Cash is increasingly coming under threat from Radio Frequency ID contactless payment systems that require a user only to wave a small object such as a credit card, key ring or mobile phone near a reader terminal.

According to ABI Research, the coming year will see a sharp increase in the number of contactless payment opportunities for consumers.

"As consumers continue to use card-based transactions for smaller, traditionally cash-based purchases, contactless payment capabilities make more sense, especially for card issuers looking to increase customer loyalty and convenience," said Erik Michielsen, director of RFID and ubiquitous wireless research at ABI Research.

The analyst firm's report noted that previous generations of contactless payments were limited to closed-loop systems not tied to financial services networks. In contrast it expects 2005 to be "a year of transition".

The expansion of contactless payment from closed, branded systems to open systems tied to bank accounts and major credit card issuers will lift the services to the next level, according to Michielsen.

Merchants with a high throughput of low-value transactions offer the best chance for all parties to benefit from the emerging technology.

Fast-food restaurants are cited by the report as a good example. McDonald's is expected to deploy Mastercard PayPass contactless systems in nearly all its North American locations this year.