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Based on Apple's press conference on September 12, their strategy can be described as: change customer behavior now, encourage an upgrade later.

The Apple wallet is going to be called “Passbook.” It works without an NFC chip, relying instead on geolocation to determine if an iPhone user is in the proximity of a compatible terminal. Geolocation is clearly not a permanent solution because it includes obvious problems, such as: unwanted notifications (if you ever want to be notified that you can use your Starbucks card, for example, you'll be notified whenever you can possibly use your Starbucks card, whether you want to or not), and imperfect functionality indoors (when you are in a shopping mall, GPS has a hard time figuring out exactly where you are).

So if geolocation is not the ideal permanent solution, why did Apple exclude NFC from the iPhone 5?

1) Leverage available products, and other people's money (OPM). There are no iPhone apps in the Apple App Store that support NFC, which makes sense since there has never been an iPhone that supports NFC. By contrast, there are dozens of applications that support QR codes and bar codes. Any iPhone app that displays a QR code for the purpose of being scanned by a terminal is a candidate for Passbook. The beauty of this model is that some company other than Apple has already paid to develop the QR/bar code processing, paid for training employees, and paid for scanning equipment needed at point-of-sale. With all of this third-party investment in place, a company that wants to put their ticket/coupon/card into Passbook simply needs to load their information into the Passbook template.  From there, it can take advantage of the key Passbook feature: opening from a locked screen.

2) Locked–screen access. Passbook opens from a locked screen.  No third-party app can do that. Because Apple writes Passbook, it is integrated with the OS, which allows the app to open directly from a locked iPhone screen, straight to the scan-able code, which is a considerable advantage because it saves the user 2 to 4 steps per transaction.

3) The hardware and the battery:  We know NFC technology takes up physical space within the phone, and uses power from the battery. Judging by the previous two points in this article, Apple is choosing to take advantage of systems and technology that have already been deployed. By not including an NFC chip in the iPhone 5, Apple has time to figure out if it really wants to include an NFC chip in the next version of the iPhone, or possibly the version after that. If they choose to include NFC in a future version, they will have time to figure out where to squeeze in the NFC chip within the very crowded chassis of the 18% thinner iPhone 5. Also, Apple is serious about maintaining long battery life between recharges, so they will want to ensure that the NFC chip does not use too much power. For example, consider Apple’s deployment of 4G technologies. 4G has been around for years now, but the iPhone 5 is the first iPhone to include 4G compatibility. Why? According to the press conference this week, Apple wanted to make sure they could maintain a long battery life because 4G uses more power than 3G. So, if Apple was willing to wait over 2 years to get the customer experience right with 4G, it makes sense that they would be willing to wait to get it right with NFC.

4) Big Data Has to Start Somewhere:  So why didn't Apple simply wait for an iPhone with NFC before it deployed Passbook? Understanding customer behavior of the mobile wallet is important to try to understand what each customer is ultimately worth over time. Apple will begin collecting whatever data it can with the sale of the first iPhone; Apple will eventually be able to draw conclusions based on this data. For example, Google Wallet has been in the market since in September 2011. Google appears to be making major decisions already – the move to the cloud and the elimination of the prepaid card – which are based in part on the full year of market data it has accumulated. Compare that to Isis, which has no data to analyze yet, and according to sources, we won't know the new timeline until October. Apple was smart to start collecting mobile wallet data by launching Passbook now.

5) Buying a new iPhone is good for Apple:  Many thought Apple would include NFC hardware in the iPhone 5 to allow for the option of a Passbook upgrading to NFC without requiring the user to buy a new iPhone. But, since the iPhone 5 does not include an NFC chip, the customer is out of luck if Passbook evolves to support NFC in the future. Apple is unlikely to support a third-party micro-ST solution or a SIM card solution to NFC because Apple likes to control all of the hardware that is directly involved with its OS. So, buying a new iPhone will be necessary to support NFC. And, that is good for Apple. According to Apple’s 10–K report released in late October last year, iPhone sales accounted for 43% of revenue.  So creating an incentive for customers to buy another phone is a good thing to Apple. Even if all of the iPhone 5 buyers need to upgrade their phones in 2 years to take advantage of NFC, that fits into the average time it takes for an American user to upgrade their phone–which is about 22 months. So an upgrade in 2 years is unlikely to raise too much customer ire.

Despite advocates on both sides of the NFC question, Apple's decision appears to be made based on logic and future revenue. As soon as Apple considers NFC as an indispensable addition to iPhone sales, Apple will begin designing NFC into the next iPhone.

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User Comments – Give us your opinion!
  • Andy Miller
    I go with the control point being the most important. Currently the contactless payment either requires a special sim and therefore involvement / influence by the carrier or 'in the cloud' which has the disadvantage that there is not always a signal in store.

    It would not surprise me if Google are working on a link to charge via iTunes therefore owning the whole process, and no doubt taking a cut along the way. Imagine what getting just 1 cent from each transaction globally could make in a year 3-4 years after introduction? That would make waiting worth their while for a year or two.
  • Eric Stauffer
    While this is big news within a small segment, it really is not that important for the typical consumer. There is no way that consumer spending behavior would change from credit card to NFC over the course of a few years, look how long it has taken to move from cash/check to credit cards.

    Older generations still do not trust technology (many often think buying something online is more dangerous than handing your CC to a waiter who walks away with it). They will not use NFC.

    Merchants already despise the processing companies and feel they are getting gouged every month, so what is the likely hood small businesses are going to upgrade their equipment to something more expensive? They won't until all the major retailers have done so and proved that people want NFC.

    People will still have to carry around other forms of payment anyways, so it would not replace the wallet. Apple is not missing out on anything.
  • Philip Cohen
    Hmmm, no NFC? Has anyone ever considered that Apple is not infallible and not every decision they make will be the right one?
  • Philip Cohen
    Hey, I'm 72 and I use an NFC MasterCard, thank you ... and NFC at POS is already well established in major retailers in Australia ...
  • Dan NIANG
    reason 2 : yeah, passbook opens the security... so why did we made security, can somebody recall me ??? reason 3 : NFC consumes so little energy that you wouldn't be able to make the difference at the end of the day (one phonecall of 3 seconds will consume more than the whole NFC day !) Conclusion : except making money, there no reason why there is no NFC on iphones. One more reason to leave these people alone on their (narrow-minded) planet...
  • Philip Cohen
    US retailers are going to be dragged kicking and screaming into the twenty-first century with MasterCard/Visa announcing mandatory EMV/NFC Chip+PIN by October 2015; of course, much of the rest of the world will have it earlier, in Australia “chipped” cards have been on issue for some years and Chip+PIN is mandated for 1 August 2014 ... In the meantime, hello "MasterPass", goodbye clunky "PreyPal" - it has not been nice knowing you ...
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Latest posts by David W. Schropfer
David W. Schropfer
David W. Schropfer is the co-founder of the Luciano Group, an international consulting firm, where he is responsible for strategic development and negotiation for the firm and its clients in the areas of mobile payments, partnership agreements, and interconnections. He is also the author of The Smartphone Wallet - Understanding the Disruption Ahead, the first book on mobile payments for consumers and retailers.
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