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Tap and Pay: Enabling digital payments through NFC

April 06, 2018

The payments ecosystem in India has changed dramatically over the past few years owing to the government’s Digital India initiative and its impetus to non-cash payments. People are now adopting various digital modes of transactions, including mobile wallets, credit/debit cards, internet banking, Unified Payments Interface (UPI) and mobile banking. In this context, an advanced digital transaction technology that is gaining traction is near field communication (NFC). The concept is already prevalent in Europe and is now finding favour in North America as well. However, its adoption in India is still at a nascent stage with people still getting used to the idea of a cashless economy.

NFC advantage

NFC is a method of short-range contactless communication between two devices that are placed within a few inches of each other to exchange data. However, both the devices must be equipped with an NFC chip. The technology is built on a radio frequency identification system that allows devices to read and send information through radio waves.

To enable a connection using NFC, users can launch the payment application on a smartphone and then tap the phone on the credit/debit card terminal (point of sale [PoS] machine). A biometric authentication is required to further process the transaction. The transaction is validated either through a separate chip known as secure element or through cloud-based host card emulation, which relays the authorisation back to the NFC modem, thus completing the transaction.

Since NFC uses radio waves to transmit and exchange data, and does not need an internet connection to work, it can be used in areas that have poor network availability. The transaction process is simple and fast, and works automatically. The quick check-out feature enables “queue-shortening” for merchants and retail stores as this payment method does not require any card swiping or ATM pin to complete a transaction. Moreover, NFC transactions are more secure since the card details do not have to be shared.

Today, leading brands like Apple and Samsung are providing NFC support in their smartphones to enable secure digital transactions. For instance, apps like Apple Pay and Samsung Pay that use NFC technology enable owners to make transactions following biometric authentication using touch ID or passcodes, thereby preventing any security breach. In addition, it is extremely difficult to obtain information because secondary-layer authentications are designed to have security mechanisms that go well beyond a normal processor. In the Indian context, NFC can be integrated with UPI to make payments digitally.

NFC limitations

The main disadvantage of NFC-based payments is its low adoption rate primarily due to the lack of support on phones. The NFC payment method is inherently accessible to only a niche segment, thus reducing the scope of its uptake. Currently, not many smartphones support NFC and those that do, belong to the mid- and high-end segments, making it beyond the reach of the masses. Moreover, greater participation is required by both commercial and payments banks to support such technology. Another major hurdle is the unavailability of merchant-side infrastructure as vendors are reluctant to incur the additional cost of upgrading their PoS terminals to support NFC.

Scope in India

In March 2015, the Reserve Bank of India (RBI) allowed “tap and pay” transactions and proposed to limit the value of such transactions to Rs 2,000 to keep the risk of security threat low. It allowed its use only for payments made offline, using NFC-enabled cards that are EMV (Europay, MasterCard and Visa) compliant. Consequently, many banks such as the State Bank of India, ICICI Bank and HDFC Bank enabled their credit and debit card customers to make in-store contactless payments.

However, the challenge for banks is to bring a shift in consumer behaviour as people are still to get used to digital payments. To this end, greater awareness needs to be created and popular apps like Apple Pay that support NFC should be launched in India. In this context, the launch of the Samsung Pay app in India is a welcome move.

No doubt, the uptake of digital payments through NFC will take time. In order to achieve mass-scale adoption, handset-makers need to provide NFC support on low-range smartphones to generate compelling use cases and inculcate habit among users. As payment tools are crucial for the government’s vision of transforming India into a knowledge economy and a digitally empowered society, this segment offers huge growth potential owing to its quick and convenient usage.

 
 

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