As transit authorities nationwide are toying with open-network electronic fare-collection systems, mobile-payments company mPayy Inc. is making a bid to become the provider for the Chicago Transit Authority’s proposed payment scheme.

 Like other cities, Chicago is examining the cost-cutting benefits an open-loop system may bring to the authority. MPayy, however, is proposing a closed-loop program that uses a contactless sticker commuters would attach to mobile phones.

Conrad Sheehan, mPayy founder and CEO, believes a closed-loop scheme works best for transit. He contends an open-loop system is not ideal to handle a transit authority’s complex fare scheme that includes weekly and monthly-unlimited passes and 25-cent transfers.

“There is a reason why [closed-loop schemes in England and Hong Kong] have worked so well,” Sheehan says. Those systems are built to handle multiple low-ticket transactions without interchange fees eating away at profits, he adds.

Chicago, which operates the nation’s second-largest public transit system based on annual ridership, is analyzing proposals for the actual implementation of a new fare-collection system.

“We are in the midst of the procurement process and cannot publicly discuss any details related to the [project],” a spokesperson for the authority told PaymentsSource in a statement.

The Chicago Transit Authority, however, recently made its ambitions known to the local media. The agency wants to reduce cash payments at the fare box that have contributed to longer bus commutes, especially during the summer season as tourists flock to the city.

The average cash fare ($2.25) takes about 25 seconds to pay, according to the authority’s internal research. A proprietary magnetic stripe transit card payment takes two seconds, while payment with a contactless card takes 300 milliseconds.

Chicago uses all three methods. Commuters may link a credit or debit card to the authority’s proprietary contactless card.

CTA officials told the Chicago Tribune the authority wants to get out of the fare-collection business as much as possible and primarily focus on operations.

MPayy’s system would be similar to the Oyster card in the United Kingdom and Octopus card in Hong Kong.

Users who purchase the sticker (or card) could link it to their checking account and schedule account top ups. The system benefits the financially underserved who use cash or a prepaid card because those consumer does not need a bank account to add value to the sticker, Sheehan says. Value could be added at participating retailers.

Sheehan touts the sticker’s security, as any relevant financial data would sit on mPayy’s own servers.

MPayy would strive to get retailers near bus and train stops to accept the stickers for payment toward such items as a newspaper or cup of coffee, Sheehan says.

Transit systems that are examining a change to an open-loop system will need to weigh the pros and cons, says Red Gillen, a senior analyst in Celent LLC’s banking group.

The arguments in favor of open loop would be scale and interoperability, Gillen says. “It would be nice [for the consumer] to use one [Visa or MasterCard] card for multiple system,” he adds.

A transit authority would be able to leverage the existing card-network rails instead of creating a closed-loop contactless system from scratch or paying a third party to do so, Gillen says.

However, arguments such as Sheehan’s against an open-loop system are common, he says. “Does the cost of the interchange outweigh the cost of build-it- yourself or an alternative closed-loop system,” such as mPayy, Gillen says.

Another alternative to an open-loop system would be to use a “nonbranded open-loop” system that operates across multiple cities, Gillen says.

Consumers may use the Suica contactless card fare system that started in Tokyo, Japan, on other transit systems countrywide, Gillen cites as an example.

“There is a middle ground between an open and closed-loop system, but it would take the cooperation of multiple cities” in the U.S., Gillen says.

MPayy is discussing its systems with other transit authorities, but Sheehan declined to disclose more details. 

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