The MT Position

By Conrad Sheehan

For tens of millions in the United States, mass transit is a fundamental part of daily living. Commuters can spend 10 percent or more of their workday riding transit and $1,000 per year.  From another perspective, mass transit is also important.  It is probably the most socially inclusive activity Americans participate in and, to that extent, is something of a great equalizer.  Billionaires and the homeless, immigrants and Daughters of the Revolution all “hang on the strap.”

A key part of mass transit is the payment process and as proprietary fare systems become obsolete, municipalities and transit authorities are looking for new payment systems to meet the needs of constituents and budgets.  A tendency might be to turn to legacy payment schemes — e.g. Visa and MasterCard — because of their marketing presence and influence, but these types of traditional payment schemes are inadequate solutions for transit payments for several reasons:

• Traditional cards (credit, bank debit, pre-paid Visa and MasterCard) are inaccessible or prohibitively costly for a large constituency of riders, namely the unbanked and under-banked, which can represent 50 percent of ridership. Pre-paid cards come with numerous fees, including activation, monthly maintenance and non-activity fees. In addition, pre-paid cards do not eliminate the need for unbanked consumer’s need for other fee-based financial services provided by currency exchanges such as check cashing and bill payment. The combined total of these fees vastly exceed the cost of a bank account, especially given the fact that the majority (62 percent) of low-income households never bounce a check, according to the November 2008 FDIC Study on Overdrafts.
• They cannot support the dynamic and often complex fare structures of transit authorities, e.g., seniors, students, military and pre-tax.
• They are built around magnetic stripes, which are too slow to meet the existing and growing throughput needs of transit. A benchmark of 350 milliseconds or less was cited in an October 2009 “Payments Sourcw” report on London’s transit throughput needs. This is not only way too fast for magnetic stripes, but also too fast for even Visa and MasterCard European contactless cards. Mass transit needs to move millions of people in a couple of short bursts each day.
• They contain sensitive financial data. Cards were designed in an off-line, mechanical world where this data needed to be on the card and facilitate carbon imprints — and this model has not changed much since. Whether in this data magnetic stripe, on chips or embossed right on the card, the traditional card will always be vulnerable to compromise at attended turnstiles and vending machines, and while fraud may not be a major issue in transit, the liability of stolen card data is. This was the case with TJ Maxx stores, which recorded a $118,000,000 charge due to a data breach.
• They are expensive. Securing data will remain a perpetual cat-and-mouse game fought by escalating technology costs on cards and readers; interchange will only rise, various and sundry fees will be introduced and re-introduced raising the cost for both riders and transit authorities.

Furthermore, there is evidence that legacy payment schemes and bank card issuers are interested in transit payments to get contactless cards into people’s hands to reduce their own fraud losses in the broader retail market and to use contactless chips as a mechanism to steer all payments into their preferred networks, namely signature-based transactions. This was evidenced recently by Best Buy’s cancellation of contactless Visa cards, which automatically routed any contactless Visa transaction into Visa’s own signature-based network, as opposed to a lower cost PIN debit transaction.

These should not be transit’s problem, not their job to solve and not their financial obligation to fund — it is a false choice between proprietary, closed-loop payments and Visa- and MasterCard-backed payment schemes.

Fortunately there are the successful transit payment systems, e.g., Hong Kong and London, which provide insight. Both systems have avoided the legacy payment schemes. In the case of Hong Kong, even in the face of direct competition from global behemoths Visa and MasterCard, the Octopus payment solution prevailed and has captured more than 95 percent market share. Both systems are built around contactless fare media and make card acquisition and reloading convenient. Both systems can be used on multiple modes of transportation and even Hong Kong has successfully opened up its payment platform to serve the broader retail market.

Newer, more efficient, secure and flexible solutions exist that do not shift the structural flaws and costs of card payment schemes onto transit authorities or merchants in general. The ideal payment solution will:

• Issue accounts to both banked and unbanked consumers
• Be agnostic to fare media form factor
• Be account-centric, not card-centric, which offers numerous advantages including (1) keeps cost of card down, (2) does not require financial data to reside on card, (3) allows transit authorities to more easily migrate fare media as they see fit (e.g. mobile).
• Allow accounts to be topped-up in a store, on the Internet or from mobile devices, or they can be linked to a bank account for low-cost debit processing outside the legacy credit card network.
• Provide for contactless RFID and magnetic stripe fare media to broaden its acceptance and increase its utility. Logical extensions would include bill payment and frequently visited stores.
• Ensure that transactions can be authorized in batch or real time, reflecting the physical realities of mass transit and have no sensitive financial data is resident on the fare media or transmitted through a network.

The ideal mass transit payment solution will provide a cost-effective solution for riders, transit authorities, contiguous (non-contiguous) transit modes and surrounding retail merchants.

Conrad Sheehan is the founder and CEO of mPayy, an alternative payment system enabling secure, efficient payment processing for consumers and businesses.

This entry was posted on Friday, April 9th, 2010 at 8:55 am and is filed under Transit Talk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.