NFC Smartphones Could Mean Greater Customer Influence

Yesterday, Google officially announced the Nexus S smartphone which was developed by Google and Samsung to ensure tight integration of the operating system and hardware. Apart from being the flagship device for Android 2.3 "Gingerbread", supporting a new SDK/NDK, and running on new hardware specs, what interests me the most about this announcement is the integration of Near-Field Communications technology.

Near Field Communication (NFC) technology is a combination of hardware and software that uses a very high frequency to transmit data between two devices when in close proximity, typically around 10 cm or less in distance. The technology is closely related to proximity cards, smartcards, and RFID equipment and serves as an extension which integrates both a smartcard interface and reader into a single device.

The first release of Android 2.3 only supports tag reading applications, not two-way communication. This allows initial applications to use NFC for tag reading and information display to the user, but prevents more direct information exchange between devices thus limiting applications such as contactless payment at point-of-sale. Also, since NFC is integrated into the Android operating system, no application launching is required to activate NFC when in proximity to a tag. This should provide a simple and satisfactory user experience.

Working in retail IT, and specifically on wireless communication technologies, the adoption of NFC has the potential to significantly disrupt the model of B2C (business to consumer) interaction. There is currently a race by retailers to adopt developing mobile technologies that allow greater interaction with guests where retailers have the most influence over purchasing habits, at the point-of-sale. Studies show that providing customers with more information about products, special offers, and targeted messages at the point-of-sale and through mobile platforms is still the most effective method for retailers to influence the customer, and outweighs fears about competitive shopping by consumers on mobile platforms.

Many retailers have been researching opportunities for customer interaction through mobile applications, cellular networks, and in-store Wi-Fi networks. Typically, cellular networks are not robust enough to provide a reliable interaction model with consumers, especially at the point-of-sale due to signal degradation inside modern facilities. Therefore, many have begun to offer free in-store Wi-Fi using a mix of existing and new network infrastructure, or managed services, to encourage consumers to connect and interact while within their stores. The draw for consumers is the ability to remain connected in their increasingly digital lifestyles. For the retailer, enhanced customer engagement through the use of mobile applications offers the possibility to influence the customer at the point of sale, drive higher sales, increase net profit by selling higher gross margin product, and increase brand loyalty.

Retail establishments have also been aggressively researching real-time location services (RTLS) to provide  highly targeted messages and promotions to consumers while in store. However, the lack of a mature business model for this level of interaction coupled with RTLS accuracy requirements are hindering progress at this point. Targeting consumer smartphone platforms for integration is typically the focus, which allows interaction with the broadest consumer segment, especially when in-store (how often do you take your phone while shopping versus a laptop or tablet?). Since most smartphone models only have Wi-Fi and cellular communications, a Wi-Fi RTLS solution is required. However, achieving the desired accuracy, usually within 5 feet, is problematic. Current Wi-Fi RTLS solutions use RSSI-based tri-lateration, which currently cannot provide the desirable level of location accuracy, ranging from 10-50 feet depending on network design and environmental constraints. Add in the complexity of initial and recurring calibration required to keep the system performing well, and the expense can quickly exceed the benefits.

The addition of Wi-Fi or RFID tags can increase location accuracy, but is not ideal for consumer use within retail establishments since the consumer would be required to pick up an additional tagged device upon entering the store, carry it with them throughout their visit, and return the tag upon exit. On the surface, that may not seem like an issue. However, a significant implication with this approach is the decoupling of user identity from the location data. Data correlation between the user and their shopping/purchase habits is of great value to retailers for business analytics including targeted messaging, providing a personalized shopping experience, understanding consumer demographics, and much more. Retailers are still developing these consumer interaction models and should be transparent in their collection and use of such information to ease consumer privacy concerns by providing detailed information to consumers, establishing strong data security policies, and adopting a consumer "opt-in" model for the service offering.

Near Field Communications (NFC) holds the potential to offer the highly localized and personalized consumer interaction model which retailers are currently seeking, while eliminating the need for deployment and maintenance of complex Wi-Fi RTLS systems. Although NFC is not a complete functional replacement for a dedicated RTLS system, it can provide most of the consumer influence benefits while sacrificing a subset of back-end business analytics such as consumer travel paths and dwell times through the store. The combination of NFC technology for localized consumer interaction, and Wi-Fi RTLS as a supplement for business analytics seems to offer a relatively good compromise.

The race by retail establishments to interact with consumers through mobile technologies should spur development of applications that utilize integrated NFC smartphone capabilities. Engadget aptly states "[NFC] has the potential to become a very interesting new method of interaction between our devices and our surroundings." Indeed!

I will be following the development, smartphone adoption, and application development surrounding NFC technologies and related wireless technologies very closely.