By Michael Simon
Smart Systems Innovations LLC
After years of pilots, U.S. transit agencies have finally moved to the public announcement and request-for-proposals stages in purchasing contactless bankcard systems, a move that should promote contactless bankcards widely in New York, Chicago, Washington, Philadelphia and Dallas.
These cities promise to put about 50 million contactless bankcards in riders' pockets and teach them how to tap and pay as well.
When accepted by transit agencies, contactless bankcards such as Visa Inc.'s payWave and MasterCard Worldwide's PayPass cards allow riders to carry one less card in their wallets by effectively rolling the transit card into the bankcard.
The potential ubiquity of contactless bankcards in transit systems means more processing volume for issuers and opportunities for acquirers, ISOs and merchant level salespeople to equip merchants in and around the transit system with contactless-enabled POS terminals.
The transit sector is a strong promoter of new payment systems. Federal funding for massive new projects has all but dried up, and transit agencies have been forced to seek other means of funding upgrades in payment systems. Their latest idea is to use a piece of future fare collections to pay for terminal and system upgrades.
By using bankcards, transit agencies reduce the volume of cash they need to collect. Cash is, by far, the most expensive way to collect fares. The agencies also avoid having to issue cards as well - which is, after all, not their main business and something they aren't really very good at doing. By accepting bank-issued cards, the agencies push customer service on to card issuers, further reducing their costs.
Accepting bankcards is a big change for the transit industry, which has been issuing scrip, tickets and tokens since its inception. Transit cards from one city can't be used in other cities. In contrast, bankcards can work anywhere. As in automated toll collection, the goal is to make people forget that they paid but trust that the result is accountable.
For some years, transit agencies worried that a large percentage of the population was unbanked or underbanked (that is, people who have no bank accounts whatsoever or very limited banking relationships), but contactless-enabled prepaid cards are alleviating that concern.
Issuers want the "top of wallet" effect. Suddenly, unless you have your bankcard with you, you can't get to work, and if it becomes your habit to tap your credit card at the turnstile or on the bus, it is the issuers' fond hope that you will tap it at the shoe store or the supermarket, too. From transit, issuers get increased card activation, usage, stickiness, distinctiveness and differentiation, with minimal marketing cost.
Acquirers see the transit agencies as very large and reliable merchants. Although the ticket size is small, the overall volume is enormous and predictable, even in economic downturns. Highly automated and largely unencumbered by chargebacks, transit agencies are relatively less bureaucratic than most government agencies. Acquiring contracts are relatively long, and the agencies don't change often.
The biggest technical challenge transit agencies face in accepting bankcards is that most of the transactions are offline and can't be authorized in the usual manner. Passengers boarding a bus cannot wait the 6 to 30 seconds that online authorization requires, even if the bus is connected to a wireless network. Given today's networks, offline authorization is the only practical solution.
The top technologies for preventing fraud in offline authorizations are negative and positive lists, but there are some additional tricks as well. The technical challenge arises because bankcard chips, unlike transit agency cards, don't have transit applications on them.
They become identifier tokens for rider, and often the transit agency is exposed to the risk of fraud. However, technology does exist that can reduce potential fraud to a trivial level, a tiny fraction of 1 percent.
Even with reduced fraud, the transit paradigm is very different from normal bankcard usage. When you present your card at a store, you are saying, "Charge me." But not every transit card presentation results in a charge.
Transit time passes or transfer rides do not result in a charge, so a fare processor is needed in between the terminal and the gateway to determine if the rider should be charged in every case.
After years of wrangling, bankcard companies have accommodated transit micropayments with various new rules, for example, no signature required and new and lower interchange and per-transaction charges. Acquirers and their gateways have figured out how to aggregate micropayments to minimize the interchange.
Although there are many radical new payment technologies, transit agencies aim to be normal merchants in the card acceptance world. Their vision is that any rider with a bankcard should be able to ride any public transit vehicle without even thinking about the fare. Transit agencies will make bankcard micropayments ubiquitous and part of our everyday lives.
The low cost of networks and devices in today's computerized world and the increased crowding in our cities are driving the trend to automated micropayment processing. This is a trend that will only increase with the years.
Michael Simon is Chief Executive Officer and majority owner of the Smart Systems group of companies, which develop and market proprietary technology for the acceptance of contactless bankcards at public transportation payment terminals. A fare collection expert, Michael speaks frequently before public transit conferences and trade groups. Smart Systems Innovations LLC offers consulting and software and has a portfolio of patents in the field of offline bankcard acceptance. He can be reached at mjs@ssysco.com.
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