Smart Card Talk

October 2006 • Volume 11 Number 10

Feature of the Month

Transit and Contactless Financial Payments

Since the late 1990s, U.S. transit agencies have made significant investments in contactless smart card-based automatic fare collection (AFC) systems. Over the past few years, the financial industry has begun introducing new payment media based on contactless smart cards for use in the retail point of sale environment. Both of these industries have settled on the common ISO/IEC 14443 standard defining the card/reader interface, which provides the opportunity to establish links between the two industries.

The value proposition for the use of contactless smart cards in the mass transit marketplace has been well documented for more than 15 years. Many, if not most, transit agencies throughout the world have recognized this value and have either implemented or planned for implementation of a contactless smart card in their fare environments. These implementations have generally made use of agency-issued smart cards that are typically used in the closed transit systems only, or in some cases also used in retail locations that have been established as extensions of the closed transit systems. These are typically stored-product implementations where the card holds the fare product or cash value that is updated with each use of the card.

Recent developments in the mass transit and financial payments industries have created opportunities for convergence and collaboration. For example:

The financial industry is now issuing contactless credit, debit and prepaid cards and other form factors such as fobs, targeting markets in which consumers typically use cash and where speed and convenience are critical. Over 13 million contactless financial payment devices have been issued in the United States, with over 32,000 retail locations accepting contactless payment as of mid-2006.

American Express, MasterCard, and Visa have implemented new programs and rules for certain merchant categories which perform low value transactions; these programs and rules may also apply to contactless credit and debit transactions. The new programs make financial payment products more attractive to consumers and merchants in markets that traditionally have used cash.

New services and payment models, including aggregation of transactions and establishment of prepaid accounts, are being offered that may provide more cost-effective processing for low value transactions.

Some transit agencies, who are seeking further improvements in customer service and operating efficiencies, are looking beyond their successful fare collection systems toward reducing, though not eliminating entirely, their role as a payment media issuer and transaction acquirer and becoming more like a retail merchant in an open payment system. This notion overlaps a broader transit industry goal to facilitate regional travel through open, interoperable fare payment in a way that is both convenient for customers and efficient for transit agencies. One possible implementation model is the acceptance of standard contactless financial payment devices directly at the customer's point of entry at fare gates, on buses or on any other mode of transportation.

With this implementation approach, the transit industry would accept the currently-issued contactless financial payment device as a static customer credential and use the standard financial industry processes for clearing and settlement that rely on back-end processing. In this model consumers would use the contactless financial payment device that they received from their financial issuer to pay transit fares directly at the subway gate or on a bus.

There are several key benefits for transit agencies to include a transit fare payment solution that is built on this model.

Customers paying fares with financial industry-issued contactless payment cards would be able to build on an existing relationship with an issuer of their choice to pay any transit fare. Customers would have fewer pieces of plastic in their wallets; regional travel on public transportation would be made easier.
For customers, paying a transit fare would become like any other retail experience and carry with it the complete customer support system, claim resolution process, and protection against loss that comes with financial payment products.
Transit agencies may no longer need to issue fare media for a large segment of its riders, possibly avoiding significant costs associated with ticket issuance and lifecycle management. Transit agencies could accrue the benefits of "account-based" fare payment without needing to directly manage and secure the privacy of those accounts.
Transit would join the larger pool of retail merchants, issuing organizations, and payment brands that have agreed to and facilitated sharing of proven "open" standards as a basis for developing equipment and support processes. T he economies of scale of the shared infrastructure (e.g., the existing open, non-proprietary, financial payments system) can provide opportunities for transit agencies to save costs by consolidating multiple clearing houses and customer service functions.
Transit would be well-positioned to take advantage of the growing trend toward non-cash payment options among consumers, which is expected to gain further momentum as state governments move toward using financial payment instruments for distribution of benefits.
nteroperability is expanded among both transit agencies and all merchants that accept such payment devices. The effect of which, according to recent studies, is that the payment device becomes "top of wallet," providing an increase in usage which is a motivator for financial service providers.
Transit would benefit from co-branding opportunities and other promotional programs that promote the agency's brand.
Card issuers have become experts at database marketing and could work with the transit agency to identify segments of customers who are likely to respond to various product offerings. Using the account-based model, temporary promotional products could be introduced with little effort.
Card issuers will be able to focus on promoting usage as this approach requires little, if any, change in operations.

Implementation considerations for this approach to transit fare payment center more on business and operations rather than on issues arising from technology definition, standards, and technical infrastructure. For example, for each transportation mode, public transit will need to define what it requires at a point of entry beyond basic financial payment functionality to satisfy its customer service and business needs. In the context of accepting traditional, unaltered financial payments solutions, the key issues that must be considered by transit agencies are: transaction time, online authorization, and risk management; transaction cost; transit fare policy and processes; and financial payment system regulations and operating rules.

In a manner similar to other merchants that accept financial payment products, transit agencies are now working with the financial industry and payment brands to develop the methods, business rules and risk models that address these issues and that enable acceptance of financial industry-issued contactless payment devices. The definition of the risk model and business case for this acceptance approach - by the issuers, the transit agencies and the processors and acquirers that support them - will be one outcome of this collaboration. Toward this end, two pilot programs, one in New York and the other in Utah, are now underway.

With a market equivalent of 10 billion transactions annually, the U.S. public transit market is a one of the largest opportunities for micropayments. There are obvious challenges ahead in developing business models that leverage common technical standards between the financial payments and transit industries. However, once thought of as disparate industries, there is a clear nexus between them at many levels. In metaphoric terms, the two industries were pursuing payment platforms on parallel, but unconnected tracks; now the switches are being constructed to allow those critical connections to be made which will benefit customers and the markets that support them.

About this Article

This article is an extract from the Transportation Council white paper, "Transit and Contactless Financial Payments: New Opportunities for Collaboration and Convergence," published in October 2006. This white paper was developed to discuss how new financial and transit industry directions could impact transit industry fare payment.

Participants involved in the development of the white paper included: ACS, American Express Company, American Public Transportation Association, ASK Contactless, Booz Allen Hamilton, Cubic, ERG Group, First Data Corporation, Gemalto, Giesecke & Devrient, Inside Contactless, MasterCard Worldwide, Massachusetts Bay Transportation Authority, MTA New York City Transit, PepperCoin, Tri-County Metropolitan Transportation District of Oregon (TriMet), U.S. Department of Transportation/Volpe Center, Utah Transit Authority, Visa USA, Washington Metropolitan Area Transit Authority.

A dditional information about smart cards and the role that they play in transit and financial payment and other applications can be found on the Smart Card Alliance web site at www.smartcardalliance.org .

About the Transportation Council

The Transportation Council is one of several Smart Card Alliance technology and industry councils that were created to foster increased industry collaboration within a specified industry or market segment.

The Transportation Council is focused on promoting the adoption of interoperable contactless smart card payment systems for transit and other transportation services. Formed in association with the American Public Transportation Association (APTA), the Council is engaged in projects that support applications of smart card use. Transportation Council participation is open to any Smart Card Alliance member who wishes to contribute to the Council projects. Additional information about the Transportation Council can be found at http://www.smartcardalliance.org/about_alliance/councils_tc.cfm