The Green Sheet Online Edition
June 14, 2010 • Issue 10:06:01
Transportation payments in transition
In the payments industry, market potential is often characterized by the length of its "runway." And the longer the runway, the better. By any estimation, the runway for transportation payments is long. But it is perhaps more accurate to say that each vertical market within transportation - whether for gas stations, bus systems, taxis or parking - has its own individual runway, with some longer, and straighter, than others.
The trend in transportation payments is toward greater automation and efficiency, with payment cards and the systems that support them being the main driver, so to speak, of value to consumers, businesses and government agencies. From contactless cards used by commuters on subways to fleet cards used by truck drivers, the move toward electronification of the transportation world seems unstoppable.
It also appears to be inevitable since how we get from here to there, and how economically we can do it, is fundamental to our busy lives. Thus, moving from paper tickets punched by bus drivers to waving near field communication (NFC)-enabled cards at contactless readers seems not a mere triumph of marketing, but the workings of a much larger evolutionary force.
Feet on the ground
Dee Karawadra, founder, President and Chief Executive Officer at Impact PaySystem, found his niche in gas stations and convenience stores over a decade ago, where pay-at-the-pump was then a 20-year-old technology.
When he started, the market was wide open because of the specialized nature of self-service pumps, where setting up and servicing the complicated POS terminals takes specific knowledge and training, Karawadra said. While more ISOs have entered the market in recent years, Karawadra believes it is still a lucrative one for ISOs.
In contrast to a typical retailer who processes $8,000 per month in bankcard sales, an average independent gas station takes in eight times that amount, Karawadra said. Larger card volume translates into larger residuals for ISOs and merchant level salespeople. Therefore, writing three new gas stations a month is equal to revenue derived from 24 average retailers boarded in that same time frame, according to Karawadra.
Fleet cards have proven to be a potent value-added product Impact PaySystem sells to trucking companies and other businesses in the automotive industry.
The fleet card is an open-loop, branded prepaid card that truckers and others use for fuel and maintenance on vehicles. Karawadra said truck stops have seen as much as a "40 percent revenue jump when they started accepting this card."
Voyager Fleet Systems Inc., a division of U.S. Bancorp., and Wright Express offer popular fleet card programs.
The wave of the present
Smart card contactless technology has been "the next big thing" since the early 1990s. But it seems to have finally hit its stride in the mass transit market. The transit systems of major cities like Chicago, Washington, Atlanta, San Francisco and Boston already run on smart cards, said Randy Vanderhoof, Executive Director of the Smart Card Alliance.
According to Vanderhoof, the primary objective for transit authorities to transition away from their legacy systems is to minimize costs. "Transit operators lose money on every rider for the most part," he said. "So they're trying to control their losses by streamlining their operations and providing better service to their customers."
The SCA defines cost savings as a ratio of fare collection to agency expenditures. A March 2010 SCA white paper entitled Planning for New Fare Payment and Collection Systems: Cost Considerations and Procurement Guidelines estimates a smart card ticketing system costs 17 cents in resources for every dollar collected in fare revenue.
How that metric compares to those of older, paper-based ticketing systems, Vanderhoof does not know. But it is universally agreed that transit agencies can achieve substantial savings by going electronic.
Smart card validation
David Cummins, Vice President of Sales and Marketing for the Transportation Solutions Group of Affiliated Computer Services Inc., put it bluntly. "When you are in a paper ticket world, it's just miserable," he said. "It's a self-defeating cycle."
ACS offers smart card, contactless solutions worldwide. It has implemented systems in such far-flung places as Riga, Latvia, and Torreón, Mexico. It is currently implementing a system in Lima, Peru, where ACS is installing its E-Validator EVD200 smart card terminals in buses and minivans.
NFC-enabled cards waved near the terminals allows for more efficient loading of passengers and reduces "shrinkage" associated with paper- and coin-based systems, Cummins said. It could be drivers pocketing some of the cash, robberies or other hazards of handling money.
Because these agencies are often cash-strapped, ACS fronts the money for the installations and then receives its compensation as a percentage of fare collection revenue. The goal in Lima, as in its other installations, is for ACS to help the transit agency achieve a 95 percent revenue collection rate.
Fare is fair
In 2007, New York City and Philadelphia cabbies staged a two-day strike to protest the new, passenger-facing VeriFone Inc. payment terminals installed in their taxis. The cabbies complaints boiled down to a lack of control over the systems when they had been accustomed to taking fare payments directly, and in cash. The end result would be fewer tips and less money in their pockets, they argued.
But time has proven their fears to be unfounded. "We now know, being years into it, that tips have actually gone up," said Erik Vlugt, Vice President of Product Marketing at VeriFone. "People tip better on a credit card. People tend to spend more in general when they're not dealing with cash. And that's been true in taxicabs, too.
"If you took a poll of drivers today, they would give you a very different opinion than they would have three or four years ago."
The systems - 95 percent of which are equipped to accept contactless payments using MasterCard Worldwide's PayPass technology - have proven beneficial in additional ways. Cab companies handle less cash, which improves safety.
And, depending on the city, the terminals provide "information to customers, GPS mapping, advertising, newscasts," Vlugt said. "So that conversion to electronic payments came with a lot of other advantages, which are much more accepted and appreciated now."
If cabbies were initially resistant to change, others have enthusiastically embraced the new technology. It all depends on individuals and communities, said Jim Morin, Vice President of Business Innovation at First National Merchant Solutions. He offered a personal anecdote. His hometown of Boulder, Colo., adopted a self-service kiosk parking system about 18 months ago, to great success, Morin said.
The kiosks are entirely unattended, which might have rattled a less tech-savvy population unaccustomed to dealing exclusively with an automated system. But Morin said Boulder "prides itself on being leading edge," a mindset the city counted on when it implemented the kiosks.
The market for electronic parking solutions - whether for municipal street parking, lots or ramps - is early in its development, but rapidly expanding, Morin added.
As the back-end payment processor, FNMS develops relationships with municipalities and then brings in its partners - program managers and equipment manufacturers - to put together programs. It has developed electronic parking payment solutions for New York, Miami, Los Angeles and Omaha, Neb., where FNMS' parent company First National Bank of Omaha is headquartered.
With the recession and cities losing revenue through shrinkage of tax bases, the move from a cash- and coin-based parking system to plastic has become an imperative, Morin said. It's a cost-saving measure in that cities don't have the expense of collecting coins from the meters. But, perhaps more importantly, an electronic solution allows cities the "flexibility to dynamically alter the price of parking," Morin noted.
Cities can charge more for parking in particular locations for particular events, such as concerts and fairs, for example. It is not necessarily a revenue driver, according to Morin, but more of a way for cities to better manage costs.
FNMS is also at the forefront of paying for parking via the web, which allows consumers to prepay and reserve parking spaces online before attending sporting or other entertainment events. "If you can print the boarding pass [on the web], why can't you print parking?" Morin said.
The last frontier
Opening up consumer payment for parking via the web channel mirrors a similar movement to open up mass transit to accept standard credit and debit cards. Currently, cities issue their own closed-loop cards that work only on their particular mass transit systems. In other words, the Boston CharlieCard and the New York City MetroCard are not interchangeable.
The benefits of going to a contactless, open-loop system are many, according to ACS' Cummins. Riders can pay for bus and subway rides with any network-branded, contactless card. From the transit authority standpoint, open-loop alternatives reduce the expenses associated with distributing the closed-loop cards and the systems designed to facilitate reloading of the cards.
VeriFone's Vlugt calls the open system the "last frontier." VeriFone is involved in open-loop payment trials in New Jersey and New York City where riders will be able to flash their network-branded bankcards on buses and at subway turnstiles. The pilots go live in June 2010, Vlugt said.
"I don't know if any transit authority is ready for bankcard only, but it's a nice add-on," Cummins noted.
The human element
Smart card mass transit systems are not without vulnerabilities, however. In the summer of 2008, London's Oyster card fare ticketing system went down not once, but twice. It was reported that the system failures were caused by the Oyster card operator Transys; the London transit authority, Transport for London, severed its contract with Transys soon thereafter.
Then, in the fall of 2008, Massachusetts Institute of Technology undergraduates cracked the security of the aforementioned CharlieCard. The Massachusetts Bay Transit Authority slapped a gag order on the students to prevent them from revealing their findings at a hacker's convention in Las Vegas. But the lawsuit was rescinded and, by the end of the year, the students were working with the MBTA to help improve system security.
And in 2009 a self described hardware hacker and others reported at another hacker's convention how they breached San Francisco's smart card metered parking system in three days.
While Vlugt recognizes that the threat is there, he emphasizes that contactless payment security is "leaps and bounds" beyond security for magnetic stripe cards. Contactless cards are much harder to duplicate than mag stripe cards because the "authentication and communication protocols are way more complex and have security mechanisms built in that the mag stripe doesn't," he said.
Theodore Svoronos, Vice President, Business Development & Strategic Partnerships at Group ISO Inc., looks at it from a different perspective.
Fraudsters like anonymity, he said. That is why they have gravitated to the online environment. Additionally, sophisticated hackers want to crack large databases and steal millions of card account numbers. "I'm not going to defraud somebody for a $15 cab ride down the length of Manhattan," he said.
Svoronos emphasizes that the main flaw in security is the upfront enrollment process, not weaknesses in RFID chips or information technology systems. "Vetting out the identity of the individual getting involved in the program, I still feel, is the biggest problem out there, no matter whether it's for a transport card or a credit card or a bank account," he said.
That is why Svoronos believes the human element, such as attendants at parking garages and airport parking lots, can never be discounted in smart card installations. "I love automated," he said. "I think automated is great because that's where we are. And we're going to be more automated tomorrow than we are today.
"My question is, how do you get there? Do I want to give the ability for the person to put their credit card into a machine, purchase a card and go away? Or do I want to control that process somehow?"
But Svoronos does not see the human element as instrumental only in system security; it is also paramount in customer service, since smart card installations can be confusing or overwhelming for certain people, such as senior citizens and individuals new to a country or locale.
"I believe in faster, better, smarter," he said. "I also believe in backup plans: in case of this we have this. And the human element still needs to be present. Not in everything. Just in some of the newer things that are coming out today to show people that it's OK."
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