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.