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February 27, 2012

QR codes versus NFC: Cheaper, but worth the risk?

In recent years, we've seen discussions on the value and viability of near-field communications (NFC) apps morph from the hypothetical to some actual real-life deployments. Google has rolled out an NFC mobile wallet, and others are on their way for trial rollouts, as we discussed in last week's post. As this burgeoning industry takes shape and the costs and barriers become more apparent, some interim and quite disruptive technological alternatives are gaining attention—namely QR (short for "quick response") codes. In fact, many merchants today are touting QR codes as the near-term alternative to a more costly deployment of contact and contactless chip-based payments using NFC and EMV interoperability and security technology standards. They are touting these QR codes despite the superior security that chip technology affords. These discussions beg the question: are short-term economic gains realized from less costly QR code technology adoption at the expense of payment security?

How do QR codes work?
example qr code QR codes are a two-dimensional form of barcode whose contents can be decoded electronically at high speed. QR code use exploded in 2011, and telephonic technology has expanded to support their application for storing all kinds of data, including URLs. As a result, consumers are increasingly using QR codes to access magazines and newspapers on the Internet and to find online product reviews by scanning price tags. The camera in a smartphone captures the picture of the QR code, and then decoding software helps the phone connect to a website or a file download.

QR codes and malware
Unfortunately, there is no way to visually discern whether the data contained in the QR code will direct the user to a malicious website or application. Infected QR code problems are just beginning to emerge because most people simply don't know the best way to protect their mobile device. According to Marian Merritt, a Norton online safety advocate, "fewer than 5 percent of people have got some form of security on their mobile devices." 2011 in particular witnessed an upsurge in hackers using QR codes as a means of transmitting mobile viruses in Russia. According to a recent report by AVG Technologies, scanning a QR code and executing its hidden applications on a mobile device is akin to "running an unknown executable on your computer." Mobile-related hacking events are expected to rise in 2012 with the advent of more advanced QR code-enabled mobile applications.

Should economy trump security?
QR codes fulfill a wide range of functionalities, but should they be used for payments? Starbucks has realized considerable success with its QR code-based mobile payment app with millions of transactions since it launched one year ago, and merchants are receptive to a more affordable point-of-sale payment acceptance system generally.

The risk of fraud in micropayments and closed-loop payment systems—such as the QR code prepaid business model that Starbucks uses for a cup of coffee—may not be as significant as for larger, open-loop transactions. Ultimately, QR codes may play a viable role in some smaller, and less risky, payment applications. Payments industry participants should carefully consider the ramifications of a strategy that expands their use more generally in lieu of NFC-enabled payments.

Cindy MerrittBy Cynthia Merritt, assistant director of the Retail Payments Risk Forum

February 27, 2012 in contactless, fraud, mobile payments, risk | Permalink

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