There’s a train pulling into the station, and it’s right on time.

Some of America’s largest transit agencies have begun to switch their fare systems from closed, proprietary technologies to open electronic-payment platforms similar to retail point-of-sale systems. Through such systems, commuters may pay with their regular debit or credit cards, including contactless cards. The readers in the open systems also will support emerging mobile Near Field Communication payments and digital wallets.

Indeed, transit is catching up with the rest of the 21st century payments market, and it may even help push some of the emerging technologies into the broader payments market.

Proponents say the change to open systems will save the agencies money through operational efficiency by reducing or eliminating paper media, and it will help keep them on the cutting edge of technology because their systems no longer will be tied to one vendor. Moreover, the agencies may earn more revenue through increased purchases of fares and agency-partnered concessions and through sales of data collected from transactions to businesses such as mobile-application developers, they say.

The change to open payments also may improve the commuter experience because bus and train riders can pay with any contactless card or enabled smartphone by tapping it on turnstile readers, thereby speeding the rush-hour process.

Late last year, MasterCard Worldwide commissioned Harris Interactive to ask transit commuters what bothered them most about their commute. Among the 1,607 riders from seven major cities who participated, 35% used cash for at least one form of transit. Among those respondents, 65% cited worrying about having enough money or the right amount, and 36% said they had experienced times when they could not get a ticket because they had insufficient cash. Moreover, 44% said they had missed a bus or train because of the time spent waiting in line to buy a fare.

There has been a bridge between cash and open payments in U.S. transit agencies: the proprietary contactless cards.

Several U.S. transit agencies issue contactless smart cards, whose accounts commuters can load with value and use to pay fares. Commuters in Chicago, Los Angeles, Atlanta, San Francisco and Miami can fund the agencies’ reloadable accounts then tap the card on readers to access rides and tap them again on readers when getting off a bus or train so the correct fare is charged. Their systems are not open, however, in that they do not accept regular debit and credit cards at the gate.

It was not a big-city agency that pioneered open payment systems, however.

The Utah Transit Authority in 2008 became the nation’s first transit authority to implement an automated fare collections system that accepted contactless bank cards. New Jersey Transit is piloting open contactless payments, while both the Chicago Transit Authority and the Southeastern Pennsylvania Transit Authority have awarded contracts for the design, implementation and maintenance of open payment fare systems. TransLink, Vancouver, British Columbia’s transit agency, will debut an open-payment system in 2013.

Because the readers installed in open payments systems work with NFC technology, smartphones with digital wallets can be used in the same way as contactless cards.

Google Inc.’s mobile wallet is a payment option with New Jersey Transit, and the digital wallet of its rival, Isis, will be part of one of the two Utah Transit Authority launch areas later this year (see story).

The transit industry accepts that open-payment systems work and offer substantial advantages over other types of fare-collection systems, mainly because the transit industry never reached the point of maturity with its fare-payment technology, Mike Nash, vice president of emerging markets, transportation and local government sector at Xerox Inc., tells PaymentsSource. As a result, he says, every fare system in the country is highly proprietary, tying each to the original vendor and limiting innovation, competition, and commuters’ payment convenience.

“A lot of the transit agencies say, ‘we want to be a merchant and not a currency provider,’” Nash says. “In their mind, it would be absurd for you to walk into a department store, say Macy’s, and have to find Macy’s currency before you even shop there. (They) want to work like (retail) and just accept payments.”

Xerox’s Affiliated Computer Services Inc. is working with New Jersey Transit and the Southeastern Pennsylvania Transit Authority on their open payment infrastructure, from readers to software.

Following are some details and discussions from some keys players helping transit agencies in their moves to open payment systems.

Isis In Salt Lake City

The Isis mobile-commerce joint venture created by telecommunication companies AT&T Mobility, T-Mobile USA and Verizon Wireless, chose the Utah Transit Authority as one of its two launch markets because the agency already had an open payment system with NFC readers, Jaymee Johnson, Isis head of marketing, tells PaymentsSource. Moreover, the consumer behavior specific to transit will help raise awareness of Isis, he says.

“Transit is an ideal-use case because it’s such a habitual behavior,” says Johnson. “You’re going to pull out either your pass or, in our case, your phone, 10 to 12 to 15 times a week.”

The Isis application, as with any digital wallet, allows users to load their payment card information into their smartphones. They also can load coupons and loyalty-program information into the phone for use with relevant transactions. The phone can pay via NFC with a tap on a card reader.

Johnson cites the widespread use in Asia of Sony Corp.’s FeliCa contactless card technology as a parallel for consumer-adoption possibilities of Isis and digital wallets in general. Consumers primarily use FeliCa cards to access transportation systems in Hong Kong, Delhi, Tokyo, Bangkok and smaller cities, but they also use them to buy merchandise at convenience stores, to access e-money services, and to store coupons and loyalty programs.

Google did not respond to queries for information on its wallet’s performance in the New Jersey Transit pilot.

The technology behind open payments is not groundbreaking. The only difference between using a card to pay and using a phone to pay is that one’s a card and one’s a phone; what happens after the tap is the same.

“The underlying technology–the contactless payments, the ability to put a card on a phone and make a payment at a payment terminal–that works, and it has worked for several years,” Johnson says.

Isis will load the reloadable card account that comes with an Isis wallet with a small sum–enough to buy a sandwich or pay a transit fare–to encourage use and to help familiarize users with digital-wallet use, Johnson says.

Cubic Readies Chicago

Cubic’s 12-year contract to design, build, install and operate an open payment system for the Chicago Transit Authority’s elevated trains, subways and buses took effect in December, and in February the company passed the first of three formal design reviews before launch.

Cubic will install contactless card readers in station gates and on buses. It also will install vending machines, support the distribution of contactless prepaid transit cards in retail outlets, handle all launch and operations marketing, provide the back-office infrastructure to support data and transaction reporting, and provide a data warehouse for data generated by the approximately 500 million annual commuter CTA rides.

Cubic’s experience with the much-smaller Port Authority Transit Corp., which serves 38,000 Philadelphia and New Jersey commuters daily, has provided Cubic a lab on consumer adoption and behavior, John Satterfield, Cubic vice president and regional director for the Chicago project, tells PaymentsSource.

Cubic provided the port authority contactless cards backed by Visa Inc.’s payWave service so commuters could use them for everyday purchases and to access transit services. The readers that supported the port authority’s existing proprietary contactless card also were able to read the payWave cards.

“I don’t think that the technology of migrating retail to public transit is the challenge,” he says of the back-end process. “I think the more obvious concern is making sure that CTA’s ridership understands and is familiar with the media options when the system is introduced.”

One of the technical challenges in Chicago that the trains-only port authority did not provide support on was the wireless communication necessary for buses moving through an urban area, Dave Blue, Cubic’s western region director of sales and marketing who is helping guide Vancouver’s TransLink conversion to open payment acceptance, tells PaymentsSource. The bus readers communicate transaction data to a central processing unit.

“We’ve tested it; we’re confident it’ll work. But in a large-scale environment like Vancouver or Chicago, with the number of vehicles and cruising around the city relying on 3G and 4G communications for authorizations and authentications, that may create some technological challenges,” Blue says, adding that the challenge is being addressed in the design process, which Cubic is in right now.

Vancouver is unusual in that it still will use its proprietary contactless cards. But because EMV cards are more prevalent in Canada than in the U.S., open contactless payments will be more familiar not only to its residents but also tourists from regions where EMV is widespread, like Europe and Asia, Blue says.

SEPTA's Shiny New System

The Southeastern Pennsylvania Transit Authority asks commuters to grade its transit service every other year, based on a scale of 1 to 10. Its scores are high, which will make changing the current payments system—using tokens, paper tickets and magnetic strip passes-- to an open-payments system difficult, Jerry Kane, the agency’s manager of capital program planning, tells PaymentsSource. It has to be done, though, because the system’s hardware is beyond the warranty of the original equipment manufacturer, and the authority no longer can get parts, he says.

Because the outdated equipment was forcing authority’s hand, the agency sought a system that could increase operational efficiency, eliminate paper payment media, and provide commuters payment options, Kane says.

With Xerox’s ACS unit as the contractor for the new system, the authority can get back to what it does best–operating buses and trains “and not acting as a bank,” Kane says.

No longer will the authority issue tokens, paper tickets and magnetic stripe passes and reacquire and repackage them. Moreover, because the new system will have a central data point that communicates with payment devices in the field, the authority will get a wealth of data it never had or had too late for effective use, Kane says, noting the agency has yet to thoroughly explore the best way to use the data it will receive.

“Unlike the retail space where they’re constantly competing for new customers and varying the product line and the marketing strategy, we need to do a better job defining what this data will be and then how we can use it to improve our services,” he says.

The Southeastern Pennsylvania Transit Authority will have an account-based system like the ones many online merchants use. Commuters can set up an account and make and track transactions, and they can then use the same bank-issued contactless cards with which they set up the account to pay at the station or on buses. A transit agency’s schedule, multiple fare packages, and discounts for groups such as senior citizens and students make processing and accounting a chore, Kane says.

“There are some challenges on the back end for the transit industry because we have a complicated fare table,” Kane says. “The fare engine in the back has to sort out the types of payment that the rider is making before they send that transaction on.”

Open payment systems will mean more than improved customer service and cost savings through more efficient operations; they also can produce revenue for a sector that typically loses money providing a public service, says Xerox’s Nash. Agencies will be able to sell data to developers for applications that are relevant to transit, such as schedule alerts or taxi reservations, he says.

“All the same revenue options available to retailers, like cobranded cards, are available to transit agencies,” says Nash. “They’re very excited to unleash innovators.”

As open payment systems take hold and mature, operators and agencies will learn their capabilities and how to maximize the benefits to the commuters and the agencies themselves.

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