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Transport for London has made it official, announcing its planned move to accept contactless debit and credit cards for fares on buses in time for the Summer Olympics next year, and on the rest of its transit network by the end of 2012.

The move by the transit authority to accept open-loop payment on its massive network will provide a big boost to the rollout of contactless payment in the United Kingdom, where about 12 million contactless credit and debit cards are in circulation, accepted at roughly 40,000 merchant locations. UPDATE: Transport for London later hit delays in launching open-loop payment, only managing to accept contactless EMV credit and debit cards on buses by the end of 2012 and, likely on the rest of its transport network by the end of 2014. END UPDATE.

"We will be the first in the world to allow the millions using our Tube, trams, buses and trains to benefit from the ease of using this technology," London Mayor Boris Johnson said in a statement.

As previously reported, London is planning to equip all of its 8,000 buses to accept contactless bank cards by the start of the Olympics, in July of next year. This would enable both UK and foreign visitors with standard contactless bank cards, such as those supporting Visa payWave and MasterCard PayPass, to tap to ride.

And for the first time, the transport authority has publicly given a timetable for the rest of the rollout of open-loop acceptance–on the London Underground, trams and overground trains–which it said today would be ready by the end of next year.

Transport authorities in some other big cities, including New York, Chicago, Philadelphia and Washington, D.C., are also planning a move to open-loop payments. But London, one of the largest public transport networks in the world, is expected to arrive first with the open-loop rollout.

Tapping in on Fare Revenue
The huge transit authority brings in nearly £2 billion (US$3.2 billion) per year from fares on its extensive network of buses, subway, trams and trains. Most of those fares are paid with Transport for London’s popular closed-loop fare-collection card, Oyster, which the transit authority estimated last June was tapped about 13 million times a day. The transit agency has issued about 40 million Oyster cards since 2003.

By comparison, Barclays and its credit card arm, Barclaycard, which have issued the vast majority of contactless bank cards in the United Kingdom, announced in late 2010 that contactless-payment transactions at the point of sale would only surpass 1 million–for the entire year. For journeys on the London Underground, riders have to tap twice per transaction, when they enter and exit gates.

Transport for London has made it clear it wants to get out of the business of changing money and collecting fares. It will continue to accept Oyster cards, but hopes to reduce costs by allowing banks and payment card networks to take an ever growing share of those transactions.

Banks and card networks, such as MasterCard Worldwide, which has made an aggressive push into transit payments for its PayPass contactless application, hope to tap in to that revenue stream by treating Transport for London and other transit agencies as "merchants," though with their high volume of transactions, the agencies would be able to negotiate a very good deal on transaction fees.

Encouraging Contactless Payment
Contactless card issuance and merchant acceptance, while continuing to grow, have not taken off yet in the United Kingdom.

Banks and card schemes see enabling consumers to use their contactless bank cards to pay for rides on the bus or metro as a way to get them to tap more often to pay for purchases at stores with the same contactless bank cards.

They also believe that transit authorities and operators giving consumers another place to tap their debit and credit cards to pay will encourage more banks to issue the cards and more retailers to install contactless terminals.

"The acceleration of acceptance landscape is definitely moving apace, and the Transport for London announcement is going to be quite pivotal," Jason Field, head of UK PayPass product management, told NFC Times. "Those merchants that may have been thinking and assessing from afar, may be thinking (more intently now) whether they would want to accept contactless payment."

Barclays and Barclaycard, which together have issued 11 million contactless debit and credit cards and which also account for most of the contactless retail terminals in place in the United Kingdom, told NFC Times in a statement that the bank expects contactless payment to become "mainstream" in the UK market by the time the Olympics rolls around. "With the majority of travel transactions falling under the £15 (US$24) limit, transport is an ideal application for contactless technology."

Preparing for NFC
Transport for London is also interested in enabling riders to pay for fares with both Oyster and open-loop payment from NFC phones. It has participated in NFC trials and been testing the technology in-house.

An NFC trial that launched in late 2007 put Oyster on an embedded chip. But UK mobile operators would likely insist that secure applications be run on SIM cards they issue, and internal tests have shown that the Mifare DESFire technology Transport for London has been moving to for Oyster is too slow when run on present NFC-enabled SIM cards.

The transit agency requires 500 millisecond transaction times or faster, and it’s not clear yet whether SIM cards in NFC phones running either DESFire or PayPass or payWave can achieve that. Vendors, however, have said they are confident transit ticketing on NFC-enabled SIMs will be fast enough.

In any case, the move to accept open-loop payment from either cards or NFC phones will not be a snap. More than 20,000 Oyster card readers have to be upgraded to also accept PayPass, Visa payWave and contactless payment from American Express cards. Many of these terminals are already being upgraded as part of their normal replacement cycles.

But enabling riders to tap with their bank cards also requires a large backend system to calculate fares and grant discounts and implement other fare policy. Just about all of the calculation at present with Oyster is done at the terminal.

In addition, the new system will have to authorize transactions differently from the way banks approve transactions at the retail point of sale. Payment card networks, such as MasterCard and Visa, are adapting their authorization rules to fit the fast-paced transit environment.

For example, the system will not authorize a debit transaction by checking immediately with the cardholder’s bank. There is not enough time for that at a busy metro gate.

The system is expected to authorize transactions in batches, later. If there are insufficient funds in a rider’s account, Transport for London could block the card at the terminal the next time the cardholder tries to use it, mainly with a blacklist on the terminal. The system is also expected to accept prepaid bank cards, which would require different authorization.

Besides enabling visitors to London to use their foreign-issued payment cards to ride mass transit in London, the move to open-loop also makes it easier to bring in other transit operators, because the bank-card networks will clear and settle transactions, just as they do when a consumer uses a card for a retail purchase.

Transport for London said it is discussing with National Rail train operating companies that accept Oyster in stations in London about also taking contactless bank cards. And riders could use the same open-loop contactless cards in other UK cities and cities internationally that are equipped to accept the standard contactless payment cards or applications on NFC phones.

There is already a national standard in the United Kingdom, ITSO, to promote interoperability of closed-loop transit cards. That effort is likely to lose even more momentum if open-loop payment takes off.

And with Transport for London accounting for more than half of transit-fare revenue in the country, this appears to be a likely outcome.