Open Payment for Regional Public Transportation … Payment for Regional Public Transportation Travel George Kocur Massachusetts Institute of Technology Prepared for …

1

OpenPaymentforRegionalPublicTransportationTravel

GeorgeKocurMassachusettsInstituteofTechnology

PreparedforTheRudinCenter,NewYorkUniversityLeveragingTechnologyforTransportation

June16,2010

2

TableofContents1. Overviewofopenpayments ..................................................................................................3

1.1 Openpaymentsystems.......................................................................................................3

1.2 Openpaymentinpublictransportation..............................................................................4

2. Customerexperience:regionaltravelwithopenpayments ..................................................5

2.1 Scenario...............................................................................................................................5

2.2 Customerinteractionswithtransitagencies,paymentindustry ........................................7

2.2.1 Purchaseoptions ......................................................................................................7

2.2.2 Purchasebyriderswithoutcreditordebitcards .....................................................8

2.2.3 Accountmanagement ..............................................................................................8

3. Interoperablepaymentmedia(cardsandphones)................................................................9

3.1 Paymentmeans...................................................................................................................9

3.2 Agency‐issuedcards:openversusclosedloop ...................................................................9

3.2 NFCphones .......................................................................................................................10

4. Regionalpaymentprocessing ..............................................................................................12

4.1 Looselycoupledfarepolicies(rewards,loyalty,post‐processeddiscounts).....................12

4.2 Integratedfarepolicies .....................................................................................................13

5. Stationandvehicleoperationsinregionalpayment............................................................14

5.1 Railstationservicesandticketmachines..........................................................................14

5.2 Busservices .......................................................................................................................14

5.3 Regionalrailservices .........................................................................................................15

5.4 Intercityrailandotherservices.........................................................................................15

6. Costs .....................................................................................................................................16

6.1 Contactlesscredit,debitandprepaidcards ......................................................................16

6.2 Agencyissuedclosedandopenloopcontactlesscards ....................................................16

6.3 NFCphones .......................................................................................................................17

7. Equityissues .........................................................................................................................17

8. Securityandprivacy .............................................................................................................18

3

9. Benefitstocustomers,agencies,region ..............................................................................19

10. Keyissuesinregionaladoption .........................................................................................20

11. Summary ...........................................................................................................................21

1. Overviewofopenpayments

1.1 OpenpaymentsystemsInopenpaymentsystems,contactlessbankcardsissuedbybanksandprocessedbybankcardnetworksareacceptedbytransitagenciesatgatesandfareboxesastheprimaryfarepaymentmedium.Thesystemusesstandardmerchantreaders,andmerchantacquirers/banks,cardnetworks,andtheissuingbanksprocessfaretransactions.Thisisafive‐partysystem:

• Thecardholderuseshisorhercredit,debitorprepaidcardatagateorfarebox• Thetransitagency’sacquirercapturesthetransaction.

o Eithertheagencyoritsacquirerperformstransit‐specificprocessingtohandlepasses,prepaidvalue,aggregation,transfersandotherfeatures

• Thebankcardnetworkcarriesthetransactionfromtheagency’sacquirertothebankthatissuedthepassenger’scard

• Theissuingbankbillstheconsumerandisresponsibleformanytypesoffraudandmostnon‐payment.

• Thetransitagencyreceivespaymentviaasettlementprocess.Themerchant(transitagency)isfinanciallyliableforsometypesoffraud.

Cardholder Merchant (transit agency)

Acquiring Bank

Payment Network (e.g. Visa/MasterCard)

Issuing Bank

4

Theuseofcontactlessbankcardsfordirectpaymentoftransitfaresdiffersfromtransitsmartcardpracticeintwosignificantways.First,novalueorpassesarestoredonthebankcard.Thecardisusedonlyasanidentifierthattiesthepassengertoapaymentaccountstoredonaserver.Second,thetransactiontoopenagateoracceptpaymentatafareboxisauthorizedbyaserverconnectedtothegateorfareboxviaadatanetwork.Theopenpaymentoptionrequiresahigh‐availability,high‐performancenetworkandservertoprocesstransactions.Bustransactionsareprocessedonline,asbroadbandwirelessnetworkcostsandperformanceappeartobeacceptable.Openpaymentsystemsarebasedonopenstandards,commodityproductssuchascontactlessbankcardsandreaders,andpaymentindustryservicesprovidedtoretailmerchantsandotherindustriesoutsidetransportation.Adoptionofanopenpaymentframeworkwillfundamentallyreshapethewaypassengerspayforpublictransportationservices.InanumberofcitiesintheU.S.andaroundtheworld,publictransitauthoritiesaremovinginthisdirection.

Contactlessbankcardtechnologyisrelativelymature,buthasyettobecomeubiquitousamongmerchantsandconsumers.Itreliesonbankingstandards,unliketransitsmartcardtechnology,thoughsomevariationexistsindifferentcountriesandbankingnetworks.(TheU.S.isnearlyaloneinnotadoptingtheEuropay‐MasterCard‐Visa,orEMV,standard,forexample.)Inanopensystem,thepaymentsindustrywouldprimarilymanagefarepayment,possiblyincludingnontraditionalparticipantssuchasPayPal,cellcarriers,orevenFacebook.

1.2 OpenpaymentinpublictransportationAnopenpaymentapproachsatisfiesthemajorrequirementsofatransitfarepaymentsystem:

• Farepolicyflexibility.Farelogicresidesonservers,enablingavirtuallyunlimitednumberoffarepolicies

• Faremodel.Thefaremodelisanaccount‐based,onlinemodelthatenablespre‐paid(pass)andpost‐paid(payasyougo)products.ItenablesWebpurchaseandotherself‐servicechannels.

• Regionalinteroperability.Acommoncardallowsinteroperabilityanddoesnotrequire(butallows)coordinationbetweentransitagencies.

• Modalinteroperability.Contactlesscardsatgatesandfareboxesareproventechnology;Severaloptionsforopenpaymentsinun‐gatedregionalrailsystemsarebeingexplored.

5

• Future‐proofing.Byusingmainstreampaymenttechnology,transitagenciesbenefitfromnewservicesandtechnologiessuchasNFCphonesandlower‐costproviders(PayPal,otheronlineservices)withouttheneedforcustomizationfortransit.

• Broadavailabilityofcontactlessmedia.Bankshaveissuedasubstantialnumberofcontactlesscardsandindicatetheyplantoissuemoreastransitacceptsopenpayment.

• Coretechnology.Servers,wirelessdatanetworksandfiberopticnetworksareproventechnology,usedascorecomponentsinopenpaymentsbybanks,cardnetworksandmerchants.

• Performance.Cardorphonetransactionscanbecompletedin600millisecondsorlessatgatesandfareboxes.

• Security.Paymentcardindustrydatasecuritystandards(PCI/DADSS)arefollowed.• Equity.Prepaidcardoptionsareevolvingrapidlytoserveriderswithoutbankcards.

Transitagenciesmaychoosebetweenclosedloop(butopenstandard)andopenloopcards.Governmentbenefitcardsarealsopossiblepaymentmedia.

• Customerexperience.Existingholdersofbankcardsandyoungerridersarelikelytobeearly,enthusiasticadopters.Olderridersandpeoplewithoutbankcardswillbeservedwellbutareexpectedtousefewerinnovativefeaturesoftheopenpaymentsystem.

Whatenablesthebankcard’sfarepolicyflexibilityisthefactthatitsfarelogicisstoredonaserverratherthanonthecardorcardreader.Thisapproachalsomakesbankcardacceptanceacrossmanyagencieseasier,sincecardsandreadersarestandardandallfarelogicisonaserver,notonacardorreader.Futuretrendswilllikelymakethebankcardoptionmorefavorableovertime,sinceitusescommodityserverandnetworktechnologywhosecostsaredecreasing.Byrelyingonthepaymentsindustrytoissuecardswhichcanbeusedtopaytransitfares,atransitagencycanalsorealizesavingsfromavoidingthecoststoproduce,distribute,andtrackitsownsmartcardorotherfaremedia.Howeverconsumershavenotdemandedcontactlessbankcardsand,whiletheirultimateadoptionishighlylikely,aperiodofyearsmayberequiredforthemtobewidelyaccepted.Atransitagencywillneedtoissueitsowncontactlesscards,probablyinlargenumbersatthestartofopenpaymentsadoption,lesseningovertime.

2. Customerexperience:regionaltravelwithopenpayments

2.1 ScenarioJaneinNewJerseydecidestovisitarestaurantinBrooklynonaFridayevening.ShechecksGoogleMapsorasimilarservicetofindtheexpectedtraveltimebyautoandbytransitanddecidesthattransitwillbequicker.Shealsoknowsthattransitwillbelessexpensiveand,with

6

regionalfarepayment,sheknowsshewillhavenodifficultypayingherfaresordecidingwhichfareproductstobuy.

SheparksatanNJTrailstation,payingforparkingwithhercontactlesscreditcard.Shewalksontothestationplatformandtapsavalidatorwithhercreditcard.Thevalidatorindicatesherboardingstation,necessarysinceNJTrailhasdistance‐basedfares.SheridestoHobokenandtapsavalidatoronthestationplatformwhensheexitstheNJTtrainandtapsatthePATHgatetoenterthatsystem.(Ifsheforgottotaponthestationplatform,PATHandNJTsharetapdataandherentrytaponPATHfillsinastheexittapforNJT.)

SheexitsPATHat33rdStandenterstheNYCTsubwaysystembytappinghercreditcard,andsheridestoherfinaldestination.Shedoesnotneedtobeawarethatsheisridingthreedifferenttransitsystemswiththreedifferentfarepolicies.Ofcourse,sheisawarethatsheischangingmodes.

IfJaneistakinganout‐of‐townguestwithher,shecanuseherowncardorphonetopaytwofares.Alternativelyherguestcanusehisorhercontactlesscardorphone,evenifheorshehasneverusedpublictransitinNewYorkbefore.

OnherreturntriptoNewJersey,JanetapsattheNYCTsubwaygate,thePATHgate,theNJTvalidatoratHobokenStationandatherdestination.Finallyshecantaptoexittheparkinglotifthelotchargestime‐basedfees.

Shereceiveshercreditcardbillattheendofthemonth,whichshowsthreetransactions,forNJT,PATHandNYCT,eachcoveringtwotrips,andafourthtransactionforparking.NJT,PATHandNYCTeachreceivepaymentviatheirmerchantbankovernightforJane’stravel.

Infutureyears,astheregionalfaresystemevolves,theopenpaymentapproachcanprovideadditionalvalueandconvenience:

• Therestaurant,whichvalidatesparkingatanearbygarage,alsovalidatestransitfares.Janeusesthesamecreditcardtopaytherestaurantbill,andonepartofthetransactionisa$2credittowardhertransittrip.Thecreditappearsthateveningonheronlinecreditcardsummary,alongwiththerestaurantandtransitcharges.

• NJT,PATHandtheMTAimplementafarepolicythatgivesa25centdiscountonthesecondandthirdlegsofatripwhenusingservicesfrommorethanoneagency.ThispolicygivesJaneanother$1credit,whichalsoappearsonheronlinesummary.

• IfJaneisafrequenttransituserwhodoesn’ttravelenoughtobuyamonthlypass,sheobtainsrewardpointsfromthecreditcardissueraspartofitsNewYorkregionfrequenttravelerprogram.Shegetsmorepointswhenshetravelsoff‐peak,whichisthecaseforthistrip.

7

• IfJaneregisteredheroriginanddestinationwiththeregionalWebsiteviahermobilephone,NJTholdsheroutboundtrainatHobokenifPATHisrunningafewminuteslate.ThissavesJaneandherfriend(anprobablysomeotherpassengers)alongwaitforthenextlateeveningdeparturetoherdestination.Holdstrategiesareoftennotjustifiedsincethetransitoperatordoesn’tknowifanypassengersareactuallytransferring,butopenpaymentallowseasierintegrationoffareandservicecontrol.

• Janewillbeabletouseherpayment‐enabledmobilephoneinsteadofacontactlesscardasthepaymentsindustryimplementsthisoption.ThisdevelopmentallowsJanetousethesameaccountandpaymentmanagementapplicationsonhermobilephonefortransitasforallherotherpurchases.

IfJanedoesn’tusetransitforaperiodoftime,oneoftheagenciescansendheramarketingemail,invitingherbacktotransitandofferinga50percentdiscountonhernexttwotrips.Thistypeoftargetedmarketingwillhelpregionalagenciesbuildridership.

2.2 Customerinteractionswithtransitagencies,paymentindustryInopenpayments,customersinteractwithamerchantbypurchasinggoodsandservicesandwiththepaymentindustrybymanagingtheiraccount.Withatransit‐onlycard,thetransitagencyprovidespartoftheaccountmanagementfunction,whilethepaymentindustryalsoprovidespartifthetransitproductwasboughtwithacreditordebitcard.Openpaymentswillchangecustomerinteractions.

2.2.1 PurchaseoptionsInopenpayment,transitridersusebank‐issuedcredit,debitandprepaidcards,oragency‐issuedcards,directlyatgatesandbusfareboxes.Openpaymentsupportsthefollowingalternativesforpurchasingtravel:

• Individualtripscanbetakenwithoutpreregistrationorpurchasingaticketbeforeenteringthesystem.Theusertapshisorhercardonacontactlessreaderandischargedasingle‐tripfare.Thetransactionisastandardmerchanttransaction.

• Single‐ormulti‐triptravelcanbepurchasedonline,viaacallcenter,ticketvendingmachineorusingamobilephonebeforeusetoobtainadiscountintheper‐trippriceandpossiblyotherbenefitssuchasfreeorreducedfaretransfers.Theagencycanselectthefarepolicyrulesanddiscounts.

• Passescanbepurchasedonline,viaacallcenter,ticketvendingmachine,orusingamobilephone.

8

Thetransitagenciesare“justamerchant”withopenpayments.Riderspurchasetransitinthesamewaytheypurchaseothergoodsandservices.

2.2.2 PurchasebyriderswithoutcreditordebitcardsAgencieswillalsoneedtoissueanMTACardorPATHCardorNJTCard,forexample,toun‐bankedorunder‐bankedusers.Theagency‐issuedcardmeetsbankcardstandardsandisreloadablewithcashatretailreloadlocationsandpossiblybankATMmachines.Anagency‐issuedcardcanbeusedonanyotheragency’sservicesintheNewYorkarea.Metroareaagenciescouldissueasingle“Tri‐stateTransitCard”;itwouldhavehighvolumeandvisibility,andwouldprobablyhavelowercoststhanindividualagencycards.Theretaildistributionandreloadnetworkwillusemerchants’existingpointofsalesterminalsforreload;cardscanbeonJ‐hooksalongwithprepaidcards,phonecards,andothers.

CreditanddebitbankcardpenetrationintheNewYorkregionisabout85percent.Therefore,atleast15percentofNewYorktransitriderswouldrequireanalternativeagency‐orpaymentindustry‐issuedmediuminthelongrun.Asmanyas50percentmayusetheagency‐issuedcardinitially.

Basedonfocusgroupsurveysinothercities,ridersusingtheagency‐issuedcardareexpectedtowantafamiliarfaremediumthatoperatesascloselyaspossibletocurrentmagneticstripeorpapermedia.Theyarelikelytowantaclear,understandablecustomerexperiencethatrequireslittlechangefromtoday’sexperience.(Riderswithcontactlesscreditanddebitcardsarelikelytousenewfeatures,suchasmobileaccountmanagement;manywillbe“earlyadopters”.)

2.2.3 AccountmanagementRiderspayfortransitontheirmonthlycreditcardbill,viadebittransactionsthattheytrackinthesamewayasotherspending,orviacashreloadsontheiragency‐issuedorgeneralpurposeprepaidcard.Ifanaccountproblemoccurs,riderswillhavetounderstandwhethertocontactthetransitagencyorthebankthatissuedthecard.Evidencefrompilotsandfocusgroupssuggeststhatridersgenerallyapplythesameprinciplesasinothertransactions:iftheproblemiswiththegoodsorservices,customerscontactthemerchant;iftheproblemiswiththebillingorthecard,theycontactthebank.Problemsarehandledthroughmainstreamdisputeresolution,refundandothercustomerserviceprocesses.

9

3. Interoperablepaymentmedia(cardsandphones)

3.1 PaymentmeansManycreditanddebitcardcustomersintheNewYorkregionalreadyhavecontactlesscreditordebitcards.Bankshaveissuedover10millionsuchcardsintheregionandarelikelytoissuemoreiftransitagenciesmovetoopenpayments.Transitpaymentwouldbeadailyuseofacard,whichwouldcreatea“topofwallet”effect,meaningthatridersaremorelikelytousethatcardforotherpurchases.Issuingcontactlesscardswouldalsohelpbanksretainorincreasetheirmarketshare.

3.2 Agency‐issuedcards:openversusclosedloopInearlystagesofopenpayment,asubstantialnumberofriderswilluseagency‐issuedcards.Agencieshavetwoprimaryissuanceoptionsandmayalsoacceptgovernment/employeeIDs:

1. ClosedLoopPrepaidCards:Closedloopcardscanonlybeusedatasinglemerchantorchainofretailers.Closedloopcards(oftencalledgiftcards)havetraditionallytargetedlargervaluetransactionssuchasdepartmentstorepurchases,althoughmerchantswithlowvaluetransactions,suchasStarbucks,nowalsoissuethem.

2. OpenLoopPrepaidCards:Openloopcardsarealsoknownasnetworkbrandedprepaidcardsorgeneralpurposeprepaidcardsandcarrythelabelofacardnetwork,suchasVisaorMasterCard.TheyareacceptedatretailersthatacceptcreditpaymentsandcangenerallybeusedtowithdrawcashfromATMs.Openloopcardsareusedbyconsumergroupsthatcannotorwillnotuseatraditionalprepaidcard,suchastheunbankedorteenagers.SomeexamplesofgeneralpurposereloadablecardsincludeGreenDotMasterCardandVisaReadyLink.

3. GovernmentandEmployeeCards:Prepaidcardsforgovernmentbenefitsprogramsareissuedinsteadofmailingchecks.Forexample,theDirectExpressCardisusedforsocialsecuritypaymentsforrecipientswithoutbankaccounts,andmanystatesissuesimilarcards.TheFederalgovernmentisalsoissuingPersonalIdentityVerification(PIV)cardsthatarebankcardstandards‐basedandmaybeusedfortransitbenefits.PIVcardsareissuedtoFederalemployeesandcontractors,andthestandardisavailabletostateandlocalgovernments.BankcardstandarduniversityandemployeeIDsmaybeacceptedbytransitagenciesaswell.PIVandotherIDcardscouldbeacceptedforprepaidtransitproducts.TheemployerwouldtransmitthelistofIDsandfundstotheagencyatthestartofeachmonth.

Aclosedloopcardcouldbeissuedonbehalfoftheagencybyapaymentindustrypartner;theagencywouldbearthecostsofcardissuance,management,reload,transactions,accountmanagement,andriskmanagement.This“whitelabel”cardwouldusethesamereaders,networkandprocessingasotherpaymentcards.Thetransitagencywouldbenefitfromlower

10

costsandadegreeofcompetitioninprocuringtheseservices.Closedloopcardsdonotrequireregistrationtoidentifytheuser.

Anopenloopcardcouldalsobeissuedonbehalfoftheagencybyapaymentindustrypartner;theagencyandpartnerwouldtypicallysharethecostsbutwouldalsosharetherevenuesfromoff‐transitsystemuseofthecardatgeneralmerchants.Thetransitagencywouldbetheissuer,whichisthepartythattypicallyretainsthelargefractionofrevenue:perhaps2percentinterchangeontransactions,plusissuanceandotherfees.However,thepartnerwouldtakeasubstantialfraction,perhapshalf,oftheissuerrevenueinexchangeforitsmanagementservices,includingriskmanagement.Iftheagencyissuedcardwaswidelyused,theagencymightearnsignificantrevenuestooffsetagency‐issuedcardcosts.Openloopprepaidcardscarrysomereputationalriskforanagencybecausetheyareassociatedwithhighfees.Substantialcareisrequiredinnegotiatinganopenloopcard.LosAngelesMTAhasissuedanopenloopcard,asanexample.

Reloadableopenloopcardsrequireregistration,whichlimitstheirusabilityfortransitsystemsthatmustserveadiversepopulation,notallofwhomcanmeetidentityrequirements.HoweverVisahasproposedanopenloopcardthatisreloadableuptoalimitof$1000,doesnotrequireregistration,mustbeco‐brandedwithatransitagency,anddoesnotallowcashwithdrawals.Thiscardispotentiallyviablefortransituse.Visachargesaverylowreloadfee;merchantssettheirreloadfeeforcustomers.Themerchantfeecurrentlyrangesfrom$2to$5,butitislikelythatmerchantsreloadingtransitcardswillacceptlowerfees.

Closedandopenloopcardsrequireareloadnetworkwherecustomersmayusecashtoloadvalueintotheiropenpaymentaccounts.Reloadatmerchantssuchaspharmacies,gasstationsandconveniencestoresviaexistingpoint‐of‐salesterminalsisthemostlikelymeansbecauseitprovidesafairlylargenetworkofreloadpoints,thoughatacost.Envelope‐lessATMmachinesatbankbranchesorrailstationsareanotherpotentialoption.Userscould“deposit”cash,whichisscannedinrealtimeandplacedintotheircardaccountforimmediateuse.

AcceptanceofgovernmentandemployerIDcards,especiallyforpasspurchasesandtransitbenefits,offersthepotentialtosharplyreducepaymentindustryfeesbyobtainingelectronicfundstransfersdirectlyfromgovernmentsandemployers.Italsooffersthepotentialtoreduceagency‐issuedcardcostsandassociatedeligibilitydeterminationprocesses.

3.2 NFCphonesAnotherpossiblemediumisNearFieldCommunication(NFC)payment‐enabledphones.ThemobilephonepenetrationrateintheNewYorkregionisover100percent,andsmartphonepenetrationisrisingrapidly(aboutone‐thirdofcellphonesaresmartphonesintheU.S.).ThisstatisticsuggeststhatthepenetrationforNFCphones,whentheybecomebroadlyavailable—likelyin2012—maydevelopquickly,sincephoneswithdatacapabilitiesarelikelytohaveNFCalso.(TheaveragelifeofacellphoneintheU.S.isabout18months.)Mobilenetworkoperators,handsetmanufacturers,SIMmanufacturers,trustedsystemmanagers,variouspaymentsindustryplayers,andothersaredebatingtheshareofrevenuesreceivedfromNFC

11

payment.Thisdebateistheprincipalfactorslowingdownintroductionofphone‐basedpayment.

OneNFCoptionmaybedeployableandusablequicklyinNewYorkonceNFChandsetsareavailable:anNFChandsetcansenditshardwareidentifiersecurelytothegateorfareboxreader.Nopaymentapplicationisinvolved;thephoneisusedstrictlyasanidentifier.Atransitagencywouldhaveadatabaseofregisteredphoneusersandwouldbeabletoassociatethetriptakenwiththecorrectregistereduser.Theuserwouldprovideapaymentmeans,suchasbankaccount,credit,debit,prepaid,ACHoragencycard,whenregistering..Becausetransitagencieshavealarge,stableuserbase,aregistrationoptionforNFCphoneusemaybeviable.

Phonepaymentisexpectedtobeamajorconsumerconvenienceformanypurchases,anditofferssomeuniquepotentialbenefitsforpaymentofdistance‐basedfaresonregionalrail,describedbelow.

ThefiguresbelowshowanNFCphoneanditsuseatacontactlesscardreader.

NFCphone

12

NFCuseatacontactlessreader

4. Regionalpaymentprocessing

4.1 Looselycoupledfarepolicies(rewards,loyalty,post‐processeddiscounts)

Earlyintheuseofopenpayments,agenciesarelikelytohaveseparatefarepoliciesandtariffs.Evenwithoutintegrationoffarepoliciesacrossagencies,someformsofcoordinationcanbeadoptedquickly:

Rewardsorloyaltyprograms.Agenciescancooperateona“NewYorkregion”rewardsprogramthatawardspointsfortravelonanyoftheparticipatingagencies.Additionalpointscanbegiventocustomersusingmultipleagenciesasapartialoffsettothelackofintegratedfares.Cardissuersmayfundafractionoftheserewardsbenefits.

Post‐processeddiscounts.Discountscanbeappliedbytheacquirertocreatealimitedleveloffareintegrationforinter‐agencytrips.Asanexample,therewardsprogramcouldapplyamaximumdailycaponsingleridefaresacrossagencies.Thecapcouldinitiallybeappliedonlytoflatfareservicessuchassubway,PATH,andlocalbusroutes.Ifthispilotweresuccessful,theapproachcouldbeextendedtoregionalrailroutes,wherethecappingruleswouldbemorecomplexduetodistanceandtime‐basedfares.Itcouldalsobeextendedtoweeklyorothertimeperiods.Therewardsprogrammanagerwouldperformthecalculationsusingtripdatafromalltheagenciesforregisteredusers.Theagencieswouldneedtoagreeonrevenue

13

apportionmentintheseoptions,butthiscooperationmaybemoreeasilyachievedthanafullyintegratedfarepolicy.

4.2 IntegratedfarepoliciesBecausetheystorenodataonthecardandcontainnofareslogiconthereader,openpaymentsystemsprovideessentiallylimitlessflexibilityinfarepolicy.Possiblefarepoliciesincludepre‐purchasedfaresatadiscountacrossagencies(includingautomatictop‐up),periodpassesofanylength,freeorreducedfaretransfersbetweenmodesoragencies,reducedfaretickets,time‐of‐daypricing,associatedservicessuchasparking,andbestvaluecalculations(thatguaranteethatthesumofsingleticketswillnotexceedaone‐dayorone‐weekcap,typicallythepassprice).Thesepoliciescanbeimplementedacrossagencies.Thechangesrequiredare:

• Farepoliciesandassociatedfarecalculationsmustbeestablishedandprogrammedintheservers.Thetechnicalaspectofthisisstraightforward.

• Revenueallocationmechanismstodeterminetheamountofrevenueeachagencyreceivesfromjointfaresmustbeestablished.Reachingthisagreementisoftenadifficultstep.

• Thesesharesarethenprogrammedintothesettlementprocess.Theprogrammingisstraightforward.

• Marketing,consumerandstaffinformationmustbecreatedtoexplainthenewfarepolicies.

Openpaymentcansupportfarepoliciesthatotheroptionscannot,especiallymarketinginitiativesthatarecommonlyemployedinotherindustries,including:

• Route‐andtime‐specificfares,aspromotions

• Introductoryfaresforcustomeracquisition.Havingpromotionssuchas‘firstmonth50percentoff’isfeasible,sincetheycanbetiedtotheuser’sbankcard(andcannotbetransferredtoanotheruser)andthereisnocardissuancecost.

• Pricecaps,regionalfaresandotherfarepoliciesthatinvolvemultiplemodesandagenciesandmultipletrips,forwhichthefarelogiccouldexceedthecapacityofcardsandreadersintraditionaltransitfaresystems.

• Validatedtransitfares.Theseareanalogoustovalidatedparking,whereamerchantpaysthetransitfareifthesamebankcardispresentedthatwasusedtopurchasemerchandise.Thesecancover,completelyorpartially,thecostofaone‐wayfareorcanbeappliedasacreditifapassengerhasapass.

14

• Frequenttravelerorrewardplansthatprovidediscountsbasedonthefrequencyortotalvalueofuse.Theseplanscanbeespeciallyattractiveforlong‐termtransitriderswhotravellessthan5daysperweekandwhoarenotwellservedbyexistingpassproducts.

• Jointpromotionswithevents,wherethetransitrideisfreeorreducedpriceifthesamebankcardispresentedthatwasusedtopurchasetheticket.

• Commuterrailpricingonaper‐trainbasis,similartoairlineyieldmanagement.Thisconceptisradicalbutfeasiblewiththeflexibilityofserver‐basedtransactions.Itisdiscussedinmoredetailbelow.

Alloftheseoptionscanbeimplementedonasingle‐ormulti‐agencybasis.Coordinatedfarepoliciesandmarketingacrosstheregionmayincreasetheeffectivenessofthesemeasures.

5. StationandvehicleoperationsinregionalpaymentThissectionbrieflyhighlightsnoveloptionsforusingopenpaymentsforsubway,busandrailservicesintheregion.

5.1 RailstationservicesandticketmachinesBecausebankswill,inthelongterm,issuethemajorityofthecardsinanopenpaymentsystem,thenumberofticketvendingmachinesinstationscanbereduced.Envelope‐lessATMmachinesthatacceptcashandreloadcardaccountsforticketvendingmachinesmaybeusedtoservetheremainingdemandbyriderswithoutcreditordebitcards.Thisapproachmayturnacostitemintoarevenueitemorreducethecostofticketvendingatrailstations.Fewerticketmachinesreducesstationqueuing.

5.2 BusservicesBusesmusthavebroadbandwirelessconnectionstouseopenpaymentseffectivelyinNorthAmerica.Typicalcommercialwirelessservicecostsofabout$40permonthperbusappearaffordableinthecontextoffarecollection.Thewirelessmodemandfarereadercanalsobeusedtoprovidebuslocationinformation,sinceGPSunitsarecommonlyincludedincommercialwirelessmodems.Thislocationinformationalsoprovidesdetaileddataonpassengertriporiginsonbusroutes.

15

5.3 RegionalrailservicesTwobroadoptionsareavailableforacceptingcontactlesscardsorNFCphonesinanopenpaymentsystemonregionalorcommuterrailservices:

• Gatesandvalidatorsatstations.Inthemostcommonconfiguration,gatesareplacedatmajorterminalsandvalidatorsatsuburbanstations.Sincethelargemajorityofridersuseoneofthemajorterminals,thegatesprovideahighdegreeofrevenuecontrol.Riderswhodonotvalidateonthesuburbanplatformarechargedamaximumorpenaltyfare.Intermediateridersmustbeinspectedonboard,eithertargeting100percentinspectionorusingaproof‐of‐paymentsystem.

• Onboardself‐validationbyriders.ThisnewpossibilityisbasedonNFCphones.o TherailroadinstallspassiveRFIDtagsoneachseatineverycar.Thetagsare

inexpensive(50cents);theyrequirenopowerorcommunications.Theycanbeplacedinaholderattachedtoaseatbackthatalsoshowstheseatnumber.

o Arider,uponboarding,tapshisorherNFCphoneontheseattag.ThephonehasanapplicationtosendtheNFCphoneIDandtheRFIDtagnumbertotheserver.Thetagnumberisassociatedwiththeseatnumberandcarnumberintheserverdatabase.Thephoneisassociatedwiththepaymentcardandpassproductbought.

o SingletripriderswouldentertheiroriginanddestinationzonesinanapplicationontheirNFCsmartphonebeforetapping.IftheyhaveaGPSphone,itcandisplaytheircurrentzoneandzonesforeverystation.IfariderdoesnothaveanNFCphone,heorshecancontinuetouseaflashpassorothercurrentmedia,orheorshecanShortMessageService(SMS)textthecarandseatnumbertoarailroad800numbertoself‐validate.

o Conductorswillhaveanapplicationonamobiledevicethatdisplaysvalidatedseatsoneachcar.Heorsheonlychecksseatsthathavenotself‐validated.Thisapproachreducesthecheckingload,whichotherwisemightincreasesincecheckingelectronicmediatakeslongerthanflashpasses,forexample.

o Thisoptionavoidscapitalinvestmentinvalidatorsandgates.o Sincevalidationispertrain,train‐specificfarescanbecharged.Servicessuchas

reservedseatscanbeprovided,possiblyforapremiumfare.Auserreservesaseatonlineforasingletriporforthedurationofapass,orchangesthereservationtoadifferenttrainifneeded.

5.4 IntercityrailandotherservicesAmtrakandintercitybusoperatorscouldacceptthesameticketmediaasurbanoperators,eitherbyhavingstaffuseahandhelddevicetocheckorvalidateelectronicticketsboughtonacontactlesscard,orbytheriderusinghisorhermobilephonetodisplaytheticket,possiblywithabarcodeorviaNFC(anexistingelectronicreceiptstandardinNFCcouldpotentiallybeused).Theticketpurchaseandcollectionmethodsusedbyintercityoperatorsaredifferent

16

fromthoseusedforpublictransit,butthesamemediacanbeused,allowingforfutureinteroperabilityandjointfares.

6. Costs

6.1 Contactlesscredit,debitandprepaidcardsCardtransactionsissuedbythepaymentsindustryrequireauthorizationbyapaymentsindustryserver.Thepaymentsindustryprovidesthemajorityofthebackofficefunctions,asitdoestoallmerchants.Thesecostsarebornebytheinterchangeandotherfeescollectedbytheindustry.

Transitagenciescurrentlyhaveextensiveinteractionswiththepaymentsindustry,sincebankcardsareacceptedforpurchaseoftransitandcommuterrailtickets.Auditandotherfinancialcontrolprocessesareinplacetomanagethesefinancialarrangements.IntheLexingtonLinefarepilot,NYCTfoundthatthebackofficeneededtosupportpurchasesofMetroCardswithcreditanddebitpaymentsatvendingmachineswasvirtuallythesameneededforanopenpaymentsolution.

Creditanddebitcardsareusedalreadyforhalformoreoftransitpurchasesinmanyagencies,andthepercentageisincreasingovertime.Transitagenciesarealreadypayingsignificantfeestothepaymentsindustry.Byadoptingopenpaymentsandeliminatingasecondlevelofmediaissuance,enhancedtransactionprocessing,improvedcustomerservice,andmeaningfulcostsavingsappearpossible.

Amajorareaofpotentialcostsavingsisintheacceptanceofgovernment,employeranduniversityIDcardsfortransituse.WashingtonandBostonreceiveover50percentofpassrevenuethroughfundstransfersfromemployersatverylowcost.Region‐wideacceptanceofIDcardswouldmakethisoptionevenmoreattractivebecauseitwouldlowerprocessingfeessignificantlyandavoidcardissuanceandmanagementcosts.

6.2 AgencyissuedclosedandopenloopcontactlesscardsControllingthecostofagency‐issuedcardswillrequirecarefulattentiontoseveralitems:

• Cardchurn.Afeeordepositislikelytoberequiredsothatridersretainthecardforaslongaperiodaspossible,preferablyoneortwoyears.NFCphones,whenavailable,canemulatebankcards,includingtheagency‐issuedcard,tolowercardissuancecosts.

• Reloadfees.Settingthereloadamounttothehighestvaluethatisreasonableforthelowerincomeusersmostlikelytousetheagencycardwilllowerreloadfees.Agencies

17

willalmostcertainlyabsorbreloadfeesforclosedloopcardsandfortransituseofopenloopcards.Thesefeesrangefrom$2‐$5atamerchantcurrently;theywillalmostcertainlybelowerfortransitusebutmaywellbeinthe$1‐$2range.A$10orhigherminimumreloadamountmaybeneededtocontrolthesecosts.Incentivestoriderstousetheirownbankcards,government‐issuedbenefitscards,ortouserailstationmachinescanreducetheuseofthereloadnetwork.Bonusesordiscountscanbelimitedwithreloads,totheextentconsistentwithequity.

• Accountmanagement.Automatingcustomerservicesothataccountbalanceinquiriesandotherroutinequestionsareansweredonline,orviaIVRoremailortextmessages,isimportanttolimitcosts.

• Off‐systemrevenues.Openloopcardissuancemaygainrevenuesfromoff‐transitsystemusetooffsetcardcosts.

6.3 NFCphonesMerchantsstatethattheywillnotpayapremiumforNFCpayments,buttheNFCindustrymaystillbehopingthatconsumerswillforcemerchantstoacceptNFCpaymentsatahigherpaymentfeebecauseconsumerswillfindNFCsoconvenient(andmerchantswillgetsomeliftinspending).TransithasanopportunitytouseNFCwithoutadditionalfeesduetoitslargebaseofrepeatcustomers,byusingthephonejustasanidentifierforregisteredcustomers.TransitwillbeinthesamesituationasothermerchantswithrespecttobroaderacceptanceofNFCinthefuture,andtheremaybesomecostrisk.

7. EquityissuesEquityissuesfocusontheimpactsofusingprepaidoragency‐issuedcardsontheirusers,whoarelikelytobeunbankedorunder‐bankedindividuals:• Unbanked:Individualswhodonothaveabasiccheckingaccount,savingsaccount,orother

typeoftransactionalaccountatabankorcreditunion.• Underbanked:Individualswhohaveabasiccheckingorsavingsaccountbutdonothave

othercommonfinancialinstrumentssuchascreditordebitcards.

18

BankingStatusofUSHouseholds(FDIC2009)

Thefollowingtypesofhouseholdsaremorelikelytobeunbanked:

• Minorities:Black,Hispanic,orAmericanIndian/Alaskanhouseholds;• Noncitizens:Thosewhereahouseholderisaforeign‐bornnoncitizen;• Language:HouseholdswhereSpanishistheonlylanguagespokenathome;• Single:Unmarriedfemaleormalehouseholds;• LowerIncomes:Thosewithanannualincomelessthan$30,000;• LowerEducation:Thoseholdinglessthanahighschooldegree;• LowerAges:Thoseunderage45;

Tomeetequitygoals,agencieswillneedtoissuethesecustomersanagency‐issuedorprepaidcardreloadablewithcashatasufficientnumberofreloadanddistributionpointswithnotransactionorotherfees.Thesamefareandpassproductsmustbeavailableonthesecardsasoncreditordebitcards,perhapswithexceptionssuchasrewardsprogramsoronlinepromotions.Asnotedabove,theuseofgovernmentissuedbenefitscontactlesscardswouldbeaneffectivepolicy.

8. SecurityandprivacyAgenciesadoptingopenpaymentaresubjecttoPaymentCardIndustry(PCI)DataSecurityStandards(DSS).Thisevolvingstandardisusedbytheentirepaymentsindustryandsupportedbyabroadgroupofvendorsandserviceproviders.Measurestoensurephysical,network,data,processandapplicationsecurityarerequired.Thesesecuritymeasuresappearappropriatefortransitagenciesandareessentiallyrequiredtodayforagenciesthatacceptbankcardsatticketmachinesoronline.DirectacceptanceofcardsatgatesandfareboxesrequiresthosepiecesofequipmenttobePCIDSScompliant.Complianceiscommonpracticesincethisequipmentissimilartomerchantpoint‐of‐salesdevicesunattendedmerchantterminals.

19

Agencieshavealreadyadoptedprivacystandards.Whilethesestandardsshouldbereviewed,themovetoopenpaymentsdoesnotappeartocreatesubstantialnewprivacyissues.Moreuserswillbeusingregisteredmediatopayfaresinopenpaymentsandmoretripdetailwillbeavailable,buttheseprivacyissuesexistnow.

9. Benefitstocustomers,agencies,regionThetablebelowbrieflysummarizesthepotentialbenefitsofopenpaymentstocustomers,agenciesandtheregion.Thesebenefitsareincreasedthroughthe“networkeffect”whenopenpaymentisadoptedbymultipletransitagenciesandintercityoperatorsinaregion.Thesamebenefitsthatcustomersreceivewithinasingleagencywouldthenbeavailableformulti‐agencytrips.Likewise,agencybenefitsalsoincreasewithadoptionbymultipleagencies:Asingleagency‐issuedcardcanbeacceptedatallagencies,reloadnetworkscanbeshared,etc.

Benefitsofopenpayment

TransitRiders TransitAgencies Region

Bustraveltimesavings Reducedcard&ticketissuance Networkeffectmultiplier

Easyforvisitors Reducedretailcommissions Loweragencycardissuance

Interoperablebetweencities

Reducedcustomersupportcosts

Sharedreloadnetwork

Onecard&billingstatement

Morestandardizedequipment Sharedintercitypayment

Reducedqueuinginstations Revenueupliftopportunities Agencytransferpointsbetter

Additionalcardsecurity Co‐branding&rewardsprogram Broadermarketingoptions

Positivepublicrelations

Thekeyissuestobeaddressedinregionalopenpaymentsarelistedbelow.Theyincludedevelopingfareprocessingsoftwaretotranslatetapsintomerchanttransactions,integrationandtestofcomponentsfrommultiplesuppliersinsteadofasingleturnkeyvendor,choosingthemeanstocollectdistancebasedfares(primarilyonrailroadvalidators/gatesoronboard),servingunbankedriders,andnegotiatingwiththepaymentsindustry.Transitrequiresfastertransactionspeedsthanothermerchants,anditrequiresinspection/revenueprotectiondevices,primarilyonregionalrailvehicles.Managingpaymentindustryfeesmayinvolvenegotiatingaspecialsetoffeesandrulesforpublictransportationtomeetspecificrequirements.

Transit‐specificdifferencesinopenpaymentsystems

Transactionspeed Distanced‐basedandzonalfares

20

Bus‐basedtransactions Revenueprotection

Fareprocessing Riderswithoutcontactlessbankcards

Systemsintegration Managingpaymentindustryfees

10. KeyissuesinregionaladoptionThekeyissuesinassessingwhethertoadoptaregionalsystemofopenpaymentsand,ifadopted,thekeydecisionstobemadeinclude:

1. Policy:Agreementtoadoptopenpaymentsamongallormostagenciesintheregionisthecentraldecision.Thismaybedonefortransit,highwaytolls,orboth.

2. Policy:Ifopenpaymentsareadopted,theycanbeimplementedatdifferenttimesandwithdifferentfarepoliciesbyeachagency,aslongasthemediaacceptedarethesame.Regionalcoordinationintheintroductionofopenpaymentswillimproveutilitytousers,andharmonizationoffarepolices,evenpartially,maybeaneffectiveelementinimprovingthecustomerexperienceandperhapsincreasingusage.

3. Policy:Havingasharedagency‐issuedcardforunbankedusersmayprovidebenefitstoridersandagencies.Adecisiononopenversusclosedloopcardsmustbemadebyeachagencyorperhapsacrossagencies.

4. Policy:Sharingpaymentservicesacrossagenciesispossible.ThesharedEZPasscustomerservicecenterisamodelthatcanbeconsidered.Sharedmarketing,asharedWebsiteandcallcenter,andsharedpaymentprocessingelementsarepartofthecurrentMasterCardphase2farepilot.Sharedretailreloadpointsareanotherpossibilityinthefuture.Agenciescouldoptoutofsharedarrangementswhencontractswererenewed.

5. Technical/policy:Developmentofregional/commuterrailfarecollectionsystemsbasedonelectronicmedia.Theissuesarethesamewhetheraproprietarysmartcardsystemoropenpaymentsystemisused.Theexpectedtimeforon‐trainstafftoinspectelectronicmediaisaboutdoublethatforvisualinspection.Anincreaseinon‐trainstaffingisalmostcertainlynotacceptable,sorailoperatorsmustmoveeithertoproof‐of‐paymentsystemswithrandominspections,ortoself‐servicevalidationbypassengers,possiblyusingNFCphones.Whileopenpaymentscanbeimplementedacrossbusandgatedrailenvironmentsinitially,atrulyregionalsystemwillincludecommuter/regionalrailsystemsaswell.

6. Technical:Verificationthatwirelessconnectivityissufficientlygoodforbustransactions.Thisisnotexpectedtobeasignificantissue,butfeasibilitymustbeassured.

7. Cost:Theinterchangeandotherfeeschargedbybanksareacostelementthatmustbenegotiatedatthestartofanopenpaymentsstrategy;itmaybepossibletonegotiate

21

thesedown.Substantialpaymentfeesarealreadybeingpaidbyagencies,butthesewillincreaseinopenpayments;thisshouldbeoffsetbysavingsinnolongeroperatingatransit‐specificticketingsystem.ItmayalsobepossibletoacceptemployerandotherIDcardsfortransitpayment,furtherloweringpaymentfees.AcoordinatedapproachtoacceptingIDcardswouldhavegreaterbenefitsthanindividualagencyefforts.

11. SummaryLondonandNewYorkareimplementingopenpaymentsystems,andSaltLakeCityandKaohsiung,Taiwanhavealreadyimplementedthem.Philadelphia,ChicagoandWashingtonDCarestronglyconsideringtheiruse.Whiletheuseofopenpaymentsintransitisnotanestablishedpractice,mostopenpaymentelementsarethesameintransitastheyareforretailmerchants.Thelistofchallengespresentedaboveisalistofthedifferencesbetweentransitandastandardmerchant.Asindividualsystemsworkthroughopenpaymentimplementationissues,theywill,withlittleadditionaleffort,bepositionedtoparticipateinabroaderregionalfaresystem.Thecards,readers,transactions,communications,andpaymentindustrycomponentswillbecommonacrossopenpaymentsystems.Userswillseethesamecustomerexperienceatallsystems,thoughwithexistingvariationsinfarepolicyandcollectionmeans(gates,fareboxes,validators).

Theuseofopenpaymentstandardsallowsfareinteroperabilityacrossasetoftransitsystemswithoutrequiringasingledesignorasinglevendor.Eachsystemcanproceedonitsownscheduleandwithitsownfarepoliciesandprocesses.Interoperabilityisprovidedprimarilybyacceptanceofacommoncardorphone,withwhichcustomerspayformanyothergoodsandservicesinafamiliarprocess.ThegreaterNewYorkregion,withasetoflargeandinterconnectedtransitsystems,mayobtainsubstantialfuturebenefitsfromadoptingopenpaymentsacrosstheregion.