In the coming year, low-value payments and prepaid cards will be increasingly mentioned in the same breath, especially in conjunction with off-line, contactless methods, says Gwenn Bezard, partner in Aite Group.

Pilots, and even some deployments of contactless payment cards, will be making a significant appearance, if only because banks are pushing them. The main sticking point from the merchant perspective, Bezard says, will be the cost of interchange, but he expects some banks to offer breaks on fees, if only to give the venue a running start. He is optimistic that big merchants will follow Starbucks’ model and offer rechargeable, merchant-specific stored-value cards as a means of gaining market share and promoting customer loyalty.

This doesn’t mean that MasterCard and Visa’s stored-value products don’t have a lot to offer, he says. They are of course the elephant in the prepaid low-value room, and neither is likely to let such a promising venue escape their gravity fields. “If they want to demonstrate and make a point, it will be tough for merchants” to do it on their own, he says. But, he adds, “For merchants, stored-value cards represent an alternative they can offer their customers as a way to capture a slice of that transaction activity.”

Stored-value card activity will pick up steam in 2006, especially as mercants realize the savings represented in acquisition costs. One possible surprise, according toBezard: Stored-value cards being offered by PayPal—cards that PayPal is now piloting in its cafeteria. He says some merchants may well climb on board if–and when– they become available.

Considering the relative size of PayPal compared to the average card issuer, the anxieties typically heard about what, after all, is only a unit of eBay may be somewhat exaggerated. PayPal is more of an innovator and good example, rather than a real threat to this country’s huge banks, which after all control much of the payment-card business.

The coming year will witness many experimental forays into this area, as the industry seeks the model that works best. In any event, the success of the entire idea depends on the deployment of contactless-enabled, point-of-sale terminals, and who’ll pay for them, points out Bezard. The cost and the implementation are bound to create some interesting conversations as 2006 unfolds. “It’s not easy to create a new payments’ system,” he says. “It doesn’t happen overnight.” (Contact: Gwenn Bezard, Aite Group, 646-485-1193)