Developing an electronic payment system for mass transit systems offers many benefits: ease, convenience and flexibility for consumers; efficiency and cost-savings for transit authorities; and a new revenue stream for credit card companies.
So why in a market where you can use plastic to buy everything from your morning coffee to your annual dental checkup, do you still have to search for exact change to pay your bus fare or stand in line at a subway ticket vending machine on your way to work?
The answer is a complex knot of technological, economic and political challenges that officials and business leaders are working hard to unravel. And while there are some early success stories to show for these efforts, it could take years before a true, nationwide interoperable cashless transit payment system is up and running.
Among the major hurdles facing transit officials and the banking industry:
1. Determining who will finance the infrastructure needed to develop and implement a cashless system.
While the benefits of transforming transit payment systems to next-generation technologies are substantial, so is the cost involved. It may cost $100 to $200 million to launch a new mass transit
payment system in a city. In order to move pioneering e-payment projects forward, it is essential to first determine who will bankroll the expense of the initial investment.
To attract funding, the transit systems must present a compelling business case to the private sector or attempt to get funding from a cash-strapped public sector. By pursuing the so-called “open-loop” card model, which allows consumers to pay for transit fares and other retail transactions with credit or debit cards, transit agencies can provide an enticing business incentive to payments and other financial services companies. In return for their investment, they gain a new revenue engine and a way to engage new users.
For example, if financial companies enable a commuter’s existing credit card for transit payments, that card is much more likely to become “top of wallet,” or his or her preferred card. There are retention benefits as well. Research shows that consumers are less likely to leave their card company if they have recurring payments (like transit) tied to that card.
However, in order to realize a return on such an investment, payments and other financial services companies must also find a way to encourage those customers to use their cards for other higher-end transactions.
2. Organizing and coordinating the disparate players needed to build and manage a new transit payment system.
Another substantial obstacle facing transit systems is that the major players involved, including local authorities, payments companies and technology providers, have not been able to agree on a common set of standards.
As the Federal Reserve Bank of Boston stated last year in a report on emerging payments: “Various [transit system] stakeholders across the United States have competing interests and may exert opposing political and financial pressures. Thus, successful standards will require agreements about what platforms to use, and how to reconcile different budgeting, cost allocation and profit-sharing approaches — factors that, until they are resolved, can hinder all interested parties from successfully moving forward.”
3.Developing an interoperable system that can recognize different cards for different types of transit and varied fare structures within a given system.
Until nationwide standards are set and adapted, transit systems across the country will continue to develop their own technologies and processes. The longer it takes to develop accepted best practices, the more divergent these systems will become — and the more difficult it will be to ultimately integrate them.
For example, because of its existing proprietary infrastructure, the Octopus card in Hong Kong requires consumers to use one specific bankcard, which allows for both contactless transit and retail applications. Although successful in Hong Kong, that closed system is less likely to work in the United States given the maturity and proliferation of card payments here.
In contrast, the Utah Transit Authority recently announced the launch of its open loop contactless e-fare collection system, which will accept existing credit and debit cards from all major card providers. This open loop approach makes interoperability easier in the long run but provides little incentive to payments and financial services companies to invest in system deployment in the short term.
4.Creating a payment system without additional fees for riders.
Despite the added convenience that dual-purpose smart cards offer, the issue of added fees may hinder consumer adoption. According to an industry trade publication, Los Angeles consumers who previously did not have relationships with banks are expected to use the cards frequently outside of transit, but would face fees of 25 cents for each retail purchase and nearly $5 a month for maintenance. Whether subway and bus riders are willing to trade those fees for speed and convenience remains to be seen.
5. Designing an electronic payments system that caters to the diverse needs of system users.
A fifth major challenge to transit agencies across the country is how to deal with complex demographic issues that are often unique to their population and design a payments system able to meet the various needs of different user groups, including one-time users. For example, in developing its new transit system, Utah had to take into account not only daily commuters, but also the waves of tourists who arrive every autumn for ski season. In addition, in many cities, train demographics can vary greatly from bus demographics, and the composition of bus and subway riders can vary greatly from line to line.
6. Ensuring customers will adopt the new payment system.
The final, and in many ways most difficult, challenge to advancing e-payment transit practices is winning over consumers. Experience shows that the best incentive is actually a disincentive. For example, in London, the transit agency helped drive usage by charging significantly more for transit riders who paid cash instead of using the Oyster smartcard, which is a stored-payments card for London’s mass transit system.
Similar approaches might be tried in the United States, although U.S. riders are more likely to balk at such a fare differential and/or at card usage fees, simply because of the sensitivity to card fees in today’s environment.
While these six challenges continue to impede or slow progress in remaking the U.S. transit payment system, there is a larger force at work that will no doubt win over time: inevitability.
We have the technology and know-how to develop a nationwide transit payment system that is faster, smarter and infinitely more convenient.
We also have an economic imperative. Transit authorities would like to exit the fare management business and focus on their expertise — moving people safely and effectively — and allow the private sector to do what it does best: operate and manage a payment system that works seamlessly with transit services.
To make this happen, government transit authorities and business leaders will need to be innovative and willing to work collaboratively. Consumers will need to be patient, but to also push for — and be accepting of — change. Like the trains and the buses that comprise our transit systems across the country, there are bound to be delays, but there is no doubt we will reach our destination.
Farhan Ahmad is the general manager, prepaid and director of emerging payments for Discover Network, Discover Financial Services’ payments network.