Article Highlights

Key Takeaway:

Shashi Verma, CTO of Transport for London, called for more regulation to lower interchange for agencies accepting credit and debit cards. Verma was among a panel of experts Tuesday that debated the pros and cons of open-loop payments, including discussing bank-card fees transit agencies pay to accept open loop.

Key Data:

On a $2 fare paid for with most debit cards issued in the U.S., interchange alone would make up 11.5% of the transaction. That compares with 0.2% if that same transaction were conducted in Europe.

Organizations Mentioned:

Transport for London
Land Transport Authority
MST (Monterey-Salinas)
• Transcode
• Arriva NL

This is the first of a three-part series on the pros and cons of open-loop payments as debated Tuesday by a panel of experts assembled by Mobility Payments and APSCA. This installment: The Elephant in the Room: Interchange and Other Bank Card Fees.  

Shashi Verma, chief technology officer for Transport for London and the driving force behind the agency’s landmark open-loop payments service, called for greater regulation of interchange rates outside of the UK and European Union to reduce fees agencies pay.

Verma, speaking Tuesday at the second edition of “The Pros and Cons of Open-Loop Payments” debate, called interchange outside of Europe and especially in the U.S., “frankly outrageous.”

“At the end of the day, what the payment industry is providing is a utility,” he said. “And the idea that you need 2% or 3% interchange or even higher, as that is the case in the U.S., is frankly outrageous. There’s no other word for it. And it has to be solved by regulation.”

Verma said Transport for London, or TfL, lobbied the British government and European Union years ago to change the rules on interchange. The EU in 2015 approved legislation capping fees at a low 0.2% on the amount of debit card transactions and 0.3% for credit for all merchants. That includes transit agencies accepting open-loop cards and wallet credentials for fares.

Verma expressed doubts that payments schemes will reduce interchange elsewhere without regulators stepping in.

Shashi Verma
Shashi Verma

“The reason that we have a lower interchange fee in the UK is not because we have a competitive position, but because we got the interchange regulated,” he said. “This is an issue across the entire economy. Governments need to step in and do something about this, which the EU has done and, thankfully, the UK government has carried on doing even after Brexit.”

The debate, co-organized by Asian independent industry association APSCA and Mobility Payments, featured a segment on interchange and other bank-card fees, a topic the co-organizers called the “elephant in the room” for transit agencies.

“The idea that you need 2% or 3% interchange or even higher, as that is the case in the U.S., is frankly outrageous. There’s no other word for it.

– Shashi Verma, CTO, Transport for London

Besides Verma, the panel featured Bas van Weele, program manager for the first major nationwide rollout of open-loop payments, OVpay in the Netherlands; Paradon Nitaya, a 25-year veteran of the payments industry, who has held senior roles at major transit agencies in Thailand; Carl Sedoryk, CEO of a bus agency in the U.S. that was the first to trial open-loop payments in California; and Çınar Basmacı, a board member for Turkish fare card and technology supplier Kentkart.

Register to Watch a Recording of the Full Debate

Verma indicated that the lower interchange fees TfL pays helps the agency keep its fare-collection costs low.

He noted that contactless open-loop payments, which TfL launched in late 2012, accounted for roughly half of the more than seven-percentage-point drop in cost of fare collection the agency has recorded over the years.

As Mobility Payments reported, TfL saw costs decrease from 14.3% of total fare revenue in 2006 to less than 7% in 2019. TfL’s closed-loop card, Oyster, launched 20 years ago–and which also supports pay-as-you-go transactions–accounted for roughly the other half of the reduction.

The pandemic and lower ridership are believed to have increased the cost rate, perhaps back above 7%. And of note: TfL has said it hasn’t done an analysis of its cost of fare collection since the 2019-20 financial year, ending March 31, 2020.

Verma said contactless payments costs less than Oyster to operate. In addition to the interchange caps in the UK, the large scale of contactless transactions that TfL handles-more than 3 million transactions per day across bus, Underground and tram-have helped keep some other expenses low.

For example, the transaction volumes have enabled TfL to negotiate an extremely low rate from its current acquirer Barclaycard. Sources have told Mobility Payments that the rate is only 3 basis points per transaction. TfL hasn’t confirmed that figure.

U.S. Interchange Rates ‘Untenable’
Not everyone on the panel agreed with the premise that costs for open loop are lower than for closed loop. But U.S.-based Sedoryk, who heads Monterey-Salinas Transit, said he believes that open loop can indeed save money even for small transit agencies. His agency has only 130 fixed-route buses in its fleet.

Sedoryk didn’t provide cost-of-revenue figures, but said he was mainly referring to savings on capital costs for rolling out open loop. That is despite the fact certification of EMV payments terminals in validators is a major cost for agencies.

When it comes to operational expenses from interchange, Sedoryk agreed that fees are very high for transit agencies stateside.

Carl Sedoryk-MST
Carl Sedoryk

“What’s happening in the U.S., as I learn more about this in world markets, is untenable,” he said. Sedoryk believes the situation is a “result of political decisions, and political decisions are those that end up leaving everybody unhappy.”

Although Sedoryk didn’t specifically refer to it, one decision that politicians in Washington, D.C., made more than 10 years ago has left concerned U.S. transit agencies very unhappy.

U.S. federal legislation known as the Durbin Amendment capped interchange on debit cards at a fixed fee of $0.21, plus 0.05% of the transaction amount, with issuers able to charge an additional $0.01 for fraud prevention.

The legislation, however, did not distinguish between large and small transactions. So, as one fare-collection system supplier pointed out, on a $2 fare paid for with most debit cards issued in the U.S., interchange alone would make up 11.5% of the transaction. That compares with 0.2% if that same transaction were conducted in Europe. And this doesn’t count acquiring and scheme fees that can make up a third, maybe more, of total merchant service charges for transit agencies accepting open loop.

“I just wish the issuing banks and the credit card schemes would be more transparent. In the U.S., we’re (transit agencies) more of a social benefit.”

– Carl Sedoryk, CEO, Monterey-Salinas Transit

Moreover, U.S. agencies, especially small ones, often can’t aggregate transactions for most of their riders. So they can’t appreciably increase the size of individual transactions. This means that fixed debit card fees hit the agencies particularly hard.

Sedoryk’s agency has been the first to pilot technology procured through a program, Cal-ITP, funded by the state of California, that helps agencies buy open-loop technology. In addition, he said Cal-ITP helped negotiate some relief for agencies on interchange in California and eligible agencies elsewhere in the U.S.

“We’ve been able to negotiate a 43% reduction in the interchange fees that’s resulted in a nearly 30% reduction in overall merchant service charges after you calculate everything in,” he said. “So a small operator like myself could never leverage the type of volumes that, say, Transport for London could. But if I merged together with all of the operators in the state of California, that accounts for one out of every seven (public transit) trips in the U.S. Now we start talking about some markets and we can start leveraging this.”

The drop in interchange Sedoryk was referring to stems from an agreement in which Visa quietly set up a special interchange category for transit agencies in the fall of 2021, as Mobility Payments reported.

Visa’s mass transit category substantially reduces fees on most debit cards from a total fixed fee of $0.22 to only $0.02 per transaction. The variable fee increased from .05% to 2%, but that amounts to little on a low-value transaction.

Yet, the Visa offer is limited in scope. It applies only to transactions under $5 and only to Visa-branded debit cards regulated under the Durbin Amendment–albeit these are the most used types of cards or NFC wallet credentials for low-value contactless transactions.

More importantly, the interchange category is only temporary, which Sedoryk earlier noted. It’s scheduled to last only three years.

And Visa, which has never announced the special interchange offer or acknowledged it publicly, has not said whether it will extend the offer when it expires.

As before, Visa’s U.S. office did not respond to a request for comment Tuesday on interchange rates for transit agencies in the U.S, or its special offer.

And while the Visa offer appeared to make Sedoryk hopeful about fees, he expressed some frustration with the overall situation.

“I just wish the issuing banks and the credit card schemes would be more transparent,” he said. “In the U.S., we’re (transit agencies) more of a social benefit. We’re not-for-profit, and the people that we’re helping are very low income and some of the most vulnerable people in our communities.” He added that he saw a “role for government” to ensure transparent fees “for those of us who are serving those groups.”

Panelist: Open Loop a Risk
According to Thailand’s Nitaya, the major payments schemes Visa and Mastercard also lack transparency when it comes to giving transit agencies visibility about how much in fees they can expect to pay down the road if they launch open-loop payments.

Paradon Nitaya

Nitaya said he’s helped Thai transit agencies implement open loop following government mandates to support the technology. But the fare-payments option introduces new risks to the agencies, he contended.

“Visa and Master(card) couldn’t tell us what happens after the first two years of promotion; they actually wouldn’t commit,” he said. “So that’s a risk to the (transit) operators and to the authorities.”

He added that costs in the future for maintaining certification of EMV-enabled payments terminals was also an unknown.

Nitaya said he and his colleagues are hoping for relief, but not necessarily from the mainstream financial industry.

“The other thing that we’re hoping for is actually the emergence of blockchain,” he said “Their fees are going to go lower in the future, and that’s something that we hope actually can keep the cost down.”

Nitaya didn’t hide his ambivalence toward open loop, saying at one point during the debate that the Thai government had “forced” transit operators to support EMV-based payments. Bangkok’s Skytrain and MRT, for example, have launched open-loop payments on four of their lines.

“Visa and Master(card) couldn’t tell us what happens after the first two years of promotion; they actually wouldn’t commit.”

– Paradon Nitaya, COO, Transcode

So open loop, when compared to closed loop “is a risk to us,” Nitaya said.

Hedging Bets
Echoing Thailand’s fears are concerns from the largest transit agency in Asia to launch open loop, Singapore’s Land Transport Authority. As Mobility Payments has reported, LTA has expressed a reluctance to becoming too dependent on the financial industry for fare collection because of the “uncertainty” of future fees. So it has no plans to phase out its EZ-Link closed-loop program.

Most panelists at Tuesday’s debate said they believed it was still necessary for transit agencies to maintain a closed-loop system of some kind, even after they launch open loop. That is not only to accommodate users without bank cards and NFC wallets or who don’t want to use them to pay fares and to support certain types of discounts and period passes.

Bas van Weele

It’s also to insulate the agencies from full dependency on banks and payments schemes. Among those panelists supporting a continued role for closed loop was van Weele of the Netherlands.

In addition to serving as program director for the nationwide OVpay rollout, van Weele is also head of external affairs for one of the nine Dutch transit operators in the OVpay consortium, Arriva NL.

The nine operators, along with processor Translink Systems, have completed the main portion of their open-loop rollout . They still plan to link concessions and other discounts and at least some period passes to credit and debit cards and credentials that customers use to pay.

But the group will also issue a new closed-loop card by the end of the year to replace the much-used Mifare-based OV chip card. A bank will issue the new card, which will support EMV technology. Cardholders, however, will only be able to use the card to pay transit fares.

“That’s one of the reasons why we choose not to just put all the eggs in one basket. If you drop it, everything’s broken.”

– Bas van Weele, program dir., OVpay; head of external affairs, Arriva NL

Van Weele noted that the profit margin for most of the transit agencies in the group hovers around 0%, meaning the agencies are “very keen on making sure that we have the lowest cost as possible, but to be as attractive (with fare-payments options) as possible, as well.”

He agreed that one reason for the planned “OV-pas” closed-loop card is as a hedge against ceding too much control to the financial industry, which in the end could increase costs outside of the control of transit operators, said Van Weele,

In other words, to go entirely with open loop would cause the Dutch operators to lose “commercial leverage,” he said.

“That’s one of the reasons why we choose not to just put all the eggs in one basket,’ van Weele said. “If you drop it, everything’s broken.”

Next installment in the series : Concessions: The Achilles Heel of the Open-Loop Proposition?

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