July 20, 2006
The Long Tail of RFID-Based Contactless Payment
According to a survey by a market research company, Ipsos Insight, over 100 million Americans would use contactless (RFID-enabled) credit cards for small payments. This supports a Research and Markets' paper that states that the biggest market for contactless payment is for sub-US$25 transactions in the "service station retail sector". [via TMC Net]
There is a potential Long Tail effect here. (Side note: Wired mag editor Chris Anderson's book The Long Tail was recently released. Anyone doing business online should read it.) The idea behind the Long Tail is that business on the Internet inverts the popular 80/20 rule. The latter rule says that 80% of your business comes from 20% of your customers, or some variation of that. On the Internet, this is not necessarily the case. The bulk of your business will likely come from the bulk of your smaller-transaction customers.
The term Long Tail comes from the tail of the exponentially decreasing curve showing expenditure over time or even over people. In the case of contactless, RFID-enabled payment cards, this is not an Internet-based payment system, so the likelihood of a Long Tail effect is reduced. However, the Ipsos Insight and Markets and Research reports suggest otherwise.
There's no saturation yet for RFID-enabled contactless payment cards, aka smartcards, or similar keyfobs. Regardless, small transactions would likely make up the bulk of purchases, and would thus produce the most total revenue. Hence a long-tail effect. (This can be proven using statistical calculus.)
Oddly enough, the current findings contradict that of a study conducted by Mondex in Canada from about 1991-1994. Mondex and their partners picked two small cities, one in Ontario province and one in Quebec province, for the trial. Their choice wasn't random. These two cities are considered to be demographic microcosms of spending and lifestyle habits in Canada. what goes on there tends to be a reflection of the country. Decades of demographic research have shown this to be true, statistically speaking.
Previous evidence shows that if any new product or service doesn't fly in these two cities, that they will not succeed anywhere in Canada, for the most part, and sometimes not in the US either. Mondex's trial was for an RFID-enabled smartcard. The effort was a bomb - though I'm sure Mondex would disagree - even with bonus cash incentives. (I remember it as being $5, but I could be wrong.)
What would be really interesting to see is the curve of total contactless payment amounts over ages or age groups (small increments), to see if the decline shows up in younger or older people, and whether this fits the Long Tail idea. My guess: anyone over 40 (who would have been 25+ at the time of the Mondex trial) is less likely to use a contactless card, so the long-tail effect would not apply over ages. So, my advice to smartcard providers and retailers is to go after the under-40 crowd.
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