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The last time riders in London could pay directly for public transit with their own money, they were riding in horse-drawn buses and trams, and conductors often pocketed the cash fares.

To curtail losses from the quick-fingered conductors, operators introduced the first transit tickets about 150 years ago. Now Transport for London, the authority that oversees the journeys of nearly 8 million riders per day, is proposing to again enable customers to pay fares directly with their own money.

But this time, the riders would tap their contactless credit, debit or prepaid bankcards at Underground train gates or onboard buses, trams and other modes of transit.

The significance of the proposed move is not lost on Shashi Verma, Transport for London's head of ticketing, who is pushing for open-loop payment even though it eventually would supplant the popular Oyster card fare-collection scheme he oversees. Oyster handles eight of every 10 bus and subway journeys in London, but Verma and the authority want to wind it down.

Verma also is keen on enabling riders to pay with a tap of their mobile phones embedded with contactless chips.

"Now I won't pretend for a minute that any of these solutions are packaged and ready to go," he said at a recent conference. "They're not. They're very far from being that. But they are also not completely outside of reach. We feel sufficiently encouraged with what we've seen and what we've done the last few years to believe it can be done."

Despite the challenges, Verma believes his agency will "commercially launch" direct contactless bankcard payment of fares by 2011.

And the authority could give the green light for enabling customers to tap their Near Field Communication mobile phones with the Oyster application onboard even sooner, by next year, he says. Once the infrastructure is in place to handle contactless bankcard payment, riders also could download these applications to NFC phones–when they become available–to pay fares directly. They also could tap the phones on RFID chips embedded in signs or posters at bus, tram or other transit stops to get the latest updates on schedules or transfer information on their handset screens. Observers expect more NFC phones to start hitting store shelves by next year, but wider rollouts will not happen until 2011 or 2012, many predict.

Both open-loop card and NFC-phone payment could be in place for the 2012 Olympic Games London is hosting. If so, visitors could pay for rides on trains, trams and buses, along with souvenirs and meals in and around Olympic venues, with the same contactless credit, debit or prepaid cards or similar applications on their phones that they use in their home countries.

Oyster would not go away completely, however, because some consumers could not or would not use bankcards to pay for transit. But Transport for London wants to greatly reduce its business of changing money into Oyster value or paper tickets and collecting fares, which costs the authority more than £100 million (US$165 million) per year. Most of that goes to an outsourced fare-collection joint venture that has run Oyster.

And Transport for London is not alone in wanting to move to open-loop fare collection. Transit officials in such cities with large mass-transit networks as New York, Paris, Chicago, Philadelphia and Washington, D.C., along with a number of smaller cities, have made it clear they are interested in handing over a large portion of their fare collection to banks and payment card schemes and processors (see chart).

The transit officials see an opportunity to make this happen because of the arrival of contactless bankcards using the same underlying technology as closed-loop contactless fare cards.

Of course, not all are convinced. Transit officials in places that have made a business of fare collection and have expanded to retail payment, such as in Hong Kong and Tokyo, are not inviting banks directly into their schemes.

But those backing the concept of open-loop fare payment face perhaps their most important challenge in London. Its transit agency operates one of the world's busiest transit systems that, unlike New York or Paris, has a complex set of fare rules for its subway any bankcard-processing system must be able to handle. And unlike New York, all bankcard transactions in the UK must comply with the EMV smart card standard, which offers more security than contactless payment in the United States but is not built for speed.

In London, as elsewhere, the bankcards will carry Visa payWave and MasterCard PayPass, and possibly other contactless brands or applications. Merchants with about 9,000 retail point-of-sale terminals, mainly in London, accepted payWave and
PayPass in the UK as of April.

That is disappointing for contactless-payment backers, who launched contactless payment in September 2007 with much fanfare. Moreover, no large chain has yet rolled out acceptance of the technology.

So bankers, card schemes and other contactless supporters will be looking to fare collection to boost the popularity of contactless payment, which so far has failed to make much of an impression on consumers in the UK or in the United States where banks have rolled out the technology.

Contactless 'Savior?'
In fact, some backers appear more and more to see transit as a savior for the contactless-payment concept.

"Transport is emerging as a critical application. It could be the making of contactless in the UK," contends Paul Rodford, head of card payments for The UK Cards Association, formerly known as the card-payments group of bank payment association APACS. "Billions of journeys, frequent transactions, and low-ticket values lend themselves to the contactless proposition."

Sandwich and coffee shops and other quick-serve establishments, which often cluster in and around transit hubs, also are natural acceptance points for the faster transactions contactless technology offer, he adds.

And consumers tapping their bankcards for fares could get them in the habit of tapping the same cards for low-value retail transactions, for which most people still use cash, say backers.

But paying a subway fare is not like buying a sandwich or cup of coffee. Transactions have to be very fast to avoid  customer pileups and user
aggravation at subway gates.

Authorizing contactless bankcards over the processing network at the gate, as banks and payment processors do in the United States for retail contactless transactions, is a nonstarter, at least the way traditional merchants authorize the transactions through acquirers and issuers. However, online authentication is feasible onboard uncrowded buses and trams using mobile-phone networks.

EMV technology, common in the UK and spreading across Europe and some Asian and Latin American countries, allows for more-secure offline transactions. But conventional contactless EMV takes too long, and even a stripped-down version of EMV requires at least 500 milliseconds for an offline transaction. That is too slow for big-city metro operators, which would prefer transactions to be authorized in half that time.

The card schemes, keen as they are to reinvigorate their contactless programs, are cooperating closely with transit authorities to adapt their authorization systems and speed up transactions for collecting fares.

"We've been working with Visa and MasterCard for about three years now to figure out how PayPass and payWave would work in a transit environment," Verma told attendees of the Contactless Cards and Payments 2009 conference in London in June. "The payments need to be really fast. And the first generation of PayPass and payWave cards that were put on the market were clearly not fast enough. To the credit of Visa and MasterCard, they have gone back to look at their transactions to see if they could be optimized for speed."

Speed Preference
It is unlikely present versions of the contactless bankcards are yet fast enough. Ergonomic studies Transport for London has conducted show the authority does not need the 200 millisecond or less transaction speeds it gets with the Oyster card to move commuters smoothly through its Underground gates, Verma says. But they must be faster than 500 milliseconds.

"There is no perceptible difference that we've been able to observe between 200 milliseconds read speeds and 350 millisecond read speeds," Verma says. "Once you get outside of 350 milliseconds, you do start to see an impact."

Visa and MasterCard have been asking vendors for faster contactless chips, in part, to deal with these demands.

But the processing power of chips would not be the only  barrier blocking faster contactless bankcard transactions. The card schemes would have to adapt their authorization systems and bend or break their scheme rules to deliver speedy fare collection while keeping risk at acceptable levels.

This could involve initially accepting cards at the gate with the transit operator taking the risk for a cardholder's first ride. Once boarded, the system could seek authorization. If rejected, the card would be blacklisted at the terminal to prevent another ride, says David deKozan, vice president for Worldwide business development for fare-collection service provider Cubic Transportation Systems Inc., a key vendor running the Oyster service.

Prepaid bankcards would pose other challenges in London's distance-based fare scheme because the system would not know how much to deduct when the rider enters the gate, he says. One answer might be to charge the maximum fare then reduce it at the other end, when the cardholder taps to exit the Underground, he says.

Additional Challenge
The EMV standard, which banks in the UK and other countries have adopted, poses an additional challenge. Banks and card schemes will have to relax their rules obligating cardholders who tap their cards to pay to occasionally insert the cards into readers and enter their PINs. This is designed to limit losses on lost, stolen or fraudulent contactless EMV cards or transactions. The card schemes allow banks to decide how often to force cardholders to authenticate themselves to the card, which stores the user's PIN on its chip.

But when riders would be able to tap their bankcards directly to pay, some probably would use them as they do their Oyster cards–exclusively for riding the subway or bus. The bank would never have an opportunity to authenticate the cardholder at a retail point of sale.

"There are specific procedures to accommodate so you don't have someone being stopped at a gate because the (risk-management) counters are at the limit," says François Gandon, products and services director at MasterCard France, which is working with Paris Métro operator RATP to accept bankcards in place of single-ride tickets. As in the UK, France follows the EMV standard.

Gandon declined to specify the new procedures the card scheme would introduce to handle transit fares. They are probably similar to those MasterCard in the UK is proposing.

MasterCard, which helped organize a trial of open-loop payment on the New York City subway involving Citibank that launched in 2006, has been more flexible than Visa has as it goes after business from transit operators with PayPass, say observers.

"MasterCard is certainly taking a much more pragmatic attitude than Visa–just their approach, more willing to adapt to the transport environment," says Chris Oulds Shoukry, who worked for Transport for London as Oyster's first program director in the run-up to the launch of the fare card in 2002 and 2003. She is now part of UK-based Alco Consulting, which has advised MasterCard on transit ticketing.

Visa Europe, which also is working with RATP in Paris, says it, too, has a flexible approach for handling fares but says the "idea is to minimize changes to the existing (authorization) system."

Transport for London's Verma said MasterCard is ahead of Visa in finding ways around the strictures of the EMV world and the need to enter PINs
periodically.

Fare Calculations
But that is not the end of Verma's headaches. Today, when commuters ride the Underground, they tap their Oyster cards at the beginning of the journey and tap out at the end, and the system calculates the fares based on the distance they travel and other discounts, including a daily maximum charge and reductions for pensioners. The terminal deducts the fare from the prepaid Oyster account at the end of the ride.

But with bankcards, all or most of the fare calculation would have to be done on the back end, not at the terminal.

Transport for London is testing a back-office system designed by the Massachusetts Institute of Technology, with which it has a research partnership to study ridership patterns with the Oyster card.

All this is in addition to changing or upgrading 20,000 Oyster terminals with readers and software that can accept the PayPass, payWave and other open-loop applications.

But Verma and Transport for London seem determined to continue down the road of direct bankcard payment, arriving at a point similar to where transit operators were 150 years ago, says Verma.

"It is grinding work; it's grinding work because there is a very long list of things that need to be sorted out," Verma said in response to a question from Cards&Payments.

Not the least of the challenges will be training the staff in the new way customers would be able to pay. "Our staff, for the last 150 years, have learned to recognize a ticket issued by us, and to go to a world where we are not issuing is something completely alien to the way we work," Verma says.  CP

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