Acquiring: A Rough First Mile

Elizabeth Whalen

So far, usage of so-called open-fare payment systems is low, and now transit agencies will confront new problems implementing them.

As the hardware for accepting payments on public-transportation systems in many cities nears obsolescence, transit authorities are planning upgrades that allow riders to pay fares with something they may already have in their wallets: a debit or credit card equipped with a contactless chip.

These new, so-called open-fare payment systems are part of a trend in which transit agencies are moving beyond costly, proprietary magnetic-stripe fare tickets and even older tokens and cash. Agencies are bringing in payment processors and banks as partners that take on many of the duties they formerly handled exclusively.

But, while potentially reducing labor costs and the agencies’ role in managing fare operations, the new payment systems come with operational and marketing challenges of their own.

In the U.S., a major issue is getting the public acquainted with open-fare payments that supplement closed-loop payment options. The only system where they’re live today is the Salt Lake City area’s Utah Transit Authority. There, according to a spokesperson, contactless general-purpose debit or credit cards account for only about 1% of payments.

The UTA’s experience after about four years isn’t stopping other systems from implementing open-fare payments, however. The Chicago Transit Authority (CTA) and the Southeastern Pennsylvania Transportation Authority (SEPTA) in the Philadelphia area are among agencies planning to offer them.

Chicago plans a summer launch while Philadelphia is planning to launch its system next spring. Other American cities also are considering open-fare systems.

In the United Kingdom, London’s transportation authority, Transport for London (TfL), began accepting contactless cards on its buses earlier this year and plans to implement the option soon on its other transportation modes, including the massive London Underground subway system.

‘De Facto Banking Business’

London and Chicago are adding open-fare options to closed-loop payment systems that already use contactless technology, while Philadelphia is upgrading from a system that currently relies on tokens and paper tickets. Transit authorities say the new systems offer convenience to riders and savings to agencies.

Today, the CTA accepts three payment methods: cash, proprietary magnetic-stripe cards, and closed-loop contactless Chicago Card and Chicago Card Plus products. The chips used in the contactless cards are about to be discontinued, and the agency saw an opportunity not only to upgrade its payment system but also to save money on mag-stripe card handling costs.

“Right now, we’re spending money to produce the fare cards. We’re spending money to maintain the equipment, and those costs only escalate over time,” says a CTA spokeswoman. “When you think about it, we’re almost in this de facto banking business where we’re issuing currency to people to be used on our system.”

The agency estimates it will save about $5 million a year over the life of the $454 million contract with San Diego-based Cubic Transportation Systems Inc.

Cubic is financing the CTA’s new payment system and will recoup its investment as riders use it, says John Satterfield, Cubic’s vice president and regional director for Chicago.

“We pay for the system to be put in place, so we don’t get paid until the system is installed and working. Then we get paid when people use it. We get paid every time somebody uses it for the term of the contract, which is 12 years,” he says.

London also has contracted with Cubic to help develop its new fare system, which Shashi Verma, TfL’s director of customer experience, says requires a £74 million ($112.3 million) investment but is expected to be cash-positive within five years.

“We will expect some increase in revenue because we’re making the system easier to use, but the majority of the financial benefits come from the reduction in costs of ticket selling,” he says.

Philadelphia’s SEPTA system also expects savings from no longer having to collect, count, and distribute tokens, says a spokesman. The agency does not yet have an estimate of those savings, he says, but he notes the switch will allow SEPTA to provide better customer service.

Riders won’t need exact change to purchase tokens as they do now, nor will they have to buy weekly or monthly passes in-person at a SEPTA sales office.

“With the new system, you’re going to be able to get a SEPTA card or use your own card. If you want to do auto-reload on your passes, you will be able to do that,” the spokesman says. Riders also will be able to add value by calling a toll-free number or going online.

SEPTA has contracted with ACS Inc., a division of Norwalk, Conn.-based Xerox Corp., to build its system, the spokesman says. SEPTA’s board agreed to the $129.5 million contract in November 2011.

Missing Taps

Both Chicago and Philadelphia have flat fares for most transit trips rather than distance-based fares. London’s buses also charge flat fares, but its subway and commuter trains charge distance-based fares, which present technological challenges that stores, for example, don’t face, says Verma.

“When people enter the [TfL] system and tap their cards for the first time, we don’t know what fare to charge them,” he says. “The fare becomes clear only when they exit the system. So, at the very least, we need two transactions, two taps together, to figure out what fare should be charged, and that’s a complete deviation from the way these cards work in the greater retail environment.”

TfL started its implementation on its flat-fare buses so it could test customer acceptance and any other issues without also having to test fare calculation, Verma says. The agency is trying to reduce the number of cash fares, which now number about 60,000 per day, or about 1% of all journeys.

“We’re now doing about 20,000 journeys per day on contactless bank cards. We’ve already reached one-third of the level of cash transactions without a huge amount of publicity,” he says. “The only visible sign that the buses accept contactless is the fact that the Visa, MasterCard, and AmEx logos are on the bus.”

TfL does offer a discount to riders using either its contactless Oyster card or contactless debit or credit cards: bus fares paid in cash are 2 pounds 40 pence ($3.74) while fares paid by card are 1 pound 40 pence ($2.18), he says.

When it opens the distance-based fare parts of its system to contactless bank cards, TfL will implement a series of rules that run in the background to calculate the fares based on both entry and exit. The agency is developing some of that technology itself, Verma says, and it is also working with Cubic.

“These systems build a trip,” says Pradip Mistry, Cubic’s vice president of engineering. “All the taps come in, and we have to build what we call a linked trip with all the taps. We then calculate the fare. There are challenges because there are times where we will have a missing tap. Somebody may not tap in, so the system has to deal with all the exception cases.”

Building those trips also required TfL to work with the payments industry to devise a new transaction model that would apply to transit, Verma says.

‘Quite Alarming’

Interchange on general-purpose card transactions is a big issue an agency must consider when processing a large number of small-value transactions. Mistry says that Cubic’s systems can aggregate fares to minimize interchange fees transit agencies must pay.

“We will wait for a pre-defined period. It could be a day. It could be three days. Then we’ll aggregate all the fares and make one charge,” he says.

Agencies can set the time period or, if they prefer, the value that triggers the charge to the rider, he adds.

Verma advises other transit agencies that are upgrading their fare systems to consider open-loop payments because of the distinct advantages they offer, most notably saving agencies money and riders time.

“The cost of ticket selling is embedded in every transport business, and many transport businesses don’t actually understand how much money they spend collecting revenue,” he says. “Were they to do some comprehensive analysis around that, they’d find the results to be quite alarming because it’s not an easy process, and it’s very expensive.”

The amount of time customers spend learning the fare system and then buying tickets is not trivial, he says, and is one among many impediments to people using public transit.

Card Availability

One new impediment that may arise, at least at first, to using contactless general-purpose cards on transit is card availability. Contactless smart cards have been in use in the U.S. since 2004 and now account for more than 75 million debit and credit cards, according to a spokeswoman for the Smart Card Alliance trade group. While that sounds like a big number, contactless cards still represent only 7% of the total Visa-MasterCard U.S. credit and debit card base numbering 1.05 billion.

In the U.K., with a population of about 63 million, some 26.9 million contactless Visa debit cards are in circulation, according to Gareth Lodge, senior analyst in the London office of research firm Celent LLC. Visa’s numbers are a good indicator of the whole debit card picture in the U.K., he says by e-mail, because all but one major bank issues Visa-branded cards.

In March 2013, a total of 5.3 million contactless transactions were made in the U.K., worth £39 million ($59.2 million), according to Lodge. In comparison, roughly 600 million non-contactless debit card transactions were made that month.

Even if riders have contactless cards, it’s not yet clear whether they will use them to pay transit fares. Regular commuters may not want to pay their fares with a credit or debit card because they don’t want to risk losing those cards. Or they receive a transportation benefit that is loaded onto a transit-specific card or an employee or student identification card using contactless technology, according to Martin Schroeder, chief technology officer for the American Public Transportation Association, Washington, D.C.

“To date, we don’t have enough information to say how well people will adopt it,” says Schroeder.

Both SEPTA and TfL are still developing their plans to advertise the new payment method to riders, say their spokespeople. TfL will launch a wide-scale advertising campaign towards the end of this year as the rollout of the new payment option nears.

For backers of open-fare transit payments in the U.S., one piece of good news is that chip cards, including the contactless variety, are likely to become much more common in a few years. By October 2015, U.S. merchants will have to be able to accept Europay-MasterCard-Visa (EMV) chip-based cards if they want to avoid assuming liability for some fraudulent transactions.

The major card networks have announced that liability shift (which doesn’t happen until October 2017 for pay-at-the-pump gas stations) to wean the U.S. off fraud-prone mag-stripe cards.

A Template

In the meantime, open-loop transit systems may help familiarize people with contactless payments. That, in turn, may lead to increased mobile-phone-based payments, says Mark Putman, senior vice president of prepaid solutions at Atlanta-based payment processor First Data Corp.

“Contactless, in the form of the card, is the first step,” he says. “It’s all going to go digital and virtual. This is a segue, a very important segue, to that. Not everybody has near-field communication [NFC] or other functionality in a phone. The reality is this is just the first phase in enabling contactless transactions and acclimating the customer.”

First Data is a subcontractor on the CTA’s big fare project. One of its jobs is to provide riders who don’t already have a contactless debit or credit card the option to get a Ventra card, a CTA-branded contactless card. Riders can use the card solely to pay for CTA transit fares, or they can choose to also activate it as a MasterCard-branded prepaid card, says the CTA spokeswoman.

Certain fees on the optional Ventra MasterCard sparked an uproar in Chicago this past spring, prompting the CTA to change or eliminate some of them.

Open-loop contactless cards pave the way for future payments technology evolution, says Cubic’s Mistry.

“For agencies, it starts with open-loop but eventually, it doesn’t matter what the instrument is as long as it’s tied to some account. Passengers will eventually be able to use mobile devices as well. It may be a card today, but in the future, it could be on a phone,” he says.

The move to open-loop payments in London reflects the fact that transportation agencies no longer have to accept transit-specific payments, says Verma.

“The real reason to do all of this is that what we call a ticket is just a payment,” he says. “It’s called a ticket because that’s the way the transport industry has approached this problem for 150 years, but when you travel on the transport system in London, all we want from you is a payment in exchange for the journey.”

Verma hopes that TfL’s introduction of open-loop contactless payment options will serve as a template for other agencies considering doing the same.

“There’s no shortage of technical hurdles when you’re doing something of this kind,” he says. “Hopefully, they only need to be overcome once.”