The fellas at ABI Research must have analysed the analysis market and come to the conclusion that there’s a gap in the market for hyperbole and overblown claims. A few months ago they pronounced the Mobile TV market "a goldmine", now they’re equally hyped about contactless payment systems, describing uptake as "Shocking and Welcome".

Now, bear in mind that ABI sell reports primarily to vendors of technology. These vendors use the reports to justify and rationalise selling the said technology to their customers. So a report that concludes "the market for contactless payments is likely to be very limited as retailers wait to see what their competitors are going to do about this new technology" ain’t going to sell reports.

So let’s read between the lines and see if we can get at another version of the truth here.

Firstly, contactless payment via the mobile phone is where you wave your mobile (or smartcard for that matter) in the direction of a terminal, which then authorizes payment to the retailer. The technology is usually based on RFID (Radio Frequency IDentification), or the more recent Phillips’ NFC (Near Field Communication).

What happens then is down to the individual system, but essentially the money can be debited from your bank, prepay payment account or mobile phone bill.

The great advantage with this system is that it’s quick and easy to use, thereby passing the first test of any mobile payment method that might stand a chance of taking off. In other words, it’s as quick and easy to use, for both user and retailer, as cash or credit card. That is, provided there aren’t some convoluted secondary security tests, over and above possession of the mobile phone itself.

As an example, if you have to wave your phone AND input a PIN, it’ll slow things up. If you have to wave your phone, press "confirm" that you authorise the transaction and then input a PIN, it’ll slow things even more. So a balance between security and usability needs to be established. What’s the betting that security wins, by the way?

The great disadvantage with this system is that it requires a significant investment in systems and hardware to get this up and running. Imagine replacing all the terminals that currently process MasterCard transactions and you can see that it’s a billion dollar investment. No wonder ABI are so effusive about all the reports they’re going to sell the size of the market.

I can’t help wondering however if the contactless payment system isn’t a little like what Clay Shirky calls the Nearlynet in his seminal essay; Permanet, Nearlynet and Wireless Data. It’s a must-read if you haven’t already.

Clay suggests that the instinct with new technology is to go for a purpose built, expensive and perfect solution to the problem (permanet). The subsequent issue is that it is frequently too expensive for users to actually afford. The solution that therefore takes off is the nearlynet one - something that kind of does the job (with some quality glitches) but is cheap and cheerful. Skype could be a newer example of a nearlynet solution.

This clearly leaves the companies investing in the permanet ideas with huge white elephants they must continue to subsidise or quietly and humanely put out of their misery.

So if the contactless payment systems might be the permanet in this instance, what could be the nearlynet? I’d say in many cases, it could be plain old sms authorisation, especially if the sales process is automated (at vending machines, for example). Sending an sms "to" the vending machine with a code representing the product you wish to purchase, is a perfect nearlynet transaction process.

So, I see the mobile payments system polarising into two different markets:

1. Automated and low transaction/micro payments = nearlynet.
2. Face-to-face and higher value transactions = permanet.

Of the two, the biggest opportunities for new entrants, are in the first area, in my opinion. The permanet area is likely to be dominated by existing big companies, like the banks or mobile operators. This may leave a sizable and highly lucrative market for the fleet of foot to quietly exploit in the nearlynet.

Story spotted on iMode Strategy