IMGCAP(1)]
This story appears in the January 2009 issue of Cards&Payments.
Last fall, Visa Inc. and prepaid card manager and kiosk supplier Ready Credit Corp. made the Los Angeles County Metropolitan Transit Authority an offer too good to pass up.
The companies agreed to pay for L.A. Metro to hold a 25,000-person trial this year of cobranded prepaid cards that cardholders could use to pay for both transit and retail purchases (
In return, the transit authority would give Visa and Ready Credit access to its tens of thousands of unbanked riders and to space in stations and near bus stops they could use to sell reloadable open-loop prepaid cards (
"That is the kind of thing I know Chicago and other transit authorities are getting excited about," says fare-collection expert Gary Yamamura of U.S.-based Three Point Consulting. "[Bankcard payment] is something that the transit industry has been interested in for years, and they see a possibility of it happening."
Though the Chicago Transit Authority and several other transit agencies in the United States and elsewhere are looking to credit, debit and prepaid bankcards to cover their transit fares, they know it will not happen overnight, notes Yamamura.
The transit authorities might be "surprised by the proposals" they receive from banks and payment card schemes, he says, noting there will be no free rides when it comes to the payments industry funding the new fare-collection systems. Indeed, banks, especially in today's troubled economy, will not be keen on footing the bill for a new infrastructure of cards, terminals and a sophisticated back-end system needed to authorize and process open-loop fare payments unless they see an attractive business case.
Still, more transit authorities are seeing a road out of their expensive closed-loop card and paper-ticketing systems and perhaps even a chance to earn some revenue by enabling riders to tap contactless bankcards when they board buses and trams or pass through subway turnstiles (
Interest appears to be strongest in the U.S., where electronic-payment systems for transit fares, especially using proprietary contactless cards, are much less developed than in Europe or Asia. So transit agencies there do not face as many issues with "legacy" systems. Moreover, U.S. banks four years ago launched a rollout of open-loop contactless bankcards, the same type of cards riders would tap to cover fares, although contactless bankcard penetration remains small nationwide.
Besides Chicago, agencies in New York City, Washington, D.C., and Atlanta are considering drafting documents requesting information or formal proposals, hoping for favorable responses from the payments industry, say sources. Officials with the Southeastern Pennsylvania Transportation Authority based in Philadelphia in November released a request for proposal and reportedly could offer a contract this spring.
In Europe, transit authority Transport for London is widely expected to try to take its massive closed-loop Oyster scheme via the bankcard route starting as early as 2010 or 2011. Transit officials in Paris also have expressed interest.
But many other transit agencies, especially in Asia, appear to have no plans to give up their proprietary fare-collection systems, which they have been expanding to retail outlets. Operators in such huge mass-transit markets as Seoul, Hong Kong and Tokyo, with longstanding contactless fare-collection systems, however, are allowing their proprietary applications to ride along on bankcards. When riders tap the cards, they use the same closed-loop readers and clearing and settlement systems as for the stand-alone transit cards.
But the ultimate goal of many transit authorities or operators is to accept open-loop credit, debit or prepaid card payment directly at the gate or onboard buses or trams. Consumers would tap contactless bankcards that support Visa payWave, PayPass from MasterCard Worldwide or other contactless applications. The same applications could ride on Near Field Communication phones, expected on the market by 2010.
Untapped Users
Payment card schemes and banks, hoping to accelerate the rollout of their lumbering contactless card programs, view transit riders as a major untapped vein of users of contactless bankcards, which target transactions below 20 or 25 euros (US$25.49 or $31.87). And transit agencies would be a major new category of merchants to accept the cards. The payments industry also believes enabling cardholders to pay fares with contactless bankcards would encourage more retailers in and around transit stations to accept contactless payment.
With pure open-loop payment, the transit agencies would pay transaction fees just like any other merchant, though at lower negotiated rates. This does not rankle transit officials weighing a move to open-loop payment. They want to get out of the business of–as Transport for London has put it–issuing their own currency to customers to pay for rides.
In the case of Transport for London, that currency is the Oyster stored-value purse, used more than 8 million times each day by riders who receive big discounts for tapping their Oyster cards to pay instead of inserting paper tickets into readers.
London transit officials in the fall were meeting with the United Kingdom's four largest banks, say sources. Their goal is to hold a trial by 2010, says Chris Oulds, a former Oyster program director and now a consultant with United Kingdom-based Alco Group Ltd.
"If you think about it, cards and card issuance are not their business," she tells Cards&Payments. "[Transport for London] is spending £100 million (US$148 million) a year (on Oyster)."
One official with the Chicago Transit Authority, the second-busiest U.S. transit agency, providing 1.7 million rides per day, believes the agency could go from "a completely closed, proprietary system to a completely open system" in just four or five years.
As in Philadelphia, officials in Chicago plan to issue bid documents that would make the requirements for a new fare-collection system vague enough to allow for creative financing and revenue models from banks and payment card schemes. The Chicago transit agency says it is prepared to sweeten the pot for the payments industry in exchange for help in covering the costs of the new infrastructure.
"We absolutely believe that someone other than a transit authority, primarily a financial institution, enjoys better economies of scale in distributing contactless cards," says Dennis Marshall, the authority's general manager and chief business development officer. "There absolutely could be royalties or exclusive payment opportunities."
Marshall declined to elaborate on possible payment opportunities for bankcard issuers, but sources say they probably would entail a certain issuer or card brand getting exclusive rights to handle transit fares for a limited period. Then the authority would open the system to all card brands. Of course, it would take years to fully roll out open-loop payment, and Chicago's proprietary transit card scheme would continue to operate.
Business Case
Marshall also declined to estimate how much an open-loop system would cost, not wanting to prejudice future proposals. But press reports in Philadelphia placed the cost of a new system at up to $100 million.
Accurate cost estimates are hard to come by, however, stresses Farhan Ahmad, director of product management at U.S.-based Discover Financial Services, who is studying the business case for financial card issuers to support open-loop transit payment. He contends capturing low-value transit transactions will not make that business case alone. Customers also must use their cards for contactless retail transactions and for other, higher-value purchases.
"It's not necessarily for the $2 fare collection; it's from the top of wallet," Ahmad says. "(And) people are much less likely to cancel a card if they have any kind of recurring payment on that card. We see that for (automatic payment of) bills. Anybody who has some kind of transit application on a card, (we) will see that retention as well."
Of course, the advantage of keeping customers loyal to a certain payment card used for transit fares would fade once a fare-collection system is opened to all open-loop cards. Moreover, it is not yet clear cardholders with cobranded bank/transit cards would use those cards for more retail purchases.
For example, British issuer Barclaycard launched its cobranded OnePulse Card in London in September 2007, carrying the proprietary Oyster application along with contactless and conventional EMV chip-based credit applications for retail purchases. But a year later, the issuer had not yet seen the so-called top-of-wallet effect, says a Barclaycard executive. Barclaycard signed an exclusive three-year deal to license the Oyster application, paying an undisclosed fee to Transport for London.
The cobranded bankcards planned for the L.A. Metro pilot next year also would support separate transit and retail applications, enabling the parties to use the authority's TAP closed-loop system before any upgrade to open-loop.
'Too Aggressive'
Discover's Ahmad, who supports open-loop transit payment, believes the projections for the LA Metro revenue share are too "aggressive." The projections assume unbanked cardholders would use the prepaid cards frequently outside of transit, and every time they do, they would pay fees. That includes US25 cents for each retail purchase, plus $4.95 for monthly maintenance and additional fees for ATM withdrawals and certain reloads. The cardholders would pay $4.95 when they are issued the card, too.
Visa and Ready Credit, which are funding the $1.6 million cost of the year-long pilot, planned for launch in mid-2009, project 90% of the 25,000 cardholders will use it for retail purchases. If rolled out, more than half of the nearly 300,000 projected cardholders over three years would own personalized prepaid cards, accounts into which they could deposit their payroll checks.
"The consumer-driven payroll cards have really gone nowhere," says Ahmad. "We will see if those aggressive assumptions are realized."
The prepaid card fees are lower than what unbanked consumers pay for cashing checks or buying money orders to pay bills, say project backers. Moreover, the transit agency would not charge them for paying fares and for reloading the transit account, they say.
At the same time, the project, if successful, could serve as a model for accommodating unbanked riders in bankcard-based fare-collection systems globally while helping transit agencies fund new fare-collection infrastructures, says Sandy Thaw, Visa senior business leader for transit programs.
"Certainly, Visa sees a long-term future of agencies accepting bank-issued cards," he says. "(And) we think there is a lot of demographic overlap in transit ridership and the targeted general reloadable prepaid product."
What to do about transit riders without bank accounts or credit cards is only one of the hurdles transit agencies and financial institutions rolling out open-loop payment of fares must clear. Among other challenges, issuance of contactless bankcards and merchant acceptance remain low everywhere.
Moreover, many transit agencies maintain variable fares. In London, for example, riders tap in at the beginning of the ride and tap out at the end, and the Oyster system calculates the fares based on the distance the riders travel and other discounts, including a daily maximum charge and reductions for pensioners.
Transport for London and its outsourced fare-collection service provider now figure those fares at the gate when riders tap out on any of the Oyster system's 20,000 readers. With open-loop transport, that fare calculation would have to move to a centralized back-end system.
Agencies could charge the fares to the accounts of credit and debit cardholders, but for prepaid users, banks and transit operators could have a problem. They either would have to charge the maximum fare upfront then reimburse the rider or charge the minimum and add charges later if the rider incurs them, says Mike Cowen, MasterCard vice president and product manager for global transit.
This could force systems integrators to add back some sophistication to the terminals, but not as much as with the closed schemes.
"It's an attractive proposition to move all of that complexity to a centralized system," Cowen says. "It's certainly cheaper to have it in one place than to have it in tens of thousands of places."
Counting Milliseconds
Bankcard authorization of fares could prove to be an even thornier problem.
Operators of big-city subway systems using proprietary cards expect readers to authenticate transactions in less than 200 to 300 milliseconds. But in countries with the EMV bankcard standard, such as the UK and France, the fastest offline transactions take about 500 milliseconds, despite vendors' claims to the contrary, say sources. That is much too slow, but observers expect transaction speeds to increase.
In the U.S., which does not support EMV, all contactless retail transactions go online for authorization, which is out of the question for paying transit fares, especially at subway gates.
MasterCard has developed a product for the transit industry it calls "MasterCard interface processor," which would send the transaction online for authorization between the first and second taps of the transit card. If the card is counterfeit, the transit operator could blacklist it for all future fare transactions.
For the first tap, the operator could take the risk for the roughly $2 fare or authenticate the card beforehand at some terminal outside the subway gate, for example, says Cowen. Transit operators outside of the United States could use the system, too, to avoid offline EMV authorizations, at least part of the time, he says.
But blacklisting cards would have to be done at the terminals, requiring more-complex management of the terminals to keep blacklists updated.
The card companies, banks and transit agencies are talking about other ways to improve security, says Three Point's Yamamura. All have pros and cons, but none "can be implemented easily, quickly or cheaply," he says.
More basic than that for transit agencies and operators considering moving to open-loop payment is whether the bankcards riders tap will work at least as well as their closed-loop cards.
"There are a lot of issues," says Michel Barjansky, a business development head for innovative customer technologies at Paris Métro operator RATP. "The first one is, can we open a gate? And the second one, if it does not open, what do we do?"
Backers of open-loop payment of transit fares intend for the credit, debit and prepaid bankcards to open the gates for millions of mass-transit riders. They say the technology is almost there to make that happen. But they acknowledge the business case for setting up such as system may not yet have arrived. CP
