Open Fare Payment Systems Convenient for Riders, Transit Systems

Posted on February 14, 2011 by Nicole Schlosser, Associate Editor

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[IMAGE]MET2FareCollection-UTABoxTrain-2.jpg[/IMAGE]For the past three years, the transit industry has been buzzing about open fare payment, a system that lets riders pay fares using a smart card-based bank card, such as a debit or credit card, instead of an agency-issued fare card. Riders simply tap the card on a fare gate or farebox, which reads the card, and the charge for the fare appears on their credit card bill.

New York Metropolitan Transportation Authority (N.Y. MTA) and Salt Lake City-based Utah Transit Authority (UTA) were two of the first agencies to test the system and Chicago Transit Authority (CTA), Washington Metropolitan Area Transit Authority (Metro),  Los Angeles County Metropolitan Transportation Authority, Toronto Transit Commission and the London Underground are all looking into the system.

The N.Y. MTA completed two successful long-term open fare payment pilots. The first was in 2006, in conjunction with Citibank, and the second took place from June to November 2010. Riders could use any card with contactless payment capability. The system is not currently in use, but the agency plans to move to it eventually, Aaron Donovan, spokesman, N.Y. MTA, says.

Opening up options

Many transit properties can now consider putting in new fare payment systems. These agencies are trying to decide whether to invest in a traditional closed loop proprietary fare payment technology — the agency buys smart cards and equipment that is able to read the cards; adds its logo, issues, distributes and sells the cards, and figures out how to recharge or add value to them — or ask for bids for open loop systems, says Randy Vanderhoof, executive director, Smart Card Alliance. "We're seeing more and more agencies considering both options," he adds.

Five years ago, not only was a contactless payment infrastructure unavailable, Vanderhoof explains, many riders did not have a smart chip, which provides the capability to use the system in their credit and debit cards. Since then, though, the financial industry has been moving in this direction and, now, transit can benefit from it, with significantly more customers who have this capability. "They can use it on transit, which before this never was really an option," Vanderhoof says.

As a result, agencies are starting to seriously look at the costs of managing an open fare payment system, which include selling cards, collecting cash out of the machines and installing enough automatic vending machines to provide the level of service required to support the fare system. Many see a way to reduce the investment and lower operating costs by allowing customers to use their credit and debit cards, reducing the number of people standing in line at the ticket window, using an automatic vending machine or paying with cash, which has to be collected and processed.

"They can just get to the thing that they're really in business to do: Transport people from one place to the other and get paid for it, by leveraging the technology being issued elsewhere within the commercial payment industry and gaining the same speedy convenience they are looking for with the fare cards that they sell," Vanderhoof says.

Simply offering options besides dollars, coins and passes seems, for some smaller and mid-sized agencies, to be a new development. Many have recently upgraded to closed-loop systems just to offer a more modern approach. "In some cases with smaller agencies, they have very antiquated fare structures," Kim Green, president, GFI Genfare says.

Costs and benefits

The closed loop smart card system has been the long-time predominant mode for fare collection, according to Green. This system puts all the responsibility on transit properties. "The agency has the capital cost of the reader, — which they're always going to have to pay for — but right now the big cost is not that initial capital outlay, it's the ongoing costs," he explains. "They have to buy cards continually, as customers buy new ones and lose them. They have to pay for the administration and handle the customer service associated with the cards."

An open payment system, Green points out, is centered on banks and financial institutions. Many consumers are receiving credit and debit cards that not only have a magnetic stripe but, also, a smart chip inside them, offering the customer more convenience and security. The main banks associated with open fare payment are MasterCard, which offers a PayPass card; Visa's pay Wave and Citibank. Financial institutions see this as a new market for them, especially public transit in larger cities, which supplies the volume of transactions that will make the investment worthwhile. "New York City hauls six million people a day. That's extremely appealing to them," Green says.

The benefit to transit properties is they get out of the ticket business. "At the end of the business day, the banks electronically transfer hundreds of thousands of dollars into the transit authority's bank account. They don't have to do anything, just receive the funds. They don't have to worry about card distribution, customer service and administrative overhead," Green says.

However, the problem is still cost. MasterCard, Visa and the associated banks charge transaction fees. Currently, credit card transaction fees are still greater than the cost of processing cash. "At GFI, we struggled with trying to help customers find new ways of paying fares. It's an evolving field," Green says. "It's a trade-off every financial manager has to make at every transit property: What's the best for customer convenience, what's going to cost the least money, where am I going to make my best return?"

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