Open-Loop-Leaning Panel Sees Role for Closed-Loop Payments in Transit

Despite the growth of open-loop payments, closed loop will continue to play a necessary role for transit agencies, especially to accommodate the unbanked and underbanked and customers that don’t want to use their credit or debit cards to pay fares, panelists at a recent Visa-sponsored webinar said.

While the generally pro-open-loop panelists discussed the benefits of the technology, including convenience, they also talked about some challenges. In addition to how open-loop can coexist with separate closed-loop systems, they discussed liability for first-ride risk, what one panelist noted were rising fees from payments schemes and the problem of contactless EMV cards and credentials in NFC wallets often not supporting multiple riders traveling together, such as families.

The UK-based panelists at the webinar, “Closed-loop and open-loop systems in mass transit: key considerations for transit operators,” held last week, was organized by Transport Ticketing Global and moderated by Tim Jefferson, senior consultant for FirstPartner.  

‘Won’t Go Away in Foreseeable Future’

Panelist Jit Ng, payments industry interface manager for Transport for London, which runs the largest open-loop payments system globally, said the technology works well for 95% of its transactions. But as a public transit agency, Transport for London, or TfL, must also serve customers that don’t have credit and debit cards or smartphones or who want to remain anonymous.

“And that’s why I think closed-loop cards like (TfL’s) Oyster won’t go away in the foreseeable future,” said Ng. “I’m not saying it’ll never go away. But that’s like the eternal question of will digital payments overtake cash? Yeah, well, ask Norway, because they’re still trying to get rid of the last 2% or 5% of their transactions.”

He added that the industry is still working on technology to enable certain categories of customers, such as seniors and disabled persons, to receive their concessionary discounts while tapping their credit or debit cards to pay fares. Until the industry works this out, it further makes closed loop vital. (Transport for London offers free travel to senior residents of London during nonpeak hours, but they must use a specially issued Oyster photocard. The agency told Mobility Payments it is not currently working on linking concessionary discounts to open loop.)

Another panelist, Ken Ritchie, senior director for global industry solutions at Visa-owned gateway and processor Cybersource, said closed loop has an important role to play.

That might be an unexpected comment from a Visa-affiliated company, which is a strong backer of open-loop payments. But Cybersource in its recent marketing material has allowed for a role for closed-loop to coexist with open loop. That role, however, appears to be mainly limited to serving riders who can’t or won’t use open-loop payments, according to Ritchie.

“Closed loop definitely has a big role to play and specifically on the unbanked or the underbanked and that is a theme that is global,” Ritchie said. “That is not just for London. It’s not just for Japan or the U.S. Being able to serve your ridership, regardless of their background, is an absolute key element. And that’s not something that open loop can do at the moment.”

He added that open loop “is not there to replace closed loop. We will try and replace cash as much as we possibly can.”

Not all open-loop backers agree that open loop can’t serve the unbanked and, especially the underbanked. The latter might have a bank account but don’t want to use conventional bank debit cards to pay fares.  

Open-loop promoters in California, where more than 25% of residents are considered underbanked and unbanked, have been promoting open-loop fintech products, such as the Cash App, as a way to accommodate these customers. But it’s unclear that these products will gain much adoption with riders.

Meanwhile, Ritchie said it was possible now to link concessions and season tickets to credit and debit cards.

“We can actually assign a unique number, be it the season-ticket number, be it a concession flag or number, directly to an open loop card,” he said. “It does mean that you need an account-based ticketing system on the back end. (Somebody) needs to go on to a portal and sign up…”

Implementations of open loop also have some other challenges. They usually don’t enable families to use the same card or credit or debit wallet token and, perhaps more importantly, they don’t necessarily foster close relationships with customers, said a couple of the panelists.

One of them was third panelist John Backway, head of central back office for the Rail Delivery Group, an association of British passenger rail operators, along with some transit authorities and retailers. RDG, which owns the National Rail brand, manages interoperability along with other tasks for members.

Backway said that before the pandemic, commuting and business travel were the mainstays of revenue for the passenger rail operators. Now it’s leisure travel.

“That customer relationship is more important than ever,” he said. “So losing contact with the customers is something we would not want to do.”

Later in the discussion, he questioned how credit and debit cards or open-loop card credentials in NFC mobile wallets could store the details of a long-haul rail ticket, like the reservation with a seat number and class. That can’t be done with a bank card, and it also can’t be done with Apple Pay and Google Wallet, at least not at present. These are merely virtualized and tokenized bank cards, he noted. Transit agencies also can’t send customers push notifications of train delays to these wallets apps.

National Rail operators also accept contactless and Oyster payments at most stations in and around London. They accept other fare media, as well, including 2D-barcode mobile tickets.

“So we do have a challenge with the unbanked; we do have a challenge with concessions. But then we also have a challenge that TfL (Transport for London) does not have, which is long-distance travel,” he said. “And additionally you might be traveling as a family together. And unlike in London, where it’s relatively easy to say well, we’ll just give children free or heavily discounted travel, and they can be provided with a specific card to enable that. We can’t really do that for a longer journey.”

If open-loop can’t “facilitate” these use cases, “we need to maintain other ticket types,” Backway continued. He added, however, that validators supporting many types of tickets are expensive.

“The ticket gate lines support five different types of ticket media currently,” he said. “Magnetic-stripe, Oyster, ITSO (UK standardized transit cards) smart card, barcode and contactless. We can’t possibly sustain that in the future. It is too expensive and too unwieldy and hard to maintain.”

Some transit agencies in such countries as France and Italy allow multiple rides on the same card for group journeys, including an open-loop service in Genoa, Italy, believed to be funded by Visa. But Cybersource’s Ritchie agreed that there are challenges in enabling the group journeys on one card.

Back to Negotiating Table on First-Ride Risk?

The high ticket prices for passenger rail in the UK presents another problem for open loop. If the open-loop system uses deferred authorization to smooth passenger flows through gates, as it does in London, there would be higher risk for the transit agencies with these higher-value transactions.  

Ng said Transport for London, or TfL, would like to see banks increase their part of a liability-sharing agreement, which helps cover the unpaid debts of riders who are found to have insufficient funds in their accounts or are somehow able to use a fraudulent card to ride.

TfL, with banks and major payments schemes, hammered out the liability-sharing agreement before the agency launched open-loop payments. The agency introduced open loop first on buses in late 2012 and then throughout its network in 2014.

Under the first-ride risk model, when a customer taps to ride, the reader will authenticate the card or credential using an EMV protocol, but defers the actual authorization until later. If the agency can’t collect the fare from that card or NFC device holder, the customer is blacklisted before the next ride until he pays his debt. If he never does pay it, issuers in some countries have agreed to cover the loss for that first ride up to a certain amount.

The amount that UK banks have agreed to pay is £10 (US$12.50), up from £6.

“It’s about turning around to issuing banks (to say), ‘this amount that we agreed on, we thank you for,” Ng said, adding: “‘(It’s) not enough now.’ We are getting a lot of resistance on that. But like everything else, it’s all about negotiation.”

Cybersource’s Richie noted that in some countries, banks have not agreed to cover any of this risk for transit agencies.

“In the U.S., there is no first-ride risk (coverage) at all; issuers are just not interested,” he said, adding: “I’m a great fan of first-ride risk. The rules that the schemes have developed are a post-payment model. The service has already been consumed. So the merchant needs to have that kind of security.”

But he predicted the problem will become more difficult to resolve as contactless pay-as-you-go transaction values increase, especially if the payments method moves to journeys on national or regional rail operators.

“I mean, at the moment your contactless limit (in the UK) is £100,” he said. “Especially in the UK, where our (long-distance rail) tickets are enormous to say the least, there’s going to be some very interesting conversations with the issuers around what that’s going to look like.”

Backway of the Rail Delivery Group said he doesn’t believe the high-transaction amounts will pose a problem because most people will continue to prepay tickets

“A longer journey, potentially somewhere in the region of £100, and the liability model not covering that, it’s highly likely that most people would not want to pay as you go on a journey between London and Edinburgh,” he said.

These purchases still could be open-loop transactions, he said. But if they are and customers want to prepay them, they’d likely have to use “model 3” of the “contactless transit framework,” reportedly developed in the UK.

Under this model, which is not used often, the customer buys the ticket in advance and could link the ticket to a contactless credit or debit card or smartphone used to make the purchase. Then they use that same contactless or NFC device to travel. Transit operator ATAC in Rome has introduced this service for monthly passes.

Agencies use models 1 and 2 much more often. Model 1 is a single-fare purchase, for which the agency knows the fare amount at the start of the trip. Model 2 aggregates transactions on a pay-as-you-go basis, as Transport for London and a number of other agencies do.

But Rome’s implementation can only support physical debit or credit cards, not tokenized card credentials on smartphones or smartwatches. Even if they could, where would users store the details of a long-haul rail ticket, like the reservation, seat number and whether it’s first or second class? asks Backway.

TfL Rep: ‘Sometimes Not Taken Seriously’

Besides wanting higher protection for first-ride risk, Ng said Transport for London wants lower fees from the payments schemes on the full-range of open-loop transactions.

He’s proposed to his own agency that it look at possible alternatives to accepting credit and debit cards, in case it needs them. For example, he’s proposed that TfL consider “open banking,” which–theoretically, at least–would enable the agency to accept bank-to-bank transfers for fare payments, bypassing the card networks.

“The scheme charges are going up tremendously year upon year,” said Ng, who said he was not referring to interchange, which is capped in the UK and European Union. “Without being too cynical, we need an alternative because there could come a point whereby we may turn around and go, ‘do we still want to accept open loop?’ I don’t think we ever will walk away from that. But you know what, it’s nice to have something in your back pocket, just in case that type of discussion does take place.”

The scheme charges Ng was referring to are network assessment fees or similar fees, which are charged by the payments schemes, such as Visa. They are the third component of merchant service charges, along with interchange and acquiring fees that transit agencies must pay to accept credit and debit cards for fares.

Like interchange, which mainly goes to issuing banks but which is set by the schemes, scheme fees are passed through to agencies by acquirers. Interchange and scheme fees are not up for negotiation. Agencies can only negotiate the acquiring fees.

Interchange usually accounts for the highest cost of the three components, even in the UK and Europe, where, unlike in other regions, interchange rates are limited to 0.2% for debit transactions and 0.3% for credit.

Ng has said in the past that interchange accounts for 60% to 70% of bank-card fees for agencies, likely including TfL. He and the agency decline to release a figure for how much in total bank card fees it pays to accept open loop.

That includes acquiring fees, which for TfL will be up for tender this year. With its millions of transactions each day–TfL is considered the largest contactless “merchant” in the UK–the agency is believed to have negotiated an exceedingly low transaction fee with its main acquirer and processor Barclaycard. Mobility Payments has learned the fee is as low as 3 basis points per transaction. The agency will be looking to at least match its current rate after it issues its request for bids soon.

It’s not clear if the schemes, especially Visa, would be willing to lower their assessment fees. Ng indicated he believes that looking at alternative payments methods could get negotiations moving. He was also referring bringing banks to the negotiating table over the liability they would be willing to take on for first-ride risk.

“And this is the hard part because sometimes without the threats, we’re not taken seriously, and we’re given, ‘yes, we’ll look into it.’ One year passes, two years pass and nothing gets done. But if you do have an alternative, then it brings a different thing. And this is why we’re looking at open loop, closed-loop, and we’re also looking at open banking, as well,” he said, then addressing his comments to Ritchie at Cybersource.

“I know from your side, Ken, as CyberSource, that’s not what you really want to hear, right? However, as a citizen of the world whereby you’re (transit agency) worried about these increasing costs not (being) sustainable, and you are public sector so you can’t pass the costs on,” Ng said, noting that TfL does not receive operating subsidies from the government outside of Covid relief funds.

Ng called on payments schemes to create a special category for transit agencies in terms of interchange and scheme fees. He contended that agencies should not be treated like conventional merchants, using his pet phrase, “Transit is not retail.”

“We need a separate one for transit because they are a little bit special,” he said. “In supporting a transit operator, you’re actually supporting a city. In supporting the Rail Delivery Group, you’re supporting a country.

“We don’t have shareholders. Any profit we make goes right back to the infrastructure. You try running a more than century-old system with minimal costs. Doesn’t happen.”

Cybersource’s Ritchie responded briefly to Ng, contending that Cybersource is “not a scheme.” Despite being owned by Visa it handles transactions from other networks as well, he said earlier.

“So all of the various fees that Jit might be charged by the scheme, I’m not seeing them,” he said, then pivoting to the issue of open loop and closed loop coexisting.

“The last thing really from my side is that I see that open loop and closed loop will continue. I think that there’s more than enough area for them to coexist within a digital landscape, a digital ecosystem working together, because I think they’re solving unique problems in their own rights.”

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