Acquiring: Transit’s New Payment Routes

Jim Daly

For a time, it seemed like open-fare contactless smart cards might take over payments on America’s buses, subways, and commuter trains, but then along came smart phones and EMV.

The only thing that moves slower than a bus stuck in a 5:00 p.m. traffic jam is the process of bringing new payment technology to mass transit. The complexity and scale of many public-transportation systems, along with the need to find funding while navigating around political shoals, means new payment systems usually require years from concept to rollout.

Now, however, modernized fare systems are being rolled out or are under contract in a number of big cities and their suburbs. Say hello to contactless open-payment card systems in Chicago, Philadelphia, and Washington, D.C. Some systems already are or will be using identification cards as fare media, too.

But open-fare card systems aren’t the only option transit executives have nowadays as they consider upgrades. Mobile payments are moving quickly into transit. Mobile technology can be added to existing fare systems at a far lower cost than installing an entirely new open-fare contactless card system.

At least seven major transit agencies now offer or soon will offer riders smart-phone applications for mobile ticketing, and another eight are considering mobile payments.

“What does muddy the water a bit is the appearance of mobile phones,” says Martin P. Schroeder, chief technology officer at the Washington-based American Public Transportation Association. “It may lead us to different directions, it may lead us in one direction.”

Heirs Apparent

Just a few years ago contactless open-fare payments seemed to be the heirs apparent to outdated systems reliant on cash, paper magnetic-stripe fare cards, or 1990s-era closed-loop chip cards supported by costly turnstile and bus readers.

In open-fare payments, the transit agency can offer a cobranded contactless prepaid card bearing the logo of a general-purpose card network—Visa, MasterCard, American Express, or Discover—giving the transit card utility anywhere such cards are accepted. Their systems also enable buses and trains to accept any major-brand credit or debit card with a contactless chip.

But now it isn’t just smart phones that threaten to “muddy” the waters. The coming of Europay-MasterCard-Visa (EMV) chip cards as replacements for mag-stripe debit and credit cards in the U.S. complicates the planning process for fare-system upgrades even further.

The contact EMV card, which the cardholder inserts or “dips” into a point-of-sale reader, appears to be the early favorite among card-issuing banks and credit unions as they review their options ahead of a major 2015 EMV deadline imposed by the card networks. In contrast, a contactless chip card is tapped on or passed closely by the card reader.

Transit officials strongly prefer contactless cards because of their transaction speed. Plus, contactless readers can exchange data with smart phones equipped with near-field communication (NFC) radio technology, laying the foundation for future mobile-payment options.

But so-called dual-interface debit or credit cards that offer both contact and contactless payments cost issuers more than contact-only cards.

Plus, contactless cards have had trouble gaining a foothold outside of fast-throughput merchant niches for which they’re especially well-suited, such as mass transit. Not many financial institutions issue general-purpose contactless cards, and not many merchants accept them—only about 660,000, or just over 8% of the approximately 8 million card-acceptance locations in the U.S.

“The volume has been very low,” says Michael J. Wilson, managing director for public transportation at the Toronto office of the big consulting firm Accenture. The reasons go beyond the higher costs for dual-interface cards, he says.

“One theory is the movement to EMV in the future has caused everyone to be more cautious,” he says.

While card issuers are tilting toward contact chip cards, most new POS terminals being installed in merchant locations nowadays are capable of supporting both contact and contactless cards, and by extension NFC mobile payments, according to Cathy Medich, director of strategic programs at the Princeton Junction, N.J.-based Smart Card Alliance trade group.

That means contactless card payments could have a place in the new EMV environment. “I think what’s happening is that merchants are being enabled to accept all of it,” Medich says.

‘Systemic Failure’

The pioneer in open-fare payments is the Salt Lake City-based Utah Transit Authority (UTA), which first tested radio-frequency identification (RFID) payment-enabled employee cards and ski passes on buses to ski resorts.

The main payment option on the UTA is Farepay, a prepaid, reloadable closed-loop contactless card introduced in 2013, but the UTA earlier enabled acceptance of MasterCard PayPass and Visa payWave contactless cards (“A Green Light for Open-Fare Payments?” December 2010).

In the early going, the UTA said only a small percentage of the “taps” on its system were coming from general-purpose payment cards. The UTA declined to speak to Digital Transactions for this story, saying the Farepay project is still new enough that it can’t draw conclusions about its success.

Some agencies far larger than the UTA are making big bets that open-fare contactless systems have a bright future in public transport.

In Chicago, the Chicago Transit Authority has rolled out Ventra, the world’s biggest open-fare payment system, according to the contractor, San Diego-based Cubic Transportation Systems. Cubic has implemented transit-fare systems around the world, including on London’s buses. The $454 million CTA project centers on a contactless MasterCard issued by MetaBank and managed by First Data Corp.

Late last year, Ventra appeared to be headed toward derailment when reports of card readers not working, poor customer service, and other problems filled Chicago newspapers and TV news reports as the transition from old fare media began.

On one particularly bad November day, CTA employees waved 15,000 rush-hour commuters through turnstiles after 165 fare readers malfunctioned at 60 rail stations. The CTA said it would send a bill for the free rides to Cubic. One official called Ventra’s rollout a “systemic failure.”

The CTA, which averages 1.7 million weekday riders on its trains and buses, kept its old fare options live longer than planned and delayed payments to Cubic until the vendor met a checklist of performance standards.

But the negative press faded in the new year as Cubic and the CTA worked out the bugs.

“Ninety-three percent of rides are currently paid for with Ventra,” says Matthew Cole, Cubic executive vice president/deputy for strategy, business development, and diversification, by email. “This reflects a fare system that is meeting performance standards and is working well for CTA customers. CTA and Cubic addressed issues and also made improvements to the software, which has been performing well and exceeding expectations for five months based on metrics and standards outlined by the CTA.”

The CTA will not say what percentage of the taps on Ventra readers are coming from non-Ventra general-purpose contactless cards.

Next up with open-fare payments is the Southeastern Pennsylvania Transportation Authority (SEPTA), which runs buses, subways, trolleys, and commuter trains in the Philadelphia area that carry about 1 million riders a day.

Current payment options include mag-stripe fare cards, cash, paper transfers, and even tokens. In fact, a SEPTA spokesperson says Philadelphia’s is the last big system to still use tokens.

SEPTA has awarded a $129.5 million contract to ACS, a subsidiary of Xerox Corp., to implement its New Payment Technology initiative. Like Ventra, SEPTA will have a cobranded transit/general-purpose contactless card, and it also plans to be ready to accept ID cards, key fobs, and mobile devices, according to the spokesperson.

“We wanted a system that we weren’t going to have to significantly upgrade or replace in 10 years or even 20 years,” the spokesperson says, adding that “SEPTA missed out on the last generation of fare-payment system upgrades. Like a lot of transit, we’re tightly constrained by finances.”

Plans called for the new system to be live in April, but it’s been delayed, in part to avoid a Ventra-style fiasco. SEPTA doesn’t have a new rollout date, but the spokesperson expects testing to begin later this year.

“We’ve certainly been watching how similar systems have been put in place … and certainly some of the challenges,” he says. “We have the benefit of being able to learn from that. We would rather push that [rollout date] back and get that right rather than go out early.”

In contrast to SEPTA’s initiative, the nearby Port Authority Transit Corp. (PATCO) in November 2012 discontinued a Visa prepaid card that it tested on its rail line connecting downtown Philadelphia with Camden and other southern New Jersey towns.

PATCO director of fare collection Kathleen Imperatore cites several reasons, including the costs of card processing and interchange, which she says were expensive on volume of only about 2,000 transactions a day.

Plus, riders just didn’t take to the Visa card despite PATCO giving out 2,000 of them. The agency sold only 200 of the cards, which had no fees for transit. “Still, we didn’t find acceptance for this,” she says.

In a rider survey after discontinuing the card, PATCO, which has 38,000 daily riders, found that many people believed they did not have enough money to load onto the card for any more than one or two trips. Many also did not want to mix transit and general-spending funds. “They were afraid they were going to overspend that money,” says Imperatore.

PATCO, however, has retained the readers it installed for the Visa card and could turn them on again should conditions change, such as open-fare payments becoming popular in Philadelphia, according to Imperatore. “We’re right across the river from SEPTA,” she says.

‘Account-Based Architecture’

The other big open-fare project about to leave the station comes from the Washington Metropolitan Area Transit Authority (WMATA), a vast system serving the nation’s capital and its Maryland and Virginia suburbs. WMATA in January awarded a $184 million contract to Accenture to replace its fare-collection system on subways and trains, buses, and parking lots. In addition to the SmarTrip card, the system will accept contactless bank cards, government ID cards, and mobile phones.

Plans call for tests to start later this year with 2,000 riders using different media at 10 rail stations and on 50 bus routes. In May, WMATA announced plans to upgrade 500 vending machines to dispense the SmarTrip card rather than mag-stripe paper fare cards.

By offering what Accenture’s Wilson calls “credentialed media,” or different types of cards or other components for fare collection, WMATA aims to give riders choice, he says. “Washington’s approach is to promote existing media that people already have and the transit-only option last,” he says.

The new system also will save WMATA money by relying not on custom-built software but on Microsoft Corp.’s Dynamics suite of business and financial applications, he says. “You have to focus on more flexible back ends,” says Wilson.

Indeed, Medich of the Smart Card Alliance says the idea behind the new fare technology—what she calls “account-based architecture”—is to put the payment function in the back office rather than on the bus or subway turnstile, where the old cards and tickets functioned as purses and interacted with readers.

With new systems, “all of that is done at the server,” Medich says. “That frees up the transit agency to offer more options at the fare gate.”

Where Barcodes Are Too Slow

An increasing number of those options involve mobile payments. They’re already an option on commuter train lines in Boston, on the DART system in Dallas, and in Portland, Ore.

Mobile payments can work in several ways. A train conductor, for example, may carry a scanner that reads a barcode—which contains the applicable fare and related data—displayed on a commuter’s mobile phone. The barcode is generated from an app the rider downloaded and linked to a credit or debit card. Or, the rider might scan a barcode by a stationary reader on a bus or train.

The newest member of the mobile club is the Northern Indiana Commuter Transportation District (NICTD), which operates the South Shore electrified rail line connecting downtown Chicago with South Bend, Ind.

In late May, smart-phone-based ticketing went live on the South Shore, which carries about 11,000 weekday commuters who live in gritty steel towns or charming but snowy bedroom communities at the southern end of Lake Michigan.

New York City-based startup Bytemark Inc. developed the South Shore Line’s applications for Apple Inc.’s iPhone and smart phones using Google Inc.’s Android platform. Bytemark’s South Shore apps do not display or read barcodes. Instead, they generate so-called Virtual Visually Validated (V3) tickets on the phone screen that the rider shows to the conductor.

NICTD’s is the third publicly announced transit project for Bytemark, which was founded in 2011 with funding from an angel investor. The first was for NY Waterway, which operates ferries in New York City and began using Bytemark smart-phone apps in January 2012.

Bytemark chief executive Micah Bergdale says Bytemark had approached NY Waterway about the possibility of developing a mobile-payment system based on 2D barcodes. Instead, Bytemark learned a bit about the mass-transit business.

“The difference between transit and airlines is the amount of people that have to get on a bus, boat, train in a short amount of time,” Bergdale says. “It’s open boarding.”

Bytemark concluded that not even barcodes would be fast enough for practical use when customers just walk on, often in herds. So it developed its patented V3 technology.

But the electronic tickets aren’t just mere reproductions of a paper ticket. They contain security features, including layers of animation triggered when the passenger taps the phone’s screen for the ferry deck hand or train conductor.

On the South Shore Line, for example, color schemes are generated and will change, telling the conductor whether the passenger has paid the correct fare and whether the virtual ticket is valid on the day of travel.

“By tapping on that you know that it’s not somebody who recorded a video or picture,” Bergdale says.

‘A Lot of Capital Investment’

After downloading the South Shore Line app, riders create an account using an email address or Facebook or Google credentials, a password, and enter a PIN for security and to avoid accidentally activating tickets. They can add as many credit or debit cards as they want to fund ticket purchases. The application also has non-payment features such as train schedules, maps, and alerts.

The app displays all the types of existing paper tickets the line offers, as well as origin and destination stations so that the correct fare is charged to the account.

Electronic tickets can be stored locally on the phone or remotely in an online account. If cellular service is unavailable, the phone will still display a validly purchased electronic ticket and submit a token when service becomes available later in order to complete the transaction, says Bergdale.

Bytemark operates a gateway that connects to merchant processors Chase Paymentech, Elavon, and Bank of America Merchant Services, Bergdale says. For the NICTD system, Bytemark is working with Naperville, Ill.-based independent sales organization BluePay Processing Inc.

Boris Matakovic, the NICTD’s chief information officer, says his agency chose the Bytemark system in part because of its low upfront capital cost of $50,000, a short development time of just a few months, and because it doesn’t require conductors to use barcode scanners.

“There’s a lot of things that come into play when you’re doing digital validation,” he says. “There’s a lot of capital investment. These guys [Bytemark] were the only guys that had experience with visual validation.”

Matakovic says the transit district didn’t make projections about customer use of the mobile apps. But after a soft launch in early May, the app had 600 registered users only three days after its official announcement, he says.

Many Choices

Bytemark’s technology went live in January for its second transit customer, the Capital Metro system in Austin, Texas. CapMetro runs local buses, a commuter-rail line, and a new bus rapid transit (BRT) system called Metro Rapid, which is an express-bus service run much like a light-rail line.

Bytemark’s apps for CapMetro include both V3 as well as barcodes for use with stationary readers on Metro Rapid because the BRT vehicles have no conductors, according to Bergdale.

Besides their payments utility, transit officials say another advantage to smart phones is their ability to display maps and other related, non-payment content, and to be linked into loyalty programs.

Add in open-fare card payments, and it becomes clear that the technological choices transit providers have today for payments have never been greater.

Some Notable Transit Payments Upgrades, 2014

Cities With Open-Fare Systems Operating or Under Contract

– Chicago (CTA)

– Philadelphia (SEPTA)

– Washington (WMATA)

Mobile for Transit Payments in Use or Under Contract

– Boston

– New York (Metro-North and Long Island Railroad)

– Dallas (DART)

– Northern Indiana (South Shore Line)

– Austin, Texas

– Portland, Ore.

– Virginia Railway Express

Agencies Considering Mobile Payments

– CTA

– LA Metro, Los Angeles

– Metropolitan Transit Commission, San Francisco Bay Area

– Metropolitan Transit System, San Diego

– North County Transit District, San Diego

– Metropolitan Atlanta Rapid Transit Authority (MARTA)

– Miami-Dade Transit

– Metro Transit, Minneapolis/St. Paul

Sources: Digital Transactions, Cubic Transportation Systems