Prepaid Cards and the Transit Industry

For the past several years, transit agencies have been moving away from cash-based fare collection systems to contactless smart card-based systems. In most cases, the cards issued have been closed loop payment cards; that is, cards that can only be used to pay transit fares. Recently, in an effort to both reduce the costs associated with administering these systems and make the systems more convenient for customers, transit agencies are considering accepting contactless bank cards at points of entry, eliminating the need for customers to buy a transit-specific card.

As banks continue the process of converting credit and debit cards to include contactless features, a large number of transit riders will be able to use these new cards on transit systems. However, transit agencies have a long-standing mandate to serve all constituencies in their service areas. Any movement to adopt financial industry products, such as bank cards, would therefore require that all riders be able to obtain such a card conveniently. Because some segments of a transit agency’s ridership may not qualify for a credit or debit card or may be uninterested in establishing a relationship with a bank, transit agencies should consider promoting the use of prepaid cards that can operate like a bank card but be available to anyone.

Non-reloadable “instant” prepaid cards provide this service. Because there is no requirement for consumers to apply for these cards, they cannot be declined. Non-reloadable “instant” prepaid cards are “cards for cash” in the simplest form. These can be limited to use at a single merchant, but they can also carry payment network branding enabling customers to use them at a wide variety of merchants, up to the amount loaded on the card at the time of purchase. [1]

Another option is to use more sophisticated reloadable prepaid cards. These cards are issued by financial institutions and carry a payment network brand, such as American Express, Discover®, MasterCard® or Visa®. Such cards are easier to obtain than a credit or debit card, since there are no credit approval requirements. The customer only needs to provide simple identification information to meet regulatory requirements. It is important to note that the issuer or provider determines the identification required, such as Social Security number, Individual Tax Identification Number or foreign-issued identification to satisfy these requirements. [2] These cards can be reloaded as often as the customer likes and are frequently associated with payroll deposit programs. [3]

In addition, prepaid cards can be obtained from convenient retail locations, from self-service kiosks, over the phone, or via a web site. There is no necessity to visit a bank.

By working with the prepaid industry, transit agencies can provide bank card products to supplement payment media, allow all riders to enjoy bank card privileges, and reduce the agency’s costs associated with the distribution and maintenance of closed loop transit cards, albeit by transferring some of these costs to the riders purchasing the prepaid cards. This approach has already proved to be feasible for serving riders that carry traditional credit and debit payment cards. Adding prepaid cards to the system would allow all riders to participate.

While network-branded prepaid cards can be marketed directly by a bank or other financial institution, one significant difference between network-branded prepaid cards and traditional bank cards is that they typically involve a third party, commonly referred to as a program manager. The program manager is responsible for marketing and distributing cards and supporting the program. Transit agencies are understandably reluctant to take on this role as it can be costly and is an area in which they lack expertise. Discussions in the industry have therefore focused on cooperative relationships with program managers that focus on retail-based prepaid cards; the agency works with a program manager who can distribute cards at transit locations as well as in shops near those locations, so that people can buy a card with cash when they need one.

Transit payment represents an important opportunity for prepaid card providers as an effective means for growing a stable customer base. Because transit agencies can benefit from cost savings, there is a reasonable basis for cooperation. Furthermore, retail-based prepaid cards are very similar to the closed loop smart cards that agencies provide today, which can facilitate a transition to an open system for current patrons, the retail sales outlets currently selling transit passes, and the agency itself.

There are even more types of prepaid cards than the retail-based products mentioned above. The prepaid card industry is highly segmented. An agency should consider each product type, since each type can provide convenient access to a unique segment of the market. Each type has its own special circumstances, but all types share a number of commonalities. Understanding the similarities and differences can help an agency develop a strategy for open payment card distribution that ensures that every rider has or can easily get a fare payment card at no cost to the agency.

Card Technology: Contactless vs. Magnetic Stripe

State-of-the-art transit industry automatic fare collection (AFC) systems currently use contactless smart card technology for the fare media. [4] The prepaid industry, on the other hand, provides mostly magnetic stripe cards, not contactless cards. However, credit and debit card issuers are transitioning to contactless smart cards, merchants are installing contactless point-of-sale (POS) readers to accept contactless cards, and processors are making the infrastructure changes to support the added data elements required with contactless. Prepaid managers can leverage this infrastructure for new prepaid card programs.

To collaborate with the transit industry, prepaid program managers will need to cover the additional cost of a contactless smart card (as compared to a magnetic stripe card), but this additional cost represents only a moderate barrier to conversion, since processors and card suppliers can already support the technology. Prepaid program managers are unlikely to convert without a promise of a positive business case. Fortunately, the interest in open payment systems that transit agencies have expressed has been motivation enough for some prepaid card issuers to begin to offer contactless cards. Agencies are advised to contact several prepaid program managers [5] to solicit interest in supporting their programs.

Participant Roles in Network-Branded Prepaid Card Programs

The prepaid business model is structured differently from the business model in the credit or debit card industry. This section discusses the different parties that are involved in a major network-branded, reloadable prepaid card program and their roles in the process. It is important to note that one entity may perform multiple roles.

The issuer is accountable for all aspects of the program, compliance with all applicable Federal and state regulations and laws, and compliance with the payment brand’s rules. The issuer has approval authority over all aspects of the program. The payment brand considers the issuer to be the owner of the program. Subject to the payment brand’s rules, the issuer must approve all parameters of the program, including maximum card balance, maximum daily transaction balances, number of periodic reloads, cardholder fees, and card art.

The program manager is the driving force behind the prepaid card program. Typically, the program manager designs the program and develops the business and marketing plans. The marketing plan includes a distribution strategy and, in most cases, a network of distributors. In conjunction with the issuer, the program manager sets the pricing and fees for the product. Program managers use their expertise in the market to develop alliances with strategic business partners and third-party vendors. The program manager must be registered with the payment brand as a member service provider for the issuer.

The payment brand sets the rules that must be followed by all parties of the transaction; the rules are typically defined in each payment brand’s operating regulations. The payment brand also standardizes information about the components that reside on the card. From a transaction standpoint, the payment brand is responsible for connecting and routing the authorization transaction to the necessary parties, as well as managing the clearing system that is used to settle transactions and support interchange between the acquirer/merchant and the issuer. The payment brand organization reviews and approves or declines the card program submitted by the issuer. The payment brand supplies and configures the card program’s bank identification number (BIN).

The processor is a member service provider (MSP) registered by the issuer to perform processing services. These services include the development of a platform for configuring and supporting the card program, performing cardholder customer service, acting as the system of record for prepaid accounts, facilitating authorization and settlement, providing reports to the issuer and program manager to manage the program, managing the interface to the payment brand’s network, and implementing fraud and data security controls. The processor must be compliant with the Payment Card Industry Data Security Standard (PCI DSS, a set of standards designed to maximize data security).

The load network provides a channel by which cardholders can add funds to their reloadable prepaid cards through its network of retail locations. The initial load cost is included in the purchase price of the card, but for subsequent reloads, the load network charges the cardholder a fee and pays a portion of the fee to the merchant.

Transit Use of Prepaid Cards

The variety and number of prepaid programs in today’s market provide transit agencies with several opportunities to expand beyond credit and debit acceptance and build a strategy of providing some type of third party card suitable for all its ridership. Transit agencies should take the following steps to evaluate and plan a prepaid card program.

First, the number of credit and debit cards held by riders should be determined. Several agencies have reported that a significant portion of their riders already carry bank cards. In addition, determining the number of contactless cards in this population will indicate how many riders are already able to use a bank card-based system. This will help determine whether a program will need to take an aggressive approach to promoting the card.

Agencies should approach several local banks to discuss their contactless conversion plans. Most banks market credit cards nationally but debit cards tend to be more local since they are based on accounts held at the bank. Discussions with banks in the area will help the agency understand the pace of contactless card issuance in the agency’s service area. In addition, the payment brands provide merchant acceptance information on their web sites.

Agencies should approach prepaid card program managers to discuss their contactless conversion plans and interest in supporting a transit program. Agencies can work with program managers to provide cards for unbanked riders through retail and transit location sales; prepaid cards may offer the fastest implementation of a network-branded bank card if there is a low penetration of contactless credit and debit cards in the agency’s regions. The existing infrastructure for prepaid card distribution can support thousands of sales locations with little or no agency involvement.

Discussions with transit benefits providers are also important, since many of these companies are already issuing prepaid cards instead of paper passes and may be willing to convert their programs to contactless cards if the agency is moving in that direction.

Government benefits cards require the support of the issuing government agency for any change to contactless technology. However, it is likely that public transit is an important service for the benefits recipients. Gaining the support of the benefits agency is important to converting these cards to contactless.

In a similar fashion, student ID cards may already be based on a prepaid program. Discussions with local institutions will reveal how to convert school ID cards to fare media.

Finally, the agency can choose to issue its own card. In this case, the agency may choose to offer a closed loop card based on bank card technology so that no additional system requirements will be needed. In this case, the agency could work with a program manager to outsource this product or become a program manager in its own right.

To develop prepaid programs most easily, transit agencies can work with one or more of the program managers who are interested in transit customers. In this model, the agency negotiates with the program manager to establish the most appropriate product features and pricing. The agency may be asked to provide fare incentives or other transit benefits to cardholders to improve the appeal of the product. Revenue sharing and the provision of other marketing support are appropriate topics for the parties to discuss. Once the program is defined, all operations are outsourced to the program manager. The agency benefits in this model by retaining control of the public portion of the product without having to develop new capabilities internally.

Agencies can also be their own program managers. With this approach, in addition to determining proper fees and prices, agency staff must negotiate with a bank to agree on a BIN sponsorship contract, secure a certified processor to manage the transactions that are generated by card sales, card loads, and card use, and support customer service requirements. Usually one entity can provide a complete package of services for program managers. The agency must also negotiate with a distribution company to support sales of cards at retailers.

Transit Agency Riders and Prepaid Card Programs

A large number of prepaid programs are currently established, with more being launched. Many of them offer attractive fees and value-added features. It therefore cannot be assumed that if a transit agency offers a prepaid program, riders will automatically choose it as their preferred payment method.

To motivate riders to use a transit agency card program, the program must stand out from all other programs. In addition, the program’s primary goal of the program is for riders to use the prepaid card instead of cash. Therefore, the benefits of using a prepaid card must be very obvious to the cardholder. These benefits can include:

• The ease with which purchases can be made
• Ability to use the card for Internet purchases
• No need to carry cash
• No liability for fraud
• A convenient reload network
• Low fees
• Use as a direct deposit vehicle for payroll and government benefits
• Rewards, discounts, and promotions (which may or may not be tied to ridership)
• Low-cost prepaid calling
• Mobile access, contactless, web browser, and SMS features
• Low-cost card-to-card transfers to avoid high remittance fees
• Healthcare and pharmacy discounts
• Credit builder facilities
• Designation of a portion of the transaction for a charitable organization

The list is already extensive, and prepaid program managers are always trying to add new benefits to entice consumers to acquire their card.

Maximizing Income

Agencies and program managers are partners in a transit prepaid card program. How active each partner is depends on the terms of the contract.

Agencies must realize that they are not entitled to share in program revenues without sharing in the responsibility for the program. Too often, affinity partners think that they are going to receive revenue, but are unwilling to assume responsibility for any aspect of the program. The actual terms of revenue sharing can vary greatly, depending on negotiations between the agency and program manager.

The strategies for maximizing income for transit prepaid cards are no different than the strategies used to maximize income for any reloadable prepaid card. They include the following:

• Encouraging use. Maximizing use maximizes revenue generated by the prepaid card program. The interchange revenue can be shared between the program manager, agency, and even the issuer and is negotiated by the three parties. Spending can be encouraged through incentives, rewards, and sweepstakes.

• Increasing customer retention. Prepaid cards can have high abandonment rates, and the cost of issuing a card is high. Maximizing revenue requires cardholder retention. Cardholders do not have a multi-faceted relationship with either the program manager or the issuer. To increase “stickiness,” it is important to make the card convenient to reload and use. In addition, cardholders should be provided with a good online cardholder experience and good telephone customer service experience. Implementing robust customer self-service minimizes the use of live customer service agents.

• Finding ways to increase average balances. Although most issuers do not share earnings on deposit (float), earnings on deposit are a component of revenues. These amounts are currently not very significant because interest rates are at historical lows and the balances on prepaid cards usually average no more than $150. However, average balances can be boosted by proactively promoting direct deposit and offering bill payment features.

• Increasing revenues by offering other value added services, such as long distance calling. The revenue split between the program manager and the agency for these services would be determined by negotiation.

• Charging cardholder fees. Charging fees can pose problems for a transit agency’s reputation. However, transit agencies would need to subsidize a program if the cards were fee-free.

• Minimizing fraud losses through strong controls.

Conclusions

Many transit agencies are looking to accept network-branded open loop payment cards as an alternative or complement to the transit-only closed loop smart card. To achieve this goal to date, agencies are relying on banks to convert credit and debit cards to contactless technology for all of their banking customers. However, banks do not serve all transit customers and a fare payment system that does not reach all riders is not acceptable.

The prepaid card industry has grown rapidly over the past several years and can now offer transit agencies the ability to supplement banks’ contactless card issuance activities with a product that the agency can influence and that anyone can buy. This capability provides agencies with the means to support open network-branded fare payment systems that reach all riders.

The prepaid industry is comprised of several types of cards, each of which is capable of supporting one or more segments of riders. Agencies should explore each type to develop a strategy that optimizes their fare media mix by using third party-issued card products. The architecture of bank card-based fare payment systems facilitates this approach.

Transit agencies may be able to achieve a variety of economic benefits from using network-branded payment cards with their systems, but agencies must clearly understand the costs associated with their current closed loop operation (e.g., card costs, security, encoding, issuance, support man-hours, maintenance). Prepaid cards provide the transit merchant the ability to reach the majority of its customers with payment products designed for open payment systems, tailor products to meet specific needs, and do so at a lower cost.

Notes

[1] At the time of writing, certain financial institutions and payment networks are relaxing the rules on network-branded non-reloadable cards to allow a few load transactions up to a maximum value of a few hundred dollars.

[2] This requirement is a result of the U.S.A. Patriot Act and “Know Your Customer.”

[3] Card program guidelines vary by payment network. The issuer or provider is required to monitor frequency and amount of card loads to satisfy Anti-Money Laundering regulations and may limit the amount. Refer to the card program’s terms and conditions for rules about reload terms and restrictions.

[4] Additional information on transit fare payment systems can be found from the Smart Card Alliance Transportation Council.

[5] A good resource is the Network Branded Prepaid Card Association (NBPCA) member list.

About this Article

This article is an extract from the new white paper, A Guide to Prepaid Cards for Transit Agencies. This white paper was developed to provide an overview of the prepaid card industry and the products available, including network-branded prepaid cards. The paper provides guidance on what transit agencies should look for when evaluating the feasibility and benefits of using prepaid cards as one element of an open loop fare collection system. The paper also provides useful information to other members of the prepaid card industry who have an interest in collaborating with the mass transit industry to expand the use of prepaid cards.

Transportation Council members involved in the development of this white paper included: ACS, Connexum Consulting, LLC, Cubic, Discover Financial Services, First Data Corporation, Giesecke & Devrient, JPMorgan Chase, MasterCard Worldwide, MTA New York City Transit, Scheidt & Bachmann, Southeastern Pennsylvania Transportation Authority SEPTA, Thales, Utah Transit Authority.

About the Transportation Council

The Transportation Council is one of several Smart Card Alliance Technology and Industry Councils, focused groups within the overall structure of the Alliance. These councils have been created to foster increased industry collaboration within a specified industry or market segment and produce tangible results, speeding smart card adoption and industry growth.

The Transportation Council is focused on promoting the adoption of interoperable contactless smart card payment systems for transit and other transportation services. The Council is engaged in projects that support applications of smart card use. The overall goal of the Transportation Council is to help accelerate the deployment of standards-based smart card payment programs within the transportation industry.

The Transportation Council includes participants from across the smart card and transportation industry and is managed by a steering committee that includes a broad spectrum of industry leaders.

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/pages/activities-councils-transportation.