The Impact of Consumer Technology
NFC Musings in Bangkok
Earlier this month, I saw this sign at one of the larger food stalls at a night market in Bangkok. As can be seen, the merchant supports WeChat Pay and AliPay, even though it doesn’t support Visa or MasterCard. While this is interesting in and of itself, one thought that sprang to mind was that neither Apple Pay nor Samsung Pay was in the picture.
Although this was in Thailand and not China, asking the question of why both Apple Pay and Samsung Pay found limited traction in the Chinese market provides some insights.
While the existence of strong domestic competitors such as AliPay and WeChat Pay certainly didn’t help the uptake, the choice of technology played a surprisingly large role.
Payment is one of those services with a tremendously strong network effect. Adoption, by both consumers and merchants, is vital. Consumers will not readily adopt a payments method that’s not supported by a large number of merchants, and vice versa.
NFC vs QR codes for consumers
Now NFC is a fantastic technology to leverage in the West European and North American markets, leveraging off the substantial existing network of EMV terminals (in addition to NFC-enabled POS).
However, the reliance on NFC is part of the reason why Apple Pay and its ilk has found it an uphill struggle in China. Apart from the existence of large, well-established competitors in the shape of Alipay and WeChat Pay, NFC was not well-supported on Chinese smartphones.
Pretty much every smartphone has a camera; any number of apps can be used to support QR codes. However, not every phone has NFC. And when only half the population – even in China, even now – has a smartphone1, the requirement that the phone supports NFC immediately excludes the vast majority of the population.
Today, there are mixed signals whether NFC will become more popular in Asia, since some large mobile phone brands are opting to drop the feature altogether from an increasing proportion of their phone models2, despite the general trend of premiumisation in the Chinese mobile phone market.
NFC vs QR codes for merchants in Asia
Going to the merchant side, the adoption cost for NFC is just that much higher for merchants. For smaller retail operations – such as the food stall in Bangkok – using a QR code to facilitate purchases has much lower setup costs than dedicated NFC-enabled terminals or even credit card readers. Investing into NFC is unlikely to generate significant returns, particularly with such a low adoption rate on the consumer side. This is especially important in developing markets, and why low-tech solutions typically end up much more popular than high-tech or no-tech solutions.
Apart from this, having the critical mass of adoption by the consumer side is obviously an important driver of adoption.
Often, it is the adoption of a technology by consumers that drives a merchant to provide the necessary support. For consumers, their devices must be NFC-enabled before they can adopt this technology for payments (regardless of whether they are Android or iOS devices – though again this is another challenge for both Apple Pay and Samsung Pay in that both are limited to their own phones). Therefore, it makes sense to give some sense of the NFC-enabled rates for phones.
A quick back-of-the-envelope estimation for the Chinese market is shown below (grey indicates estimated numbers).
Moreover, it’s important to note that these figures are for shipments, and not installed base for each given year. Instead, the NFC-enabled rate for the installed base is probably considerably lower due to the rise in NFC in the last couple of years. Furthermore, the NFC-enabled rate is likely to be lower still in many developing Asian countries compared to China.
This means that the current (2019Q1) NFC-enabled rate in China is likely to be between 20% and 30% – assuming an upgrade cycle of somewhere below three years – and therefore a total of some 140 million ~ 210 million devices that might be able to support NFC payments of some kind. Although this may sound impressive, it is important to keep in mind that WeChat already has an installed base of over 1 billion, whereas Alipay is around the 900 million mark.
What does the future hold?
All this means, if we consider both the consumer and the merchant view, that NFC in Asia will be limited to the more premium end of the market, at least for the immediate future.
But does all this spell an inglorious demise of a once much-heralded technology? Not necessarily. Firstly, NFC-enabled rates in the US and Western Europe are likely to be considerably higher. Secondly, NFC provides a qualitatively superior user experience, and one that is likely to resonate well with the premium end of the market.
In short, NFC payments might just turn out to be the Amex of the digital wallet world – if it doesn’t get supplanted by some other high-tech solution first.