Oyster and Octopus - a tale of two cities' contactless cards

In his travels for silicon.com's latest special report, about business and technology in China, Dan Ilett encountered Hong Kong's fabled contactless payments card, Octopus. But is Octopus' grip on this market firmer than Oyster's?

This week Visa joined the race to become the accepted standard for contactless payments in the UK. The company is piloting a contactless card scheme in London to compete with MasterCard's alliance with RBS and even Transport for London's (TfL) Oyster card.

To many British people the concept of contactless payment is relatively new but in Hong Kong it has been around for almost a decade.

The Octopus card was first introduced in Hong Kong in 1997 as a public transport smartcard, much the same as London's Oyster card is now, but shareholders quickly recognised the potential to extend the use of the cards onto the high street. In 2000, Octopus soon obtained a 'deposit-taking company authorisation' from the Hong Kong Monetary Authority to expand its use to a number of different applications.

Today more than 50,000 Octopus card readers can be found, not only in most modes of public transport in Hong Kong but in other places such as car parks, shops, cafes, wet markets - which sell livestock and fish - and leisure facilities. They can even be used for access control in schools and apartment blocks.

People can travel around the city and pay for items in some shops without the need for cash.

Chris Skinner, associate director at analyst Tower Group, says: "It's been around for years so it's not surprising it's leading the world. I often think that it's a disruptive payment method for banks. Any bank that partners with a scheme like this will come out a winner."

RBS recently partnered with MasterCard to pilot its own version of a contactless payment card in Edinburgh.

An estimated 95 per cent of Hong Kong residents aged between 16 and 65 possess an Octopus card, according to Octopus Holdings. There are 13.4 million cards in circulation and only seven million people live in Hong Kong, while daily transactions of 9.4 million total HK$69m (almost £5m).

Each card, made by Sony, has a built-in microchip that can act as a digital purse, ticket and key - transmitting signals by radio frequency.

For financial transactions users wave their card over a reader and the correct amount is deducted from the card automatically. But contactless payments have advanced so much in Hong Kong that last year shops began to offer loyalty points to customers who use them - 800,000 people have already signed up for the scheme.

Graham Taylor, Gartner distinguished analyst, says: "In Hong Kong just about everyone has one. They were the first [place] to extend it beyond the transportation system.

"But not everyone agreed with it and it's not without problems. Some merchants didn't want to get involved because there has to be some sort of interchange charge. And [to do it] the transport authority in effect had to become a money issuer."

But back in the UK, plans to add electronic wallet functionality to the Oyster smartcard ticketing system suffered a major setback earlier this year.

In 2005, TfL announced it had shortlisted seven potential suppliers to transform Oyster from a ticketing system into a means of paying for goods such as coffee and newspapers. Trials were scheduled to start before the end of the year but didn't materialise. And, at the end of April, TfL said none of the suppliers had been able to meet its criteria. The rollout was put on hold.

TfL has also had some problems negotiating ticketing with overland rail companies because of disagreements over who should pay for the card readers.

So while it's taking time for TfL to achieve a contactless payment standard and a ubiquitous ticket for Londoners, the likes of MasterCard and Visa have had enough time to realise contactless payments are a huge opportunity.

Gartner's Taylor adds: "Here it's more complex because you have a number of train companies that have struggled to do it. Basically Visa and MasterCard have realised it's going to get big and they should take part. It would suit them if they were the clearing house. It would not suit the transport companies to hand the revenue over to Visa and MasterCard. And that's where the battle will occur."