By Jemima Kelly

LONDON (Reuters) - London-based fintech company SETL and global auditing firm Deloitte <DLTE.UL> have joined forces to produce a contactless card that enables retail payments to be processed and settled almost instantly by the means of blockchain technology.

The payment card, which has been successfully tested by 100 users and is expected to go into commercial production by the end of 2017, has been created for customers of FTSE 250-listed Metro Bank. The test-users used their cards to pay for cupcakes in sterling, with both customers' and merchants' bank balances updated in "live-time".

"This is fiat currency, it's real money," said SETL CEO Peter Randall, who earlier co-founded equities exchange Chi-X. "It's not a form of cryptocurrency or anything else; it’s money you can go and take out of the bank and spend."

Blockchain, which originated in the digital currency bitcoin, works as a web-based transaction-processing and settlement system.

It creates a "golden record" of any given set of data that is automatically replicated for all parties in a secure network, eliminating any need for third-party verification, and allowing for payments to be settled in a matter of seconds.

Critics say blockchain technology has not yet proven its scalability; bitcoin's blockchain at the moment processes fewer than 300,000 transactions per day. But SETL says it can process billions of transactions per day, or tens of thousands per second, allowing it to compete with the large card networks, which process around 2,000 to 3,000 transactions per second.

The payment card uses Deloitte's "Smart Identity" blockchain system, with customer identity records stored and certified by Deloitte and then sent to SETL to set up user credentials.

"(This) underlines the importance, in the new distributed ledger world, of identity management," said Deloitte partner David Myers.

SETL's Randall said the payment card would allow merchants to offer payment services to their customers for a much lower cost than the card providers that currently dominate the market.

"What this allows people to do is to effectively make a payment from their account to the merchant’s account, completely encrypted end-to-end, without having to go through all the existing very expensive legacy infrastructure," he said.

SETL is part of the Financial Conduct Authority's regulatory sandbox - an arena for start-ups to experiment with new technologies without incurring all the normal regulatory consequences of engaging in the activity in question - and has been issued with an e-money license by the FCA.

"Retail payments have for too long been dominated by a few players to the detriment of customers," said Metro Bank CEO Craig Donaldson.

"Given all the potential that blockchain has to offer, we hope that the success of today's test will play a key role in moving us a step closer to providing a more efficient and flexible service for customers."

(Reporting by Jemima Kelly; editing by Mark Heinrich)