Every one of the 273 stations on the London Underground will be fitted with gates carrying the electronic sensors and all 5,800 buses will also be "updated" to handle the smartcard.
Travellers will eventually be able to use the cards on taxis and mainline rail services as well. The cards will activate a sensor, but need not even be taken out of pockets to do so.
"This contactless travel will greatly reduce the fumble factor at ticket gates and will shorten queues," said David Bailey, projects director at LU.
Loyalty schemes will see "free" rides offered to frequent users of the Tube network. Similar to the frequent flier programmes run by airlines, LT managers say "rail miles" will encourage people to use public transport.
LT say that smartcards will also greatly reduce the fraud bill - estimated to top pounds 30m a year. At present 180 stations rely on clerks to check passengers have bought tickets to travel.
The new system received a cautious welcome from the capital's passenger watchdog, the London Regional Passengers Committee.