NFC or QR codes? Both have a path forward in mobile payments

In the earliest days of mobile wallets, there was much debate over whether to focus on using QR codes — which can be displayed on any phone’s screen — or to wait for more phones to support Near Field Communication, which provides a more streamlined experience. The biggest concern was betting on the wrong horse.

Experts worried that NFC and QR would be the next Betamax and VHS, with only one winner. Today, the technologies are more like Coke and Pepsi, with each appealing to different tastes.

In time, the market niches for NFC or QR codes have become much clearer in the U.S. and other markets. A trend toward contactless payments and contactless card issuance, beginning even before the global pandemic made cash less desirable, was clearly steering payments toward an NFC chip in cards and phones.

NFC has overcome earlier cost concerns and moved to the forefront as potentially the best option for an open-loop transportation ticket and payment network, as well as being a more secure and easier option at the retail POS.

But QR codes remain strong, particularly for international payment options where consumer technology is less consistent.

How we got here

NFC has been considered more secure, but harder and more costly to deploy all along, while QR codes are slightly less secure, but easier and less costly to deploy, said Tim Sloane, director of emerging technologies advisory services for Boston-based Mercator Advisory Group.

Both options have addressed their shortcomings.

“If we only compare mobile use, then the two technologies are likely at parity,” Sloane said. “The problem is, in the U.S. we can’t just dump physical cards and move to mobile. Because physical cards need NFC to maintain security, the simple route from a consumer behavior perspective is to continue with mobile NFC, as it duplicates the tap-to-pay experience for the average consumer.”

However, the QR code is increasingly being used for closed-loop solutions, including loyalty programs, such as scanning a membership card to make purchases at a warehouse club.

In that regard, there will still be debate over which is best to use — though there is much less risk in adopting either format.

After Apple added an NFC chip to iPhones to support Apple Pay, a host of mobile wallets entered the market. Apple doesn’t let other companies implement NFC wallets on its devices, but the rival Android ecosystem is more welcoming to such apps.

Apple Pay joined Android Pay (later to become Google Pay) and Samsung Pay, all of which supported NFC in some way. Apple used the phone’s secure element, Google additionally supported host card emulation, and Samsung Pay added magstripe emulation on top of that.

Those using QR codes were PayPal, Chase Pay and the Merchant Customer Exchange wallet, CurrentC.

Wallets using other technology have failed. The Softcard mobile wallet (formerly ISIS) developed through the major telcos six years ago operated through NFC, but it fumbled around with its rollout and endured a marketing nightmare with its original name.

PayPal’s Venmo launched a plastic card with both NFC and QR codes late last year. A QR code is printed on the front of the Visa-branded card to connect to the Venmo account for P2P payments, and the card itself can be used at NFC-enabled terminals.

The PayPal solution was recently added to Clover POS systems through an agreement with processor Fiserv. It was a key development, illustrating that QR codes will continue to have some solid footing at the point of sale.

QR codes shine in key markets

QR codes have become the go-to method in some of the world’s largest markets. Combined, Alipay and WeChat Pay in China account for 90% of the country’s mobile payment market, and both initiate transactions at the POS through a QR code.

The massive growth of QR code technology in China has pushed the envelope in other parts of the world, with some European wallet providers seeking to work with Alipay for a more unified, interoperable QR codes that would connect a fragmented mobile wallet landscape and best serve travelers.

Chinese regulators have monitored QR technology closely, becoming so concerned with the market explosion three years ago that they put a temporary halt to expansion by limiting the amount of QR code spending that could take place.

They were mostly concerned about QR code payment options popping up that weren’t already strongly entrenched in the marketplace. But six years ago, the People’s Bank of China put a temporary ban on QR code schemes overall, seeking mostly to halt the proliferation of non-bank virtual credit cards being issued.

In Brazil, the country’s instant payment system PIX launched late last year. The country has established the QR-code platform as the easiest for scale, but also set up the system for money transfers and payments by using cell phone numbers, by sending e-mails or linking them to tax IDs. The system operates through the Central Bank of Brazil.

Network effect

The card networks have been strong proponents of NFC.

Late last year, Visa launched its Tap to Phone technology for NFC-enabled Android devices, pushing contactless technology in about 15 markets, with the U.S. on the radar this year.

Similarly, Mastercard introduced Tap on Phone as a way to encourage cash-based micro- and small-business merchants to enter the digital age and accept contactless payments. Mastercard’s solution was piloted in 16 countries, including North America.

Both technologies essentially turn a smartphone into an NFC contactless payment acceptance device, making it even easier for merchants of all sizes and those within transportation hubs to engage in an open-loop system.

“We continue to work diligently with our merchant and issuing partners to implement NFC technology and contactless capabilities around the world,” said Kush Saxena, executive vice president for U.S. merchants and acceptance at Mastercard. “In addition, for years we have been focused on setting and advancing standards and specifications set forth by EMVCo to continue the growth of NFC and contactless, in addition to QR code.”

As Mastercard looks to the future, it sees several benefits from open-loop capabilities that would make tap-and-go contactless a preferable option for transit providers and riders, Saxena added.

“With open payments, riders would no longer need to wait in lines to buy system-specific products or try to understand complex fare policies that vary,” Saxena noted. “Riders would simply be able to choose how they want to pay and tap their card, phone, or device — just like they do for other purchases.”

As its interest in NFC and QR codes grew, Mastercard has delivered new enhanced contactless specifications to ensure its technology continues to advance with others in the market — and the card brand can support both.

Acknowledging that the U.S. has been slow to move to NFC compared to markets like Canada and Australia, Saxena said Mastercard’s philosophy about the future of payments is simple.

“It’s about providing and enabling choice,” he said. “We’ve been spearheading the transition to contactless for over 15 years, working with industry partners and across sectors around the world to increase the use and acceptance of electronic payments and enhance safety, security, and convenience at checkout.”

Transit provides a path for growth

For either NFC or QR codes to advance further, a payment gateway or transaction switching engine working with independent sales organizations or software vendors has to push the solutions along.

Because the U.S. is moving toward having contactless cards issued at an 80% clip in the next year or two, New York-based payment gateway NMI sees that as critical mass.

“I don’t think it is a matter of choosing NFC over QR codes, or vice versa, it’s that you are choosing contactless and there are use cases for both,” said Nick Starai, chief technology officer at NMI.

A major initiative for NMI is to push the open-loop transit contactless solution in which a contactless card in a digital wallet would work through NFC on any transportation system.

“It’s always a pain when traveling to try to figure out the transportation system and how a card works and where to get it,” Starai said. “We think in the next few years in the vast majority of cities and certainly the major metros, you will be able to use your contactless credit card with an NFC tap to get on trains and buses.”

The card brands look at open transportation systems as “a place that creates habits for using contactless in the future,” Starai added. “If you get on a bus three times a day, and you are used to using your credit card to tap to get on, you will do the same at stores. This scenario is really interesting to us.”

New York was the first city to have an open-loop contactless system in the U.S. with its Omni network, with the card brands working with issuers in the city and surrounding areas to deliver contactless cards.

“Certainly, pre-COVID, the card brands and transits had this vision of helping spread contactless card use,” Starai noted. “It may have been less impactful pre-pandemic, but it now works in both directions — consumers who are getting used to contactless in other places will use it now when they get back on transit.”

NMI is investing in future technology like the card brands’ tap-to-phone, insisting it is the catalyst for the future and eliminates various headaches consumers and merchants face now.

“Most people in this industry have had tons of headaches with these little card readers or dongles attached to phones because of poor quality, a battery that is dead, or it is hard to get Bluetooth paired,” Starai said. “Those external dongles just get in the way, but now phones can be turned into a true NFC card-acceptance device.”

Contactless ticketing provider Calypso Network Association last week said it would work with the NFC Forum to educate the marketplace on the benefits of NFC in transportation and how to expand the infrastructure to handle what would be mobility-as-a-service.

“At CNA, we believe that NFC is the best solution for providing users with simple, efficient, ergonomic access to all forms of mobility,” Philippe Vappereau, chairman of CNA, said in a press release. “The collaboration with NFC Forum is an important opportunity to promote the benefits of open standards more effectively to all players in public transport and showcase the value of converging on-demand transport ticketing services that support a range of consumer mobility solutions.”

NFC Forum has operated as a non-profit industry association led by mobile communications, semiconductor and consumer electronic companies since 2004. It has pushed open standards to facilitate interoperability and data exchange among different products or services with the intention to fuel widespread adoption.

“We plan to start coordinating NFC Forum efforts with CNA activities immediately,” Mike McCamon, executive director of NFC Forum, said in the release. “Activities under discussion include a white paper highlighting the benefits of NFC technology for public transit decision makers as well as identifying and developing new NFC use cases in transit applications particularly with MaaS solutions.”

The organizations say NFC is one of the most widely implemented technologies in the world and available on three billion smartphones.

Infrastructure plan

In most cases, the decision to go with an NFC or QR code-based payments and communication network is made on the basis of what a country’s banks are able to handle.

“The reason you see QR codes being so much more prevalent in Asia and Pan America is because the banking infrastructure is not as mature as it is in the U.S.,” NMI’s Starai said. “Anyone in the U.S. can go into any state and get a credit card that works anywhere.”

In other parts of the world, fragmentation in payments is more prominent, leading to a variety of payment instruments and methods and varying systems within the banks, he added.

“That is why a QR code is a quicker payment method when you have no infrastructure or rails to handle card payments and contactless technology,” Starai noted.

In the U.S. and U.K., payments rails would continue to favor credit card payments for the foreseeable short term, Starai added, with contactless instruments and services “being the next wave of the future.”

“With NFC, you just tap without having to put your thumb in a certain place for the reader to accept it, and it gives it the edge in contactless transit and in-store for that reason,” Starai said. “With QR codes, you have to open the phone to connect with an image and the phone has to be in the right position for it to work.”

Much like NFC, QR codes in the U.S. will continue to find ways to attract attention and gain favor in certain merchant categories, particularly the restaurant experience for consumers.

“QR codes are revolutionizing the dining industry by making the restaurant experience safer, more convenient and efficient,” said Mike Welsh, chief creative officer at digital consultancy Mobiquity. “Currently, many restaurants are using QR codes to share their menus with guests in a contactless way — but this is just one way to utilize them.”

QR codes have the ability to be an end-to-end solution, Welsh added, starting when diners are searching for information about a restaurant’s COVID policy, their vaccination status among staff, and even wait times for a table. They also provide real-time viewing on a menu as items are available, as well as paying for food, and redeeming or achieving rewards.

“Restaurants can remove touch points while at the same time enhancing the experience,” Welsh said. “QR codes could also be used to provide real-time feedback to staff during the meal to ensure the experience is a good one. Lastly, QR codes have the ability to improve backend operations in coordination with POS and inventory systems to reduce manual effort and increase efficiency in the kitchen and for staff.”

In working with merchants and payments infrastructures globally, Mastercard has seen all of the current and potential use cases, but also a trend that is not likely to change much.

“We have found that QR-based payments are being leveraged in growing markets, while mature markets are focused on more sophisticated NFC payments types,” Mastercard’s Saxena said.

Yet, no one can say QR codes aren’t robust enough to work in many settings.

“There are multiple ways for QR to operate, from a presentment made by the merchant to my phone or a presentment from my phone to the merchant, and both of these approaches are used for different scenarios,” Mercator’s Sloane said. “EMVCo has released a QR standard and most U.S. networks can support that standard and some already have.”

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