With mobile payments slated to grow immensely in the next few years, NFC is top of mind.

NFC – or Near Field Communication, for the uninitiated – is a technology that enables short-range communication between compatible devices. NFC isn’t new by any stretch of the imagination, but it has become more relevant as of late with Apple diving into it and the fact that it will play a critical role in the advancement of mobile payment systems.

The Basics of Near Field Communication

Essentially, NFC functions by allowing the exchange of data between two devices in close proximity (mere centimeters) to each other that have the right technology (NFC chips). It can work via one-way communication, where one device reads and writes to a passive receiver, or two-way, meaning both of the devices can transfer data (Android Beam, for example).

Mobile Payments via NFC

With mobile usage on the incline and mobile capabilities rapidly advancing, all signs point to mobile payments becoming commonplace –and NFC will be leading the charge. In fact, the Global NFC Transaction Market is expected to post a compound annual growth rate of almost 50% from 2015-2019.

The technology is already in place –some smartphones have NFC chips that let you pay simply by holding your device close to an NFC-enabled contactless pay receiver, in much the same way you would tap your credit card. Furthermore, with Google Wallet and Apple Pay continuing to make inroads, the concept of the digital wallet is more of a reality than you might think. As Sharon Profis of CNET predicts, “One day, we’ll all be paying for things with our phones, and NFC is the ticket to that future.”

Secure Element vs. HCE

While we can expect NFC contactless payments to grow exponentially, security is naturally a pressing concern. Given the succession of credit card data breaches plaguing big corporations, many consumers are skeptical of how safe their information (and money) is when it comes to mobile payments. But, while perfect security doesn’t exist, there are two main security options that offer complex, advanced protection – secure element (SE) and host card emulation (HCE).

Secure Element

A secure element is a tamper-resistant platform that offers a secure data processing environment – in the realm of mobile payments, it is typically a chip found inside the mobile phone or on the SIM card that is capable of hosting secure data. The NFC chip from the payment receiver communicates with the SIM card to access the secure information needed to complete the transaction.

Host Card Emulation

HCE is the ability to mimic a physical smart card (a credit card, for example) using a mobile device without using the secure element. Rather than storing the sensitive data in the hardware, as is the case with SE, it is stored in highly secure host databases that must meet stringent security criteria. HCE routes this data from these secure databases through the device NFC capabilities, allowing it to communicate with the payment receiver and complete the transaction. The phone acts as the credit card, enabling tap-to-pay functionality.

While there is some debate over which is the better method, it is likely that both will continue to grow in popularity. Many smartphones are expected to support HCE (Blackberry 10 and Android 4.4+ devices already do), and the iPhone 6 and newer iterations leverage NFC and SE, signalling that the NFC ecosystem will likely need to develop to handle both.

The question is, will the merchants and banks that are developing mobile payment solutions adapt to such an environment?