New York plans to dramatically digitize its subway system, phasing out its iconic MetroCard to install contactless tap-and-go technology, bringing a dose of the 21st century to a system that dates to 1904 but often feels even older than that.

The city's earlier efforts to replace the 23-year-old MetroCard stumbled for a number of reasons, including a lack of options — the projects predated the launch of the iPhone and Apple Pay — but also because its current system, though crude by today's standards, did a good job of addressing speed and cost.

Fortunately for the Big Apple, it now has allies that have proven their capabilities in other parts of the world, including the London Underground.

New York MetroCard vending machine
Bloomberg News

"London was very successful. We learned a lot from that and we are taking pieces of the London system and importing it for New York," said Pradip Mistry, vice president of customer experience at Cubic, the transportation technology company that is driving New York MTA's payments migration.

The big takeaway is the emphasis on selling a clearly easier user experience. New York commuters usually load the plastic MetroCards at self-service kiosks in stations, then swipe the cards at the turnstile to enter the system. Past attempts to modernize the MTA's system failed to improve upon this process; card swipes at the turnstile must be approved within 300 milliseconds, but credit and debit card payments can take much longer. Even MetroCards, which date to 1994, have a high failure rate.

Mobile wallets change the math on this substantially. The MTA is working with Mastercard, which it worked with over a decade earlier in an attempt to bring contactless fare payments; and with Cubic in London, found the London migration saved about $150 million in three years by enabling "capping" or a daily ceiling on fares that's easier to execute with an app than with a plastic card.

The system is also more open to visitors, who can pay with a contactless mobile app and do not have to find kiosks in the subway system.

The London project showed the value in avoiding "extra cards" where possible by allowing people to offer an existing payments device to pay for commuting, Mistry said, adding the passenger flow is smoother as a commute payment becomes more like any other routine payment.

"A MetroCard is another card in your wallet, we want to move as many consumers as possible to mobile though we know there will be consumers who will not want to use mobile," Mistry said, adding that one of the goals of the project is to move as much of the "funding" of commuter payments outside of the MTA's infrastructure as possible, and mobile wallets can only be funded externally. "Even that new contactless card will be based on open standards."

After the migration, which should be complete by 2020 with plastic MetroCards phased out by 2023, riders will replenish contactless cards or mobile apps remotely. The migration will cover subways, buses, Metro North trains to Westchester County and Connecticut, and the Long Island Rail Road.

Visa did not return requests for comment by deadline and there was no notice on its website regarding the New York transit system, though Visa has worked on New York transit payment projects in the past, including a mobile payments pilot seven years ago that never caught on; Mastercard also tested a smart-card system with the MTA at that time.

Three years ago, the MTA disclosed plans to replace the MetroCard with an RFID or NFC system starting in 2019, eventually leading to the current project, which has been underway in some form for more than a year.

The "open" nature of the new MTA payment system draws from another Cubic project in Chicago. The CTA's Ventra card is open, and can be used to pay for other products besides transit fares.

"New York will really be a combination of the London and Chicago projects," Mistry said. "The subway fare will be an account-based system. The current MetroCard is just another version of a token as far as the passenger is concerned."

It's the account-based system that holds the most potential. By making the subway fare an "account" rather than a single-purpose declining balance, there's an opportunity for the MTA to tie transit payments to marketing, general content, alerts and collaboration with merchants. It also addresses the age-old question of whether it is cost-effective to handle each fare payment as an individual transaction, paying interchange each time another passenger goes through the turnstile.

This plan is still early stage, though it will be possible for the MTA to deploy "offers" similar to the Montreal metro system to manage spikes in traffic, or turn a commuter's account into a revenue generating engine.

"An account based system can do all sorts of things that you can't do with a card system," said Peter Quadagno, a West Chester, Pa.-based payment consultant who has worked for transit authorities—he was one of the designers on the original MetroCard project in New York in the 1990s. The MetroCard will morph into something resembling most other mobile apps, Quadagno said. "It will be really easy to do marketing or other phone-based transactions that can run off of the MTA account."

Given the age of the New York transit system, and its size, large projects often get bogged down. The Second Avenue Subway has been under construction for decades, the Fulton Transit Center near the World Trade Center opened years behind schedule and billions of dollars over budget, and the system still faces repairs from Hurricane Sandy, which hit the region five years ago.

The six-year time frame to the total retirement of MetroCards provides time to execute the project, Mistry said.

"It's a great undertaking. There will always be challenges in a project like this," Mistry said. "The system has so many moving parts, and different demographics, different daily routines, and different kinds of users."

Cubic plans to handle the project in phases, with leeway coming from the parallel fare collection that will exist near the end of the project in which both contactless and MetroCard payments will be supported.

"You can't just start at station one, or bus No. 13. You have to be tactical on how you introduce the technology. You have to look at traffic flow, and encourage early adopters first to get them away from MetroCards, then move onto other users," Mistry said. "I look at it as a giant jigsaw puzzle."

Cubic also has the experience of working on a similar migration in Sydney, and the most recent uptake numbers from London show strong growth—40% of transit payments are made using contactless payments, up from 25% a year ago.

And while North American transit lags transit systems in other parts of the world, there are some signs systems in the Western Hemisphere at catching up. Just this week, Cubic announced Atlanta's MARTA transit system will deploy a cloud-based digital fare collection system.

"When we take a look at our requests for proposals, it's obvious that transit agencies throughout the country are looking at upgrading their systems, with capabilities that are suitable for open-loop payments," said Erdal Yazmaci, co-founder of Cardtek. "While it's not available throughout the country right now, companies are preparing to be able to enable open-loop payments with low or no cost in the future."

More cities will be accepting mobile tickets within the next couple of years, Yazmaci said. "But, when it comes to open-loop payments, I think it will take a little more time, as the hardware itself will require changes and most transit operators are still not ready. Many cities throughout Europe are already using open-loop solutions, however. The U.S. will catch up."

Kate Fitzgerald contributed to this story.