Ticketless, Please

  Managers of public transit systems face many payment-related frustrations. They must fix malfunctioning fare boxes, card readers and kiosks, find ways to board passengers faster, and keep track of ridership and fares, all while trying to cut costs.
  Credit and debit card networks, issuers and merchant acquirers believe they can alleviate some of those annoyances. But first they must convince transit agencies to accept for fares bank-issued, open-system contactless cards whose transactions settle over the same rails as those initiated at millions of merchant locations worldwide.
  For issuers of contactless debit and credit cards, transit payments offer huge potential for transaction growth worldwide. In 2006, Americans alone took 10.1 billion public-transit trips per year, boarding vehicles 34 million times each weekday, according to the American Public Transportation Association.
  Transit officials likely are keeping a close eye on contactless bankcard tests for transit in Utah and New York City. Moreover, officials in Washington, D.C., are planning upgrades to accept universal contactless bankcards at their fare boxes and gates. Outside the U.S., transit networks in Turkey and southern Taiwan have small projects to accept open-loop contactless cards for fares, and officials in London are evaluating the possibility (see sidebar, page 29).
  In 1999,the Washington Metropolitan Transit Authority began using a proprietary contactless smart card payment system called SmarTrip. The authority since has expanded the system, created by Cubic Transportation Systems Inc., a subsidiary of San Diego-based Cubic Corp., to 2.5 million cards usable on its trains and buses, in parking lots, and for buses of other cities in the District of Columbia's metropolitan area.
  In 2004, the agency began a pilot to test a cobranded Citibank card that also is embedded with a SmarTrip chip to enable cardholders to pay for fares on the authority's proprietary system.
  Such cobranded bankcards embedded with proprietary transit chips have drawn interest in London, where the Barclaycard OnePulse bank card includes an Oyster transit card application. And in Taipei, Taiwan, four banks pay the transit authority $15 per card in licensing fees to place Taipei's EasyCard transit application on their credit cards.
  But Greg Garback, executive of the Washington, D.C., transit authority's department of finance, now looks to pilots by transit agencies in Utah and New York City as the next steps toward his goal of contactless bankcard acceptance at all fare boxes. "They have taken our concept one step further," Garback says of the two agencies. "They are getting away from the proprietary applications that plague our marketplace."
  Eager to join the movement, the Washington authority has hired Cubic to install readers that accept both contactless bankcards and the system's existing proprietary smart cards. Riders will tap cards at entry and exit readers, as they do now, to indicate fare charges based on trip distance and time of day, Garback says.
  Many transit authorities eventually may concede some of their card-issuance and transaction-settlement responsibilities to the open-loop, contactless bankcard systems supported by Visa Inc., MasterCard, American Express Co. and Discover Financial Services LLC. But becoming just another merchant presents its own set of payment challenges, especially when some locations are on wheels.
  Adam Gluck, MasterCard senior business team leader and vice president, says his sales pitch to transit officials starts with the chance to issue fewer tickets and fare cards. "Rather than having people behind bullet-proof glass collecting cash and talking through squawk boxes, they're on the platform in colorful vests" helping customers, he says.
  That line of reasoning is what convinced Utah officials to test contactless bankcard acceptance.
  The agency accepts credit and debit cards for purchases of transit tokens and monthly and weekly passes on its Web site and at customer-service offices. It will begin accepting credit and debit cards at ticket vending machines of a new commuter rail line that will open this spring.
  But most of the approximately 500 buses and 80 paratransit vehicles the Utah Transit Authority operates, which traverse six counties in and around Salt Lake City, accept only cash and small currency in their fare boxes. The kiosks that issue paper tickets for the 46 train cars on its existing 18 miles of light-rail lines accept only cash or transit tokens. The fare-collection system does not collect any data about rider use.
  Even so, 41 of the Utah agency's buses are on the cutting edge of transit payments in the U.S.
  When Utah transit officials a few years ago began to research contactless fare-payment options, Craig Roberts, manager of card systems for the authority, liked the prospect of accepting bank-issued contactless cards along with proprietary contactless cards.
  During the region's ski season from November 2006 through April 2007, Utah officials tested acceptance of MasterCard PayPass, Visa payWave and American Express ExpressPay open-loop contactless cards on its 41 buses serving the Wasatch Front ski area.
  The agency also tested acceptance of chip-embedded cards, including closed-loop contactless Mifare Ultralight cards it purchased from Smart Card World of Vancouver, B.C., Canada. Utah transit officials distributed the cards for the Salt Lake City Convention and Visitors Bureau and for the ski resorts to issue to tourists and employees.
  Australia-based ERG Group, which helped Utah manage the pilot, supplied the readers and specified the coding for the closed-loop cards. For bank card acceptance, ERG installed readers manufactured by Israel-based On-Track Innovations Ltd.
  With a limit on parking personal vehicles in the ski area, resorts reimburse the transit authority for the fares to transport their employees and some customers to the slopes. "We needed to count the number of passengers we had because we were paid by the ski resorts for transporting their employees as well as season-pass holders," Roberts says.
  The agency collected only about 219 contactless credit and debit card transactions during the pilot, Roberts says. A number of those transactions were on PayPass cards tied to accounts the Utah Transit Authority opened at local branches of Cleveland-based KeyBank to test payments as both a customer and merchant.
  NEW VOCABULARY
  In considering a credit and debit card pilot, Roberts says he had a general notion that accepting bank-issued cards would raise security issues and incur transaction fees. He soon started learning a new vocabulary. "Even the word 'acquirer' was not something we had in our language," Roberts says.
  "PCI," the Payment Card Industry Data Security Standard, was another new term for Roberts. He says meeting technical requirements of PCI was not difficult because the agency was testing a new payment system anyway.
  But PCI rules about security policies and procedures, such as limiting which employees access payment data and conducting extensive background checks on those workers, seemed tricky. So the transit agency decided to have ERG manage its payment data for the second round of the pilot, which is during this year's ski season, from November through April 2008.
  Larry Weissbach, ERG executive vice president, says ERG can remove most of the PCI burden from transit agencies by hosting payment-data systems in its data centers.
  Another new term for Roberts was "interchange," which he still finds somewhat mysterious but has learned is a point of contention between merchants, card issuers, merchant acquirers and networks. "When we talk to people in the industry, they're not able to explain how it works," he says. "It's difficult to get a real candid discussion about that."
  Indeed, small transit transactions are not a well-established interchange category. And identifying the ideal structure of interchange and other fees acquirers, third-party processors and payment-services providers would pass along to transit agencies is one of the Utah pilot's goals, Weissbach says.
  Roberts says Utah paid ERG $400,000 to oversee the first season of the pilot. "We know it was more expensive than that for them," he says.
  Weissbach says he is not sure how much ERG will charge transit agencies for bankcard-related services in the future. "With Utah being the first big program for us, we're still trying to determine what the best economic model is," he says. "That will be an important factor for most transit agencies in the decision-making process but also for the credit card companies and companies like ourselves."
  For the first year of the Utah pilot, micropayments specialist Peppercoin Inc., which loyalty and marketing firm Chockstone Inc. acquired last spring, aggregated an individual's PayPass transactions into batches before sending them as larger transactions to Chase Paymentech Solutions LLC, the transit authority's acquirer for the first phase of the pilot. Sending a cardholder's transactions as a batch helps merchants avoid paying the fixed-fee portion of the interchange rate, typically 5 cents or 10 cents, for each individual small transaction.
  This year the agency will not test aggregation. It will use Salt Lake City-based Zions Bank as its acquirer for the pilot, just as it does for bankcard payments initiated at its customer-service and Web sites.
  Roberts says it is unclear to him whether all card networks will allow aggregation in the future, and whether aggregation, transit-interchange categories or both will become the norm.
  Besides transaction-fee questions, Gluck says a general lack of understanding of bank-issued cards does cause some "hesitation" among transit managers considering new payment options.
  Though bridging industry cultures is challenging, Roberts believes opening transit agencies to the wider merchant world would benefit everyone. "Historically, transit tends to operate within its own world. Each has, essentially, a proprietary [payment] system that was developed individually," Roberts says. "One of the things that is appealing to me for going with an open system for payments is we have a standard."
  The agency hopes one day to accept chip-embedded identification and payment cards issued by local employers and colleges and to use a third-party prepaid card issuer to create a cobranded transit card for unbanked riders, Roberts says. "The bottom line is that we want an electronic fare-collection system where we don't have to issue the (contactless) media ourselves but rather can accept media that people already have," he says.
  Roberts does not mind being, as he describes himself, a "rank amateur" in the bankcard-payments world. "I'm learning this as I go along," he says. "By doing the pilot, we've learned what questions to ask, but we don't know the answers."
  MAKING SYSTEMS 'FUTURE-PROOF'
  Weissbach has helped transit managers consider a variety of proprietary payment systems over the years, and he believes it is wise that more of ERG's clients are considering pilots or system upgrades to accept both local transit and universally accepted contactless payment devices, including cards, fobs and Near Field Communication-enabled phones. (NFC supports two-way communications between NFC-enabled devices.)
  "Most agencies are focused on making sure their payment systems are fair, convenient and work well for their patrons," Weissbach says. "They want to make sure that they get it right and that it's future-proof."
  Transit managers understand the value of universal bankcard payments to eliminate the headaches associated with agencies having to reimburse each other if they accept the fare cards of other transit agencies in their regions, Gluck says.
  "The biggest challenge we have is these are public entities or privatized entities for providing a public good," Gluck adds. "Our job as a supplier of technology and enabler of technology is to help them come to grips with how they can save money."
  The potential to save money and improve boarding time convinced the New York Metropolitan Transit Authority to begin a pilot in July 2006 to accept PayPass payments at the 79 turnstiles in 30 stations along its Lexington subway line, from 138th St. in the Bronx to Borough Hall in Brooklyn. Citigroup and MasterCard sponsored the planned six-month pilot, which the parties have extended.
  The transit authority earlier this year also tested fare payments on the Lexington line using Nokia phones embedded with NFC contactless chips tied to Citibank PayPass accounts. Before the test ended in April, Citi customers who subscribed to AT&T Wireless service could pay fares by tapping their NFC-enabled phones on the same turnstile readers that accept PayPass cards and tokens. They also could use the phones at local drug stores, fast-food merchants and to download from promotional posters containing NFC chips information such as movie trailers and advertisements.
  Whether paying with PayPass-enabled phones, cards or fobs, Citi customers in the pilot can pay for each ride individually or create prepaid transit accounts tied to their card accounts. Those customers receive a $1 bonus for each $10 they load into the prepaid account. They pay a flat $2 fee for train rides, and transfers to buses are free.
  A New York transit spokesperson says officials are not discussing the pilot with journalists. But representatives of Citi and MasterCard view the pilot as a success so far.
  "Customers love using their credit and debit cards to get into the subway," contends Josh McKay, Citi vice president of global innovation. "They like not having to worry about the balances on their [fare cards], they like automatic reload and they like looking at their transaction and ride history."
  NEW YORK RIDER REVIEWS
  Of the roughly 7,000 Citi cardholders who participated in the first round of the pilot, which ended in September 2006, 15% of Citi PayPass credit card users and 23% of debit card users said they used the subway test stations more because of the contactless-payment option, according to a survey by MasterCard (See table, page 28).
  Sixty-five percent of pilot participants paying fares from Citi credit card accounts and 63% paying from Citi debit card accounts said they likely would continue using PayPass on the subway in the future.
  Of the 3,500 calls from pilot participants to customer-service lines, most were requests for general information, such as how to join the pilot or get a PayPass card. The second-highest category of calls were those transferred to Citi to resolve typical card-related issues, such as activating new cards that customers forgot to activate before trying to use, McKay says. Only one call had to be transferred back to the transit agency's customer-service department.
  New York transit officials have been using a system MasterCard designed to aggregate PayPass transactions for single rides. With every 10th fare payment or 14 days, whichever comes first, the system sends a batch of rider PayPass transactions to Chase Paymentech, the transit authority's acquirer for the pilot, for processing and settlement.
  Another transit-agency worry is transaction speed.
  In the New York trial, MasterCard and Citi met the standard transit fare card read time of 300 milliseconds at Lexington line turnstiles without authorizing transactions as they occurred, figuring they could block bad cards for subsequent trips.
  For the first year of its pilot, the Utah Transit Authority used a "store-and-forward" method to collect bankcard transactions on its ski-service buses to clear at the end of each day, Roberts says. The method gave bankcards the same 300 milliseconds to 500 milliseconds transaction time as proprietary transit cards, he says.
  But delayed payment authorizations make transactions riskier because they do not validate account status before proceeding. "That's driving us to do everything we can in terms of communication with our buses to do real-time authorization and communication," Roberts says.
  For Utah's pilot this ski season, the agency still will store transactions to clear at the end of each day. But it plans to extend acceptance of contactless credit and debit cards to its entire system, Roberts says, perhaps as early as some time in 2008. And it hopes that wireless card readers, communicating constantly via a telecom network, can validate and authorize most bankcard transactions as they occur.
  The challenge for the agency, its fare collection support vendor, merchant acquirer, wireless telco and bank card networks will be to conduct those wireless transactions at a speed of 500 milliseconds or less. "I'm not sure how quickly we can get there," Roberts says. "There may be a middle ground that we need to be in for a little while."
  Garback says he will expect contactless bankcards to meet the 300 millisecond norm of SmarTrip cards. "Half a second is cumbersome at the gate," he says. "You have to pause a card at a target for what seems like an eternity."
  New York is preparing to expand its Citi PayPass pilot to a couple of bus lines near the Lexington Line, which will allow participants to test bus-to-subway transfers, recognition of monthly and weekly passes, and the speed of transactions in a mobile environment, McKay says.
  Despite the need for transaction speed, transit and payments experts are taking time to carefully consider how best to open transit to universal card payments.
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