After several years of open-payments
trials, North American transit schemes are gearing up to make the
jump from closed-loop payments to open-loop at their electronic
faregates. Robin Arnfield reports
In their current implementation, North
American transit schemes use proprietary electronic fare platforms,
where passengers add funds to contactless prepaid cards from cash
or open-loop cards. Passengers tap these closed-loop cards at
subway station faregates or buses’ fareboxes.
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However, closed-loop card systems are costly
to maintain and lack an easy upgrade path to emerging technologies
such as Near Field Communications (NFC) cellphone payments, says
John Mavriyannakis, senior manager, consulting at Deloitte
Canada.
“The move to open loop is something we’re
seeing across the board in North America,” says Mavriyannakis.
“Transit schemes almost have to migrate to open-loop,
because of the high costs of closed-loop as well as privacy
concerns about closed-loop cardholder data.”
“Shifting to open-payments saves considerable
costs, for example from reduced cash-handling and theft as well as
closed-loop card lifecycle management and customer service,” says
Nasreen Quibria, a payments consultant with Logica.
“With open-loop, the cost of installing the
payment acceptance system is born by the banks, not the transit
scheme,” Mavriyannakis says. “Also, the banks are responsible for
upgrading the transit acceptance infrastructure to new technologies
such as NFC.”
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Procurement phase
“Now that several open-loop transit pilots
have been completed, US transit schemes are embarking on the
lengthy process of procuring and deploying open-loop systems,” says
Randy Vanderhoof, executive director of the Smart Card Alliance
(SCA), a US-based industry association.
The most prominent US open-loop trial took
place during June-November 2010 in the New York transit area,
involving the Metropolitan Transportation Authority (MTA), the Port
Authority of New York & New Jersey/PATH (Port Authority Trans
Hudson) and NJ Transit. In the trial’s first phase, which took
place in 2006, only contactless MasterCards issued by Citi were
tested. But in the 2010 pilot, contactless MasterCard and Visa
cards from other issuers could be used. MasterCard sponsored both
phases, while VeriFone supplied contactless reader technology.
“The NYC trial was a success,” says Walter
Allen, national sales manager for VeriFone’s vertical markets
group. “It proved that the MTA can accept open-loop cards at
turnstiles at the authorisation speed it requires. Now there are
requests for proposals (RFPs) from Washington DC and Chicago for
open-loop transit systems. The awards for these RFPs will be made
by early 2012.”
Vanderhoof says that NYC is one year into a
four-year open-loop upgrade to its entire transit system, and that
it is close to completing installation of an open-loop system for
its buses. “Based on the length of time it has taken NYC to move to
open-payments, I estimate that in 2015 there will be four or five
major US cities operating open-loop transit schemes,” he says.
Dual-purpose
For the foreseeable future, North American
transit schemes will continue to offer closed-loop cards alongside
open-loop acceptance. “Due to the need to cater for unbanked and
underbanked consumers, as well as special fares such as people with
disability or government-assisted transit passes, transit schemes
will have to operate closed-loop systems plus open-payments,” says
Vanderhoof.
“A solution for unbanked and underbanked
transit passengers is for banks to issue open-loop general-purpose
reloadable (GPR) prepaid cards,” says Walter Allen, national sales
manager for VeriFone’s vertical markets group. “But to gain
acceptance in transit, these GPR prepaid cards need to become
widely available and their fees have to be low.”
Transit schemes implementing electronic fares
for the first time plan to offer passengers the choice of
closed-loop cards or open-payments. TransLink, the regional transit
scheme for Vancouver, Canada, is working with San Diego,
California-based Cubic Transportation Systems on a C$171 million
(US$168 million) electronic fare system consisting of Compass, a
reloadable closed-loop card, as well as acceptance of
open-payments.
Mike Madill, TransLink’s vice president of
enterprise initiatives, says TransLink began installing electronic
faregates at its train stations in summer 2011. He says that people
using bank cards to pass through the faregates will pay a standard
single fare, while Compass cardholders will benefit from discounts
as well as the ability to load monthly passes onto their cards. “We
aim to go to pilot in October 2012, with the system becoming fully
operational in March 2013,” Madill says.
The Southeastern Pennsylvania Transportation
Authority (SEPTA) also plans to offer closed-loop and
open-payments. According to the Philadelphia Inquirer,
SEPTA will announce the winner of a contract to supply a US$100
million electronic fare system encompassing open-loop cards and
proprietary contactless cards in November 2011. The project, which
is expected to take three years, will eventually lead to NFC
cellphones being accepted as well.
NFC
Quibria says North American transit schemes
are lagging behind foreign transit schemes in their adoption of NFC
payments. “Globally, the transit industry is moving towards NFC,”
she says.
“Until now, the lack of NFC phones has delayed
NFC deployment by US transit schemes,” admits Mohammad Khan,
president of contactless payments technology vendor ViVOtech. “But
there are now an increasing number of NFC phones in issue, and 2012
will see particularly strong growth in NFC.”
“Transit payments could become a value-added
usage case for NFC-enabled cellphones,” says John O’Brien, an IDC
Canada senior analyst. “NFC also sets the stage for transit schemes
to deploy new business models leveraging travel-related data for
discount offers. Commuters who are flexible about when they use
transit, could be sent texts offering reduced prices if they take
trains either before or after rush hour. This will result in new
revenues, as seats that would have been empty are now generating
fares.”
“Transit schemes could establish NFC payments
partnerships with retailers located near their stations,” says
Quibria. “This would enable the transit schemes to share in these
retailers’ revenues from purchases by passengers.”
Google and Isis
In 2011, two rival NFC payments initiatives,
Google Wallet, whose initial partners are Google, MasterCard, First
Data and Citi, and Isis, a joint venture between AT&T Mobility,
T-Mobile USA and Verizon Wireless, were launched in the US.
“Google Wallet and Isis have potential in the
US contactless transit environment,” says Alistair Newton, research
vice president and industry services director, banking and
investments services at Gartner. “But NFC adoption in transit will
need a high-profile deployment to attract usage, for example the
NYC transit network. Another benefit of transit schemes adopting
NFC is that this will lead to other sectors embracing NFC
payments.”
“Visa believes open-loop contactless transit
systems can help pave the way for a broader deployment of NFC and
contactless payments in general,” says Sandy Thaw, Visa’s senior
business leader, product development and management.
In October 2011, NJ Transit became the first
US transit system to accept payment by Google Wallet, testing the
technology on seven bus routes and at New York Penn Station and
Newark Airport Station. NJ Transit is also offering open-loop
contactless card payments on the same bus routes and at Newark
Airport Station.
EMV
One drawback with transit schemes migrating to
contactless open-loop cards is the fact that most US cardholders
only have contact-based cards.
“Based on reported supplier shipments, the SCA
estimates there are around 100 million contactless cards in the US
out of a total US market of 750 million cards in issue,” says
Vanderhoof. However, this doesn’t take into account regional
variations in contactless card distribution by issuers.
“In the North-eastern US, JPMorgan Chase has
the largest market share, and it has issued more contactless cards
than any other bank by far,” Vanderhoof says. “So the number of
contactless cards showing up in transit hubs in NYC, Philadelphia
and Washington DC could be higher than elsewhere in the US.”
Moves by US issuers to expand their
contactless card rollout are likely to be combined with migration
to EMV. In August 2011, Visa announced a migration plan offering
incentives to encourage US merchants and acquirers to migrate to
EMV and contactless card acceptance by 2015. Visa’s initiative is
expected to be followed by American Express, Discover and
MasterCard, spurring industry-wide migration to contactless EMV
cards in the US.
But Newton warns that, because of all the
stakeholders involved, moving the US to EMV will realistically take
five to seven years.
“EMV will be an issue for US open-loop transit
schemes in the next five years, but EMV and NFC/contactless are
hitting at the same time,” says George Peabody, director, emerging
technologies advisory service at Mercator Advisory Group. “Given
that simultaneity, EMV isn’t a big deal, it’s just one thing to
plan for.”
Transit schemes are already building a
requirement for EMV compliance into the RFPs they are requesting
for open-payments systems, says VeriFone’s Allen.
Authorisation
A key challenge of open-loop transit payments
is ensuring that authorisation speeds are acceptable to passengers,
particularly with the move to EMV. Closed-loop transit cards are
typically authorised within 300 milliseconds, as there is no
requirement to communicate with external issuers and acquirers.
A common feature of US open-payments transit
pilots is a dual-stage authorisation process for open-loop cards.
When an open-loop card is used at a turnstile, it undergoes an
immediate validity check on a hot card database held by the transit
scheme, which issuers update in real-time. Alternatively, the check
can be done using a system operated by Visa or another card
network, which was the model adopted by MasterCard in the NYC 2010
open-payment trial.
“In the NYC trial, the criterion was that this
check should take no more than 300 milliseconds,” says Allen. “The
average was 500 milliseconds, but the difference between 300 and
500 milliseconds isn’t perceptible to riders.”
If the card is not on a hotlist, the passenger
is allowed to proceed. However, should the subsequent full
authorisation check with the issuer reveal that the card is invalid
or out-of-funds, the card will be blocked against further usage on
the transit system.
In September 2011, PATCO (Port Authority
Transit Corp.), the Philadelphia to Southern New Jersey transit
scheme, launched a 12-month open-payment trial. “In the PATCO
trial, when an open-loop card is used at the turnstile for a
pay-as-you-go trip, the card’s eligibility is verified against a
hotlist hosted by Cubic before access is granted,” says Pradip
Mistry, vice president, engineering at Cubic. (James, Cubic is
acting as system integrator for PATCO.) “Payments are aggregated
for pay-as-you-go trips into a single payment transaction and
approved by the issuing bank on a daily basis.”
Initially, the only card accepted during the
pilot is a PATCO-branded GPR Visa prepaid card. In February 2012,
the trial will be widened to any Visa-branded contactless credit or
debit card as well as contactless cards from other card
schemes.
Salt Lake City
Salt Lake City, Utah is the first North
American city to implement open-loop transit payments. The Utah
Transit Authority (UTA) launched its system in January 2009, having
previously operated a cash-based paper ticketing system.
During the 2006-2007 and 2007-2008 ski
seasons, UTA ran an open-loop pilot involving its buses taking
skiers to local ski resorts. “The reason for testing open-payments
on ski buses was that we only wanted to install open-loop card
readers on a set number of bus routes,” says UTA spokesperson Gerry
Carpenter. “Also, we wanted to test the system with out-of-state
visitors who would be using open-loop cards.”
When UTA implemented its open-payment system
on its 500 buses and 35 transit stations, its criterion was that
its contactless readers had to accept open-loop cards as well as
proprietary cards such as student and corporate IDs. “The readers
accept all open-loop contactless cards including Discover Network’s
Zip,” says Carpenter. “They are able to validate proprietary ID
cards to see if they have been deactivated, for example because a
worker has left their employer. Google has tested Google Wallet
application on our system and found that it works. Isis plans to
test its NFC technology on our system during 2012, with commercial
rollout taking place in 2013.”
UTA currently has a flat fee structure, with
riders paying a single adult fare for unlimited distance. “We plan
to leverage our open-payment system to introduce distance-based
pricing,” says Carpenter. “We already ask riders to tap their cards
when they board and leave trains and buses and when they make
transfers. All our buses and trains have GPS, so we can identify
where customers get on and off.”
Toronto
One stand-out from the general migration to
open-payments is the Toronto Transit Commission (TTC), whose train
and bus networks handle 85 percent of the Greater Toronto area’s 6
million daily transit passengers.
In Southern Ontario, the Presto contactless
closed-loop card system is used across the GO Transit bus and train
network plus eight other transit systems (James – this is not
counting the TTC, which currently has 11 stations accepting Presto
cards).
“The TTC had wanted to remain separate from
Presto and convert its non-reloadable monthly fare-pass system into
an open-payments platform,” says Jacqueline Chilton, a partner at
Glenbrook Partners Payments Strategy Consulting.
“We felt Presto was too expensive to implement
and not sufficiently flexible,” says Brad Ross, the TTC’s corporate
communications director. “Open-loop’s advantage was that there
would be no capital costs for the TTC to implement the hardware and
software. The infrastructure cost would be handled by the banks who
would also manage the open-payments processing.”
In summer 2010, the TTC called for RFPs for
open-payments. However, in October 2010, newly-elected Toronto
mayor Rob Ford decided to cancel the open-loop project and
integrate the TTC with Presto. “Currently, 11 TTC stations accept
Presto, and the TTC plans to fully implement Presto on its network
within the next three years,” says Ross.
“Ford said it didn’t make sense to have two
separate transit card systems in Ontario – Presto and an open-loop
platform in Toronto,” says Chilton.
“Presto does plan ultimately to migrate to
open-loop, Ross says. “At some point, there will be a Presto
open-loop trial.”
“The next generation of Presto will be able to
accept open-loop contactless cards for pay-as-you-go transactions
as well as NFC payments in the next three years,” Presto says on
its website.
“Open-loop is a win-win for transit schemes
and banks. Transit schemes want to give existing riders more
options for payment, and bank card issuers see transit agencies as
fertile new ground to increase card usage.”
