By Conrad Sheehan, CEO, mPayy
For tens of millions in the U.S., mass transit is a fundamental part of daily living. Commuters can spend 10% or more of their workday riding transit and $1000 per year. From another perspective, mass transit is also important. It is probably the most socially inclusive activity Americans participate in and, to that extent, is something of a great equalizer. Billionaires and the homeless, immigrants and Daughters of the Revolution all “hang on the strap.”
A key part of mass transit is the payment process and as proprietary fare systems become obsolete, municipalities and transit authorities are looking for new payment systems to meet the needs of constituents and budgets. A tendency might be to turn to legacy payment schemes –Visa and MasterCard – because of their marketing presence and influence, but these types of traditional payment schemes are inadequate solutions for transit payments for several reasons:
Traditional cards – credit, bank debit, pre-paid Visa and MasterCard – are inaccessible or prohibitively costly for a large constituency of riders, namely the unbanked and under-banked, which can represent 50% of ridership. Pre-paid cards come with numerous fees including activation, monthly maintenance and non-activity fees. In addition, pre-paid cards do not eliminate the need for unbanked consumer’s need for other fee-based financial services provided by currency exchanges such as check cashing and bill payment. The combined total of these fees vastly exceed the cost of a bank account, especially given the fact that the majority (62%) of low income households never bounce a check, according to the November 2008 FDIC Study on Overdrafts.
They cannot support the dynamic and often complex fare structures of transit authorities, e.g., seniors, students, military and pre-tax.
They are built around magnetic stripes, which are too slow to meet the existing and growing throughput needs of transit. A benchmark of 350 milliseconds or less was cited in an October 2009 Payments Source report on London’s transit throughput needs. This is not only way too fast for magnetic stripes, but also too fast for even Visa and MasterCard European contactless cards. Mass transit needs to move millions of people in a couple of short bursts each day.
They contain sensitive financial data. Cards were designed in an off-line, mechanical world where this data needed to be on the card and facilitate carbon imprints – and this model has not changed much since. Whether in this data magnetic stripe, on chips or embossed right on the card, the traditional card will always be vulnerable to compromise at attended turnstiles and vending machines, and while fraud may not be a major issue in transit, the liability of stolen card data is. This was the case with TJ Maxx stores, which recorded a $118,000,000 charge due to a data breach.
They are expensive. Securing data will remain a perpetual cat and mouse game fought by escalating technology costs on cards and readers; interchange will only rise, various and sundry fees will be introduced and re-introduced raising the cost for both riders and transit authorities.
Furthermore, there is evidence that legacy payment schemes and bank card issuers are interested in transit payments to get contactless cards into people’s hands to reduce their own fraud losses in the broader retail market and to use contactless chips as a mechanism to steer all payments into their preferred networks, namely signature-based transactions. This was evidenced recently by Best Buy’s cancellation of contactless Visa cards, which automatically routed any contactless Visa transaction into Visa’s own signature-based network, as opposed to a lower cost PIN debit transaction.
These should not be transit’s problem, not their job to solve and not their financial obligation to fund – it is a false choice between proprietary, closed loop payments and Visa and MasterCard backed payment schemes.
Fortunately there are the successful transit payment systems, e.g., Hong Kong and London, which provide insight. Both systems have avoided the legacy payment schemes. In the case of Hong Kong, even in the face of direct competition from global behemoths Visa and MasterCard, the Octopus payment solution prevailed and has capture over 95% market share. Both systems are built around contactless fare media and make card acquisition and reloading convenient. Both systems can be used on multiple modes of transportation and even Hong Kong has successfully opened up its payment platform to serve the broader retail market.
Newer, more efficient, secure and flexible solutions exist that do not shift the structural flaws of card payment schemes onto transit authorities or merchants in general. These solutions are “open” but do not rely on traditional network schemes. They address the critical factors facing transit, as well as position transit systems to take advantage of fast, secure contactless payment, unprecedented rider convenience, adaptable fare media, sophisticated fare pricing and the value of multi-merchant and multi-modal processing.
Conrad Sheehan is the founder and CEO of mPayy, an alternative payment system enabling secure, efficient payment processing for consumers and businesses.