With the emergence of contactless cards and a couple of transit trials testing the use of this new payment medium in lieu of transit passes, the Smart Card Alliance’s Transportation Council released a white paper in October, 2006, exploring this new payment method.
Suitably named “Transit and Contactless Financial Payments: New Opportunities for Collaboration and Convergence,” the 39-page document, is available for free download from SCA’s website, www.smartcardalliance.org.
Here are some of the council’s conclusions:
Calling the New York City and Utah transit pilots “ground-breaking,” it noted that these projects “will push the envelope for fare payment in public transport by directly accepting a contactless financial payment device at the subway turnstile or on board a bus at the farebox.”
What’s possibly holding up further expansion is that existing fare collection systems are “closed” and “unique to a single operator or regional consortium,” says the white paper.
This is probably why few “transit operators have explored leveraging other payment options for their customers…”
Contrast that to the financial payment industry which, says the council, “has coalesced around standard contactless smart card technology to assure full interoperability for ExpressPay from American Express™, MasterCard PayPass™ and Visa Contactless. “
With more than 32,000 merchant locations (as of October, 2006) in the U.S. now accepting contactless payments and more that 13 million contactless financial payment cards and devices in existence in the U.S., “these consumers enjoy the freedom of full interoperability anywhere contactless payment is accepted. Transit operators want to offer as many payment options to their customers as possible and leveraging the financial payments industry infrastructure is key to opening up that set of payment options.”
For transit agencies, there are several core elements for developing and deploying fare collection systems:
- transaction speed;
- fare policy (pricing) flexibility; tangible improvements in customer service;
- operating and business efficiencies;
- and data security and user privacy.
“There are striking parallels in the needs of the transit and financial payments industries and work is underway to narrow any gaps.”
This Transportation Council suggests that an alternative to today’s traditional transit payment model could be available without requiring major changes to the financial payments infrastructure.
Solving the challenges of merging micropayments with transit “reside more in the realm of business strategy and operational processes than in the realm of technology solutions…there appear to be many ways to resolve the business and operating demands of the transit market. The key question is what combination of technical solutions can be structured to solve the needs of individual transit agencies…?”
The council proposes creation of “an alternative established paradigm” for the financial payments industry both in terms of a good business model and technologically.
“As a preliminary conclusion,” the council notes, “it appears that through a combination of financial industry rule changes and new business operation processes, the cost of processing individual transit payment transactions may become economically viable, so that processing no longer exceeds the cost of the fare product itself.”
Both transit pilots in Utah and New York wrestled with that challenge. “Individual transit agencies and financial industry issuers and acquirers/processors would need to develop their own business models to determine the economic viability of this approach in their environments,” the white paper adds. “As the marketplace matures, further development is underway in the financial industry’s approach to micropayments, including the evaluation of several small value payment models such as subscription-based payment, prepaid accounts, post-paid accounts through transaction aggregation, and direct payment processing over the standard payment networks.”
One suggestion from the white paper is for an aggregation system of payment “which identifies repeat transactions that use the same payment instrument (such as a credit card) and aggregates the charges up to a certain value or time to process a smaller number of higher value transactions.
“Some merchants with a high volume of low value transactions are now using aggregation as a technique for reducing the cost of financial payment card acceptance,” the council says. But right now, just “a limited number of third party processors offer aggregation services.”
The council also offers “other approaches that may make micropayment transactions more cost-effective.” These include:
- Subscription-based payment. An up-front payment covers “all you can buy” over a particular period of time.
- Prepaid account. An up-front payment is stored in a customer account and decremented as purchases are made.
- Postpaid account. Where an authorization is made up-front, transactions are aggregated and later settled when a threshold amount or time-frame is reached.
- Direct payment. Micropayments are billed individually and processed over standard payment networks, at fees (“discount”) negotiated between the merchant and the acquirer/processor.
The financial industry is beginning to pay attention. For example, they’ve already changed the rules that require signatures on small payments–mostly $25 or less. Plus, customers will receive receipts on these transactions only if requested. That one was to comply with Regulation E, but the Federal Reserve recently eliminated that mandate on credit card transactions of $15 or less, making it easier for issuers to get involved in micropayments.
Bottom line, as the white paper notes, is that the U. S. Transit industry produces some “10 billion transactions annually” making it one of the country’s “largest opportunities for micropayments.”
The council report concludes with this comment: “There are obvious challenges ahead in developing business models that leverage common technical standards between the financial payments and transit industries. However, once thought of as disparate industries, there is a clear nexus between them at many levels. In metaphoric terms, the two industries were pursuing payment platforms on parallel, but unconnected tracks; now the switches are being constructed to allow those critical connections to be made which will benefit customers and the markets that support them.”