Canada's transit fare plan could loosen debit card rules nationwide

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Payments Canada is proposing to allow delayed transaction authorization to enable debit cards to be used in open-loop transit — and the change could affect far more than commuters.

Currently, Canadian debit cards must be authorized in real time. The rule change would apply to other low-value purchases where online real-time authorization for debit may not be available, such as vending kiosks, on-board airline or train purchases, and parking meters.

Canadians are heavy users of contactless debit cards when shopping. According to Canadian debit scheme Interac, which is subject to payments infrastructure association Payments Canada rules, Canadians use Interac 16 million times daily to pay and exchange funds.

Only Interac can process domestic POS debit transactions. Canadian debit cards can be co-badged with Visa or Mastercard for e-commerce payments and purchases outside Canada.

Currently, Interac debit cards can’t be used to buy transit tickets at turnstiles or fare gates. This is because Payments Canada requires real-time online authorization at the time of purchase for both contactless and PIN debit transactions, a requirement that isn’t practical in high-throughput environments like transit. Debit cardholders must be notified about the price before paying, a process that is also at odds with transit fare payments that are aggregated at the end of a trip.

With delayed authorization, card issuers face the risk of being liable for transactions where the cardholders lack availability of funds, while merchants must be willing to provide a service before a card is authorized and they receive settlement. In addition, Payments Canada wants to allow transit schemes to have flexibility in how they display prices to debit cardholders.

Although Canada is lagging other countries in implementing open-loop transit, it’s not surprising Payments Canada wants to facilitate transit debit transactions. Vancouver’s TransLink, the only Canadian scheme to implement open-loop payments so far, apart from a pilot in Laval, has seen big growth in credit card usage.

TransLink launched its Tap to Pay system in May 2018 and, according to spokesperson Ben Murphy, over 10,000 unique credit cards or smartphones are tapped each day on its fare gates and buses. TransLink is currently unable to accept debit cards.

Several Canadian cities are expected to adopt open-loop transit in coming years, such as Edmonton, Ottawa and Toronto.

To manage the risks with offline debit, Payments Canada looked at models developed elsewhere.

Lisa Sattler, Payments Canada’s policy manager, said the association developed its proposed rule in accordance with international best practice for open-loop transit payments.

Other countries such as the U.K. and Australia have introduced Pay-As-You-Go (PAYG) frameworks to enable contactless cards to be used in open-loop transit schemes.

One option for Payments Canada could be to adopt the risk model developed by Transport for London (TfL), which operates the U.K. capital’s bus, train and underground network.

TfL adopted delayed authorization when it launched an open-loop PAYG system for its multi-mode transit network in 2014. Its PAYG framework, developed with international card schemes, has become a model for other countries’ open-loop systems.

TfL’s system leverages EMV card authentication and includes agreements for sharing liability between transit schemes and card issuers.

The use of EMV allows debit cards to be authenticated, even in an offline scenario, said John Elliott, head of transit at U.K.-based Consult Hyperion, which advised TfL and the card schemes on the development of London’s open-loop scheme.

This removes one element of risk. However, PAYG systems face the issue of whether card accounts have sufficient funds to pay for journeys.

TfL accepts a “first ride risk” from cardholders who haven’t used their card on its network before and might lack sufficient funds. It lets them make their first ride, while taking the risk of losing the fare.

“This risk is limited to whatever the largest single fare might be, for example £10 on the London Underground,” said Elliott.

To ensure only the cost of one fare per passenger is at risk, TfL has implemented a “deny list” of defaulting cards, whose cardholders shouldn’t be allowed to travel. While cardholders are completing their first ride, the terminal they used performs online authorization.

“If it isn’t a good card, then the deny list is updated and, the next time the passenger tries to buy a ticket with that card, they are barred,” said Simon Laker, a principal consultant with ConsultHyperion. “During the time it takes for passengers to tap their card, the terminal polls the back-office deny list to see if the cards are blocked.”

Provided TfL updates the deny list, the issuer assumes the risk of covering the journey cost, even if the card account lacks funds. If the deny list isn’t updated, for example every 30 minutes, TfL bears the risk.

TfL uses delayed authorization to calculate complex fares at the end of a journey, for example where a contactless card is used multiple times during a period of time. It can ensure the customer is charged the best rate at the end of the day or the end of the week. This fare aggregation system allows TfL to promote off-peak travel and day trips and take the pressure off peak travel periods.

Payments Canada wants comments by June 23 for its proposed change.

“Under Payments Canada’s mandate, new rules approved by our board have to be ratified by the Finance Minister,” said Sattler. “Canada’s October 2019 election could impact the minister’s approval of the new rule, but we’re working towards Q1 2020 as a target. We don’t think our new rule would impact merchants in terms of upgrading existing terminals.”

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