Mastercard sees Apple Pay as catalyst for transit payments

Mastercard has spent years attempting to overhaul transit payments to allow riders to pay with a contactless credit or debit card. This time around, it expects Apple Pay to play a significant role.

U.S. transit automation has lagged much of Europe and Asia, hamstringing a way to improve the transit systems and cutting off a key path to migrate consumers to new forms of payments. Prior to the launch of Apple Pay and similar mobile wallets, the U.S. lacked a catalyst to convert not just subway turnstiles but the merchants that surround transit access points.

“It’s infrastructure in the U.S. that’s been a challenge,” said Linda Kirkpatrick, executive vice president of U.S. merchants and acceptance for Mastercard. “With any payment system you need an entity that can accept a payment type, an entity that’s going to issue it and consumers that are excited about using it. Having all three come together at one time isn’t easy to do.”

Chris Ratcliffe/Bloomberg

Mastercard, which has worked with transit systems globally for years to automate payments, predicts that U.S. adoption is about to change. The card network expects that new transit technology will be live in more than 20 cities in the U.S. within the next few years.

Los Angeles, Boston and Denver are already live with newer systems, and New York is opening contactless payments and mobile ticketing on subways and buses by the end of 2019. Apple Pay is also expected to go live with transit systems in Portland, Ore., Chicago and New York later this year.

Apple Pay is an important addition because it brings in more active users. Apple Pay in the past year has added merchant holdouts such as CVS and 7-Eleven, which are often located near subway stations, thus creating a string of transactions that include both transit and non-transit payments.

Also, the new Apple Card will use Mastercard’s network for merchant acceptance. Apple Card’s success is heavily reliant on driving traffic to Apple’s other services through incentives and easy navigation to payments, providing a potential kick for transit payment automation, which becomes another payment type in a mix of related transactions. Google Pay also recently added support for open transit payments.

“We’ll help each other … the Apple Card, being a digital-first program, will be the use case for transit payments with smartphones as for contactless cards,” said Kirkpatrick. “It’s another way in which consumers will be able to pay for transit while in transition.”

The help may be two-way. Contactless payments in the U.S. have lagged other markets. But as Apple Pay picks up speed, it helps provide the “acceptance” and “user” portions of the “three elements” Kirkpatrick mentioned.

“If transit went contactless and no other merchants did, that wouldn’t be as compelling,” Kirkpatrick said.

Outside of the U.S. there are ample examples of how open loop transit payments benefit both the transit system and the general uptake of digital payments. In London, open loop transit payments have been successful enough for long enough to export the technology starting three years ago. In other cities, such as Singapore, open loop transit payments are at the center of a broader “smart city” initiative to use digital ID and mobile technology to connect residents to travel, commerce and security access.

“Opening London Transport for London network to open-loop contactless cards is credited with spurring the growth of contactless transactions more broadly in the UK.,” said Zilvinas Bareisis, a senior analyst at Celent. “After all, many people use public transport daily and it’s a great, habit-forming type of transaction.”

One of the differences between these markets and the U.S. is the earlier adoption of contactless payments, and the earlier deployment EMV cards. That created a consumer and merchant base for open digital transit payments that did not exist in the U.S. until recently. The EMV upgrade in the U.S. ushered in contactless support, creating a network of mobile-ready merchants to accompany transit systems.

“In markets where contactless is part of the fabric of the payment system, it was easier to get to market,” Kirkpatrick said. “With fragmented merchant adoption in the U.S. there wasn’t ROI to update the transit terminals.

Boosting U.S. transit use through digital open payment systems will remain a challenge, in part because U.S. systems have more problems than fare collection, ranging from crowding and service problems in some cities to rider shortages in others.

And attempts to automate U.S. transit are hardly new and have not been successful. Salt Lake City's transit system tested the telco-led ISIS/Softcard mobile wallet nearly a decade ago, and Mastercard tried to automate and open New York's transit system circa 2006.

There are some differences this time. Beyond Apple Pay's growth and participation in the Mastercard project, there are security and standards improvements that didn't exist during those past efforts.

Mastercard and Visa have pushed tokenization for several years as a way to secure and standardize contactless and online payments. The token replaces a card number with a replacement value that's worthless beyond a single transaction.

“Tokenization has been the vision that payments are going digital, and to recognize that trend early and invest in the tech that enables Apple Pay transactions and thus this transit payments move,” Kirkpatrick said. “Any connected device, and digital-first program that has our tokenization in the background allows the card number to turn into a dynamic token that’s harder for fraudsters to penetrate.”