target - $1.05, page-9

liam now is the time to buy....
Liam ITSO obviously has not excited anyone here.
Just my opinion for what it is worth.


A common opinion these days regarding smartcard technology is that as each year passes, particularly the years 1992-2001, technology from that period becomes redundant or obsolete. A term frequently used by some‘generic’.
ERG has built, during that time, the most impressive and expansive multi-modal, multi-applicable auto fare transit system in the world.
It has come at no small cost. What’s more it cannot be duplicated without investing similar amounts of time, energy and money. Given the boom and bust of the tech sector it is unlikely that ERG would encounter a rash of competitors willing to invest the amounts needed to compete or at best break even with ERG within 7 years in the transit sector, if at all.

Whilst all ERG shareholders believe in chip technology many are not savvy with the nature of the strategy, strategic alliances, technology, and the long term benefits of multi-applications.
The most common complaint from shareholders is that competitors are winning contracts and offering systems far more cost effectively than ERG. That is true. Downer in Perth for example. Perth chose a cheaper option. Brisbane followed. I will explain in detail later.
There is obviously a big difference between Downer, Cubic and ERG.

I am more interested in the latter two, there are many companeis like Downer offering stock standard transit sstems.There is an interesting strategic divergence beween Cubic and ERG . Cubic builds a system, no where near as sophisticated, whilst retaining maintenance it literally hands over the keys to the operator at a price. ERG builds a far superior system and retains maintenance and ownership of the system and then charges a royalty for every user over a contracted period, a period that is extended persuant to ERG meeting service criteria. A period also up for renewal. The market values the short term strategy. But what about the long term? It is interesting to hear the opinions of analysts in Europe and the USA regarding ERG’s flagging market acceptance. They are gobsmacked.
I have been harping on for years about transit being the “killer application”. ERG believes critical mass is the “killer application”. But the “killer application” has been a moving target. First it was Fraud. Then Stored Value. Then Loyalty. Then Online Authentication. For me it was always transit. The bottom line, as ERG has correctly called, is “critical mass” from transit. Economies of scale will support the business case. Eventually.
The business case is critical for multiple applications to deploy and succeed. Visa, with an annual turnover of almost $4 Trillion, recognises the chicken egg dichotomy. Huge sums are needed to support such a large scale program but huge losses are envisioned without practical adherence to deployment and growth. The USA for example today accounts for 7% of smart card adoption whilst Europe, where ERG enjoys a sizeable market share (second to none), Europe has 84% smart card compliance. As I have mentioned before it costs USD130 to attract a single credit card customer. Visa believes USD9 billion will be lost per annum to systems integrators such as ERG if banks continue to drag their feet. Visa also recognises that almost half of its massive revenue is derived from debit.

However first things first. Why ERG?
To value ERG, and compare it to its competitors over the long term, it is important to understand the technology, the alliances, the smartcard issuers, and the market players.
Technology:

The system must be wholly reliant apon common standards of interoperability. It must meet ISO 14443 a smartcard standard.
That standard is split into four components;
1: Physical Characteristics. Exposing dimensions and behaviour of the scard to electro and magnetic fields.
2:Radio frequency power and signal interface. Characterisics of power-transfer. Interfaces A and B. C is a variant of B which evolved from Sony. As we have discussed before Itstrue.
3: Initialisation and Anti-collision. Multiple scards can be processed in one hit.
4: Transmission Protocol. Resets handshake between scard and readers.

Both Cubic and Sony initially failed to meet ISO 14443. Cubics GoCard and Sony’s FeliCa were denied. Cubic has since merged with type B. Its readers already supported the standard. Sony had to strike an alliance to support FeliCa. Because transit systems are essentially closed (95% is local) there was little demand for scards that crossed countries. ERG meets both Type A and Type B.
Seattle,San Francisco,Washington DC,Rome,Lazio,Sydney,Hong Kong,Singapore, Manchester use Type A.

The bar was then lifted as specfications went one step further. Namely;
EMV, Globalplatform, CEPS level three developed by Proton (common electronic purse specs) and ITSO (Integrated Transport Smartcard Org). These standards were specifically designed to fit financial applications. The strategy at first was to value add the transit component to the bank issued scard. With the exception of ERG cost efficiency focussed on a universally accepted closed system which was until recently the order of the day. Fogarty’s stewardship throughout these challenging times was exceptional.

The last and most demanding specification ITSO is where ERG has excelled. The fact is ERG is the only transit system operator and clearance house integrator in the world that has met the rigid standards imposed by ITSO. To go into these specs is rather long winded. But I have included the specific demands of ITSOlater if anyone is interested. The reason Cubic did not bid for Manchester was simply because it could not conform to ITSO. Cubics London Prestige system is NOT compliant to ITSO. Cubic’s systems use memory chips. Its clearance house system does not include extensive financial management and instead creates reports of scard revenue and use so that funds can be manually transferred between entities. Summary data is used and fund transfers are typically done on a monthly or quarterly basis.

Cubic and ERG manufacture and supply entry turnstiles, card processors, value load terminals, card readers, point of sale terminals, ticket validators, and vending machines.
The backoffice equipment, hardware and software, for the complete central system is supplied by ERG. ERG is a system integrator. It designs, develops, supplies, installs, commissions and maintains the smart card transit system.
The Public Transit sector has always been recognised by the players in the scard industry as being the “key” appliaction that brings mass volume to feasible scard deployment

ERG has met all the ITSO guidelines. ERG first won Sesames Cartes in 1998 for the Hong Kong transit system. The most succesful of all transit systems in the world.In recognition of its technological excellence in 2003 ERG won again, this time for its work on the UK’s national ITSO standard. ERG’s technological superiorty is clearly beyond dispute.

However commercialising multi-applications, EMV for example, remains a mute point. ERG certainly has the contracts,alliances and technology but due to, until now, slow movement toward commercialising the smart card there has been little progress for the following reasons;
Unlike the transit industry, the financial industry adopted the contact interface scards since contact scards were deemed more secure and had a fully developed set of standards. However Visa does has Mifare Pro X up and running with EMV solutions. It is expected that Japan and the USA financial industries will leapfrog to contactless when the time is right.

Although both industries, transit and finance, use scard technology their business requirements are different. Both comply to differing standards. It is not because ERG is dragging its feet. As yet no clearinghouse for financial applications currently exist that can process scard revenue and non-revenue transactions. Therefor clearance houses do not typically handle any funds directly. They issue instructions to the banks to transfer funds, but are not an intermediary recipient of those funds. Which blows my theory of ERG deriving revenue from debit as Visa Mastercard et al do.

ERG due to its dual interface chip technology will be able to comply readily when standards are decided apon.
There are only two true clearinghouse operations in the USA. San Fransisco (26 agencies) Seattle(7 agencies) Washington is a far simpler system. We know who runs them.

The future is not difficult to predict. Visa already has had talks with NSW govt but talks halted due to Cubics Supreme Court challenge.

To strategy is easy to follow:
The payment products such as Visa or Mastercard are issued by a bank and accepted by a merchant for payment of goods or services. The clearance network is Cirrus or Plus or Interac. The financial instos such as banks, credit unions etc hold the deposits. The funds are transferred from the card holder to the financial insto. To date there is no financial payment scheme that includes multiple scard issuers. “The key to this dilemma is critical mass”.
Critical mass will determine ERG’s ability to secure a common platform whether it is CEPS from Protons Prisma
and ultimately EMV. The price of scards is no longer prohibitive. The difference between a magnetic stripe terminal and a smart card terminal is less than US$50 and the price gap continues to narrow. Once terminals can be substituted with little or no incremental cost, chip migration will move mainstream.
Visa aims to complete 90 percent of the migration of cards and terminals to chip by the end of 2008.

Visa has announced that from 2003 onwards, all newly installed terminals should be EMV chip terminals. From a business standpoint, this is excellent news for the industry. At a company level, it is up to our member financial institutions to decide how they want to move forward in the area of infrastructure for chip migration. Our members have contributed funds to move the infrastructure in a quick manner and to overcome the barriers. Payment is at the hear t of commerce. Visa’s vision of the future of payments is for universal commerce - the ability to pay any time, anywhere, over any device. This is being supported by the ability to build a number of different applications on the same chip platform.


The list of demands to conform to ITSO is exhaustive and puts costs of R&D in a more positive light; I have included the stringent guidelines below:

The demands from ITSO are to:
 Encompass passenger transport concessionary travel, educational travel, prepaid ticketing schemes and operators’ own ticket products
 Encompass park and ride and car parking applications
 Encompass bus, tram, rail, ferry, and be extendable to other transport applications, such as taxis and road user charging in the future
 Encompass e-government applications based around the concept of a citizen card
 Encompass stored value for various applications
 Be capable of including commercial applications, including an e-purse
 Be capable of including a loyalty scheme or schemes rewarding use of one or more of the above products.
The system will provide for the inclusion of cards carrying multiple applications in order to integrate into city applications, commercial users, loyalty schemes etc. The UK Government has set ambitious targets for the modernisation of public services.

Local Authorities have accepted the challenge and agreed to electronically enable 100% of transactions by 2005.
So what are the requirements?

Electronic voting
Electronic requests for service and complaints
Library enrolment, membership, reservations, borrowing, renewals and payments for services
Leisure centre enrolment, membership, reservations, and payments for services
Local authority management including identification, access control, time recording, and cashless catering / vending
Advance reservation of car parking On-street and off-street car parking payment
Council payment systems Identification / authentication for most council services
Entitlement to concessions and reduced price services, separate from the reason for that entitlement.


You are required to state the ISO/CEN and de facto industry standards that the card will conform to.
For card type, you are required to state operational range and transaction processing speeds.
Views are sought on the development of the Smartcard chip and the potential to bring initiative products to the market. Of special interest would be:
 The use of chips in appropriate jewellery for school children
 The concept of a mobile personal device acting as a Smartcard allowing new information to be transmitted and received via wireless networks.
Issuing and Renewals Network
The issuing and renewal network will be as open and freely available as possible. Views are sought on the provision of a suitable retail network for both card issue and recharge.
The issuing/renewal network will include at the minimum the following locations:
 Current transport operator Travelshop locations
 Suitable council premises
 Schools
 Suitable commercial/retail premises
 Via a suitable internet application (for example schools could link a digital camera/scanner to a PC and capture images as required)
All issuing stations for personalised cards must be capable of recording customer information and relaying that information to a suitable data store.
All issuing stations must initially transfer a digital image to the Smartcard.
All issuing stations must be capable of recharging applications other than those they themselves currently issue.
All issuing stations must be capable of helping customers with queries or problems as they are expected to form a first line help point.
For bulk issues and renewals, the use of a bureau service would be of interest. Suppliers are required to state their experience in this area.
Users should potentially be able to renew and recharge their cards by a variety of means that will evolve over time. Views are sought on the appropriate combination and your ability to deploy the issuing and renewal network that may include:
 At card issuing stations
 At agents in local shops
 Schools
 Automated ticket machines
 Via suitable machines in bus stations/Metro stations
 Via city information points and kiosks
 On bus

 Remotely by telephone/credit card
 By transfer of value from any separate e-purse held on the card
 By post event billing (similar to credit card)
 Via wireless technology
 Via suitable device built into PC
 Via suitable device built into digital television boxes
 Any other method the supplier deems suitable
It is likely that a combination of Contact and Contactless recharge equipment be adopted across the system.
As some of the recharge points will be at unmanned locations, the equipment must be fit for purpose.
The recharge points may have to co-exist with existing applications. You will be required to supply the all the necessary information, protocols and interface software to allow third parties to integrate with their own products.

Smartcard Readers (TRANSPORT REQUIREMENTS)
7.12 Smartcard readers will be fitted to all the buses forming the North East region. The readers should be capable of connection to existing machines on buses. Machines commonly found in the region include; Wayfarer 2 and 3 machines, Almex and ERG machines.
7.13 Smartcard readers will also be fitted to automated ticket machines and potentially barriers in Metro, Northern Spirit stations, bus stations and public transport interchanges.
7.14 For outdoor locations, the readers will be fit for purpose and conform to IP66.
7.15 The readers will, where appropriate include a passenger display. Where feasible, these should adapt to the requirements of users and offer a range of services.
7.16 Proposals are sought on the mechanisms by which the correct fare is calculated for a journey via the use of entry readers only and a combination of exit and entry readers.
7.17 Views are sought on the feasibility of using satellite based location systems to communicate the vehicle position to the ticket machines in order to transact the appropriate fare.
7.18 Existing ticket formats will continue to available alongside Smartcards for some time. The scheme must be capable of acceptance by the national Rail Settlement Plan for the issue of rail tickets in due course.
7.19 Equipment must be approved for use in a rail environment particularly with respect of interference with safety critical installations.
7.20 The scheme will eventually encompass taxi operators within the region. The supplier is asked to confirm that the card reading equipment will be compatible with systems installed in taxis.
7.21 The scheme will eventually include park and ride at a number of interchange points. The suppliers are asked to confirm which parking ticket equipment they can integrate with.
7.22 Information points are to be located at various points within the region that will give customers access to data and information of products on their card, including expiry dates/ remaining balance and listing or recent deductions/journeys.
Local Authority / Retail / Commercial Readers
7.23 Readers for these applications will be placed at appropriate points throughout the region. These readers will be at both indoor and outdoor locations.
7.24 For outdoor locations, the readers will be fit for purpose and conform to IP66.
7.25 The readers for these applications will in many cases co-exist with existing applications and products. For example, the information kiosks that are being developed throughout the region will incorporate Smartcard functionality.
7.26 The readers for many applications may have to co-exist with existing applications. You will be required to supply the necessary information, protocols and interface software to allow third parties to integrate the readers with their own products.
7.27 Safeguards and anti-tear processes should be included for all applications to ensure minimal effect on the cardholder if for example; a card is removed mid way through a transaction.
7.28 Cardholders should be able to see generic and application-specific data stored on their smartcard which relates to themselves, their attributes and / or activities.
7.29 An Internet site will be maintained providing details of Smartcard products and allow customers to obtain information about their own card including transaction details and amount of credit/expiry of applications.
7.30 The use of personal pocket readers for customers of the system would be of interest.
8 Back Office Systems.
8.1 Unlike a transport only system, the regional Smartcard will exist in an open commercial environment where applications will be installed, amended and removed as required.
8.2 In order for this to be viable the Back Office System will have to become more than a transaction processing point for transaction information only. The Back Office System(s) may become a regional data farm and the only point at which a Smartcard can be rebuilt if lost or damaged. This is not to advocate the Back Office System as one large system. It may be several small systems operating over the appropriate communications infrastructure.
8.3 Views are sought on how best to set-up and manage the regional system.
8.4 Facilities must be provided to allow the downloading/uploading of data and / or applications from any point in the regional structure.
8.5 The use of wireless LAN would be of special interest.
8.6 The system will allow communication to readers for software updates, hotlisted cards / users and any other information required.
8.7 Views are sought on how hotlisting and revocation might be addressed in a multi issuer and inter related application environment.
8.8 Data submitted from any point must be verified to ensure that it is complete and accurate. Each transaction must be uniquely labelled and securely held on the reader. Security must be such that gaps in data transmission can be easily spotted and corrective action taken.
8.9 Views are sought on the system currency. For example, how often data would need to be downloaded to the Back Office system to maintain system credibility and prevent fraudulent use.
8.10 Data received from interoperable devices that do not belong to the regional scheme must be promptly relayed to the appropriate organisation. Conversely, the system must be capable of receiving information from other Back Office systems relating to schemes being administered by this system.
8.11 Proposals should address the total life cycle security of cards and data, in particular to ensure that confidential information is only made available to authorised parties in agreed formats. We are especially interested in ensuring that the appropriate mechanisms to protect the citizen are implemented.
8.12 Suppliers are requested to demonstrate compliance with the UK Data Protection Act. for both back office and front end systems.
8.13 Similarly, we would seek assurances on the physical security of the Back Office systems and in particular measures to taken against machine failure, data corruption and information data storage policies.
8.14 The Back Office system will reconcile transactions from a variety of sources in accord with commercial agreements defined by scheme participates.
8.15 The Back Office system must be capable of providing various reports for information and management of different schemes. The provision of such information will itself form a commercial agreement defined by a scheme participant.
9 Proposed Developments
9.1 In a scheme of this size, it is not practical or desirable to roll out all applications from day one. An indication of product delivery is as follows:
Stage One
 Education Management Systems
 Scholars Concessionary Travel Scheme
 Passenger Transport Operators own products
 Loyalty Schemes
 E-purse
 Car Parking and Park and Ride
Stage Two
 Elderly and Disabled Concessionary Schemes
 Joint Transport Operator products
 Further city/government schemes (libraries, leisure)
Stage Three
 Extensions to the above
 Commercial applications
9.2 You are required to demonstrate that you are able to deliver a Regional Smartcard initiative within this time frame.
10 Collaborative Research and Development
10.1 Local authorities and academic partners from across the region have a history of working with industrial suppliers in developing pre-market applications and business models for the introduction of new services.
10.2 This has enabled the region to gain an international reputation as a centre for excellence in smartcard applications research and development. It is envisaged that the successful applicant(s) would work with local academic partners and local authorities to sustain this position.
11 Management of the Scheme
11.1 The proposal will include information on the management of the scheme and particular reference to the following will be made:
 The management of the communications infrastructure
 The management of the data collection
 The management of the card issuing/renewal network
 The management of the Back Office system
 The management of the physical and electronic card real estate.
 The management of system evolution and development.
11.2 Views are sought on how costs would be allocated to various management structures and on what basis this would occur.

So for those that havn't fallen asleep that is it!!!!!