Will RFID lead to near-field communications (NFC)?

Mobile banking and payments is considered a promising area, in which near-field communications (NFC) is widely viewed as the pinnacle. NFC promises to turn the mobile phone into a secure credit card by enabling the exchange of data between devices over about four inches of distance. While companies work out the kinks to make it attractive for all members of the ecosystem, including carriers, radio frequency identification (RFID) tags that can be affixed to the mobile phone are cropping up as a temporary solution – one that Aite Group senior analyst Nick Holland says is extremely flawed.

“This is seen by the people who put the stickers out as some interim technology that will magically get us to NFC, whereas what is really required is a solid business case for NFC and a level of merchant penetration for contactless payments that makes NFC viable,” Holland said. “This, as far as I’m concerned, is a step in the wrong direction. This is not something that will accelerate NFC. If anything, it’s going to be a distraction.”

Companies including Blaze Mobile, MasterCard, First Data and, as of today, Alcatel-Lucent and Tetherball, are among those using RFID stickers to bridge the gap to NFC. Alcatel-Lucent (NYSE: ALU) announced today its touchatag venture will work with Belgacom mobile and micro payments company PingPing, to create an open model of application development for contactless cards and mobile payments. Through the partnership, Belgian consumers can use one contactless card or sticker to launch mobile payments or other mobile applications.

Tetherball, a mobile marketing application vendor, also today introduced an RFID-based mobile loyalty program that relies on in-store RFID point-of-sale terminals or standalone RFID kiosks that it provides for its clients. Tetherball gives every customer that signs up for the program an RFID sticker for their mobile phone that uniquely identifies them. Tetherball clients, including Dairy Queen and HotBox Pizza, can then send offers to that customer through an SMS text message. The consumer redeems the offer by scanning the RFID code at the point-of-sale terminal at the retail location.

Tetherball’s RFID service was designed with mobile marketing and customer loyalty, not payments, in mind, according to president and Chief Operating Officer Jay Highley. It is also targeting a younger audience versus the high-end smartphone users NFC will likely appeal to. Still, through its relationship with NFC software provider Vivotech, an NFC solution that takes the technology inside the phone could be in the company’s future.

“The Tetherball Tag itself could easily be an evolutionary step toward embedded NFC,” Highley said. “But for now, both retailers and brands are looking for a solution that works now, and they want to capitalize on the power of mobile. Up to this point, there has really been no simple, predictable way to put a program out there and be able to measure the effectiveness of that program and see how many people are engaging the brand as a result of the program.”

While the industry holds promise, Highley is correct in saying it is still predominantly unrealized. To date, most handsets do not come with NFC-capable chipsets, although they are in the pipeline. Nokia, which recently invested in Obopay to focus on mobile payments, has already introduced three fully-integrated NFC phones and will offer the technology to mobile operators that want it embedded in their phones. Semiconductor company NXP also recently introduced what it claims to be the world’s first industry-standard NFC controller, a chipset that will allow handset makers and carriers to offer mobile payments direct from the handset.

The first handsets will begin shipping from Nokia within six months, and Holland predicted a 24-month window before more NFC phones really start to take off. It begs the question, he said, of whether or not an interim step is even needed. In the US, he estimated there are only about 60,000 merchants, or 1% of the total merchants, using contactless readers, which is where the real roadblock lies.

“You can have all the stickers you want, but if you don’t have the merchants with the terminals that allow you to interface with the stickers at the other end, it’s just a sticker,” he said. “It’s like putting a Band-Aid on your phone.”

For this reason, he said, the industry would be better served by concentrating on putting the 20 million to 30 million existing contactless cards already on the market to use and encouraging more retailers to add point-of-sale kiosks. RFID tags could get consumers comfortable with tapping their phone to make a payment, but Holland said there’s the danger that they are underwhelmed by the technology to the point that when NFC phones actually come to market, they will be reluctant to even give them a try.

“I’m a believer in the [NFC] technology,” Holland said. “It is going to happen. I am somewhat bemused by the pilots going on. It’s sort of an appetizer item. Will someone please step up and bring us the entrée rather than play around with these starters? It’s getting pretty dull.”