Transit and Retail Payment: Opportunities for Collaboration and Convergence

Publication Date: October 2003
Pages: 49

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Executive Summary

Public Transportation Presents an Expanded Market Opportunity for Contactless Payment Systems

Ridership on public transportation in the United States is expanding, with significant investment underway to modernize and automate current fare collection systems. To further stimulate ridership, the federal government is providing incentives for employers to subsidize the use of public transportation by employees. This situation represents a unique opportunity to grow customer bases and revenue streams, not only for transit operators, but also for retailers and financial institutions.

Transit operators are moving away from multiple, non-integrated fare collection systems to systems that require only a single contactless smart farecard and allow travelers to access multiple modes of transportation, regardless of whether the transportation is administered by one agency or by multiple agencies within a region. This common infrastructure can provide efficiencies across operators and improve overall customer service.

Retailers and financial institutions also have an opportunity to partner with transit operators to provide the consumer with a payment card that can be used to pay for goods and services such as snacks, bridge tolls, parking fees, or food in restaurants or grocery stores located near public transit stations. Pilot projects in the United States and implementations of similar programs elsewhere indicate that consumers welcome such multi-application payment cards, perceiving them as convenient and cost-effective.

Contactless Smart Cards Are an Excellent Solution for Convergent Transit-Retail Payment Applications

The success of contactless smart cards in automatic fare collection systems has already been demonstrated worldwide. Smart cards are also suitable for retail-financial applications, accommodating not only contactless interfaces but also the magnetic stripe interface more common to retail transactions in the United States. Contactless smart cards can therefore represent a viable solution for converging transit and retail-financial payment applications, providing a single card that meets the common requirements for both partners: ease of use, ability to replace cash, quick and accurate transactions, security, and data collection for improved market identification and customer service.

Convergent Transit-Retail Payment Applications Require Collaboration and Agreement on Technical, Business and Consumer Issues

Numerous scenarios are possible for implementing a combined transit and retail payment card–ranging from the use of a multi-technology card that incorporates a contactless chip for transit payment and traditional magnetic stripe for retail payment to a multi-application contactless smart card that supports both transit and retail payment. Each possible implementation involves different opportunities and challenges for the institutions issuing and accepting such a card.

Various business and technical issues are barriers to collaboration among transit and retail or financial partners, including selection and use of compatible standards, use of a common payment methodology, selection of compatible operating systems and security approaches, upgrade of retailer point-of-sale terminals, potential changes in fraud exposure and liability, and development of programs to drive customer acceptance. Resolution of these issues is critical to developing contactless payment approaches that can be used across the transit and financial-retail industries.

Partnerships Can Leverage the Investment in Smart Card Infrastructure to Create Competitive Advantage

Contactless smart cards offer significant benefits for transit operators–both for improving customer service and operational efficiency and for opening up opportunities to collaborate with other industry sectors. The public transportation industry is at a crossroads as it considers strategies for the next advances in smart card-based fare payment. Should the industry leverage the technology developed in closed transit systems to enter the retail payment market, or should it focus efforts on becoming an application on a card issued by others?

Strategically, this is the time for transit operators to explore the potential for linkages to formerly disparate markets and develop partnerships with employers, financial service providers, retailers, and other transportation service providers. By leveraging the new contactless smart card infrastructure, transit operators and their partners can differentiate product and service offerings and create a strategic competitive advantage.

About This Report

This report was developed by the Smart Card Alliance to describe the current market opportunity for a combined transit and retail payment card. This report provides answers to commonly asked questions, such as

• What investment is being made in transit contactless smart card fare collection systems in the United States?
• How do automatic fare collection systems use smart cards now?
• What retail payment methods are commonly used in the United States and how are smart cards being used?
• What opportunities exist for payment cards to include both transit and retail or financial applications?
• What business and technical issues must be resolved to implement a convergent transit-retail payment card?
• What are the requirements that must be met for transit operators and retail-financial organizations to collaborate on a combination card?

If you would like to join the task force, please contact info@smartcardalliance.org.