Transit agencies often offer open-loop payments mainly for convenience–to enable their customers to tap to pay for fares with their credit and debit cards and NFC wallets without having to buy a ticket or top-up a closed loop card. But can open-loop payments also save a transit agency money? A panel of experts says the answer to that question depends on the agency’s market and implementation.
Transport for London reduced its total cost of fare collection by more than 7 percentage points between 2006 to 2019, from more than 14% to less than 7%. Shashi Verma said open loop accounted for roughly half of that 7- to 8-percentage-point reduction in fare-collection costs.
This is the final in a series of articles on the pros and cons of open-loop payments as debated June 27 by a panel of experts assembled by Mobility Payments and APSCA. This installment: Open-loop payments: Can it save agencies money?
Transit agencies often offer open-loop payments mainly for convenience–that is, to enable their customers to tap to pay for fares with their credit and debit cards and NFC wallets without having to buy a ticket or top-up a closed loop card.
But can open-loop payments also save a transit agency money?
That’s a difficult question, in particular since any agency that rolls out open loop typically has to maintain a separate closed-loop fare system, as well. That’s to accommodate unbanked and underbanked riders and to support certain types of discounts, including at least some of the concessions the agencies offer.
Most panelists speaking at the recent debate webinar, “The Pros and Cons of Open-Loop Payments,” agreed that open-loop payments can lower the cost of fare collection. But it depends on the agency’s market and implementation.
Panelist Shashi Verma, CTO for Transport for London, or TfL, said at the top of the webinar that his agency conceived of its pioneering open-loop payments service 16 or 17 years ago with cost savings uppermost in mind.
“There was an analysis of the cost of revenue collection; it was very clear that we were imposing on our customers the unnecessary task of having to buy tickets,” Verma said. “We were able to imagine a world in which people could be liberated from the task of buying tickets. And in that process, we would reduce the time that customers took to buy tickets, and we would reduce the cost for us for collecting fares.”
Transport for London reduced its total cost of fare collection by more than 7 percentage points between 2006 to 2019, from more than 14% to less than 7%. The agency launched its closed-loop Oyster card, which also saved on the cost of revenue collection, in mid-2003. It followed with contactless open-loop payments on buses in late 2012 and throughout its network in 2014.
“We were able to imagine a world in which people could be liberated from the task of buying tickets.”
– Shashi Verma, CTO, Transport for London
Verma, when asked, said open loop accounted for roughly half of that 7- to 8-percentage-point reduction in fare-collection costs.
Another TfL staffer, Adrian McMullan, the agency’s manager of pricing and forecasting, said in March that contactless payments had lowered the “cost of sales” by 3 percentage points, as Mobility Payments reported. Oyster pay as you go–which like contactless can be used for daily and, more recently, weekly fare capping–accounted for a 5-percentage point drop in fare-collection costs.
Verma: Resist Customization with Open Loop
Verma said TfL’s business case for open loop was stronger than it would have been if the agency didn’t already have a closed-loop system in place with Oyster.
“I think there’s a different question for people who don’t have either a close-loop or an open-loop system and then are thinking of investing (in open loop),” he said, adding that he doesn’t believe agencies should “shoe horn” everything into open loop, such as concessions, so would need a closed-loop system, as well.
When asked whether he believes that smaller transit agencies could expect to also see cost savings by offering open-loop payments, Verma indicated that they likely could, but with conditions.
TfL “blazed the trail” in introducing contactless to fare payments outside of the retail payments model in a form acceptable to the banking industry.
He noted that now that the technology for open loop is much more “standardized” than it was when TfL was implementing it, “it’s important (for agencies) to not keep reinventing ticketing,” like they did for closed loop, with “endless customization.”
Although Verma sees a definite role for closed-loop payments, including to support concessions, he indicated that he believes closed-loop is more expensive than open loop for transit agencies, at least in Europe.
Therefore, it’s important for agencies to survey the “standardized”
products are on the market “and see whether it fits your processes, because that is the way to get a cheap and good quality implementation.”
If agencies are able to do that, “the world of suppliers is much wider,” Verma said. “And if you want customization, then the world of suppliers is limited.”
By standardized products, Verma was no doubt talking about validators and contactless readers, the latter certified by the payments industry. He was also talking about transaction models for credit and debit cards that are unique to the transit industry.
Pioneer in Deferred Authorization and Fare Aggregation
TfL was the first or among the first agencies to have real implementations of fare aggregation and deferred authorization.
“This is what we cracked, many years ago,” he said. “The complexity comes from not knowing the fare at the point of use. So if your fare is based on the distance you’re traveling, you need an entry and an exit tap to figure out what the fare is, and you need to connect those two transactions. That is something that doesn’t happen in the world of payments anywhere else.”
TfL developed its own back office that enables the aggregation. The agency also negotiated with UK banks on sharing the risk of fraudulent or otherwise unpaid transactions, known as first-ride risk.
But banks won’t accept liability for first-ride risk for transit agencies in some countries, including the U.S. And that fare-aggregation model that TfL pioneered, with the help of its vendor, Cubic Transportation Systems, is often not used by other transit agencies to accept open loop. Instead, these agencies restrict open-loop payments to occasional riders paying for single, full-fare trips. In addition, smaller agencies may not see enough open-loop transactions to aggregate.
This is a problem for agencies if they have to pay high merchant service charges to accept open loop. In addition to high fixed fees from interchange, they would have to pay high fees for acquiring if they don’t have a strong volume of transactions. They also must cover payments network scheme fees.
“Unfortunately, this is one where the world is complicated,” Verma said. “We have a huge starting advantage of scale. But we matched that up by also lobbying first the British government and then the European Union to regulate interchange fees in the EU and therefore our fees are very low. In most of the rest of the world, that’s not the case. And certainly, if you look at the U.S., interchange is exorbitant. So that is a problem.
He added that even with closed-loop cards, agencies have to pay merchant service fees based on interchange if they accept debit and credit cards for top-ups. (Although Verma didn’t mention it, the size of the reload transactions are usually much larger than open-loop taps on validators, which can help blunt the impact of high fixed interchange fees.)
Option: Running with the Retail Model
Panelist Paradon Nitaya, COO of Transcode, who has helped implement open-loop payments in Thailand and beyond, said he generally believes closed loop is lower in cost than open loop. That is unlike other panelists. But he pointed out that he was referring only to closed-loop programs in Asia, where salaries are generally lower than in the West (and perhaps where managing closed-loop is more labor-intensive than open loop).
But Nitaya said some open-loop implementations can be cheap.
“Just like Shashi said, actually, if you’re a small operator, you actually don’t have a very complicated fare,” he said, noting that, for example, he and his colleagues implemented open loop on one line of the State Railway of Thailand. The line has only 11 stations.
“If you’re a small operator, you actually don’t have a very complicated fare.”
– Paradon Nitaya, COO, Transcode
“And what we did is actually leverage the bank’s retail system,” he said. “We built a temporary fare-collection (system), actually with middleware and ran through that and then sent it back to clearing like a retail transaction. That worked like a charm for the past year.”
Panelist Carl Sedoryk, CEO and general manager of small California bus agency Monterey-Salinas Transit, disagreed with Nitaya, saying that, at least in the U.S., there are “some very small agencies with very complicated fare structures.”
That is, in part, because of the numerous discounts government officials mandate for transit agencies. Still, there is momentum behind open loop, so small agencies need to find a way to support it.
“The market has spoken–open loop for every other transaction that you want to purchase, whether it’s a cup of coffee or a taco off of taco truck, everybody has something that can read open loop today.
“The $20,000 taco truck that’s in my parking lot at lunchtime will take an open-loop payment, yet up until two years ago, the $900,000 zero-emission bus that I had did not,” he said. “What we need is to create for the smaller operators, you know, for London, Kentucky, instead of a London, England; or for Manhattan, Kansas, instead of Manhattan, New York; a way for them to share and create a marketplace for small operators.”
Sedoryk said there are 200 urban areas with mass transit systems in the U.S., but 6,000 non-urban and rural systems. He agreed that implementing and maintaining closed-loop payments would be more expensive than open loop for these cash-heavy transit operators.
“The $20,000 taco truck that’s in my parking lot at lunchtime will take an open-loop payment, yet up until two years ago, the $900,000 zero-emission bus that I had did not.”
– Carl Sedoryk, CEO, Monterey-Salinas Transit
But he agreed that transaction fees in the U.S. are “untenable,” while noting that Visa has offered a special interchange category for transit agencies in California and in at least some other places in the U.S. (That special offer, introduced in the fall of 2021, is temporary however, and only applies to one type of debit card-albeit the one most used for low-value transactions in the U.S.)
Common Back Office Feasible?
Thailand’s Nitaya suggested that small transit agencies in the U.S. might be able to have a common back end that is “shared between many, many, cities and actually have (support) a very complicated transaction.”
That is unlikely to happen in the U.S., however, and Nitaya mistakenly said he believed that Turkish cities have a common back end for their fare systems.
Panelist Çınar Basmacı, a board member for Turkey-based supplier Kentkart and sponsor of the webinar, said there is no national clearinghouse in Turkey and “each city transit agency has its own fare engine.” There’s no such regulation and no such demand at the moment.”
But he added that Kentakart is working on that very concept in a couple of other countries.
“In South Africa, we are thinking of making a big clearinghouse project for all the cities that will connect the regions in the cities and also, we are doing this in Italy for dividing the revenues for each of the cooperatives.”
“(In Turkey), each city has their own fare engine.”
– Çınar Basmacı, board member, Kentkart
Panelist Bas van Weele, program manager for OVpay, the first major nationwide rollout globally of open-loop payments, in the Netherlands, said he believes connecting to a back office shared by multiple agencies could work. But it depends on the business model the agencies are following.
He was answering a question about whether open-loop payments are only feasible for agencies that will have a “critical mass” of transactions to send through the system.
In the Netherlands, there are 2.5 billion fare transactions per year, van Weele said. But for the nationwide open-loop service, there will not be one back office or hardware supplier, for that matter. The nine Dutch transit operators participating in the open-loop service selected their own vendors.
“So each and every PTO will choose its own brand of validators, and we’ll choose which services we will collect from the supplier,” he said. “We do know there are other business models in the world obviously, which are vertically integrated and are fully handled by the supplier of your hardware, software and back office.”
He noted that the latter proposition–using one vendor for everything– can be a “one-way street.”
“You are fully depending on your supplier, at (any) moment in time.”
“So each and every PTO will choose its own brand of validators.”
– Bas van Weele, program director, OVpay
(Note that Shashi Verma’s comments during the debate about costs for open-loop payments and whether other agencies can replicate TfL’s success expanded on pre-event statements he made to Mobility Payments.
In them, he said that to be successful with open-loop payments, the markets that transit agencies are operating in must also have sufficient bank card penetration. In addition, agencies should not offer higher prices for customers to pay with open-loop cards and credentials than they do for closed loop. And finally, a good open-loop implementation requires thinking about the customer experience carefully.”
“As much as we have tried making transport just like retail, it still has its own needs. Ignore these, and you end up with a substandard experience and low take-up.”)
The debate was co-organized by independent payments and identity organization APSCA and Mobility Payments.
Read the first two installments in the series:
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