Barclaycard’s Visa debit and credit cards will soon
be used as transport cards, incorporating functionality for
payments on Oyster, London’s public transport ticketing system. The
deal is a major opportunity for driving the growth of contactless
payments, but there are challenges in making it work. CI
reportsFrom the middle of this year, Oyster – the prepaid transport
card for the London bus and underground rail (‘Tube’) system – is
to be made available on Barclaycard debit and credit cards, marking
a major advance in developing contactless payments in
Europe.

TranSys, the consortium delivering the Oyster smart card project
on behalf of Transport for London (TfL) which operates London’s
transport network, has given Barclaycard exclusive rights to place
Oyster functionality onto its Visa cards for three years. The first
cards to include Oyster functionality will be trialled in London in
February 2007 and the cards are planned to be fully launched in
mid-2007.

The licence means that Barclaycard cards could become the first
all-in-one contactless cards to combine payment and transport
functions in the UK. The new Barclaycard/Oyster card will have
three separate functions: a standard chip and PIN credit card
facility; new Visa ‘wave and pay’ technology for contactless
payments up to the value of £10 ($18); and Oyster functionality for
use on the transport network.

“The announcement is of extreme importance for European payments,”
said Guido Mangiagalli, head of new channels at Visa Europe. “It’s
the first programme to combine contactless payments and transport
in our region, although there have been similar programmes in South
Korea and Russia which have both been extremely successful.”

Visa said that this was the first time that chip infrastructure is
being used in multi-function environment for both contactless and
non-contactless payments.

“It’s a sign that contactless is arriving,” said Cameron Olson,
vice-president of business development at smart card software
providers Smart Technology Solutions (STS). “London has a
high-density population so it’s a good place for contactless to
take off.”

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The technology being used in the Barclaycard/Oyster project is very
similar to that used in the Visa Wave contactless programmes in
Asia-Pacific. “New global specifications for Visa Contactless have
been agreed by all regions,” said Mangiagalli.

Europe has been slower than many other regions to adopt contactless
payments. While MasterCard Europe is also running a number of
contactless pilot projects, notably one with the Royal Bank of
Scotland, neither MasterCard nor Visa has any mass issuance
contactless programmes in the market. Visa said that the
Barclaycard/Oyster contactless programme would first be tested
through a “family and friends” pilot before being rolled out in the
middle of 2007.

“Contactless in the UK is in its early phases of development and,
with the exception of Oyster, there has not been any implementation
beyond a limited number of small pilot projects, mainly
closed-loop, which have started to develop in the last year or so,”
said Francesco Burelli, principal consultant at financial research
consultancy Capco. “So far there has not been any relevant
development of a four-party scheme contactless solution in the UK,
with most contactless initiatives being driven either in the United
States or in the Far East. Much will depend upon how the deal
between TranSys and Barclaycard will work out: adding an Oyster
wallet and RFID [radio frequency identification] functionality is
easily achievable, but enabling the Barclaycard POS terminals to
acquire Oyster transactions is not such a straightforward
operation.”

“The Barclaycard/Oyster card will follow the same interchange
structure as today,” said Mangiagalli at Visa Europe. “When the
card is presented at the reader on the London Underground gate it
will work as an Oyster application so there is no interchange in
that regard. When the contactless functionality is used for buying
coffee, a newspaper or other items, it’s a Visa application.”

Jay Walder, managing director for finance and planning at TfL,
said: “Bringing together Oyster with the Visa ‘wave and pay’
function on a single card will allow customers to pay for low-cost
items such as coffee and newspaper quickly and securely while
getting from A to B throughout London.”

However, according to Olson at STS, things won’t be that simple.
“The major challenge is consumer confidence,” he told CI. “The next
is building the merchant acceptance network, especially larger
merchants such as coffee chains Starbucks and Costa, as well as
Boots [a chain of chemists that also has a secondary business in
sandwiches and drinks]. Those high-volume merchants don’t have a
contactless infrastructure. Oyster lost a big opportunity by not
being able to roll out a full e-money programme, which is where
they’ve lost the market.”

Huge potential

The numbers are huge – there are some 6 million Oyster cards in
force and they are used to pay for some 38 million journeys each
week. However, far from all of them will be converted to
Barclaycard Visa cards.

“The increase in adoption will come by enabling non-transport
plastic cards – Barclaycard’s debit and credit cards – to operate
contactless functionality through the Oyster wallet for transport
ticketing functionality and through Visa’s ‘wave and pay’ for other
types of merchants,” said Burelli at Capco. “Oyster cardholders are
already used to the convenience of proximity payments on an

e-wallet to pay for their daily transport needs. Barclaycard should
not find it difficult to convince its London-based cardholders to
add the Oyster functionality to existing cards and, by recruiting
merchants to accept proximity payments, to create the minimum core
critical mass that would be required to kick-start the mass
adoption of contactless payments in London and the south-east of
England.”

Oyster cards also have a large role to play in cash replacement.
The pricing structure of Oyster means that it is far cheaper to use
the card than to pay for a transport ticket by cash. “Passengers
who switch to Oyster pay-as-you-go will save money, as Oyster fares
are always less than the cash fare,” said TfL.

Launched in 2003, Oyster is already a well-developed product. Up to
three different travel cards or bus pass season tickets and
pay-as-you-go functions can be stored on the same Oyster card at
one time. The card can be topped up through a range of channels –
online, over the phone, at Travel Information Centres or at one of
2,300 Oyster-

enabled agents. According to TfL, 85 percent of all Londoners live
within 400m of an Oyster ticket shop.

There are major implications about what this means for the future
of Oyster. “Unless Barclaycard is planning to expand the Oyster
wallet into a wider merchant acceptance other than transport,
Oyster usage will remain confined to the transport environment,”
said Burelli at Capco. “In this scenario, we will keep seeing
Oyster cards as we know them right now and some Barclaycards with
Oyster payment functionality as an add-on.”

Burelli added that Oyster’s long-term future could depend on the
popularity of Visa’s ‘wave and pay’ function – given that Oyster is
already an expensive scheme to run, at some point in the future it
may be more viable to incorporate the programme into an
international contactless scheme, according to Burelli. “In that
case TranSys could easily close its issuing role and remain a pure
merchant with a wider POS base,” he said.

Successful in Hong Kong

Hong Kong’s Octopus card has long been a model prepaid card system.
Like Oyster, Octopus has been along a steady path of evolution from
being accepted solely for mass transit transport payments to
expanding its network of merchant acceptance. In 1994, Hong Kong’s
major transport operators formed Octopus Cards. In 1997 it had
issued 3 million cards in three months and two years later the
company began its own independent operations. In 2001, it was
approved as a deposit-taking company by the Hong Kong Monetary
Authority.

There are now some 13.8 million Octopus cards in circulation; over
95 percent of the population between 16 and 65 has a card. Daily
transactions total an average of 10 million with a value of £4
million. Some 390 merchants accept the card and there are over
50,000 Octopus readers in the market.

However, Burelli believes that there are a number of points still
requiring clarification before the Oyster/Barclaycard business
model can be exported.

He said: “I think that it is too early to say anything about the
exportability of the model to the other markets simply because the
model is far from being clear at present. There have been a number
of discussions in the recent years between banks and public
transport organisations in Europe but without any significant
agreement or joint initiatives being developed. Technically, a
bank-issued payment card can easily hold a transport proximity
payment but there are issues about the position of monopoly that a
bank would gain in case of the transport card being available only
as an add-on to a bank card.”

Octopus card: 2006 statistics