industry?
Vipul Rajendra Maniar | September 24, 2019
As anybody in the Point of Sale (PoS) payments industry will know, money in this industry can only be made if enough people use the system. Since the industry runs on transaction percentages that are as low as 1-3%, it is clear why volume is paramount for profitability.
To complicate things further, there are at least three parties that have to share the same piece of the pie; the Issuing Institutions or Issuers (who issue the cards), the Acquiring Institutions or Acquirers (who acquire the transactions and own the PoS), and Interchanges like Visa and MasterCard (who provide the means to enable global acceptance of the cards). There are complex contracts drafted to determine how this minuscule percentage is distributed amongst them.
Two more parties complete the ecosystem- the Cardholders who use the cards to buy goods and services and Merchants who offer these.
Understanding Interchange fees for credit card transactions
Cash V/s PoS Transactions
It is the Merchants who fund the industry by forgoing a part of their profits in exchange for a promise of higher sales. Therefore, while the Issuers, Acquirers, and Interchanges are doing everything they can to move cash transactions to the PoS to rake in higher returns, one can understand why the Merchants are reluctant in following through. They still prefer cash as it’s convenient, and cash transactions are quick. Accepting PoS transactions not only delays their funds but also causes delays at the time of doing the transaction. This can be due to multiple factors like the time required to authorize the payments, extra time needed to get the customer to enter the PIN or sign the receipts, etc. These delays might seem trivial individually but look at the big picture, and they become apparent irritants.
For instance, consider takeaway style restaurants, operating in busy business areas during lunchtime. This is probably when they experience peak orders and have to serve the customers as quickly as they can. Customers are in a hurry, and any delay by the restaurant would mean they would lose them to the nearest competitor. Paying via PoS would mean more time; hence, both customers and merchants prefer to use cash. Since the value of each of these orders is small, they are called Small Ticket transactions and cash has been the default mode of payment for these Small Ticket transactions.
Having mostly captured the bigger retail chains and high-value transactions, the Issuers, Acquirers, and Interchanges were looking to capture the Small Ticket transactions and displace cash as the preferred payment mode. However, they were finding this conversion very difficult until NFC emerged.
Near-Field Communication – An Overview
NFC (Near-Field Communication) is a communication method that allows two objects in close proximity to exchange information without coming in contact with each other. Incorporating this in Integrated Chip payment cards, called EMV Cards, has enabled cardholders to make payments by just waving their cards over the PoS devices. They are more commonly called Contactless or Tap-and-go transactions and were probably the first mode of payment that was practically faster than using cash. Issues, Acquirers, and Interchanges worked together to make this even quicker by eliminating the need for PIN or signature for Small Ticket contactless transactions.
NFC – The Game Changer
Initial surveys by various research and advisory firms on NFC suggested that Cardholders liked the convenience and had significantly upped the usage of their cards. The Issuers, Acquirers, and Interchanges were happy as this was driving up the transaction volume. Merchants also seemed to be pleased with the speed and ease of doing contactless transactions. It was like they had found the Holy Grail and the PoS industry embraced NFC whole-heartedly. They weren’t wrong.
Source: Aite Group
Surveys across geographic regions revealed how cardholders, especially younger generations, were swiftly moving to NFC as the preferred mode of payment. So much so that even mobile phone manufacturers jumped on the bandwagon by offering their own solutions. This further added to the convenience as cardholders no longer needed to carry physical cards. They just needed to add them to their phone’s wallets once, leave the cards at home, and just tap their mobile phones to make payments.
This is the other change that NFC brought. Payments were no longer limited to using cards. Solutions soon started popping that allowed customers to pay using smartwatches, fitness trackers, key fobs, and anything and everything that the Issuers were able to put a chip in, which further fuelled the speed of adoption.
There was one more area which was witnessing change – The PoS device itself. Without the need to swipe/insert cards, enter PIN, and print receipts for NFC transactions, the PoS devices started to shrink in size. Acquirers began offering plug-and-go PoS devices that could be attached to Android and Apple devices, easing Merchant adoption. This enabled Acquirers to not only expand foothold in existing markets but also penetrate new markets that were hitherto limited to cash.
Cash has been king for a very long time, but a new contender to the throne is emerging. NFC has definitely taken some sheen off cash’s crown but will it be able to snatch it away? Only time will tell.