Engadget Primed: What is NFC, and why do we care?

Primed goes in-depth on the technobabble you hear on Engadget every day -- we dig deep into each topic's history and how it benefits our lives. Looking to suggest a piece of technology for us to break down? Drop us a line at primed *at* engadget *dawt* com.

The introduction of Google Wallet felt a little too good to be true, didn't it? It's magical, like the tech equivalent of pulling a rabbit out of a hat. In reality, the tech behind mobile payments has been around since 2003 on a much smaller scale using near-field communications, more commonly known as NFC. The idea behind Wallet (amongst other services, like ISIS) is contactless pay -- using your phone as a credit card -- and is just one of the many ways NFC can be useful in our everyday lives. In fact, we're only scraping the surface of what's theoretically possible.

Google is definitely not the first company to dabble in NFC, but it appears to be poised and ready to push the tech's adoption forward at a rapid pace with the advent of Wallet and Offers. Until now the coals have been hot; but if a fire's going to start, someone monolithic has to throw a few newspapers in as kindling -- and Google volunteered. But what good is NFC if it's just an acronym that causes our eyes to glaze over? Is El Goog the only instigator? After the break we'll focus on what NFC is capable of, and why we want it on our phones as soon as yesterday.

Table of Contents

NFC, the brainchild of Sony and NXP, is at the bottom of the wireless totem pole. It allows two devices embedded with chips to snuggle up together and transmit small pieces of data between each other when they are in close proximity. This data can be credit card information, coupons, tickets...you get the idea. As all of this is rather sensitive, it means you'll need to get up close and personal with the other device in order for it to suck down your data -- a simple swipe or tap should do the trick, and your most intimate bytes will soon be whisked away into the wilds of the internet.

Remember RFID? That's the baby that started it all, and it's been around since the '90s. RFID microchips are installed in reader tags that can be found in a number of everyday items -- they're found in stores, supply chain equipment, animal tags, and even "smart" passports. There's a good chance you already take advantage of it if you have a MasterCard PayPass. There's a RFID chip installed on your credit card that, when tapped on the payment station, will complete your purchase without needing to go the "old-fashioned" route.

Since NFC is based on the same technology, it's easy to mistake it for RFID. It takes the same type of chips and bumps it up a notch by adding computing power. That's why putting it on a phone is so critical; NFC not only needs the proper hardware (an antenna and controller, both shown below) but the right software (OS platform support, apps, etc) as well.

Google Wallet is a prime example of blending hardware and software together. The Wallet is an Android app (available only on Sprint-powered Nexus S phones at first) that will store virtual versions of your credit cards, gift cards, and coupons. Go into the app, punch your PIN code in, and you'll be able to tap your phone onto the merchant's paystation to checkout and purchase stuff. But this app wouldn't do a thing if the Nexus S didn't have an NFC chip already built-in.

The full capabilities of NFC can be broken down into three key genres:

1. Card Emulation Mode - The mode in which Google Wallet and other forms of contactless pay will be based, card emulation mode is exactly what it sounds like -- the phone becomes your credit card. Emulating a traditional smart card makes it convenient for companies like MasterCard and Visa that already have infrastructures set up for contactless pay, since nothing has to be changed.

2. Reader Mode - This allows the phone to read passive RFID tags on posters, stickers, and other stationary objects that contain certain types of information on them. For instance, you could tap your phone on the reader tag in a movie poster and it would begin playing the movie trailer, provide theater times, locations, and so on.

3. Peer-to-peer (P2P) Mode - P2P offers interaction between two active NFC-equipped devices such as phones. Using this mode, you could make payments to another individual or business just by tapping the two phones together. If the ice cream truck comes barrelling down your street or if your neighbor wants to pay you for that cup of sugar they just asked for, cash would no longer be a necessary part of the transaction. Or, what if you just got a killer track and you want to share it with your neighbor on the bus? P2P Mode is the magic that'll make it happen.

As the name implies, P2P could also go a long way in creating an enhanced multiplayer gaming experience. One example we've seen already is Angry Birds Magic, a newfangled build of the world's most popular time waster. We're certain this could open up to hundreds of other uses for multiplayer gaming.

NFC technology works in a similar manner to Bluetooth -- after all, they're both wireless technologies that rely on close-range and secure transmissions -- but there are some important differences.

With NFC, it's faster to connect two devices together and it can't transmit as far. The intrigue of mobile payments is that it takes less time to swipe your phone across a device at the register than it does to whip out the plastic or check. This is one of the primary reasons phone manufacturers and credit card companies are working hard to persuade skeptical merchants; the faster a line moves, the more a company profits.

As highlighted earlier, mobile payments are just the tip of the NFC iceberg. There are virtually limitless applications and uses that could be developed for it, and here's some that are in the works (if not already out and ready to go):

• Monitor your health

• Mobile tickets for trains/planes/mass transit (see ISIS video below)

• Unlock doors: hotel rooms, cars, etc.

• Pair bluetooth devices by tapping on your phone

• Log onto WiFi networks

• Check-ins: Foursquare, Latitude, etc.

• Initiate a video chat or join a conference call

• Share files between phones: music, docs, photos

• Store mobile "punch cards" for restaurants

• Replace grocery store value cards with mobile coupons

Alright, we threw in the last couple options to satisfy our own wishful thinking; it's perfectly feasible though, so just be sure to give us credit if you decide to make it actually work.

Now, it may go without saying that both devices will need to have NFC chips and antennas installed already, but what if your handheld device doesn't have one? In the US, that means anybody that doesn't own a Samsung Nexus S or Nokia Astound; at least, those are your only choices if you're not so inclined to nab an NFC phone from overseas and use it on US airwaves. Here's a few external methods you can employ:

SIM and MicroSD cards - It's hard to believe that NFC hardware could be embedded on such a small piece of equipment, but SIM cards and MicroSD have been developed that would allow the same kinds of contactless pay on your NFC-less phone. The only negative aspect factoring into this method is the idea that these chips are laying underneath multiple layers of metal and plastic, which could downgrade the quality of the antenna's signal.

Here's a quick demo of how it works:

External sticker/sleeve - By putting your device in a sleeve or case containing the necessary hardware, you'd have an uninterrupted signal being broadcasted; these things can be a bit thicker or bulkier, however. Softbank released an iPhone NFC sticker last year that is thin enough to allow the Apple bumper to go right on top of it, yet still emits an NFC signal.

This tech has been around for several years, and the only place it's found real success to date is in Japan, so why is it taking so long to reach acceptance everywhere else? One would probably have an easier time figuring out if the proverbial chicken beat out the proverbial egg. Phone manufacturers don't want to factor in the additional cost of NFC hardware without being absolutely certain it's going to pay off for the company and its shareholders, but it's even more difficult for merchants to sign on and drink the Kool-Aid if there's no hardware for its customers to purchase stuff on. There had to be one common denominator that every player could agree on.

Over the coming years, a much heavier emphasis will likely be placed on NFC adoption. Several analysts have estimated how many phones will ship with this capability by 2015, all indicating an explosion of growth in NFC use; the chart below takes a look at one such forecast, courtesy of iSuppli.

According to the estimates, over 30 percent of all phones globally will have NFC built-in within the next four years. Why is there such a sudden spike in interest and growth?

The main driver of NFC is contactless pay. All of the other benefits listed above are just side effects, made possible because mobile payments will end up generating enormous piles of money for the banks, credit card companies, and OEMs. Several companies are involved in bringing NFC to the mainstream, but over the last year or so we've seen some highly influencial ones help bring this technology to the spotlight. So, who's largely to thank?

Google - By adding NFC hardware to its Nexus S and software into Gingerbread, Google laid the foundation to its new empire of mobile payments and other potential applications. It found traction by signing critical deals with MasterCard, Subway, Macy's, and several other vendors, and announced Wallet (presumably in anticipation of any possible Apple announcement). The company helped NFC move forward a great deal by giving it plenty of needed exposure.

Nokia - Nokia began incorporating NFC into a few of its phones a few years ago. The only one that hit any sort of stride in the US was the 6131 on T-Mobile, but the company did have a larger influence on its use overseas. Google may have struck the necessary deals and made the headlines, but it's hard to imagine NFC really picking up steam without Nokia's involvement.

ISIS - As a joint venture by AT&T, Verizon Wireless and T-Mobile, ISIS aims to integrate contactless pay and interactive coupons into your phone. The company is reportedly working to partner with Visa and MasterCard for now, and the system will be trialed in the summer of 2012 on the Utah Transit Authority in Salt Lake City. ISIS could easily be influential due to the support it has from three out of the four national US carriers.

But will ISIS clash with the Google Wallet or any service put out by other OS platforms? At the recent D9 conference, AT&T Mobility CEO Ralph de la Vega answered that question by saying ISIS is currently in talks with Google to put their services together, and that the goal of the joint venture is to unite mobile commerce, so you can keep the same wallet when you move from one carrier to another.

Let's take a look at the ISIS vision:

MasterCard - MasterCard is one of the pioneers of mobile payments and was instrumental in setting up a thriving infrastructure with Paypass. Enough time has passed for consumers to become accustomed to the concept of contactless pay, and the costs of setting it up on our phones are a lot lower thanks to existing infrastructure. Certainly having the buy-in from Google and ISIS will be extremely beneficial to continue growing at a faster rate.

Samsung / Visa - Visa has already been hard at work rolling out its mobile payment system worldwide, but Samsung has partnered up with the company to get London hooked up for the 2012 Olympics. An Olympic and Paralympic Games mobile handset will be available complete with a Visa-enabled SIM card. The idea is so crazy it might just work -- so long as the handset is offered at an affordable price, that is. International travelers will rely mainly on prepaid SIM cards to communicate during their Olympic visit, and we think having an inexpensive phone to go along with that SIM is a no-brainer. So, why not add NFC to the handset and let your new visitors take it for a spin?

These are just a few of the companies working together to make mobile commerce real. As a result of their hard work, millions upon millions of handsets will start shipping with NFC-enabled chipsets over the next year. But just as we see happen with any blossoming technology, there's bound to be some concerns along the way.

Naturally, most people have a difficult time coming to terms with leaving their wallets at home; it's a huge risk to rely solely on our electronic devices. Glitchy hardware or software can cause your phone to crash, and at one time or another we've all probably experienced a panic attack as our battery dies. Nobody will leave home without a backup, and no merchant will ditch plastic altogether, either. Most businesses still take checks and cash, after all. We have difficulty swallowing the mantra of "keep your wallet at home," since we're going to need our photo ID, licenses, permits, or other random rubbish we fill them with. And so what if it takes an extra ten seconds to open our wallet, take a card, and swipe through the machine?

The other concern -- security -- is far more important to consumers. Since we'd be using this tech to handle wireless payments and other transactions involving highly sensitive personal data, do you think anybody will want to give it a go, knowing full well it's vulnerable to possible attacks? How do we know our credit card information isn't getting hijacked every time we tap or swipe our phones? We've seen the downfall of other venues that house our personal information (we're looking at you, PSN) and wonder what the likelihood is of the same thing happening when we use our phones.

Fears of hijacked mobile payments are part of the reason why we haven't seen a massive adoption of NFC yet. It's hard to convince the general populace this is as safe (if not safer) as stuffing your life savings under the mattress, and we imagine this preconceived notion of your bank account getting broken into will take a few years to get over. The big players discussed earlier are investing a huge chunk of money to make sure this type of thing won't happen, since the success of contactless pay depends on it.

Google is not taking the security of its Wallet lightly. Purchases -- at least during this summer's trial -- will be limited to $100; the NFC standard restricts all communications to 4cm as a way of preventing malicious attempts at your personal data from the outside; and finally, credit card data is encrypted and stored away from the rest of the core OS, on a tamper-resistant chip. This information can only be accessed by specific authorized programs. As an added measure, Google has set up a system of three PIN codes before the transaction can be made: first to unlock the phone itself, second to get into the Google Wallet, and third to be required at the time of transaction. Just don't make your PIN something obvious like "1111" or "1234," okay?

With contactless pay kicking into high gear, it's normal for us to have these kind of fears. It's a whole new ballgame, after all, so should we wait until all the bugs are worked out? Since our phones will be using the same exact infrastructure as our contactless cards, there's no reason to believe the transaction side will be any less secure. The only question we have, frankly, is on the software side. How difficult will it be for a hacker to get into the Wallet app even with the security measures in place? Will the "open" nature of Android OS be Google's downfall?

We're confident that OEMs, banking institutions and vendors will all make the user's security a top priority, and are taking every step necessary to ensure our data is safe -- if they don't, nobody will buy into the idea. It doesn't mean it's foolproof, but you're living in a cave if you think that any form of payment actually is.

What phones will have NFC support in the coming months? With Sprint partnering up with Google Wallet and the other three US carriers backing ISIS, it's very likely we'll begin seeing NFC phones become mainstream in the next two years. Just in the last six months, we've seen an outpouring of OEM support for NFC tech in their phones and operating systems: Samsung will sell a NFC-equipped version of the Galaxy S II later this year; RIM announced that the BlackBerry Bold Touch 9900 will be hooked up, as well as any devices using OS 7 going forward; HTC is working on embedding chips into its hardware within the next 12 months; the list goes on. And don't forget, we're still not sure what Apple's got cooking up in iOS 5, or if we'll see the hardware built in to the next iPhone.

There's a lot to be sorted out, of course; the security measures, the support from US carriers and merchants, and the fact that each platform will need to form its own agreements with merchants since there's no universally accepted standard to bring them all together. And we wouldn't be surprised to see the government try to make its way into the whole mess in the near future.

But let's face it -- like it or not, NFC is coming in a big way. You don't have to participate if you don't want to, but we're excited to see what near-field communications will do for us. Yes, there are still a lot of wrinkles that need to be ironed out, but the increase in support in the last six months has been exponential. Get ready, because the NFC news coverage might indeed be a trickle in the desert right now, but the inevitable flash flood that's coming will be unstoppable. Truth is, we know we're going to get addicted. It's just like any other cool gadget -- the first time we get a random stranger to share the latest Gaga track with us by bumping our phones together, we'll be goners.

[Images courtesy MobileWaytoPay, iFixIt; forecast data by IHS iSuppli]