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How Paying With Your Phone Will Disrupt Retail

Editor's Note: to see our infographic slideshow on Retail Shopping in 2015, click here.
Almost any smartphone addict dreams of paying for things with their phone. In 2011 that will rapidly become reality, owing to new enthusiasm around "near-field communications," or NFC. But it's also going to disrupt the retail world and create hyper-competition in the payments space.

For the uninitiated, NFC technology boils down to a new chip inside your smartphone that can read and interact with other NFC-enabled devices, and also with the electronic tags that are used in retail stores. The upshot: it lets you wave your phone in front of the register to pay for goods and services.

It's coming quickly. Google (GOOG) has already said that the next version of Android will support NFC chips. Nokia (NOK) has said all its phones in 2011 will ship with NFC, too, and RIM is hiring NFC engineers. Even the carriers are in on the game: AT&T (ATT), Verizon (VZ) and T-Mobile (DT) have created a joint venture called ISIS for standardizing NFC.

NFC technology isn't exactly new. A lot of point-of-sale systems already include so-called "contactless" readers that let you wave your NFC-enabled credit card instead of swiping the magnetic strip. McDonald's (MCD) credit card terminals have them; so do most turnstiles in the New York City transit system. Mastercard (MC) has been a leader in this field with its "PayPass" NFC system.

NXP Semiconductors (NXPI) is a $5.4 billion company that produces 80% of the NFC chips on the market today. According to Jeff Miles, NXP's director of mobile transactions, the retail world is about to change in a very big way.

"If I'm paying with my cell phone, that means I have my phone inside the retail store," he says. Shopping for a TV inside a big-box store? "I could be receiving all the info Sony wants me to have on that day, that time, that store," he says. Unlike credit cards, phones can do two-way communication; an NFC phone would open up a channel for the retailer to talk back, sending you time- or place-sensitive coupons and promotions.

It will also change things for location-based services like Foursquare and Gowalla. "NFC can also play a real role in check-ins," says Miles. "Instead of having the user check in with GPS, the phone can give real authentication to a retailer," he says, making check-ins a more reliable metric. "It even allows you to check in to a specific area of the store," says Miles, referring to a new phenomenon called "micro" location based services.

There are two major disruptions here: number one is the point of sale. When employees and customers both have NFC-enabled devices, there's no need for a cash register. This is one reason that retailers like Best Buy (BBY) say they are in the process of experimenting with "decentralized" checkout.

It will also heat up the payments space. PayPal (EBAY) is growing by leaps and bounds because of mobile transactions, but Mastercard (MC) is also gunning for top position in payments by investing heavily in software. Judging by its acquisition of RedLaser, eBay (EBAY) will probably be using NFC too, as part of its quest to steal purchases away from brick-and-mortar retailers.

Retailers will have to revise their in-store policies, creating new rules and regulations around the technology. Since NFC chips can work without any battery power, that means NFC phones could be used to buy things even if the phone is dead. Should that be allowed? "That's something the retailers will have to decide," says Miles. Either way, the future will hit e-commerce fast. "We believe the market will ship 5-7mil phones in the next year," says Miles, "and it will largely replace the 2-D barcode."

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