A New Age for Transit Payments?

  A few months ago, Greg Garback, an executive from Washington, D.C., was on a business trip in Manhattan and needed to get uptown, so he decided to take the subway. Instead of purchasing a prepaid MetroCard, he headed straight to the turnstile, waved his Citibank MasterCard PayPass key fob over a reader, and within 300 milliseconds the fare gate opened.
  Garback, who is executive officer of the Department of Finance at the Washington Metropolitan Transit Authority (WMATA) in Washington, D.C., was one of thousands of riders taking part in a trial co-sponsored by the New York City Metropolitan Transportation Authority (MTA), MasterCard Worldwide and Citibank. The project's goal is to test the feasibility of allowing open-system contactless smart card devices to pay transit fares directly at fare gates without the need to purchase separate closed-system transit cards.
  "Swipe is dead, long live the tap," Garback told his colleagues when he returned to WMATA's office in Washington.
  Garback is accustomed to WMATA's system, which enables riders to buy a prepaid transit card using a bank-issued card. The prepaid card is inserted into a turnstile to access the gate.
  But whenever he is in New York, Garback says he hates the time it takes to purchase a fare card and then try to swipe the system's prepaid magnetic stripe card so it reads correctly. Being able to use a contactless card-and his own bank-issued card at that-is revolutionary for an industry that traditionally has operated closed payment systems accessible only with proprietary tokens or prepaid mag-stripe cards, he says.
  As chair of the Smart Card Alliance, Garback is not an unbiased participant in the New York trial. In his position, he and other transit officials believe open-system contactless payments could revolutionize the way transit agencies do business.
  "Public transportation agencies are nothing more than big box retailers of transportation services," Garback says. "We're no different than 7-Eleven. A few years ago 7-Eleven only took cash. Now they take just about any form of payment, including contactless, and that's where we want to go. We need to make riding transit so easy on consumers that they have no excuse not to use transit."
  The test in New York, as well as a contactless pilot involving Utah Transit Authority buses along the Wasatch Front ski area near Salt Lake City, should help transit agencies determine whether acting more like big box retailers by accepting bank-issued contactless cards directly at fare gates can provide a boon to the $11 billion U.S. transit market and add convenience for their riders.
  But even if the pilots prove successful, whether the integration actually occurs remains to be seen, some analysts warn.
  To date, banks and credit card issuers have issued more than 13 million contactless payment devices, including key fobs and Near Field Communication-equipped mobile phones. Moreover, more than 32,000 retail locations worldwide accept contactless payments, according to the Smart Card Alliance. The cards use the same ISO 14443 tap-and-go technology standard that many transit operators use with their propriety contactless card systems.
  At the same time, the payments industry is increasing its focus on expanding its share of the micropayments industry, says Kathleen Reilly, MasterCard vice president of advanced payments. "We want to show customers that PayPass brings speed and convenience to everyday purchase," she says.
  To help do so, PayPass has relieved merchants of the risk for payments less than $25 and no longer requires consumers to sign transaction slips for low-value sales. Issuers now assume the financial risks for such payments.
  The combination of the two industries sharing the same standard technology and the payments industry's increased focus on expanding its share of the micropayments market may create a perfect storm. The aftermath could result in transit being able to adapt to a changing culture in which consumers can initiate tap-and-go payments everywhere from McDonald's to 7-Eleven, says Paul Korczak, MTA program manager.
  Such a move would begin to allow transit agencies to meet their long-term goals of moving away from being card issuers, adds Steve Frazzini, MTA's fare-collection program manager. "[Presently] we have to deal with purchasing and reordering cards, keeping track of our inventory, distributing the cards, tracking the cards, dealing with customer claims and replacing those cards," he says. "If we could unload those responsibilities and become more purely a merchant, it makes a whole lot of sense."
  With the MTA pilot, Frazzini and Korczak are examining if unloading those responsibilities will work for both the agency and for customers. So far, the pilot, which encompasses 79 turnstiles throughout 30 stations along the subway's Lexington line-from the 138th St. Station in the Bronx to Borough Hall in Brooklyn-has yet to experience a single difficulty, according to Frazzini.
  "In New York City you can't afford mistakes," says Reilly, noting that the pilot has seen "tremendous consumer uptake."
  However, moving beyond a pilot may prove difficult as agencies such as MTA incorporate contactless payments into their systems, notes Brian Triplett, senior vice president at Visa USA. Yet both transit agencies and the payments industry have a stake in working together to overcome those difficulties, he adds.
  SHARED WALLETS
  Indeed, from the payments industry's perspective it makes sense to help agencies reduce the number of cards they issue since banks' debit and credit cards already are in their customers' wallets. Moreover, the process could help issuers increase transaction volume among their card bases, says Triplett. With millions of riders each day using public transit in the nation's biggest cities, transit represents a prime market for issuers looking to gain revenue for their contactless credit and debit cards, he adds.
  However, any suggestion that the transit and payments industries are approaching a natural convergence does not mean that the widespread installation and acceptance of contactless payment devices will occur overnight. The two sides first must overcome a number of obstacles, including figuring out how to aggregate small payments and to develop a means to process varying fare scales, including those based on distance and time of day.
  However, David Stone, head of business development at the small-payments technology company Peppercoin Inc., is confident each of the challenges can be overcome if the interested parties work together.
  Waltham, Mass.-based Pep-percoin's research has shown that nearly 80% of consumers are willing to use credit or debit cards for transit. And Stone contends that contactless cards quickly could become the predominate form of transit payment.
  Peppercoin is working with the Utah Transit Authority (UTA), which previously had no automated fare-collection mechanism, to aggregate transactions from buses and send them to processor Chase Paymentech Solutions LLC as a bundled transaction. Once the pilot begins around Dec. 15, Craig Roberts, UTA electronic fare collection manager, anticipates significant savings for the agency because it will send fewer transactions to be processed.
  In New York, the platform that MasterCard developed for the pilot is to aggregate the contactless PayPass transactions. However, Korczak notes that the aggregation may be outsourced to an outside vendor after the trial so that the system can accept other brands' contactless cards as well.
  With every 10th paid fare or every 14 days, whichever comes first, the agency sends a rider's combined fares to Chase Paymentech, the agency's contracted processor, as a single transaction for settlement. The net result has been "extremely positive," says Korczak, because of the savings to the agency.
  To date, MTA has been satisfied with the pilot and, as of C&P's press time, officials there were planning to expand the test to include buses and NFC-equipped mobile phones. Doing so would ensure MTA that the contactless technology can provide a means to access all modes of transit, says Frazzini.
  But even when MTA expands its pilot to include buses, New York's fare structure remains "elegant in its simplicity," says Garback. New York's fares are the same for most riders, but a switch to contactless-payment acceptance for WMATA would require a more complex approach. WMATA's system uses varying single-ride rates based on distance and time of day, applies discounts for children and seniors, and offers weekly and monthly reduced-fare passes, Garback says.
  Yet Garback says he already has a solution in mind. What WMATA could do, he says, is make turnstiles essentially payment terminals. Contactless payment devices could then be used to track when riders enter and exit billable transit services, and fare collection could be based accordingly.
  "We'll take the transaction, bounce it against a fare table, price it out, and that's the cost of the transaction," Garback says.
  His solution is similar to the EZPass electronic fare-collection system, which keeps track of when cars enter and leave a tollway or turnpike to determine how much to collect at tolls.
  NOT SO FAST
  Yet even if the system works well, transforming transit from its traditional closed business model to a merchant-like open model will take time, especially for small- and mid-size agencies, says Garback. But when agencies compare the cost of their existing propriety fare-collection infrastructures to that of making turnstiles payment terminals, they will begin to open up their business model, he contends.
  Garback's notion of the future integration of contactless credit or debit cards will not occur overnight, and it may not even occur at all, says Willy Dommen, principal at Booz Allen Hamilton, noting that consumers first have to adopt contactless cards for their everyday purchases before transit agencies can begin assuming that they will use them for transit.
  "Transit alone is not a sufficient business to drive the adoption of contactless," he says. "First we have to get to a point where, from a merchant perspective, you can't do anything but accept contactless."
  However, Garback suggests that the current rollout of contactless cards is just the tip of the iceberg. "Within the next three-year [bank card] renewal cycle everyone will have one, and we'll see a gradual shift as people migrate from paper money to plastic," he says. "We're all looking for speed and convenience, and that's the key message."
  Though Atlanta is going entirely contactless with its transit-fare system, in most cases mag-stripe cards or tokens are not going to disappear from transit anytime soon, Garback adds. Instead, he sees transit in the future offering the traditional payment methods plus contactless payment devices.
  If both the MTA and UTA pilots prove successful, a number of subsequent pilots, including some involving Visa, will begin next year, says Triplett. "All the right people are engaged," he says. "The biggest thing we're dealing with right now is whether we're asking all the right questions and solving the right things."
  Whether the right questions are being asked remains to be seen. But it seems doubtful that swiping cards at turnstiles will be replaced by tapping contactless devices instead any time soon.
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