Contactless Payment Turf Wars: Transit Platforms

1. >Contactless Payment Turf Wars: Transit Platforms
2. Contactless Payment Turf Wars: PiTaPa Pitfalls
3. Contactless Payment Turf Wars: Why Oyster is missing from mobile
4. Contactless Payment Turf Wars: Tapping the potential of TAP
5. Contactless Payment Turf Wars: Apple Card and the Prepaid Innovation of Apple Pay Suica
6. Contactless Payment Turf Wars: EMV closed loop transit dumb cards

Transit is a holy grail for contactless payments, it’s the biggest driver, the golden uptake path to bigger things. That’s why the credit card industry promotes EMV contactless on transit systems which have traditionally been closed ticket systems.

EMV contactless on transit achieves two goals for credit card companies: it increases credit card use while capturing processing fees from transit operators under the guise of saving them money. The credit card industry benefits from all that ticketing infrastructure without having to invest anything themselves. Think of it as putting the fox in charge of managing the chicken coop. From the American Express “Contactless in Transit” PDF:

How does the American Express transit solution help Merchants optimize payments in the transit industry? It reduces the cost of handling cash and maintaining proprietary fare systems.

Visa and Mastercard make similar claims. This is an interesting contradiction because lower cost internal payment processing is cited as the advantage for closed loop stored value smartcard systems over Open Loop and credit cards.

Industry experts and journalists such as Junya Suzuki like to discuss transit payment systems as being a battle between “Open Loop vs. Closed Loop” contactless payments. EMV contactless is portrayed as being open “good” vs. Stored-value/prepaid transit SmartCards (Suica, Oyster, etc) as closed “bad”. This is entertaining but the whole debate is a setup: smartphone digital wallet platforms destroy the distinctions between the two. Digital wallet cards like Apple Pay Suica and Smart Octopus on Samsung Pay merge ‘open’ and ‘closed’ into a seamless whole that’s more convenient flexible and powerful than either one on its own.

The Japanese IC Transit Card Model: Scale, Compatibility, Regionality
Open Loop really only has one theoretical advantage: scale because it works everywhere, on paper. There are 2 basics problems with that theory:

• The EMV payment technology behind open loop was created for supermarket checkout not whizzing through transit gates at rush hour. It addressed the needs of credit card companies at the time but doesn’t address the needs of transit and never can in it’s current format, and it’s not easy to implement on gates and backend systems.
• The reality is that not everybody has credit cards or good credit ratings.

Japanese IC Transit cards neatly sidestepped the open loop scale advantage when they merged under a single interoperable compatible Transit IC SmartCard standard in 2013. Contactless prepaid SmartCard e-money use took off from there.

JR East does a good job of creating loyalty point programs for JR East area merchants tying them into the Suica e-money network. Other Japanese transit companies do the same for their regional Transit IC cards. When Hong Kong officials complain that the city is missing the contactless payments QR code gold rush in mainland China because of the success of Octopus, that simply proves how deep the Japanese/Hong Kong IC transit card model has penetrated beyond transit into payments and the general fabric of daily life.

When a smartcard system achieves the level of success and everyday use like Suica or Octopus it isn’t just a smartcard system anymore, it’s a platform.

Keeping it Closed and Building a Platform
What’s fascinating but rarely discussed is that Suica and Octopus are the only transit smartcard systems that have built transit and e-money contactless payment economies of scale, in other words a platform. They are the only native transit stored-value smartcard systems hosted on smartphone payment platforms like Apple Pay and Samsung Pay. And they are both based on FeliCa. In fact when you compare Suica and Octopus with other transit cards, their success is completely at odds with what western experts call success:

• The systems are closed loop stored-value SmartCards
• The systems are based on “non-standard” FeliCa
• They limit credit cards to a backup role for recharging

For these reasons western experts, especially in the UK, dismiss Japan and Hong Kong as ‘outliners’ but that misses the point. Success deserves attention and study, not ridicule camouflaged as analysis. As said before, Japan is the world’s greatest guinea pig test market, a unique place to identify and analyze new tech trends, and how to adapt them for use in other markets.

JR East and Octopus Holdings Limited have also evolved their platforms adding new services and features. Technology aside, there are essential core concepts that can be applied to any closed transit smartcard system for long term benefits that build a transit payment platform not just a ticketing system.

1. Staying Closed Loop allows Value Capture, a transit platform cannot be created without value capture, Open Loop means turning over value capture to the banks
2. Transition from transit only to transit + e-money use (Suica, Octopus, EZ-Link. etc)
3. Nationwide transit + e-money smartcard interoperability
4. A matching mobile service to create and manage online customer accounts and attach credit cards for over the air recharging via smartphone apps (Mobile Suica, Smart Octopus)
5. Native card digital wallet support: Apple Pay Suica, Smart Octopus on Samsung Pay, etc.
6. Promote transit region and local retail with loyalty points and campaigns linked to smartcard + credit card combinations

These concepts transform a transit smartcard system into a platform on which transit operators can build all kinds of services and new infrastructure tying transit, retail and mobile payments together in new powerful ways. Reimagine Oyster or NYC MetroCard as transit payment platforms and the possibilities are endlessly exciting. The transit smartcard system positioned as a platform is the essential concept most people don’t see or understand. They only see a ticketing system. Visitors to Japan can see the transit smartcard as platform in action where Apple Pay and Google Pay are taking it to the next level.

The Open vs. Closed Debate is Over
Apple Pay Suica is a unique matching of a transit smartcard platform hosted on a major digital wallet platform, the most successful matchup in the world right now that deserves a case study. The standout feature of Apple Pay Suica is that the huge and growing list of Apple Pay credit cards from around the world simply work for recharging Apple Pay Suica on the go. Anyone from around the world with a global NFC iPhone X / 8 / Apple Watch 3 can simply add Suica and use it in Japan.

JR East ties in all kinds of local retail partner points and promotions which in turn drive customers to Apple Pay Suica and more credit card use. Apple Pay Suica in turn is driving Suica use and general Apple Pay use far more than credit cards on their own. The new Super Suica format coming in spring 2012 will deliver these platform advantages nationwide.

It’s this mix and match flexibility of the Apple Pay + Suica approach that neatly collapses the open vs. closed debate. Customers use the card they want to earn the loyalty points that work best for them with loyalty points from both transit and credit sides. Recharging my Apple Pay Suica with a BIC CAMERA View CARD  (JCB) for a year earned me over ¥20,000 worth of BIC CAMERA store points. I never purchase iPhone cases with money anymore, I use points. Apple Pay Suica and credit cards benefit each other and drive use of both.

This works in many different configurations which is the appeal for customers, the approach benefits both the transit operator and the credit card companies letting each focus on building their own platforms instead of wasting time and resources on turf wars. It’s an intriguing win-win model that can be adapted and applied to other transit markets tying together transit, retail and mobile payments together into new synergies.

One thing is clear: for smartphones more so than it was with plastic smartcards, transit is the golden uptake path for contactless payments but the combination is most successful when a transit platform matches up with a smartphone one.

Update
The San Francisco Bay Area Planning and Urban Research Association (SPUR) came to Tokyo and wrote a nice outline of the Japanese Transit Platform Business Model.