Anyone who has been following the smart card industry over the last few years is used to hearing major card schemes insist, year after year, that contactless payments are just around the corner.

While the technology has been proven and stable for quite some time, the enthusiasm of the banking and merchant communities had remained somewhat tepid in many markets. However, the last two years have seen significant progress on all continents, with several countries finally moving beyond the pilot stage.

From a global perspective, the early adopter of contactless technology has been Asia, particularly for transport applications, with countries like Japan offering contactless payments as early as 2000. However, these Asian payment solutions have been largely proprietary and often country or even city-specific, in a fairly fragmented payment scheme landscape.

"While the small size of such schemes allows them to deploy new technologies much more rapidly, there can be compatibility issues to deploy it more largely," says Cyril Villemin, director of product marketing for contactless payments at card manufacturer Gemalto. "It is the case in Taiwan and Korea, with proprietary e-purse solutions that are only accepted by select retailers."

In terms of global contactless standards like MasterCard's PayPass and Visa's PayWave, Malaysia and Australia are currently leading the charge in the Asia Pacific region. "In Malaysia, 80% of cards issued each year are now contactless," Arnaud Jullien, vice president, banking products & services, at card manufacturer Morpho (formerly Sagem). "In Australia, adoption started fairly early, in 2007 with CBA, followed by Macquarie and ANZ in 2008."

US: bypassing Chip & PIN

However, the first major market to truly embrace PayPass and PayWave was undeniably the United States, which bypassed EMV contact and Chip and PIN, to directly start adopting its version of EMV Contactless back in 2005.

This can be explained by the fact that the card schemes launched their first marketing campaigns on their home turf, but also by a stronger security business case, in a country that still relied on magnetic stripes and signature.

Today, with over 100 million contactless cards in circulation in the US, contactless represents about 15% of the country's card market. The question, now, is whether contactless could finally bring Chip & PIN to the US market, the last major country to resist this change.

"I think we will see a slightly different form [of Chip & PIN], that will work online, in the way that contactless payments are working here in the US," says Charles Walton, executive vice president, payments, at Inside Contactless, a provider of Contactless and NFC technologies.

According to Walton, MasterCard and Visa could be under pressure from major retailers like Wal-Mart, which has made EMV contact deployments in both Mexico and Canada, to migrate to EMV Contact in the US for a common North American infrastructure.

Indeed, Canada is currently in the middle of an EMV transition based on a dual interface infrastructure, which will support both contactless and contact Chip & PIN. According to MasterCard, 100% of active cards in Canada will be PayPass-enabled by next year.

"Chip payments are necessary in the US to really secure the end-point, whether on a contactless card, a dual interface card, or a mobile phone," Walton adds. "I don't think continuing to rely on mag stripe, a 1950s technology, for the end-point security, is where we're going to be in the next five years."

Meanwhile, in Europe, where EMV contact has now become the norm, the pace of adoption remains uneven. The clear pioneer in the region is the UK, where an increasing number of banks are planning to issue contactless cards, and several major retail and fast-food brands are already accepting contactless payments. Most recently, the major retail chain Boots began a roll-out of MasterCard PayPass.

Lewis Nolan, vice president, head of contactless for the UK at Visa Europe, says the UK market went from 400,000 Visa contactless cards in early 2009, to over 8 million today. "We'll probably end the year towards 12 million cards," he adds. "This represents about 10% of cards in the UK, but given the multiple holding of cards, it accounts for a higher percentage of the population."

For Nolan, the country's lead is due in part to the nature of its card market: "I think because it is one of the most mature card markets in Europe, it is the most likely to be looking for innovation and to adopt new things to enhance the payment experience, both from an issuers' and a merchants' perspective," he explains.

The need for a first mover

However, beyond the particulars of the local card market, the UK rollout also met one of the main conditions for successful adoption: the commitment of a major bank to issue contactless-enabled cards to its entire customer base. As JPMorgan Chase did in the US back in 2005, Barclays kick-started the UK market by committing in 2009 to adding the contactless feature to all new or reissued debit and credit cards.

"What we have seen is that contactless generally starts taking off on a given market once a large issuing bank decides to take the plunge and send a strong message to the market by converting a large part of its card portfolio," Gemalto's Villemin explains.

Barclays also met another important condition, with its presence on both the card issuing and merchant acquiring sides. "Countries where adoption is the fastest tend to be those where issuers and acquirers are very close," Villemin continues. "When a bank is both an issuer and an acquirer, contactless can be launched faster, with a stronger pitch to merchants, who will be assured there will be cards in the field to match their terminals."

However, merchants in Europe could end up suffering a case of transition fatigue after the relatively recent move to EMV, which could in turn delay their take-up of a new payment method. This may be particularly true of smaller, individual merchants, for whom speed of transaction may be less of an incentive than for large fast food chains and supermarkets.

Yet Villemin argues that the main hurdle for merchants isn't about technical upgrades. "They want to make sure that cards will be deployed in the market to validate the model they have been sold: a higher average ticket and faster transactions," he says.

On the continent, Turkey appears as the clear leader in contactless adoption, driven mainly by transport applications, with about 10 banks issuing PayWave cards. Poland is another high-growth market, with local banks announcing widespread deployments in the coming months.

In Italy, the country's largest bank, Intesa Sanpaolo, announced this year the first significant commercial contactless card roll-out on that market, under the PayPass standard. Elsewhere in Europe, limited rollouts and pilots are taking place, in countries such as Switzerland and France, but not on the scale of the UK market.

The French paradox

As the smart card payment pioneer, the French market's cautious approach to contactless may seem surprising. Only limited pilots have taken place so far, with a larger regional pre-launch currently under way on the French Rivera, in the city of Nice.

One reason for the French banking community's cautious approach may be the failure of the Monéo e-purse initiative. Launched a decade ago and based on contact chip technology, Monéo was never widely accepted by the merchant community, and is now mainly used for parking meters and in universities.

In fact, contactless adoption on the French market has been initiated not by a bank, but by retailer Carrefour, through its own financial services outfit. The group had a clear business case, by controlling both card issuing and acquiring in its own supermarkets.

"French banks will also issue contactless cards, but the main hurdle remains merchant acquiring," Jullien adds. "There have been a lot of successive migrations and merchants are now fully equipped with EMV contact point-of-sale terminals. The move to contactless acquiring therefore represents an added cost and so it will take some time."

The Nice initiative is described by some as a fully commercial rollout, and by one bank as a "dress rehearsal." But while the most optimistic predictions expect a country-wide rollout to begin in 2011, banks are much more guarded.

BNP Paribas, which is involved in the Nice initiative, says no date has yet been set for a market-wide rollout of contactless cards, and points out their issuance is conditioned by the "widespread deployment of contactless terminals" with merchants.

BPCE - the largest issuer in Nice through its two brands, Banque Populaire and Caisse d'Epargne - says that while it intends to eventually issue contactless cards to its entire customer base, "the pace of deployment will also be linked to customers taking ownership of this new technology".

However, MasterCard considers regional rollouts like the Nice initiative to be one of the conditions that help foster mass adoption "Other cities where we have taken this approach include Milan, London, and Warsaw," the company says. "These concentrations ensure that a targeted group of cardholders will have enough daily exposure to merchants who accept contactless payments that they begin to adopt it in their day to day habits."

It should also be pointed out that this latest French pilot is not limited to contactless card payments, but trying out a variety of business models, including public transportation and loyalty programmes.

"One of the most interesting aspect of the Nice project is that it will allow participants to evaluate all contactless technologies on a large scale pilot and try to devise a business case for each of them, be they dual interface cards, NFC phones, NFC stickers, for payment as well as transport applications," Morpho's Jullien says. "It is important for the various players to learn to work together, as contactless brings new opportunities in terms of marketing, co-branding and multi-applications."

Indeed, contactless seems to be delivering on another one of the card industry's most elusive promises: multi-application. Several commercial rollouts have already involved co-branded issuance, from Barclays' initial contactless issuance, combining a debit card and the London Oyster card public transport pass, to Lufthansa's frequent flyer payment card.

The phone factor

For Inside's Walton, however, it is the use of NFC mobile phones that will really drive a surge in contactless payment adoption, once the acquiring infrastructure is in place: "I think that is what it will take to get the market moving."

Indeed, mobile phones not only have the same potential ability to make contactless low amount purchases as bank cards, but they also provide richer interaction possibilities for loyalty programmes, coupon applications, or even expense tracking. Moreover, they may constitute a compelling solution to further secure online purchases.

"The future availability of secure payment chips in these phones should really help secure online transactions," Walton explains, "as well as giving us almost the equivalent of Chip & PIN both over-the-air and through a proximity interface, and thirdly peer-to-peer, where I expect more services to be launched by the banking community as these phones become available."As with multi-application cards, a commercial rollout of mobile payment services will require the business models to be worked out between mobile carriers, banks, and other potential players. With technology that is now fairly mature, these profit and power sharing issues might be one of the biggest hurdles to overcome.