Some U.S. Transit Agencies Holding Off on Launching Open-Loop Payments

When the Utah Transit Authority finalizes the contract for its planned account-based ticketing system by the end of this year, among the provisions will be making all validators for its buses and rail ready to accept open-loop payments.

But when the new system launches, open loop will probably not launch with it, UTA officials confirmed to Mobility Payments recently.

The agency just wants to be ready when it believes the time is right to offer the open-loop payments option to customers.

“We’re hoping with the new system, we get some mileage out of it, and that if we want to enable support for open payments, it’s not going to require a major new procurement to do it,” said Jerry Van Wie, UTA’s special project manager, fares, told Mobility Payments.

UTA is not alone. It’s not uncommon for transit agencies when they replace their validators–especially as part of a new fare-collection system–to make the equipment ready to take contactless credit and debit cards. But some agencies are not activating the open-loop feature when they launch the new fare system or are not planning to do so.

The Metropolitan Transportation Commission, which oversees transportation planning and financing and coordination in the San Francisco Bay Area, is one of them. MTC has a 2018 contract with Cubic Transportation Systems for more than $460 million to overhaul the agency’s Clipper closed-loop fare collection system and operate it for 10 years.

Nearly 7,000 validators have or will have the hardware to accept EMV payments. And to actually implement that functionality with additional planning, designs and testing would only cost another $7 million, according to MTC, not counting maintenance and merchant fees. But it’s difficult to get agreement from among the two dozen transit operators using Clipper to go to open loop, an MTC spokesman earlier told Mobility Payments. Many of them don’t see it as a priority yet.

Carol Kuester, MTC’s director of electronic payments, told Mobility Payments in a brief statement earlier this year that the authority has “planned for and funded open-loop payment acceptance through the Clipper program.” But she didn’t say when an open-loop launch would happen. She referred additional questions to a colleague, who didn’t respond to requests for comment.

In Seattle, seven transit agencies serving the city and surrounding Puget Sound region this spring began introducing an account-based ticketing system which took nearly three years and $80 million to roll out–mainly through system integrator INIT.

It includes a total of around 6,000 readers, according to a spokesman for one of the agencies, Sound Transit, who said the agencies “did ensure that the card readers and back office are capable to support open-loop payments.”  

But while the “industry has evolved” to make open-loop implementations easier, the spokesman said the “timing is yet to be determined” for actually launching open loop. He added that “it is on our roadmap.”

Such other large U.S. agencies as Metro in Los Angeles and WMATA in Washington, D.C., also have introduced new validators. But as a spokeswoman for WMATA put it to Mobility Payments last year, WMATA has “no immediate plans” to turn on the terminals to take the open-loop cards. The same is true for Metro.

There are various reasons for agencies not going the last mile to start accepting contactless debit and credit cards. Some see their closed-loop card programs as the priority. Some also worry about accommodating unbanked and underbanked customers, who often don’t have bank cards or don’t want to use them.

There are additional costs for accepting open loop, as well, such as interchange and other bank card fees and maintaining PCI security compliance. And it’s difficult to support concessions, such as senior and student discounts, with debit and credit cards.

Finally, some agencies simply don’t sense a strong demand among their customers for open loop, at least not yet.

Speaking from Experience
Of all the U.S. agencies that are holding back on activating open-loop payments, even as they roll out new fare hardware and software, only one can speak from actual experience with the technology.

The Utah Transit Authority is a pioneer in open loop. UTA launched acceptance of contactless debit and credit more than 10 years ago–the first such agency to do so in the U.S. on more than a trial basis. But with relatively few contactless bank cards in circulation, among other hurdles, adoption rates were minuscule. So UTA killed service in 2018 to save on costs.

Now UTA plans to roll out a new account-based ticketing system on its 700 buses, more than 100 light-rail vehicles and 18 commuter trains. That includes supporting open loop and other fare media, including mobile ticketing on all new validators on board vehicles and platforms. The agency will also replace ticketing-vending machines and install a new back office.

UTA issued a request for proposal for the ABT project in May, with bids from vendors due around the middle of this month. A contract might be awarded in late October, according to a spokesperson.

As Mobility Payments reported in May, the project will make the mid-tier U.S. transit agency perhaps the first to roll out open-loop payments twice.

The first time around, UTA saw low adoption of open-loop payments, with take-up reaching much less than 1% of ridership. Some days it reportedly dropped to an abysmal 100 riders per day tapping their credit and debit cards to ride.

The low number of contactless EMV cards in the pockets of UTA customers during the roughly 10 years of operation of the open-loop payments service–and NFC wallets only starting to become available around five years into the service-helps explain that low adoption.

But since ending the service four years ago, UTA officials say they haven’t seen many signs that the situation has changed, though they add that they haven’t studied the matter.

“I haven’t heard a lot of people, at least in Utah, that are wanting this technology or feeling like they need the technology,” Monica Morton, UTA’s director of fares, told Mobility Payments. “I mean, a lot of our riders have subsidized fares.

“So if you look at the market that would use it, it would probably be tourists or people taking it for events that aren’t regular riders. “Again, it’s not something that I’ve personally heard, where the market is screaming for it here in Utah.”

UTA: Need to Control Costs
When asked by Mobility Payments if backers of open loop, such as payments schemes, are promoting the technology heavily to agencies such as UTA, the officials said that, on the contrary, they haven’t heard any promotion of the technology besides perhaps from some vendors. It is probably very different in such open-loop hotspots in the U.S. as New York City.

“We’re not getting approached by banks or anything like that, saying, ‘Hey, you know, you guys should be promoting or pushing contactless open loop,’ ” said Van Wie.

When asked if the amount of card fees, including interchange, that U.S agencies must pay to accept credit and debit cards would give UTA pause when it comes to deciding when to activate the open-loop technology, Morton responded, “Absolutely.

“We need to keep our costs of collection under control, and the higher they go, either through a new cost of the collection system or the higher they go through these interchange fees and things like that, it can be, in my opinion, a deal breaker.”

She said the agency could consider aggregating open-loop transactions (which could help soften the blow from high fixed interchange fees charged when customers tap most debit cards). In addition, she said she would like to see payments schemes, such as Visa, expand an interchange rate cut that creates a special category for transit agencies in the U.S.

As Mobility Payments has reported, U.S. transit agencies pay among the highest high bank card fees among agencies accepting open-loop payments globally, especially compared with European agencies. The card fees in the U.S.–interchange, acquiring fees and network fees combined–sometime amount to 8% or 9% or more of open-loop fare revenue if the agency doesn’t broadly aggregate transactions.

Visa last fall introduced a special interchange rate for transit agencies that substantially lowers rates. But it’s only for one, albeit popular, segment of debit cards. And the rate cut is believed to be valid for only a limited number of years and perhaps only in certain geographies, such as California.

Still, it seems to be more a question of when rather than if UTA and other U.S. agencies launch open-loop payments after they revamp their fare-collection systems.

“We really haven’t studied this very closely to really have a strong feeling that, ‘Yes, the time is now,’” said Van Wie. “We’re just making sure that when we do procure a new system that we have that option.”

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