NFC technology: A cashless society

A world without money. T3 investigates...

With the launch of Near Field Communication (NFC) technology, and wireless and mobile phone payments slowly being introduced by major corporate players, could notes and coins all but disappear?

“One tuna sandwich sir? That’ll be £4. Cash? I’m sorry we don’t take that anymore.” So instead you pay for the sandwich the same way you now pay for a metro ticket, a cup of coffee or a taxi fare -- with a wave of your mobile phone. You put the grubby banknote back in your pocket and consider where you might be able to get rid of it later. Maybe you could spend it at the local market.

On the way home a billboard for a new film catches your eye and by touching it with your phone you download a trailer and some discount coupons. At the supermarket you buy so much that you’re asked for your pin number but you refuse their offer of cashback. You wonder why they’re still bothering to ask this in 2020 when fewer and fewer people want the wretched stuff any more.

The decline of cash

Cash, at least in the physical sense, is no longer king. Ever since the first credit cards were introduced by Diners Club and American Express back in the 1950s a growing proportion of our daily spending has been cashless. Coins and banknotes have increasingly been replaced by ‘megabyte money’ that exists only as digits on a computer screen and can be moved effortlessly around the globe in the blink of an eye. This is, of course, very handy if you’re a national government and want to inject £200 billion into the economy, but equally it’s convenient if you want to pay for a restaurant meal or a tank of petrol, too.

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According to the European Central Bank, a total of €1.68 trillion was put on the plastic by Europeans in 2008 and although the recession might have seen a few over-used cards snipped in half since then, the trend is clear. Spending on cards has increased by an annual rate of 12 per cent over the last five years and after five thousand years it seems the days of metal and paper money may be numbered. Later this year Steve Perry, executive vice president of Visa Europe, expects that spending on cards will eclipse the value of cash transactions in the UK for the first time. By 2015 he estimates we will be putting £2 in every £3 on plastic. So much for the credit crunch.

The move to an increasingly cashless society is a change of profound significance, both psychologically and economically, but it’s a transformation that many consumers seem happy to make. The rise of internet retail, the availability of credit and the improved security of ‘chip and pin’ have all added impetus to the traditional convenience of card payments. Even mobile network operator O2 has launched its own NFC payments service.

But let’s not kid ourselves; this isn‘t all happening just for our benefit. As another unsolicited letter arrives on the doormat breathlessly announcing that you’ve been pre-approved for cards it’s clear there are wider economic interests at work.

Why do we want a cashless society?

Paradoxically, cash costs money. It’s so expensive in fact, that businesses are often only too keen to offload it back onto their customers. For example, that cheerful cashback offer at the supermarket checkout is designed to keep the hard cash in the supermarket’s system to a minimum. A few banknotes may not seem much of an inconvenience but overall McKinsey estimates that the real cost to a retailer of handling cash is a significant 1.3 per cent of the purchase price.

On an larger scale, the European Commission estimates that the total cost of different payment methods is equivalent to as much as 3 per cent of GDP, with cash accounting for more than two-thirds of the total. When compared to the 2.1 per cent of GPD represented by the EU’s entire agriculture sector it‘s clear that this is a huge sum. It suggests that the simple act of transferring money from one person to the next costs the EU €370 billion a year -- more than the entire economy of Poland.

It’s hardly surprising to hear then that serious efforts are being made to wean us off cash. This year will see the rollout of the Single European Payment Area (SEPA) designed to reduce cross-border transfer costs in Europe and promote spending on cards. McKinsey claim the move could save European banks €50 to €100 billion a year. In the US, credit card companies have sought to increase the use of cards to pay for small ‘top-of-wallet’ purchases by waiving the need for signatures on purchases under $25. By July, Visa says it will expand the initiative to 98 per cent of its retail categories including department stores and hair salons.

While this may mean that we get a bit more time to discuss our holiday plans with the hairdresser it doesn’t eliminate our need for cash, especially when it comes to smaller payments. In the UK 80 per cent of the 27 billion cash transactions that take place each year are for items totalling less than £10. However, what now heralds a truly revolutionary shift away from coins and banknotes is the advent of contactless payment systems. This technology could soon reach a critical mass and although cash won’t be completely phased out like the cheque in 2018, it may soon seem as quaintly nostalgic and largely redundant as public telephone boxes do today.

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Wave and Pay

You may have noticed that contactless payment systems are already here. Near Field Communication (NFC) technology is being used by banks and credit card companies like MasterCard’s PayPass and Visa’s PayWave. This short-range wireless technology enables a smartcard or chipped device to communicate with a reader so the customer to pay for everyday items like a sandwich or a newspaper with a simple wave of the card, just as London Underground passengers use their Oyster cards.

Go into an outlet of Pret a Manger, Yo Sushi, Coffee Republic or EAT and you can already pay for items contactlessly. This is, of course, a major benefit for retailers where speed means increased profitability. Barclaycard has been one of the pioneers of contactless payments in the UK, announcing at the beginning of 2009 that all their new cards would come with NFC chips allowing contactless payments for items under £15. For purchases over £15 the standard ‘chip and pin’ process applies. Barclays expects all their cards to be contactless by the end of 2011.

Adoption of the new contactless payment systems has been rapid since 2007. The UK now has more than 22,000 contactless terminals, a figure that has doubled in the last six months. At its current rate of growth the UK Card Association expects 12 million contactless payment cards to have been issued by the middle of 2010 and for 1 in 6 cardholders to have a contactless card by the end of the year. The Barclays OnePulse card, launched back in 2007, also shows how additional functionality can also be incorporated into a NFC-enabled card. The OnePulse not only allows credit and contactless payments but can also be used by London commuters as an Oyster card.

Yet despite this success, cards themselves may soon be on the way out too. This may seem a radical step when we’ve only just started considering getting rid of cash but NFC technology isn’t limited to cards. The chip can be placed in any device and increasingly attention is beginning to turn to another ubiquitous item, the mobile phone. This opens up a whole new area of functionality not available on a simple card, including easy access to the internet.

Ringing the change

Mobile phones have the capability to incorporate mobile transfers and online banking as well as contactless payments. Combined with their other functionality this gives mobiles far greater potential to be the hub of our daily lives. “M-commerce is a strategic priority,” according to Marc O’Brien, Visa Europe’s head of UK and Ireland, who announced in February that the company was spending an additional €200 million on researching low-value contactless payments. The company is in active discussion with all handset manufacturers and mobile operators to develop common standards for payments.

It’s the need for common standards that presents one of the greatest obstacles, but in markets like South Korea government pressure and corporate co-operation has spurred development. A Korean consumer may use their mobile to watch TV, surf the internet or phone their friends but they can also use it to pay for a metro ticket, a cab fair or a snack from a vending machine via mobile T-money. In 2008 a total of 151 billion won (£8.4million) of such mobile money was spent each day. Although that’s less than 1 per cent of total internet banking transfers it still represents an awful lot of train rides and cans of coke. It’s also possible to give gifts by mobile by visiting a vendor’s site, buying an icon of anything from cosmetics to coffee and sending it to a friend. Each day over 70,000 if these gifts are sent in South Korea.

Japan is similarly ahead of the curve. The FeliCa contactless card technology was developed by Sony and launched five years ago. Today there are more than 120 million cashless payment chips in the wallets and purses of Japanese consumers despite the country’s overwhelmingly cash-based consumer tradition. One of the most successful applications is the McDonalds Kazasu discount coupon scheme which has 4.5 million subscribers. The technology has adapted particularly well to Japan’s loyalty card culture.

Other hurdles that will slow down the adoption of mobile contactless payments include the speed with which the necessary handsets get out into the market. There are also huge up-front costs to contend with in the installation of card readers. With an estimated 27 million sales locations worldwide it will inevitably be many years before a reader in ever store means that pocket change becomes completely superfluous. However, at least in the towns and cities of the Developed World the change will be clear to see within the decade. Juniper Research estimates that by 2013 the total amount of NFC mobile spending will already exceed $30 billion.

No Need for Change

In ten years time the infrastructure of cash will still be largely available as it’s in the interest of businesses to provide as many payment options as possible. There will continue to be traditional tills in the shops and banks in the high street - after all, they’ll still want our business. ATMs won’t disappear either although, like the public payphones of today, most will probably be old and neglected. There certainly won’t be a Saturday evening queue at the machine as people won’t need so much cash to enjoy a night out. As the number of ATMs dwindle you might occasionally be glad your phone has an augmented reality app which tells you where the nearest one is. Dutch bank ING launched just such an application last year.

Banks might even start passing on the real cost of cash by charging customers a small fee for ATM withdrawals as they already do from private cash dispensers. South Korea introduced a similar measure several years ago by giving preferential VAT rates to customers who pay with a card rather than cash. As a result of this incentive the percentage of cash payments fell from 40 per cent to 25 per cent between 2002 and 2006. Such charges will only serve to accelerate the move towards a truly cashless society in other countries too.

In the shops we’ll be approaching a critical mass of contactless payment points. You could go all day without realising you’d left your wallet at home but you’d know almost straight away that you’d left your phone behind. Conceivably you could be using your phone’s NFC technology to lock your front door. Unfortunately, despite speedier payment, the queue at the lunchtime sandwich counter won’t shrink dramatically because companies will take the opportunity to reduce staffing levels. Some retailers may even start to refuse cash altogether or regard it with the same scepticism they now view cheque payments.

With NFC-capable phones able to send and receive data we’ll begin to see the emergence of smart posters, signs and advertising. By touching their handset to the poster, users could download anything from directions and product information to ringtones and free coupons. We could even vote for our favourite pop idol (should we feel the urge). Such technology has already been tested in a number of Asian markets. A trial by Mastercard in Taiwan, for example, allowed users to download a coupon for free popcorn from a movie poster. A 2008 test in Japan enabled users to download a trailer for the WALL-E movie direct from one of the posters.

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Public Support

But will the public support the move away from cash? Indications are very favourable. As well as the rapid uptake of contactless and mobile payments in South Korea and Japan, initiatives in the UK have also been very well received. When O2 tested mobile phones also capable of being used as an Oyster card on London Underground 89 per cent of users said they would be interested in using mobiles and 68 per cent said they would be interested in other contactless payment options. The surge in online retail has played a big role in making consumers comfortable with card payments, although uptake will inevitably be slower in countries where consumers are still somewhat cautious. In Germany, for example, there are online retailers who still offer the option of paying cash on delivery.

The introduction of ‘chip and pin’ has served to significantly reduced people’s fear of fraud. Steve Perry of Visa Europe points out that fraud has fallen to a mere 0.05 per cent. NFC readers can only read a chip over a few centimetres which, their advocates reassure, make them inherently more secure. However, there will inevitably be concerns that will influence what kind of cashless payment method is used for different kinds of purchase in the future. We are not going to start buying cars or property with a wave of a mobile phone. Whilst we may use contactless payments for small items we will retain chip and pin for higher value payments and for large payments we may even be required to provide biometric authentification.

There have been several trials of biometric payments such as paying with fingerprints. One such trial is currently under way at Rewe supermarkets in Cologne in Germany using technology from Dermalog. Rewe spokesman Andreas Kraemer claims that ‘on average paying using a fingerprint takes only seven seconds, paying with a bank card that requires a PIN takes 12 seconds and paying with cash takes 20.’ There is the added benefit that while you may leave your phone or wallet at home one would hope you won’t misplace your finger. Others have suggested retina scans as a means of identification and payment and there have even been instances of people having chips implanted under the skin, such as to pay for drinks and gain access to the VIP area of the Baja Beach Club in Barcelona.

Tax and Spending

While there may always be people daft or pretentious enough to fall for nightclub gimmicks this hardly seems an option that many consumers will warm to. However, it does highlight growing concerns about what personal information is collected, who has access to it and what they might use it for. In ten or twenty years time could every move and every purchase we make be tracked centrally? As technology has given governments and corporations greater potential to monitor more and more of our daily lives the fear of a surveillance society has increased. Cashless payment methods could play a central role in this.

The attraction to governments of being able to monitor all our financial transactions is clear. While they are keen to point out how this could reduce organised crime and money laundering they’re generally less eager to highlight how the system could be used to squeeze more tax out of us. The small cash-in-hand payments to the babysitter or the odd job man could soon come under the scrutiny of the Inland Revenue. Cash could become associated with something furtive and illicit. More than that, it could one day even become illegal.

Things are already beginning to move slowly in this direction. The Greek government announced that from January next year any cash transaction over €1500 will no longer be legal. As the government struggles with the nation’s economic problems it’s keen to clamp down on rampant tax evasion. But countries with sizeable black economies may face the most resistance to the introduction of a fully cashless society. It’s estimated that Italy’s black economy equates to 40 per cent of GDP and even in the UK the figure is 12 per cent. That’s a sizeable portion of the economy that will be keen to retain an untraceable means of doing business.

A lack of faith in governments and banks could actually be entirely counterproductive. During the recent financial crisis many people sought refuge in cold, hard cash. Arguably it had been a reckless attitude towards ‘megabyte money’ that caused the financial crisis in the first place. The European Central Bank reported that the quantity of euro banknotes in circulation hit a record €762 billion in April 2009 with particularly high demand for €100 and €500 notes. This figure was up 15 per cent on the year before and suggests some nervous Europeans preferred to keep their money under the mattress. Even in a largely cashless society we’ll no doubt want some banknotes, gold coins or other readily tradable currency hidden away to guard against the worst case scenario.

A World without money?

The recent global turmoil has reignited calls for a world currency, too. With the hegemony of the US dollar currently being severely challenged, some have suggested that it should be quickly replaced as the global reserve currency, perhaps by International Monetary Fund units. Nobel prize-winning economist Joseph Stiglitz who last year headed a UN panel reviewing the financial crisis argued that such a system “could contribute to global stability, economic strength, and global equity,” and could be easily implemented in the near future. It’s a move supported by several governments including China, Russia and Brazil although, unsurprisingly, not by the United States. In reality national self-interests might prove hard to overcome but the euro shows what can be achieved.

But if people are wary of their own governments then these days they are altogether more distrusting of international banks and the people that control them. When national politicians recently declared some financial institutions were ‘too big to fail’ was it confirmation that these corporations had become more powerful than democratically elected governments? The ability to control the supply and value of a global currency could concentrate enormous power in the hands of an unaccountable elite in charge of a World Bank. Would we potentially be prepared to sacrifice our freedoms for the mere convenience of a cashless global currency? That might seem an unacceptable price to pay in any money.

For five thousand years money’s attraction has been built on portability and convertability. Importantly it has also been built on trust. This crucial ingredient means that, while we may soon be dispensing with day to day use of coins and banknotes, it may prove all but impossible to totally remove the need for physical money. While Zimbabwe shows that governments are more than capable of destroying the value of the cash in your pocket through reckless printing at least the perception is that it is practically and psychologically harder to do that creating new virtual money. With the price of good, old-fashioned gold recently reached record highs it’s clear that these fears aren’t confined to Zimbabweans.

By definition a cashless system lacks the fundamentally tangible and transparent qualities that the human psyche demands. If anything the element of trust is as important as ever as the speed and scale of ‘megabyte money’ introduces greater volatility into world markets. Perhaps in the far distant future, technology will allow us to dispense with our current concepts of work, pay and commerce. Robots labour and artificial intelligence could allow us to live a life of leisure, or at least a life where financial considerations are not paramount. We can only hope. Perhaps we should resign ourselves to the fact that so long as there is a need for money there will be a need for physical cash in some form, although increasingly as a dependable store of wealth rather than a means of buying a tuna sandwich.

title: How NFC technology works / url: How-NFC-technology-works

1/Near Field Communication (NFC) is a contactless, wireless means of transferring information between two close objects

2/ It is activated when two antennae communicate with each other through a magnetic field (for example, your Oyster card and the reader)

3/ Devices can come in the form of smart-cards, mobile phones, credit and debit cards, cash machines and computers to name a few

4/ NFC is similar to Bluetooth, but is a much faster means of communication with enabled devices able to instantly recognise each other. However, NFC has a much shorter range (making it more secure) and a much slower data transfer rate.

5/ Benefits include easy mobile payment and identification by serving-up personal info, such as bank account and passport chip details.

6/ It can be used to gain entry into other events like concerts and sports events, with Manchester City FC using NFC for its season tickets.

7/ It's likely that NFC could eventually be used to open your house, unlock your car door or open your safe.

8/ Long lines at bus stops while folks fiddle with change will be eradicated by NFC-enabled smart cards like Oyster. Speed of service in shops is also likely to increase, but counter staff may decrease as a result.

9/ iPhone app "Bump" lets users exchange contact information by "bumping fists" with the phones. Other files can be easily transferred between NFC devices at a maximum rate of 848kbit/s

10/ NFC devices could eventually decrease the load in your wallet, by eradicating the need for cash, credit cards, store cards and driving licences. All information could potentially be stored on your mobile handset. Just don't lose it.

11/ Picking up information on-the-go from smart posters and billboards will become second nature. Don't think the advertisers haven't noticed the potential.