While it appears as if Nokia will be the first manufacturer to embed a near field communication chip in its handsets, if Apple NFC-enables the iPhone 5, it could signal a tipping point for contactless mobile payments.

While the potential for contactless mobile payments is huge, it has been held back in the United States and other markets due to fragmentation and a lack of a revenue-sharing agreement between the various players. However, once NFC chips are embedded in mobile devices on a large scale, it could set off a domino effect taking the mobile payments ecosystem to the next level.

“There are rumors that the iPhone 5 will be NFC-enabled, but we don’t know for sure,” said Red Gillen, senior analyst at Celent, Boston. “Why that would be a significant development in the mobile payments space is that there are between 150 and 160 million iTunes wallets out there, and people are actually making transactions.

“There is a chicken-and-egg equation in the mobile payments world—you need both buyers and sellers to kick-start a mobile payments service,” he said. “With an NFC-enabled iPhone, one part of the equation would be in place, although it would take a while for iPhone users to cycle through to the new NFC-enabled devices.”

NFC Apple of merchants’ eye?
While contactless mobile payments in general and NFC/RFID-enable payments in particular have been touted for some time, they have yet to live up to the hype (see story).

In fact, NFC has its detractors (see story).

However, McDonald’s use of NFC technology combined with the distribution of mobile coupons illustrates the potential for the intersection of mobile payments, loyalty, customer relationship marketing and database-building (see story).

“Looking at the technology, having an NFC chip embedded in the iPhone perhaps connected to an iTunes wallet has great potential,” Mr. Gillen said. “We’ll have to see what Apple will do to create more value above and beyond plastic cards—my credit card works today, what is the argument for using my iPhone instead, or any other mobile wallet?

“What value will they create for consumers?” he said. “An example of added value is meaningful, contextually relevant offers or incentives such as couponing based on where consumers are and their past behavior.

“A rewards program from Apple would be a big step in the right direction, and based on some patents Apple has filed, they seem to be thinking in these terms.”

Nokia to be first to market
Nokia was the first major handset manufacturer to announce plans to NFC-enable its mobile devices, although those plans have been delayed.

Apparently there were some crossed lines of communication earlier in the year when it was reported that all Nokia phones shipped in 2011 would be NFC-enabled.

Nokia then backed off that assertion and said that not all, but some of its Symbian-based handsets released next year would have NFC chips embedded in them.

The news coming out of NFC World Asia indicates that Nokia is sticking with latter message—some models will be shipped with NFC chips embedded, but not all.

“However, we’re still taking NFC devices in the millions of handsets, which is a significant stat,” Mr. Gillen said. “We’re going to see NFC-equipped phones start to ship in a commercially meaningful way in 2011, which in and of itself is significant.

“The technology aspect is important and foundational, but ultimately it will not drive people to adopt it—retailers have to add value,” he said.

Enough reach to be a game changer?
Nokia has wide reach internationally, but limited market share in the U.S.

Apple devices get a lot of buzz, but they are still limited to AT&T subscribers in the U.S.

Would two handset manufacturers releasing NFC-enabled devices provide enough reach to help the contactless mobile payments ecosystem reach the mass market?

“A move by Apple into contactless mobile payments could be a game changer,” said Howard Wilcox, senior analyst at Juniper Research, Basingstoke, Hampshire, England.

“Paying for smaller-value items like coffees and sandwiches with your device would be made much easier in heavy footfall retail outlets at peak times especially,” he said. “It’s a natural development from using your device for so many other apps.

“That said, iPhones account for a relatively small proportion of the total number of devices in the marketplace, so for mobile contactless to really become mass market NFC will need to be embedded in most vendors’ new phones of all types—not only smartphones.”

Chicken-or-egg
Many analysts cited the chicken-or-egg barrier facing mobile contactless payments.

NFC chips must me embedded in a wide range of handsets, and merchants must have NFC/RFID readers installed at the point of sale on a wide scale. Carriers, financial institutions and payments processors must also be on board.

The iPhone 4 was rumored to have a NFC chipset embedded, but it did not happen after all.

“Even if we assume the next iteration has one, which would clearly be a very positive sign for the mobile NFC ecosystem, it will require time to reach a critical mass of devices,” said Thomas Husson, Paris-based senior analyst at Forrester Research. “Nokia have announced recently they would embed NFC in selected smartphones of the future Symbian OS but none have shipped yet.

“In short, there is a chicken-or-egg issue—lack of NFC devices, business model issues and limited consumer interest are key hurdles to overcome to really move the market forward,” he said. “There are other interesting opportunities in the mobile payment market to look at.

“I am neither saying NFC is not a key technology for the future nor that it goes beyond payment—loyalty, marketing, transport—but simply that it will take years to scale.”

Celent estimates that 200,000 store in the U.S. currently have NFC/RFID readers installed at the POS, based on Visa and MasterCard public data.

Currently, NFC-enabled plastic credit and debit cards, as well as stickers and micro-SD chips, are compatible with those readers.

That is a start, but the number of contactless readers needs to increase significantly for contactless mobile payments to really take off.

It is apparent that the value to merchants is not relatively apparent right now. Merchants are asking “What’s in it for me?”

Right now there are adaptations like stickers or micro SD chips that can be used to enable a mobile device for NFC or RFID transactions.

“So imbedding the chip in the device is a step further in the evolutionary curve, enabling anyone with the iPhone device to already have the technology accessible with no additional effort or cost,” said Beth Robertson, director of payments research at Javelin Strategy & Research, Pleasanton, CA.

“Certain segments, like transit, are active with RFID programs and have the contactless readers installed,” she said. “There are also transit industry trials using NFC technology.

“But generally the merchant base in the U.S. is not widely enabled, so that ramp-up needs to occur at the same time as consumers are enabled.”

If anyone can do it…
Many believe that Apple entering the market for contactless mobile payments would light a fuse under the industry and would lead to a rapid implementation of NFC/RFID in a variety of other phones.

What Apple could bring to the table that would really transform the market and lead to a mass popularization of NFC/RFID is consumer interest and attention.

Various forms of both mobile and contactless payments have existed for some time, but the biggest stumbling block that remains for both fundamentally boils down to consumer apathy and confusion.

“Despite all the best efforts of the major players, consumers still don’t really see the point and for many consumers it still lacks an important wow factor to draw them in,” said Gilles Ubaghs, senior analyst at Datamonitor, London. “Apple being Apple, any introduction would lead to high levels of interest from consumers, and if Apple can implement it in the user-friendly way it’s built its reputation on, interest would likely be very high.

“A good analogy I think is the fact that Apple did not invent the MP3 player, but they are the ones who really took the technology mainstream,” he said.

“It’s worth keeping in mind as well, when it comes to payment technologies, people tend to be very conservative, so having a known and trusted brand like Apple will be much more successful than a new start-up that no one has ever heard of.”

However, the real key to the long term success of any rollout is giving consumers a reason to use it.

Even in countries like Japan or South Korea where the technology is common and widespread, use remains anemic at best, according to Datamonitor.

The form factor of a payment by phone is not really enough yet to get people to use it, especially long-term.

“Cash and cards despite the hype remain extremely portable and user-friendly,” Mr.Ubaghs said. “Only by tying contactless mobile payments into further value-added services such as couponing, discounts and automated ereceipts are consumers finally shifting to using it.

“Apple appears to be developing something along these lines and if it all works well, could prove very successful, which will likely lead to many imitators,” he said.

Final Take
Dan Butcher, associate editor, Mobile Commerce Daily