Open Loop in US Transportation Systems 1 / 16 White Paper

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1 Open Loop in US Transportation Systems 1 / 16 White Paper Open Loop in US Transportation Systems

2 Open Loop in US Transportation Systems 2 / 16 Our market information (qualitative and quantitative) is based on a combination of primary and secondary research, along with our long-standing experience of the industry. Intelling takes no responsibility for any incorrect information supplied to us by manufacturers or users. The information contained herein is general in nature and is not intended, and should not be construed, as professional advice or opinion provided to the user. This document does not purport to be a complete statement of the approaches or steps, which may vary according to individual factors and circumstances, necessary for a business to accomplish any particular business goal. This document is provided for informational purposes only; it is meant solely to provide helpful information to the user. This document is not a recommendation of any particular approach and should not be relied upon to address or solve any particular matter. The information provided herein is on an as-is basis. Amounts are converted according to recent conversion rates known at time of publishing. The converted amounts are only a gross evaluation and are not intended to reflect accurately the variations of currency rates. Publication date: March 2013 Release 1.0 Author: Thierry Spanjaard - tspanjaard@smartinsights.net Published by Intelling, 9-13 rue Bel Air, Marseille, France

3 Open Loop in US Transportation Systems 3 / 16 Table of Contents Table of Contents... 3 Overview Transport authorities vs. transportation operators Needs of mass transit operators Revenue structure Fare payment systems Coins, tokens, paper tickets Magstripe tickets Contactless cards NFC Cost of fare collection Open Loop fare collection Concept Advantages Inconveniences NFC in transit Open loop pilots and projects New York New Jersey NYC Transit PATH NJ Transit LIRR New York future developments Salt Lake City: UTA Chicago: CTA and Pace Philadelphia: SEPTA Washington DC: WMATA Dallas: DART San Francisco: BART Table of acronyms Sources... 16

4 Open Loop in US Transportation Systems 4 / 16 Overview Mass Transit systems have been in existence for over a century, and their fare media did not evolve much during the first century of their history. Now, new fare media such as contactless cards and tickets are ubiquitous, and transport authorities are permanently looking for means to make fare collections easier, cheaper and more flexible. Now, the US are on the path to EMV adoption, with, in the near future, hundreds of millions of people equipped with credit, debit or prepaid cards able to communicate in contactless mode. At the same time, under pressure for a better profitability, and in a move to get away from payment, which is not considered as their core business, transportation operators are in search of solutions to integrate banking cards payments in their mass transit systems. Such a use is called open loop as the payment means is a universal banking cards rather than a closed loop transportation operator-issued dedicated card or ticket. US transport authorities and transportation operators have launched multiple pilots, and several projects to integrate banking card as part of their payment solutions in mass transit systems. Now, next steps to come are the generalization of contactless-enabled banking cards, and the evolution to NFC, the use of a mobile phone as a means of payment. Stakeholders in the transportation service industry envision a future in which payment for mass transit will be performed through an array of means including dedicated transport operator-issued fare media in the form of cards or NFC apps, associated with open loop payment systems including banking cards and NFC handsets. 1. Transport authorities vs. transportation operators In many countries, government delegate their role in organizing transportation means to transport authorities. Transport authorities are generally in charge of decisions on: Transportation global plans: preferred transport means, investment level, major objectives of the transportation system,

5 Open Loop in US Transportation Systems 5 / 16 Subsidies to transportation operators, Transportation networks including alignment, stations, etc. In some cases, rolling stock, Tariff schedule principles, and often rates, Population targets, Etc. Also in many cases, transport authorities are responsible for the investments in transportation networks, either on public or on private funds, or, most often, on a combination of public and private funds. Transport authorities generally decide on population classes who have to benefit from discounted prices on public transport, or who will even travel free. For instance, transport authorities may decide to grant free transport to the elderly, handicapped, youngsters, jobless, etc. populations. Transport authorities, or even governments, decide on universal access principles that apply to transport. For instance, transport authorities may decide cash is always to be accepted as a means of payment for transport. Transport authorities delegate to transportation operators the operation of transportation networks. In most cases, an area or a region is served by several transportation operators, who obtain licenses from the transport authorities for each line they operate. Also, there may be different transportation operators for each transportation means: subway, bus, ferry, etc. A transportation operator is generally responsible for: Acquiring rolling stock, Hiring employees, Operating the transport means, Operating the payment system Providing detailed data to the transport authority. Transportation operators can be public or private organizations. In most cases, they are subsidized by transport authorities. When several transportation operators serve the same area, or the same population group, most transit authorities demand interoperability between different transportation means to allow for an end-to-end journey with a single payment. This implies an elaborate revenue recognition scheme to attribute its revenue share to each operator.

6 Open Loop in US Transportation Systems 6 / Needs of mass transit operators 2.1. Revenue structure Transportation operators cater to a wide variety of populations. In most cases, transportation operators serve a large number of commuters. Commuters typically use the same transportation means, at around the same time, every working (or studies) day. Commuters constitute a loyal set of customers, regardless whether this is by choice or under constraint. For transportation operators, commuters generally constitute the better part of their revenue, as well as the most predicable. For this reasons, commuters are the target of all attentions of transportation operators. Typically, transportation operators propose subscriptions to commuters. As these commuters often belong to target populations defined by the transport authority, they are entitled to preferred price plans. At the other end of the spectrum, are the one-time users, who yield a small revenue. One-time users may be visitors or residents who seldom use public transportation systems. Supporting one-time users is generally seen by transportation operators as a constraint imposed by the transport authority. In most cases, transport authorities impose that one time users should be able to use a variety of payment means, including cash, to use a transport system. For this reason, the cost of the fare media, including management cost, may sometimes be higher than the actual cost of travel for one time users Fare payment systems Coins, tokens, paper tickets Originally, most transportation systems used coins, tokens or paper tickets as a means of payment. The inconvenience of coins and tokens is that they do not allow to adapt the transport price to the specifics of each user. Paper tickets allow delivering various types of tickets depending in each user, but are cumbersome and expensive to control and allow little automation in revenue recognition.

7 Open Loop in US Transportation Systems 7 / Magstripe tickets Then, came ticket with magstripe, whether made out of paper, cardboard, or plastic. Magstripe allows AFC (automated fare collection) and feeding with data a global accounting system to ensure revenue recognition for each operator. Magstripe tickets can be differentiated according to various population needs, allow price variations, and can be reused to cope with the needs of commuters. However, the amount of data on a magstripe is limited, and canceling a magstripe ticket generally means rewiring it, which often means costly reader-writers Contactless cards Contactless cards are now used in most mass transit systems around the world. Contactless cards allow the greatest flexibility: they can contain a lot more data than a magstripe, and include each transit passenger details. Contactless cards are the most flexible solution to cater with the needs of multiple categories of users in a mass-transit system. Contactless card readers are cheaper to install and to maintain than magstripe readers. Automatic fare collection system using contactless cards can feed data directly into a consolidation system to allow revenue recognition between various operators NFC NFC, or Near-Field Communication is a set of standards for smartphones and similar devices to establish radio communication with each other or with readers by touching or bringing them into close proximity, usually no more than a few centimeters. Typical applications include contactless transactions, including mass transit payment data exchange, and setup of more complex communications. NFC-enabled phone transactions can be used today with existing transport contactless infrastructure. There are several ways to introduce NFC into a transport system, from simple point-to-point pay-as-you-go schemes to more complex implementations that include multiple operators and multiple payment options. NFC also supports all forms of ticketing systems, from open (ungated) systems, to controlled entry programs, to completely gated schemes, according to the NFC Forum.

8 Open Loop in US Transportation Systems 8 / Cost of fare collection All aforementioned (in 2.2) ticketing systems are perfect for commuters. They allow a link between the fare media and various IT platforms such as the subscriber management system (dealing with commuters), the revenue recognition system, However, the media cost is seen by some transportation operators as prohibitive for one-time users. Smart cards are obviously more expensive than simple paper tickets, and for one-time users, the media cost (with its associated overhead) can sometimes be higher than the fare itself. Some transportation operators have set up systems to issue contactless cards to one-time users for a price including a deposit, and to install systems for users to return their card and collect the deposit at the end of their trip. Other transportation operators keep on having two different systems for commuters and for one-time users, reserving tokens or disposable magstripe tickets to one time users. However such a solution increases the global cost of operation as employees and or dedicated automats are to be used to sell fare media to these one-time users. 3. Open Loop fare collection The pressure of transport authorities and the evolutions of mass transit operators leads them to try and cut costs wherever possible in order to concentrate on their core mission: provide transport services to passengers. Many of them now consider their role is not to collect money, and that they are more efficient in their mission is some other entities takes care of the fare collection. After investigating multiple options, several transit operators realized that they can be considered as just another merchant. Thus, why not collecting the cost of a ticket in a one-off payment transaction? 3.1. Concept The idea behind open loop is to take advantage of the existing payment means infrastructure. When most users are equipped with a payment means that can be accepted on an AFC (automated fare collection) gate, why not adapt the AFC gate to perform payment transactions. Under the open loop concept, AFC gates perform a regular payment transaction, just like any merchant, at the gate given the passenger is equipped with a contactless

9 Open Loop in US Transportation Systems 9 / 16 debit or credit card Advantages Under the open loop concept, the transit operator does not need to care about issuing fare media. Debit and credit cards are issued by financial institutions or payment service providers, and are open by nature. Debit and credit cards are now widely accepted by cardholders, and in most countries, bancarization rate is sufficiently high to consider a banking card as an almost universal payment means. Payment transactions are easy to implement thanks to an extensive infrastructure, in terms of payment systems, concentrators, payment processors, etc. Low value payments, typically under US$ 25 (EUR 19), are now generally accepted without any cardholder verification method such as PIN or signature. Also printing transaction receipts are now considered optional. Being large merchants, transportation operators can negotiate fair commission levels with transaction acquirers. The ongoing migration to EMV in the US is a highly favorable factor. By 2015, the date set for the liability shift, most US cardholders will be equipped with smart cards, most probably with dual interface, thus enabling contactless payment. According to IMS Research, dual interface cards and contactless cards will account for over 40% of the payment cards in issuance in the US by Inconveniences The open loop concept fits with the need for payment for one-time users equipped with a contactless banking card (credit, debit or prepaid). When transport authorities impose that cash is to be accepted as a means of payment, open loop does not provide a full answer. Also, open loop does not address the needs of the unbanked population (8.2% of households in the US, according to the FDIC). This can be solved by having tellers or automats selling prepaid cards, valid for a few trips, or even down to one trip to cater with this demand. For subscribers, there is a need to store the subscription details in the card. As credit, debit, and prepaid cards are owned by financial institutions, this would mean having a specific agreement between the transportation operator and the financial institution, which is hardly feasible for all financial institutions and all transportation operators. Open loop has been facing criticism saying that it would give banks access to data

10 Open Loop in US Transportation Systems 10 / 16 about where and when people are traveling to different parts of a city. 4. NFC in transit NFC, or Near Field Communication, allows the use of an NFC-enabled smart phone to emulate a card (or a reader) in a transaction. Typically, a NFC handset contains a wallet, which, in turn, contains one or several cards. This means that a handset may support payment by banking cards (debit or credit), prepaid cards, or transportation agency-dedicated fare media. New payment means can be added on a handset equipped with a Secure Element (SE) the same way applications are added on a smart phone, in a secure mode thanks to a TSM (Trusted Service Manager). For these reasons, the deployment of NFC appears to be a good solution for transportation payment: specific applications can be used along with existing banking cards. However, transportation payment at gate requires the transaction to be completed in less than 300 ms. Criticism arose, especially from TfL (Transports for London) in the UK saying they could not complete transaction in less than 500 ms with handsets with a SIM-based SE. From the traveler s perspective, NFC-enabled phones have great benefits over paper tickets. Tickets stored virtually in phones are inherently more durable, less likely to be lost, and are perceived to be more environmentally friendly than paper versions. They are even more convenient than plastic cards, with no fumbling in a wallet for the right card. NFC-enabled phones can hold multiple payment applications, allowing the traveler to select which method to use credit, debit, travel passes, or prepaid tickets. Updates are easy and can be done over the air, avoiding a trip to the bank or other point of sale, according to the NFC Forum. Using their NFC-enabled phones, consumers can manage their cards and tickets anywhere at any time. Season tickets can be automatically renewed over the air; there is no need to physically visit a ticket office to order, pay for, or even collect the new ticket. And this can be done while a consumer is walking from the parking lot to the train station or bus stop it doesn t need to take place at a computer or at the point of sale. NFC programs in the field have also created new revenue streams for transportation operators from promotional opportunities, such as downloads from inexpensive tags placed behind smart posters or complementary retail purchases. Transportation operators can also benefit from reduced operating and maintenance costs by cutting down on the use of paper tickets, ticket machines, ticket sellers, and even ticket collectors. A mobile device allows the operator to provide additional services such as

11 Open Loop in US Transportation Systems 11 / 16 language settings, advertising and promotional opportunities, tourism information, loyalty schemes, and direct marketing, says the NFC Forum. 5. Open loop pilots and projects Several pilots have taken place in the US, and many projects are either already running, or in deployment phase New York New Jersey NYC Transit The first pilot took place as early as 2006, when New York City Transit (NYC Transit), an operating agency of the New York Metropolitan Transportation Authority (MTA) partnered with MasterCard and Citigroup, to explore open loop potential. They installed contactless readers at 30 stations on the Lexington Avenue train line, that accepted MasterCard PayPass cards issued by Citibank. Passengers were offered two transit fare payment options: pay as you go, and prefunded fares. To use the pay-as-you-go option, riders tapped the Citibank payment device on the specially equipped turnstile. The rider was charged the regular full fare for each trip taken. To use the prefunded fare option, riders registered either on the pilot web site or at the customer service center and purchased value-based fares in advance, much as they do today with the MetroCard PATH In 2010, NYC Transit along with the Port Authority Trans Hudson (PATH) train and New Jersey Transit, ran a pilot allowing to pay transit fares directly at the point of entry (i.e., at turnstiles in subway stations and on boarding buses) without the need to purchase separate, transit-only fare media NJ Transit In 2011, NJ Transit extended the pilot to cover flat-fare bus routes as well as multi-zone bus routes, where rides are charged according to the number of bus zones traveled. To use the new feature, bus customers simply tap their cards on the designated card reader when boarding the bus and again when leaving the bus. NJ Transit worked with ACS, a Xerox Company, to implement tap on/tap off logic and global positioning system (GPS) integration capabilities.

12 Open Loop in US Transportation Systems 12 / 16 In October 2011, NJ Transit partnered with Google Wallet to test NFC mobile payments. NJ Transit is testing this technology on ticket vending machines and at ticket windows at New York Penn Station, on the six Tap>Ride bus routes, and at Newark AirTrain Station LIRR The Port Washington line of the Long Island Rail Road (LIRR) in New York launched in 2012 a test of NFC-based payment technology that allows commuters to pay for their tickets with their smartphones. LIRR is owned by the Metropolitan Transportation Authority (MTA). The new system is powered by Masabi, a UK-based mpayments specialist. Another program, dubbed The Handheld On-Board Ticket Pilot Program, will let passengers pay on board the train using their debit or credit cards. It uses an iphone cradled in a PaySaber device, a solution provided by USA epay mpayments specialist, to process fares using an app designed by the LIRR New York future developments Early 2013, MTA announced that its plans to eventually replace legacy magstripe-based MetroCard with contactless transport and bank cards are being revamped, because banks have not distributed the cards widely enough. The initial plan to introduce the contactless cards from 2012 to 2015 is in need of being recalibrated. Now, the authority expects that a new system will be in place within three to five years. By 2019, the authority said, the MetroCard is expected to reach the end of its useful life Salt Lake City: UTA Utah Transit Authority (UTA) is the regional transit provider for Salt Lake City and its surroundings. UTA first AFC pilot was with contactless cards in 12006, for ski buses. The success of the pilot led UTA to decide the launch of an open loop system for its whole network. The system went live on 2009, with the installation of readers on all of UTA s 520 fixed route buses, and 170 validators on light rail and commuter rail. The initial fare products were contactless bank card acceptance for single adult fares, including honor of transfer rules and use of third party paid passes (ECO Pass for employers, Ed Pass for colleges and universities, and Ski Pass for five ski resorts within the UTA

13 Open Loop in US Transportation Systems 13 / 16 service area). The system accepts contactless cards issued under the American Express ExpressPay, Discover Zip, MasterCard PayPass and Visa paywave brands. The system works on a tap on / tap off base, which means that users have to tap their card on a validator each time they enter or get out of a transportation means. UTA specified that transaction time must be equal or lower than 300 ms. Now, UTA plans to add a series of additional fare media including: Contactless co-branded cards, Federal Personal Identity Verification (PIV) cards, etc. From the inception of Isis, the association of major mobile network operators (AT&T Mobility, T-Mobile USA and Verizon Wireless) to provide NFC wallet services, UTA has been associated with the project. As Isis is tested in Salt Lake City, UTA opened its payment system to mobile phones. UTA s existing system, which allows consumers to pay with their contactless credit and debit card by tapping an electronic fare reader on a bus or train platform, allows Isis-enabled mobile phone users to pay using their phone. In addition, in order to support the development of Isis, its early adopters are allowed to ride the entire UTA network for free. As a result, UTA records more than 600 transactions per day from Isis Mobile Wallet users Chicago: CTA and Pace Chicago has announced the launch of Ventra in 2013, with the objective of bringing convenience to users of the CTA and Pace, operator in the Chicago region. The Ventra Card is a new dual-purpose card that includes a Transit Account and an optional Money Network Prepaid Debit Account. In addition to using the card to pay for train and bus rides, CTA and Pace customers can activate the Prepaid Debit Account for everyday purchases. Ventra actually includes: Ventra card, issued by Metabank, a transit dedicated contactless card, Ventra ticket, from single-ride to one-day pass, Bank cards, requiring registration of bank cards with the system, in order to support transit passes, value and pay as you go modes, In addition, the Ventra card can be used a general purpose prepaid card, for online shopping, or payments at merchants. Ventra announces they will be ready to use NFC handsets in the near future.

14 Open Loop in US Transportation Systems 14 / Philadelphia: SEPTA SEPTA is the transportation operator in Philadelphia and its surroundings. SEPTA set up an AFC using contactless fare media including SEPTA-issued passes, bank-issued debit cards and credit cards, and prepaid cards. When passengers present a banking card, SEPTA behaves like a regular merchant, and completes a regular payment transaction on its centralized electronic processor. The electronic processor complies with banking industry standards, allowing passengers to use any bank approved payment device or card for fare payment. One-time passengers can obtain reloadable prepaid cards from fare vending machines Washington DC: WMATA The Washington Metropolitan Area Transit Authority (WMATA) made a decision in 2010 to move from proprietary, agency-specific fare media to fare payments managed directly at the gate or through central accounts. The media accepted include bank-issued payment media, agency-issued closed loop media (SmarTrip), and the Federal government-issued Personal Identity Verification (PIV) cards and Common Access Cards (CAC) that are in common use in the operating area. During the peak season, 40% of DC transit riders are federal employees, and each is already carrying a government-issued contactless smart card ID. Federal employees are equipped with either a CAC or a PIV to be used as their primary form of access to government facilities as well as its secure networks. This new system will also support PIV-I cards that are issued to contractors, state/regional and the first responder community. WMATA intends to ensure that the new infrastructure upgrade will use these credentials as the payment token for federal transit benefits. Still, the new system will not load an app onto the federally-issued credentials. Instead, it will link the card to a back office system for payment authorization. Actually, the incorporation of PIV applies not only to the DC metropolitan area, but its surrounding regional operators as well Dallas: DART Dallas Area Rapid Transit (DART) is the transportation operator in Dallas and its surroundings. DART is pursuing a project intended to create a region-wide electronic payment infrastructure for transportation and other services, using contactless devices such as smart cards, credit and debit cards, RF devices, barcodes, and NFC

15 Open Loop in US Transportation Systems 15 / 16 devices San Francisco: BART BART (Bay Area Rapid Transit), one of the transportation operators in San Francisco Bay Area, ran an experiment from 2008 onwards, to demonstrate the use of NFC for rapid transit. The contactless payment solution provider ViVOtech enabled the BART NFC mobile payment trial in San Francisco, in a partnership with Sprint, First Data, and fast food chain Jack in the Box. The project enabled hundreds of commuters to ride BART just by waving their NFC mobile phones at the gates to gain access to the stations. Participants were able to pay for transportation and to use their phones to pay for meals at Jack in the Box locations around the Bay Area. In addition, the trial featured targeted promotions to consumers via Smart Posters at BART transit stations that helped drive traffic to retailers. The trial enabled several thousand mobile-enabled BART trips and meals at Jack in the Box, with a very high rate of Over-the-Air (OTA) top-up of both BART and Jack in the Box prepaid accounts. In the project, ViVOtech deployed its award-winning mobile wallet, OTA provisioning service, Smart Posters and promotion engine, as well as contactless payment readers in stores.

16 Open Loop in US Transportation Systems 16 / 16 Table of acronyms AFC BART CAC CTA DART EMV FDIC ms MTA NFC NYCTA OSPT OTA PATH PIV SE SEPTA SIM TfL TSM Automatic Fare Collection Bay Area Rapid Transit Common Access Card Chicago Transit Authority Dallas Area Rapid Transit Europay MasterCard Visa Federal Deposit Insurance Corporation millisecond Metropolitan Transportation Authority Near field Communication New York City Transit Authority Open Standard for Public Transport Over The Air Port Authority Trans-Hudson Personal Identity Verification Secure Element Southeastern Pennsylvania Transportation Authority Subscriber Identity Module Transports for London Trusted Service Manager Sources Smart Insights Weekly archives - Smart Card Alliance White Paper: NFC Forum White Paper: Published by: Intelling, 9-13 rue Bel-Air, Marseille, France -report@smartinsights.net Publication date: March 2013