Transit and Contactless Financial Payment: New Opportunities for Collaboration and Convergence

Publication Date: October 2006

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Executive Summary

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 payments industry is focusing on expanding its share of the micropayments market and making the necessary changes in business rules and practices to foster that expansion. 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. While there are other implementation models, two of which are also described in this white paper, there is a specific focus in this paper on 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.

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. In the context of accepting traditional, unaltered financial payments solutions, the three key issues that emerge for transit agencies are transaction time, online authorization, and risk management.

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 all 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.

This Smart Card Alliance Transportation Council white paper discusses these and related issues, as well as providing details about the way traditional financial payment products are used and about transit industry requirements for payment systems. The objective of this white paper is to discuss how the new financial and transit industry directions could impact transit industry fare payment. The white paper is intended to provide a framework for discussion of the opportunities and challenges in linking transit and financial payment and to present options for how standard contactless financial payment devices can be used for transit fare payment. This white paper explores the following:

• Current transit payment systems and their unique requirements
• New financial industry products and services that target the micropayments market
• Key considerations for implementing one model that allows transit agencies to accept American Express, MasterCard, and Visa contactless payment cards–as they are presently being issued in the U.S.–as another option for paying transit fares on a bus or at a gate, without the intermediate step of purchasing transit-specific fare media.
• Two pilot projects, MTA New York City Transit and Utah Transit Authority, which are evaluating the use of contactless financial payment devices to pay fares directly at subway gates and on buses, respectively.
• Possible alternative implementation models that could leverage the capabilities of multi-application smart cards and contactless payment-enabled mobile phones.

The transit and financial industries are breaking new ground in adopting new payment media and models. Various models could be implemented that would allow the transit and financial industries to leverage the new financial industry directions and both industries’ choice of common contactless smart card technology for the payment device. Each model carries with it a specific business case with different cost/benefit characteristics. Transit agencies will need to develop requirements and model how different solutions can meet their specific business needs in order to select an implementation approach.

Both the transit and financial industries are currently very interested in understanding the opportunities and challenges of using contactless credit, debit and prepaid devices for transit fare payment. With such strong interest, it is expected that the current implementations will fuel discussion to evaluate how the two industries can work together to deploy solutions that deliver value to all participants in the transit payment process.

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.

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. 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.