this article is a gem...Closing the Gap: Will Banks and Transit...

this article is a gem...

Closing the Gap: Will Banks and Transit Create a Common Contactless Card?
By Thad Rueter

Agents working long, stationary shifts in subway ticketing booths selling tickets is not Michel Barjansky's vision of their job description. Barjansky, electronic ticketing manager for Paris Metro operator RATP, says he would rather have those agents out on platforms, helping the 1.3 million daily riders navigate the system and performing other customer-relations tasks.

"We don't want people practicing card issuance," he says. "This is something we want to outsource. Any third party that is ready to issue cards that are compliant with our standards are welcome."

One possible solution? Have a bank issue chip-based contactless cards that could be loaded with fare-payment applications. That could allow transit operators to focus on running trains and buses, and cut their card-issuing and customer service costs.

Many transit managers share Barjansky's view. Card issuing "is something we would like to step away from," says Greg Garback, executive officer, department of finance, for the Washington Metropolitan Transit Authority in Washington, D.C.

And they are encouraged by the recent rush by banks and credit card issuers to offer contactless cards-using fundamentally the same tap-and-go technology many transit operators use-that consumers can use to quickly make small purchases. If contactless smart cards can be used for daily purchases of coffee and newspapers, why not for subway, train and bus fares?

Agreeing on a technology standard is, for once, not the problem. Both banks and transit agencies are using contactless smart cards based on the same international contactless standard, ISO 14443. "The technology is converging," says David deKozan, vice president of marketing for U.S.-based Cubic Transportation Systems.

What is more, the idea figures to have appeal to financial institutions introducing contactless cards. After all, wouldn't the many commuters who use mass transit in big cities like New York, London and Taipei love to have one card that gets them on the bus and also pays for lunch? Both sides see the appeal, but they each have very different priorities and requirements, which means progress may be by fits and starts.

"The main challenge is definitely not on the technical issues, as the smart card technology could perform complicated transactions," says Tony Yeung, operations manager at Hong Kong mass rail operator MTR Corp., and chairman of the information technology and innovation commission for international transit association UITP. "The main challenge is to bring different parties together into balanced business relationships."

The potential for convergence is there, largely because more than 100 cities around the world have introduced chip cards for mass transit fare payment in the past decade since Seoul and Hong Kong pioneered use of the technology.

More contactless transit cards are being issued each year. Transit consumed an estimated 95 million smart cards in 2005, vendor association Eurosmart says; other vendor estimates put yearly demand at up to 150 million cards. With millions of riders each day in the biggest cities, transit represents, in theory at least, a prime market for issuers looking to gain revenue and top-of-wallet position for their contactless credit and debit cards.

Supporters of such schemes point to existing electronic-money and transit projects in Hong Kong and Tokyo, where rail operator JR East issues the Suica transit card with a retail e-purse. Later this year, the 2.6 million Londoners who use Oyster contactless cards for transit soon could have an electronic money application as well. Washington D.C. transit officials have begun a pilot with U.S. credit and debit card issuer Citibank that could involve 20,000 cards. In Singapore, QB Pte Ltd. has a contract to promote merchant acceptance of the ez-link contactless card issued by the main transit agency, the Land Transport Authority.

Financial institutions in South Korea issue credit cards that can be used for fare payment. Visa International, which says that since 2004 transit has been a common feature on Visa cards issued in South Korea, says card activation rates increase 27% and spending 9% when transit is involved. "We gave consumers another reason to use the cards," says Stephanie Ericksen, Visa International's vice president of product technology.

Focus on Retail

But just because smart cards used for transit and retail purchases are close technological cousins doesn't mean the two sides will come together and flood the market with multiapplication cards anytime soon. For one thing, issuers of contactless payment cards have a big enough job now just getting the cards into the hands of consumers. "We continue to focus on the retail side for the time being," says Scott Rau, senior vice president, card services, for U.S.-based JPMorgan Chase & Co., which says it has issued more than 6 million contactless "blink" cards in the United States since June 2005 (see page 9).

Also, transit agencies are busy coming up with smart card schemes that can be used on neighboring, but different, transit systems, a process that often involves political and budgetary rivalries. Transit systems have complex fare structures, a potential logistical knot when it comes to a transit-and-retail card. For instance, some transit systems require riders to tap their cards when they enter and when they leave, and charge them according to the distance traveled. The contactless products being promoted by such payments organizations as Visa, MasterCard and American Express are not designed to accommodate such a two-step process.

Clearing and settlement also could become an issue. And there are decisions to be made about prepaid versus postpaid fares, and uninterrupted access to operational data upon which transit agencies rely.

Also, while contactless payment could be headed for a breakthrough year, it is by no means certain that enough consumers will put chip-based cards into their wallets to justify further efforts in transit. Furthermore, transit agencies usually serve large numbers of lower-income individuals. "Some may not be attractive as credit card holders," says Cubic's deKozan.

Contactless payment, though, is nearing the end of its infancy, which could prove beneficial for transit. "Within a few months, we should be close to obtaining critical mass. At that stage, issuers will look for some sort of differentiation," says Rahul Gadkari, field marketing manager for France-based smart card vendor Axalto.

That likely will involve different form factors-creative card shapes or key fobs--and adding applications--transit, perhaps, or loyalty programs-to existing single-application payment cards. Even if issuers step further into transit market, it is uncertain what kinds of cards will result. "There could be three or four different models," Gadkari predicts.

Probably the most famous model is the Octopus card in Hong Kong. Introduced in 1997, the card added nontransit payments in 2002. Approximately 13.5 million Octopus cards were circulating as of early January. About 95% of Hong Kong's adult residents who are 65 and under carry an Octopus card, a penetration rate that any issuer-transit or financial-would envy. About 3,000 stores and restaurants, plus some 10,000 parking meters, accept the stored value cards, says Eric Tai, Octopus CEO.

Daily transactions stand at about 9 million, with average daily nontransit spending at US$2. Consumers add value to cards at manned point-of-sale terminals that accept Octopus for payments, plus self-service recharging machines and some ATMs.

Octopus, despite its ubiquity, has had a hard time weaning customers from cash for retail payments. Almost 20% of spending by Octopus cardholders comes from nontransit sources. Tai says. That's up from about 15% in early 2005, but less than the 35% allowed by the deposit-taking license under which Octopus runs its electronic money scheme. Tai says he hopes the nontransit figure increases to 30% by year's end.

Another problem Octopus has, and which could be faced by other operators, is the reluctance of some merchants to pay card-transaction fees. At least some outlets of a major fast-food chain in Hong Kong, Maxim's Cake Shops, left the Octopus program because of fees. A few Starbuck's Coffee shops also left the program.

Tai says fees vary based on the size of the business, but he would not give specifics. The fees are believed to be around 1% of the purchase amount. In other projects, when a credit or debit application is used alongside transit payments, normal interchange fees apply, according to executives from MasterCard and Visa.

Some transit operators speak about Octopus with more than a little professional awe. One reason is that different segments of the Hong Kong mass transit system work under unified standards, says Thomas Parker, who monitors unified fare schemes for the American Public Transit Association, and is in charge of automatic fare collection for Bay Area Rapid Transit, the largest of about two dozen transit operators in the San Francisco region. Another reason is that Octopus basically set up its own system for retail payments.

The Octopus e-purse is being used as a rough model by Transport for London as it adds an electronic purse to Oyster contactless transit cards, a TfL spokesperson says. TfL, though, cannot function as a bank. In mid-January, TfL was in final negotiations to add an electronic purse. Among the bidders were major banks Barclay's and Royal Bank of Scotland, along with a group that includes U.S.-based financial services company JPMorgan Chase, according to TfL. Transit and banking officials declined to comment further.

In southern Taiwan, banks are issuing the MasterCard-branded TaiwanMoney Card, which combines transit and retail functions on a dual-interface-that is, contact and contactless-chip that complies with the international EMV smart card standard. About 2,000 of the cards have been issued so far, says Art Kranzley, executive vice president at MasterCard International.

Seven cities in Taiwan worked together to help create this common transit card, which supports MasterCard's contactless credit and debit application, PayPass. Cards can be loaded at point-of-sale terminals and ATMs, and clearing and settlement takes place through cardholders' bank accounts, he says. Transit and nontransit payments will be made from separate purses.

In South Korea, at least a dozen issuers have in the past few years issued credit cards with contactless chips for transit fares, including postpaid fares. Commuters in Seoul can use the T-money transit and retail card. Updated transaction volumes for retail payments were not available, but an official involved with the project told Card Technology late last year that volumes were small.

Visa says its contactless cards issued in Korea have transit applications separate from the retail payment feature. Cardholders can use their regular Visa accounts to buy transit passes, which are then stored on the chip, says Ericksen, the Visa vice president. Cardholders to cover fares from a prepaid transit account.

Issuers in South Korea and Japan also allow for postpayment of fares. The Surutto-Kansai group, which operates transit for the Kansai region, Japan's second largest metropolitan area, since 2004 has issued postpaid "PiTaPa" cards. The group is made up of private transit operators, including those that also own department stores. The group collects fares monthly from cardholders' debit accounts. Customers can use the cards for retail purchases and to earn loyalty rewards. Cardholders undergo credit checks and face spending limits for both transit fares and retail purchases. A few credit card companies have also expressed interest in issuing cards.

Another model is to put a contactless chip for transit onto a card with a magnetic stripe for retail payment, as South Korean issuers have done in the past. That's what's also happening in a pilot in Washington, D.C. Since November 2004, a small number of Citibank magnetic stripe cards with 2K memory chips have been issued to commuters, says Garback, the agency's finance executive, as well as chairman of the Smart Card Alliance, a U.S.-based industry association. The pilot is scheduled to end in 2007, and will involve no more than 20,000 cards, according to current plans.

Convenience stores and cafes are located at exits and entrances of transit stations throughout the system, he adds. For now, the transit chips can be loaded at vending machines, but he hopes one day the cards could be loaded over the Internet, or tied to cardholder bank or credit accounts, something commuters can already do with transit-only smart cards in some cities. He declined to offer details about the progress of the pilot, and Citibank did not respond to requests for comment

Hesitation from banks

It is unclear just how interested banks are in working with contactless transit, especially with major banks mum about their plans. Garback says the interest is relatively light, but increasing. "Various agencies are getting into the conversation phase with banks," he says.

But the failure of previous bank-run e-purse programs, and the investment of European banks in contact smart card technology, may be giving them pause when it comes to transit, says Barjansky, of the RATP in Paris.

"Nobody has made money with an e-purse," he says. European issuers found it hard to make money on low-value retail purchases. Cardholders found that e-purses were inconvenient to load with value, and moved increasingly to debit cards. Barjansky adds that banks in Europe are busy with migrating to the EMV international smart card standard, making contactless transit less of a priority.

Another factor delaying efforts is that transit agencies are busy with their own fledgling smart card projects.

First, regional transit cards

In San Francisco, for instance, which has the third-highest median household income among major U.S. cities-and thus presumably commuters who banks would view as attractive customers-transit officials have been enthusiastic about establishing partnerships with banks. But for now their focus in on getting various Bay Area transit agencies to use a single smart fare card, a project that has been regularly delayed. Retail is not the main priority.

"This larger vision is just something that will have to wait," says Randy Rentschler, legislative director for the Metropolitan Transportation Commission, a San Francisco-area planning agency. He adds there has been little interest so far from banks about contactless transit in the Bay Area. "We really expected the banks to be the leaders," he says. "It surprised us that banks did not come in."

In the Netherlands, Trans Link Systems is developing a nationwide smart transit card. CEO Jeroen Kok says 10,000 cards have been issued so far, with 300,000 expected to be issued by the end of 2006. "Our philosophy is to first go with transit," he says. "That's difficult enough. There's still a lot of work to be done in this area (interoperable transit cards)."

Coming up with a common transit smart card is probably the only concrete project that makes sense now for most transit agencies. That's because banks have shown few signs they are aggressively targeting the transit market, says Michael Laezza, vice president of sales for Australia-based transit systems vendor ERG Group.

Among the questions contributing to the hesitation is that of speed. Transit riders need to go through gates as quickly as possible; the top limit for a transit contactless transactions is about 250 milliseconds. Contactless transactions using the banks' "quick" EMV schemes are said to take a half second or more.

Another question is whether a joint card scheme would involve authorizing payments on the spot, the way bank cards work in many advanced countries. The alternative is to send those payments in batches overnight-this is called offline authentication. "The transit world is offline," says transit and contactless payment consultant Gary Yamamura, of U.S.-based Three Point Consulting.

Security and privacy also concern vendors and transit officials. But transit and payment functions could be divided on chips, with firewalls protecting the applications, says deKozan, of Cubic. This could be important because commuters might not want financial institutions to know where and when they use transit systems.

Another issue is how fees will be divided among transit agencies and card issuers, and whether new schemes will save transit agencies money.

"We don't want to pay any more than we pay today," says Barjansky. He could not say exactly how much the actual card, its delivery and management now cost except that it is no less than "several euros." At this stage, it is hard to say whether a transit operator would see savings if a bank issued that transit card.

As it stands, transit agencies are investing large sums of public monies on fare-collection upgrades and smart cards projects with no help from banks.

In the New York City area, for instance, the Port Authority Trans-Hudson commuter train system is testing a smart fare card system, a spokesman says. The test follows installation of new turnstiles in 13 rail stations, part of a $69.9 million project. Long term, the agency hopes to play a part in expanding a smart card fare-collection system to other New York-area transit agencies.

In effect, many transit agencies are becoming more involved in card issuing, not less. "If we are building the infrastructure and prove it works, could (the private sector) dream up a better solution?" asks Rentschler, who works with San Francisco transit agencies. "It's possible."

More talking between card issuers and banks is sure to come in 2006, especially if contactless payments prove popular among consumers, and transit agencies can successfully introduce smart fare cards that work across entire regions or nations. But it seems doubtful that agents will be able to leave ticketing booths anytime soon.