Can Transit Agencies Quit Closed Loop after Rolling Out Open-Loop Payments?

A panel of industry experts squared off for a first-of-its-kind debate about the pros and cons of open-loop payments, tackling a range of issues–from whether transit agencies can completely eliminate their closed-loop programs in favor of open loop, to costs agencies should be ready to incur when rolling out the technology.

Below are highlights from the 70-minute online debate held Oct. 5 and organized by Mobility Payments and Asia-Pacific payments and identity business association APSCA. The debate featured experts from across the industry spectrum:

It included panelists from the two large transit agencies with perhaps the highest adoption rates for open-loop payments globally, Transport for London and Transport for New South Wales.

Two other panelists hailed from major closed-loop card programs in Asia–Octopus Holdings in Hong Kong and EasyCard Corp. in Taiwan.

There was also a top representative from pure-play open-loop technology supplier Littlepay, as well as a veteran of the group that manages Europe’s premier closed-loop technology, Calypso.

Rounding out the panel was an independent consultant who has held key roles with two of the largest fare-collection system vendors globally, Cubic Transportation Systems and Thales RCS.

The panelists responded to statements posed by moderators, as well as fielding follow-up questions. At various points, the moderators called on experts from the audience, who offered their commentary.

‘Shoehorning Solution’
Much discussion during the debate centered on issues transit agencies would face if they rolled out open loop: Should they continue to manage two infrastructures, both open and closed loop? How would they support concessionary discounts for seniors, students and other categories of riders with credit and debit cards? What about their data and extra revenue they can make with their closed-loop cards?

Mick Spiers, now an independent consultant, who worked for Thales and, more recently, Cubic, said completely eliminating closed-loop cards would add needless complexity to a fare-payments service that already works.

“I love open payment, but if you think it completely replaces the inclusive nature of what a closed-loop system can do, you end up with all of these transitional costs, pulling out your hair out, going, ‘What am I going to do with concessions? What am I going to do with the elderly? What am I going to do with school children,’? Spiers contended. “And we end up trying to shoehorn a solution that we had right in closed-loop systems.”

He noted that while Transport for London has broadened its base of customers with its high-profile open-loop payments system-which boasts a high open-loop penetration rate–its closed-loop Oyster card shows no signs of fading away.

“It’s 10 years now that it’s been in operation, and the penetration at best is at 60%,” said Spiers. “That means that at least 40% of people are still using other means. Forty percent’s a huge number. That’s not pocket change. When you look at the Oyster numbers over time, they actually haven’t decreased substantially. They still sell 100,000 (new) Oyster cards every week. A hundred thousand! Just keep that in mind.”

‘Ending Up in the Back of Sofas’
Not everyone on the panel agreed

Paul Griffin, head of commercial for Australia- and UK-based Littlepay, a payments service provider for mostly small open-loop projects in the UK, continental Europe, Central America and the U.S., countered that for a transit agency to continue to maintain its infrastructure of proprietary closed-loop cards after rolling out open loop would be a “horrible waste.”

“Mick mentioned that there are 100,000 cards being sold each week on the Oyster program. Where are they ending up? They’re ending up in the back of sofas; in the back of wallets that aren’t being used,” Griffin said. “You know, it’s a horrible waste.

“It’s not a productive use of people’s time or funds. You’ve got TVMs (ticket-vending machines), you’ve got to collect the cash out of them.

“Mick mentioned that there are 100,000 cards being sold each week on the Oyster program. Where are they ending up? They’re ending up in the back of sofas; in the back of wallets that aren’t being used…”

– Paul Griffin, Littlepay

“If you really are honest as an agency or authority, and you actually calculate the cost of all of this, you’ll see it’s a pretty scary number, and it vastly exceeds the cost of payments processing in an open-loop mode­–which is why Sainsbury’s and Tesco’s and (other) supermarkets do not run closed-loop programs,” Griffin said.

‘Processing is a Volume Game’
Panelist Jit Ng, who is payment industry interface manager for Transport for London, or TfL, but who was not representing the agency on the panel, said he doesn’t “disagree with what Paul is necessarily saying.” He noted, however, that to benefit from lower processing costs for accepting open-loop transactions, transit agencies would have to handle a lot of transactions.

“Processing is a volume game; it is the number of transactions. That’s the main point of processing, and that’s how you can then build on that to negotiate with the schemes (and acquirers) in order to be able to get a better deal,” said Ng, who worked nearly 25 years at Visa Europe before joining TfL.

However, while a large transit agency in Europe might be able to negotiate lower processing and acquiring fees, it cannot do the same for interchange or network assessment fees, which are non-negotiable.

And even though interchange is capped in Europe at 0.2% for debit transactions and 0.3% for credit–much lower than in such markets as the U.S.–interchange fees for one large European transit agency still account for around 60% to 70% of total bank card costs to accept open-loop payments, with network assessment fees accounting for most of the rest, Ng said, no doubt referring to TfL.

“So I would argue that the interchange model needs to reflect that 60% to 70% of a typical merchant’s costs is way too high for the public sector. It cannot be that.”

– Jit Ng, payments industry expert

Interchange was originally created in the 1960s, mainly because the costs of fraud were unknown, Ng reminded attendees and other panelists. “But we’ve now moved on since the 1960s. The costs are more clearly understood,” he said.

“So I would argue that the interchange model needs to reflect that 60% to 70% of a typical merchant’s costs is way too high for the public sector. It cannot be that.”

And while the “halo effect” from TfL introducing open-loop payments has been “massive,” he stated further, “Transit is not retail.” Agencies have a social responsibility to serve riders and cannot behave like profit-making entities. That means they can’t simply raise ticket prices to cover increasing interchange costs.

Ng added that public records show TfL is not pocketing the unspent value on millions of unused Oyster cards.

Agencies Can No Longer ‘Sweat Their Asset’
Another significant expense for transit agencies rolling out open-loop payments are costs to buy and maintain certified terminals, said panelist Kurt Brissett, executive director of connected journeys for Sydney-based authority Transport for New South Wales.

“A lot of the costs (for open loop) are borne out of that, and when you do make that decision to go for open loop, the refresh rate of your hardware; your infrastructure, becomes dictated by the payments certification regulatory bodies–EMVCo and the respective scheme-certification processes,” Brissett said. Like TfL, Transport for New South Wales added open-loop functionality on top of its network of closed-loop validators.

“Transit agencies for a long time could sweat their asset and their hardware for up to 20-plus years in some instances,” he continued. “But you just can’t do that when obviously you make the decision to go open loop.”

Panelist Nora Tang, general manager of the technical department and international projects for Octopus Holdings, parent of Hong Kong’s ubiquitous closed-loop card, noted that some of the transit operators that co-own and use the Octopus scheme are now interested in introducing open loop.

Like Brissett, she said that the upgrade of the certified readers, along with end-to-end requirements for the network, including back office to be in compliance with EMV and PCI-DSS requirements is “certainly quite an investment for them.”  

“Transit agencies for a long time could sweat their asset and their hardware for up to 20-plus years. But you just can’t do that when obviously you make the decision to go open loop.”

– Kurt Brissett, Transport for New South Wales

But she added that, “the key area that they are looking at is not necessarily the investment, but actually is the efficiency of the (open-loop) systems. That’s especially true if there are “very high throughput requirements” for their passengers.

And that is an issue in particular for Hong Kong operators that will conduct online authorization of transactions, she said.

First-Ride Risk Overstated
Transit operators in Hong Kong are also concerned about the risk of not collecting revenue from a first-time rider that tapped his or her credit or debit card or card credential on an NFC device that turns out to be fraudulent, said Tang.

“In case the transaction is lost in the first place, will the operators be able to collect the revenue?” she asked. “So these kinds of issues are more in the operators’ area of concern rather than the cost.”

While open-loop payments is new to a market like Hong Kong, it’s been used for years in the UK, and not only in London. Privately owned bus companies have also rolled out the technology throughout the country.

“And operators don’t talk to us really about first-ride risk,” said Littlepay’s Griffin. “It’s a bit of a bogyman issue, to be honest. People put it up there and say, this is a big problem. But when you look at the data–we get the money back.

“If you’re going to be able to get yourself an invalid EMV card, you might go and buy yourself a watch or some jewelry. You’re not going to jump on a bus.”

Transport for New South Wales’ Brissett agreed: “From a first-ride risk perspective, just following on from what Paul said, it was a significant risk that was initially flagged with us, but the rate of fraud amongst our ridership certainly didn’t materialize anywhere near to the extent that we thought.”

Brissett added that the other major risk his agency was worried about, card clash, didn’t happen to any significant degree, either. He credited customer education and lessons learned from Transport for London’s experience. Transport for New South Wales has seen adoption rates for open-loop payments of around 50% since fully rolling out the technology in 2019.

“Customers got the idea fairly quickly that they had to separate the cards, and that they had to use the same card or the same digital device to tap on and tap off in order to be charged the correct fare and to be able to gain access to the relevant rewards and incentives,” he said. “We had a big marketing campaign around that. And to our customers’ credit, they got it.”

Different Dynamic in Asia
Just like for Octopus Holdings’ Tang, for panelist Ting Chen, chairwoman of EasyCard Corp., which runs the dominant transit and retail e-purse card in Taiwan, moving to open-loop payments isn’t a matter of cost.

The transit operators her city-owned payments company serves, including the Taipei MRT, could afford it. “Implementing a new payment system, the cost to do that, it’s relatively small,” she said. “We’re talking about a fraction of the budget compared to building or maintaining the metro.”

But according to Chen, EasyCard charges low settlement fees to transit operators for collecting fares. If the Taipei transit agencies were to support open loop, merchant fees would be much higher, she said. She added that ridership is still only 80% to 85% of pre-Covid levels, despite sustained marketing efforts to bring it all the way back.

“At this point, I’m not debating the cons of opening up for open loop. It’s that we don’t see enough pros at this moment.”

– Ting Chen, EasyCard

“So at this point, I’m not debating the cons of opening up for open loop,” she said, when asked about the business case for open loop. “It’s that we don’t see enough pros at this moment.”

In addition, she notes that it could be more difficult to support government subsidies and concessions with open loop. For example, riders in Taipei are eligible for monthly refunds to their EasyCards based on ridership.

Octopus’ Tang also said that riders in Hong Kong often get money loaded onto their Octopus cards in the form of lump sum refund payments from the government.

“Now, for open-loop payment, there is a restriction on how the card will be able to get a refund or charge back to the card in order for the customer to use the subsidy, which basically paralyzes the whole subsidy scheme,” Tang said. “First of all, the government will be considering the fee that the card schemes will be charging them for putting funds into that card. Secondly, the refund rules of some of the card schemes basically do not allow refunds that are more than the expense being spent on that card.”

Part of the reason for the difficulty by transit agencies serving Asian cities to find an open-loop business model is that many of the closed-loop fare card programs in these cities are also used for retail payments. That includes EasyCard, Octopus, Japan’s Suica and the Rabbit card in Bangkok.

“That’s a totally different ballgame, especially in Asia. We’re profit-making organizations, each one of us,” said payments expert Paradon Nitaya, who has worked with the Rabbit card for several years. He was speaking as an attendee of the debate.

“For open-loop payment, there is a restriction on how the card will be able to get a refund to the card in order for the customer to use the subsidy, which basically paralyzes the whole subsidy scheme.”

– Nora Tang, Octopus

“We’re making a lot of money on issuing cards. Most people outside of Asia don’t know this. We (also) get data, and we don’t only use the data for transit. All of us have lifestyle applications. They actually have a super application. It’s another business completely,” he said.

But “social or political” pressure is often brought to bear, causing transit officials to support open loop in Bangkok (and elsewhere in Asia), Nitaya added. Thai operators are beginning to roll out the technology and so are operators in Hong Kong. And Singapore’s Land Transport Authority, in 2019, fully launched Asia’s largest open-loop service outside of China, despite the authority-owned store-value card, EZ-Link, being used for both transit and retail.

Can Open Loop Handle Concessions, Other Complexity?
Some panelists expressed doubts that open loop could adequately support concessionary discounts and general fare complexity.

Panelist Ralph Gambetta, international relations and business development manager for the Calypso Networks Association, which manages Europe’s most-used closed-loop technology, contended late in the debate that the comments he’s heard from most of the other panelists raise these doubts.

“I see that you all have lovely, simple fare structures,” he said. “But if I see many of the realities, we need to manage cross-regional fares, cross-border fares. And here I haven’t seen any answers coming in.”

He said he supports open-loop payments as one of many fare-payments options that could broaden the base of customers. In fact, he noted that many transit agencies in Europe that use Calypso for their closed-loop cards are introducing open loop for such customer segments as occasional riders, who buy single tickets. But he contends that open loop is not appropriate for all riders.

“There are those who just have one fare structure to manage, but we here have services running three different fare structures, and even cross border. So really oversimplifying things will not help.”  

Backers of open-loop payments would counter that a number of agencies that have rolled out open loop, including Transport for London, demonstrate the technology can support multimodal rides with fare capping and handle other complexities. And TfL is working on supporting concessionary discounts with open loop cards, as well.

And open-loop technology is designed to have global interoperability, meaning that travelers from, say, Singapore or Tokyo, would be able to tap their Visa-branded cards when they visits London to ride on the Tube.

Littlepay’s Griffin noted that agencies could accommodate the concessions by linking the eligibility for the discounted fares to open-loop cards and credentials on the back end, as agencies are beginning to do in California. (Although that new eligibility verification system there is only being used by one small agency so far, and it remains to be seen if it will gain adoption).

As an alternative, agencies could issue white-label EMV cards to replace proprietary closed-loop card technology to support concessions and other categories or riders who don’t have bank cards or don’t want to use them to pay fares, he said. White label would work on the same readers that take credit and debit payments, and the cards could easily be virtualized and loaded into wallets supporting such NFC payments services as Apple Pay and Google Wallet.

“I see that you all have lovely, simple fare structures. But if I see many of the realities, we need to manage cross-regional fares, cross-border fares. And here I haven’t seen any answers coming in.”

– Ralph Gambetta, Calypso

In either case, “everything’s moved to the back office,” said Griffin. “So all that you need to do is transmit a token number. An EMV card is exactly that. It’s a token. It’s a number.”

Ng, the payments industry expert, notes that while open-loop backers say that they can support concessions and other special customer segments, he believes there’s “a big discrepancy down here.” In addition, with closed loop, everything is done by the transit agency. White-label EMV cards, while closed-loop, would require a separate issuing apparatus and a separate program manager at the agency.

“To me that sounds like they’re going be two different processes,” Ng said. “So how do you marry that up? That will be a hell of a challenge.”

Spiers wrapped up the debate by remarking that given enough time and money, the industry could solve any potential problem with open loop and white-label cards. “But I still scratch my head as to why would we?

“Why don’t we just use open payment for what it’s good at, which is broadening the base to a new group of riders, reducing the cost of fare collection. And then let’s rapidly shift to account-based, where we can do some pretty darn clever things around fare policies, concessions and the like.”

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