Op-Ed: Debunking the myths of open-loop payments in transit

Open-loop payments have grown in popularity due to their perceived convenience, speed and ease of use, allowing riders to simply tap their preferred bank card for travel. While their appeal is driven by the promise of a modern, user-friendly experience, open-loop technology has numerous drawbacks, such as implementation challenges, integration costs and ongoing transaction fees. In this article, I’ll share my perspective on the subject, debunk some common myths and offer agencies advice on achieving the best results with the technology. 

How political pressure overrides good strategy 

Policymakers sometimes market open-loop technology as a sleek, modernization strategy that offers greater convenience, lower costs and higher ridership. The push for full open-loop adoption in transit undermines the reality that many agencies still rely on monthly passes and concessions. Open-loop systems currently lack support for more flexible fare structures unless layered with complex eligibility processes or closed-loop add-ons. 

High upfront costs for hardware, software and payment processing platforms fees can be problematic for smaller agencies that may not have the same resources as larger operators. Attempting to roll out open loop as a complete replacement rather than an enhancement can be shortsighted, forcing agencies to abandon their existing closed-loop infrastructure, like smart card systems. 

Payment modernization needs to reflect rider behavior, not political hype 

Open-loop projects are often unsuccessful because they fail to address the diverse needs of the existing rider base. By neglecting to support popular products like monthly passes, agencies risk alienating a majority of users who may be forced into a less convenient or more expensive system. Let’s take Transport for London’s (TfL) success with contactless fare payments, for example. Many have tried to replicate the model, focusing on the city’s high adoption rates of open loop.  

What they fail to consider is that TfL’s primary product remains its Oyster scheme, which uses proprietary cards and technology that require pre-loading. A significant number of TfL’s customers qualify for concessions, such as students, pensioners and low-income residents, followed by monthly pass users. Open-loop technology cannot currently support these mechanisms to the desired standard.  

Real risks vs. perceived risks of open-loop payment technology  

There is a common misconception that being the Merchant of Record is a burden for agencies. These concerns are exaggerated since agencies already manage similar responsibilities. A direct relationship with the payment processor or facilitator enables transport companies to negotiate better deals. Riders are also less likely to request chargebacks because they can see the service provider on their bank statements.  

The real barrier to open-loop technology is often the readiness of the bank to process transit transactions (MTT/PAYG as required by the card schemes). Currently in the U.S., there are about five banks/acquirers certified for transit (cEMV) payments. In Europe, the situation is not much different. For a bank to support such models, it usually takes at least one year of work and hundreds of thousands of dollars.  

This also comes with L3 certification that is mandatory and required by card schemes. Apart from the technical side, acquirers are usually not willing or able to offer transaction fees suitable for transit. For example, there is often a fixed element in the fees, and this can be a significant percentage of the ticket price. 

The success of an open-loop project depends on the vendor—specifically, whether it has a proven path to cEMV, terminals, an acquirer and existing L3 certification. If this is not in place, the process of enabling open loop can take years and become prohibitively expensive. 

Why closed-loop payments persist among transit’s core riders 

The main reason the majority of riders still prefer closed-loop payments revolves around familiarity and convenience. Products such as pre-paid cards and monthly passes offer superior value and predictability when compared to bank cards. A large portion of the population is also reluctant to use bank cards for travel due to security concerns, meaning they will always seek another option, such as cash or prepaid digital wallets, no matter how well-marketed open-loop technology is.  

Closed-loop cards are crucial to ensuring public transportation remains accessible to all societal groups. Unbanked/underbanked riders may not have another way to pay for fares, making a system fully reliant on open loop a barrier to essential services like public transit. At the same time, these riders are not necessarily without smartphones, and smartphone‐based payments can be a convenient and cheaper alternative to cEMV. Agencies can issue White-Label EMV cards that are not part of the banking system, but those are considered an expensive option. 

How account-based ticketing (ABT) systems help overcome the limitations of open loop 

ABT offers a way to overcome the limitations of open-loop systems. ABT systems are not restricted by specific fare media, so they support closed and open-loop processes equally. This means they can facilitate EMV card payments, QR codes, mobile tickets and closed-loop cards while maintaining backend flexibility, with tokens as the main mechanism. 

With open-loop payments, fare rules are distributed across multiple channels, making it both difficult and complex to manage different fare structures. ABT enables more dynamic, flexible fare structures and subsidies based on user accounts. Their token-oriented architecture ensures they’re built for flexibility, allowing agencies to make software updates while applying fare rules without needing major overhauls.  

Open-loop payments enable future innovation, but only when the infrastructure is ready  

Once mature enough, open-loop technology can provide greater convenience, fairness and accessibility in transit operations. Riders won’t need to buy proprietary cards or preload funds before traveling. They can simply use their bank cards while agencies monitor usage in real time and automatically apply fare rules such as discounts or concessions. 

Tap-and-go fare capping will give low-income riders access to travel discounts without the upfront costs of monthly passes. By analyzing data from open-loop systems, agencies can create new incentive programs that reward riders and establish dynamic pricing models that adjust fares according to usage patterns. The collected data will further support enhancements to transit services, such as route optimization, while reducing cash handling costs.  

Final thoughts 

Open and closed-loop payment systems can complement each other; however, it’s important to be aware of the complexities involved. Agencies need to be diligent in equipping themselves with the knowledge and tools needed to tackle these challenges if they want to avoid costly mistakes. This means aligning modernization efforts with actual demand, not current trends or political pressure.  

Transit technology must be adaptable and responsive, safeguarding the public’s interests. An agency’s user base will not adopt any technology, no matter how appealing, if it falls short on practicality or expectations. By prioritizing flexibility and inclusivity, agencies can meet community needs while upgrading their digital infrastructure.