What’s the Cost of Open Payment Systems?

During the past five years, there has been considerable buzz about open payment systems. In short, this means using contactless bank cards such as MasterCard PayPass, VISA Wave and American ExpressPay to pay for transit fare in addition to using these cards at retail establishments. These smart cards will be used with a swift tap at the turnstile or on the bus farebox to process fare payments. The main attraction has been to re-think traditional fare collection processes with coins, bills and magnetic stripe credit/debit cards, and to migrate to contactless bank cards. Transit then becomes one of several merchants in open payment system architecture. In a parallel move, the mobile phone/smart phone industry is also vying for a crossover entry into the transit payment space — albeit in its early developmental stages.

Today’s electronic payments solutions offer many new methods to improve customer convenience and introduce new service businesses to provide better customer convenience. But what are the tough questions related to cost issues and risk? Is there a strong business case to migrate to open payment systems?

This article highlights some of the considerations in adapting such technologies as applications for transit. The concept of operation is easy to grasp. It has created excitement in the transit, banking and related service sector industries. But its implementation is complex with new stakeholders — and there are technical, cultural and financial issues to address. Some of these matters are outlined in this article. In closing, some points are noted with the expectation that it may invite further discussion.

Why Change the Current Payment Structure?

Credit/debit cards are commonly used account-based paymentinstruments. We use them for grocery purchases and other items at retail stores. The process is well understood, including how to use it to buy a transit pass. So why not extend this payment method using contactless bank cards to pay for all transit trips? Is it viable to replace the traditional transit “house” smart cards?

This convenience could also be extended to regional transit agencies that may opt to participate as separate “accounts” but as partners in a larger electronic payment scheme.

Key Issues in Introducing Change in Payment System

Some of the issues and structural changes have to be addressed. At the user level, clearly there is simplicity. But that is the tip of the iceberg. Below that — the submerged two-thirds level — there are many issues to address. Some of these are:

• Revenue Collection PrincipleIt will be a change from today’s pay first/then ride method to a predominantly ride first/pay later method; it will become a billing system. The benefit of the “float” — that unused portion of a pre-paid payment — will disappear with a post-payment scheme.
• Technical and Institutional Factors Infrastructure changes, addressing rider demographic issues, and developing new public/private partnership will be required.
• Societal Issues How to meet the needs of at least 26 percent of U.S. population at large that is unbanked and underbanked (FDIC’s 2009 Report). Also how to comply with local, state and federal subsidy mandates such as providing reduced fares to seniors/disabled and free fares or a complementary “ticket” for eligible persons who have to use transit to seek a job or to visit health care center.
• Cash Payments Retaining it for those who prefer to use it and for those who have no choice and have to use cash or a government script — these payment methods have to be addressed.
• Integrating Legacy SystemsIntegrating a current data system usually requires multi-generation “stove pipe” systems — for fare system, security, sales and revenue accountability, banking needs and so on. Migrating this information to a newly introduced data system involves software, intellectual property (IP) and other issues. It becomes a vital and pivotal need for success.
• Managing Expectations Technology is a moving target. This often brings into play political (ribbon-cutting) schedules and deliverables schedules. Often GM and board membership changes add to the complexity of service delivery for staff and the selected contractor.