Skipping NFC in the iPhone 5 will cost Apple dearly

While buying school supplies at Staples for my daughter today the new, high-resolution screen on the point of sale terminal caught my attention. But it wasn't the screen, it was the huge NFC receiver at the top of the unit (like the one pictured) that got me thinking.

I'm a little stunned at the recent rumor that Apple may have omitted Near Field Communication (NFC) hardware from the iPhone 5. 

Leaked photos of purported iPhone 5 parts show a mysterious square chip originally believed to be an NFC chip. Yesterday AnandTech threw water on that theory speculating that the iPhone 5 won't support NFC because its unibody metal back case will seriously degrade performance.

Although its still purely theoritical at this point (we won't really know until the September 12 announcement), let's assume that the rumors are true and examine why Apple might omit an NFC chip from the i5.

First, I have to say that Apple would be foolish to omit NFC from its golden goose iPhone which produces more revenue than all of Microsoft. NFC is the key to mobile payments and the smartphone can (and will) replace the wallet. It's just a matter of time.

Wallets are a classic example of analog technology and are easily replaced by something digital. They're big, bulky, inefficient, inconvenient and a security risk. Wallets are a pain in the ass and I've been looking for ways to replace mine for as long as I've had a smartphone. If forced to choose, I'd chose my iPhone over my wallet every time -- as I suspect most people would.

(For more on digital wallet replacements read my reviews of CardStar, BookBook for iPhone and Geode.)

Here are some data on the recent trends in mobile payments/m-commerce, for the unconvinced:

1. Worldwide mobile payments will surpass $170 billion in 2012 (up 61.9 percent over 2011) according to Gartner 
2. Mobile payment are expected to exceed $600 billion by 2016 (Gartner)
3. Google Wallet is now cloud-based and can be used with multiple credit and debit cards
4. Starbucks has partnered with Square to facilitate direct smartphone payments
5. PayPal is now accepted at 16 national merchants, including over 3,000 Home Depot, Abercrombie & Fitch,  Barnes & Noble, and Office Depot locations
6. Discover has agreed to process payments for PayPal
7. Retailers love cashless payments because consumers spend more

Granted, NFC is nowhere near critical mass, but Apple has the power to make it mainstream. Apple already has over 400 million active credit card accounts on file and it would be logical to link them to a slick mobile payment system tied to the iPhone.

It would work like direct mobile billing, which allows you charge a payment to your mobile account which then appears on your monthly carrier bill. Apple could do something similar with direct iTunes billing allowing customers to charge anything from gas to groceries to the credit card on file in their iTunes account. The PassBook app in iOS 6 would be the logical interface to complete these transactions netting Apple a tidy commission from every sale.

Two potential alternatives to NFC include Bluetooth LE (low-energy) and QR code based payment tokens, but they're not as fast and convenient as NFC.

Apple has at least six patents related to mobile payments but has indicated that it plans to move slowly on mobile payments. Apple likes to let their competitors do their market research for them, according to Piper Jaffray analyst Gene Munster.

The problem is that doing so leaves a lot of money on the table. Why would Apple intentionally avoid such a lucrative business when it already has 250 million iPhones in people's pockets and 400 million credit cards on file? Color me confused.

Omiting NFC hardware in the iPhone 5 could be fatal mistake for Apple. It would set it back another year behind Android devices that already contain NFC hardware and severly cripple Apple's promising PassBook app in iOS 6.

But there's hope yet, according to Mike Wehner writing for Yahoo News the iPhone 5 will "undoubtedly" feature NFC technology. I guess there's still hope after all. 

What's your take on NFC in the iPhone 5?