Apple: Is The iPhone 6 NFC Rumor True?

| About: Apple Inc. (AAPL)
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A January 24th Note from Sterne, Agee & Leach, discusses an exciting and futuristic topic, directly involving Apple, Inc. (NASDAQ:AAPL), that has been speculated about for some time. The matter involves Near Field Communications ("NFC") and payment technology. Further, the Sterne Agee analyst writing on the matter, Vijay Rakesh, who has been remarkably accurate pursuant to being made aware of him in recent months, believes it could be a catalyst for NXP Semiconductors (NASDAQ:NXPI), a chip maker with products in several industries, including payments.

Payment Technology And Security

Perhaps the key issue surrounding NFC is safety from fraud and theft. However, there have been "Severe security issues" to it. As an example, a smartphone can be hacked so that malicious parties are able to listen in to a room when the user believes that his or her device is switched off.

Recent problems experienced at Target Corporation (NYSE:TGT) have pushed similar matters into national focus with questioning from the US Senate scheduled. The retailer's CEO, Gregg Steinhafel, says speedier adoption of EMV is advisable. Counsel for the National Retail Federation has also called for upgraded card security. Industry experts are reported to say that "90 to 95% of cards in the US will have chips within two years." The end of 2015 has been specified as the time for EMV implementation.

Amidst security concern that has never shown signs of abating, migration toward EMV chips, as mandated by MasterCard (NYSE:MA) and Visa (NYSE:V) has appeared to be the sensible, modern route. NXP is one of the firms that stands to benefit from implementation of EMV in the USA. It is meaningfully positioned with respect to Chinese bankcard operations, and also in India where EMV is believed to be required.

Regarding the technology, a recent USA Today piece, while acknowledging improvements, states that EMV does not solve all the problems Target has recently encountered. Other foreseeable concerns involve card-not-present transactions, such as when an online purchase is made. However, EMV currently puts to rest several other security issues as NFC incurs them.

Marketplace For EMV And NFC

Yet there are considerations relevant to market dynamics such as customer privacy and likelihood of popularity. Additionally, the (un)willingness of merchants to upgrade equipment remains pertinent to EMV, even though MasterCard and Visa have already mandated it. A sensible inference is that, particularly if smartphones are able to offer NFC to their users, businesses would obtain devices capable of using EMV, NFC, and legacy magnetic stripes. VeriFone Systems, Inc. (NYSE:PAY) is amongst the companies that has been offering such products for some time.

It might all be about to play out. The reason? NFC could be a new feature in the iPhone 6! However, prior to the time an NFC-enabled smartphone is offered there probably should be plenty of places for customers to use it. It makes sense that capable Point of Sale ("POS") devices would precede phones that feature NFC. Meanwhile, there has been several headlines implying that an iPhone 6 will be released this year.

Apple's Patent Application

Delving deeper, a new story line involves a secure iWallet system with iBeacon from Apple. It stems from United States Patent Application 20140019367, "METHOD TO SEND PAYMENT DATA THROUGH AIR INTERFACES WITHOUT COMPROMISING USER DATA." Two secure air links and interfaces sound crucial for mobile communications between the user's device and the POS terminal. At least two of the claims explicitly specify use of NFC in "The first secure link:"

Claim 6: …wherein establishing the first secure link comprises establishing a near field communication link between the purchasing device and the point of sale device.

Claim 20: …wherein the computer program code configured to establish the first secure link comprises computer program code configured to establish a near field communication link between the purchasing device and the point of sale device.

NXP already has a relationship with Apple as a mobile device supplier. It is a secure connections business, as demonstrated through its involvement in EMV amongst other technologies. Several Claims in the Application referenced above describe a "Secure element (No.'s 1, 2, 8, 9, 15, 16)." Though nothing conclusive has been reviewed, Sterne Agee indicates that Apple could be a marquee secure element customer of NXP for new reasons.

While a potential iPhone that offers users the ability to make payments might be in the future, the patent discussed has not been granted. Lawful recognition of the United States Patent and Trademark Office is still being pursued. iWallet and iBeacon seem to be innovative products.

It would make sense that any possibility of using biometrics in combination has been considered, as Apple has implemented a fingerprint reader in the iPhone 5s. A Forbes article published on December 7th discusses other possibilities and offers an overview:

…since any iOS phone can turn into a point of sale, the last thing remaining in your wallet can easily be replaced as Apple has turned your phone into both an outbound payment system and a system that could potentially receive money too, with no physical credit card being required…Apple may be close to assembling a complete payment revolution.

However, if the next iPhone is to include NFC and be released this year, it would have to overcome security issues that have been thrust to the national forefront and also usability impediments. To summarize, at the least, we have a rumor.

Disclosure: I am long AAPL, NXPI, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.