I have attempted to explain the unique Japanese ‘transit platform’ business model in many posts scattered over 3 years. It’s a model that didn’t exist outside of Japan for a long time because Japan was the first country to move beyond plastic cards and launch them on mobile devices in 2006. There are transit systems that are very close to what the Japanese transit platform does, Hong Kong Octopus in particular, but none that combine the elements of private enterprise transit, a mobile platform and a nationwide footprint.

A reader asked some very good questions regarding JR East Transit Platform model basics and how they compare to Open Loop. I’ll try to summarize the essential points.

1) Thinking about this recently – is there a non-techie argument for introducing Suica-type cards in the current day in places with preexisting open-loop infrastructure, wide debit card adoption (even kids), and little overcrowding at ticket gates due to lower volumes?

2) As a tech & transit nerd, I obviously love them, but what could be a convincing, economically sound pitch to a transit operator for creating/adopting an integrated transit&e-money system, given the significant expense and questionable added value?

3) Answers to possible q’s about EMV contactless: 1. 定期券 (commuter passes) & discounts can be tied to card no.; 2. solution for visitors: in-app/paper/multi-trip tickets (like in SG). Obv., Suica has superior privacy & speed, but where speed is not an issue, what’s the killer argument?

My response:

Simple choice: moving people quickly and safely by transit, managed wisely, is a license to make money. A transit company can use that license to build something of greater long term value for the users and businesses of the transit region, a win-win, or give it away to someone else.

A transit platform is the best approach if a company wants to achieve the former. Investing everything in Open Loop as the only strategy is the latter.

Any argument for building a Transit Platform or going all in with Open Loop transit comes down to transit company priorities for safe operation, better customer service and long term business goals. A few crucial points to consider.

Who owns the customer?
A vital point many people miss in the Open Loop debate is that transit users end up as the bank card customer, not the transit company customer. This might seem like an insignificant difference but ‘owning the customer’ is the whole game and key to growing any kind of business, in our era or any era. There is also the question of what’s best for transit user privacy. Which brings us to the next point because one of the best ways to own the transit customer and build a business far beyond simple fare collection is a transit card.

Transit Cards: micro bank account without the bank
Prepaid transit cards are a delivery vehicle for all kinds of service goodies, a mini non-bank account if you will, from transit to points rewards and a growing portfolio of services. The beauty of a non-bank transit prepaid card is its flexibility and security. It can be a simple ticket that customers buy with cash from a station kiosk, or it can be linked to an online account for extended transit services and users can further extend it by attaching a credit card and earn reward points.

eMoney micro bank accounts for all kinds of payments and services that float
The important transformation here is evolving the card beyond transit fares to eMoney payments that can be used throughout the transit region, pioneered by Suica and Octopus. Japanese transit companies and Hong Kong Octopus have built those micro bank account transit cards into a very nice transit payment platform business that combines transit, payments and other services attached to the card which means there’s a lot more stored fare floating around than plain old transit-only cards.

One benefit not discussed much in the open is that by encouraging heavy use and ‘recharge’ of the transit/eMoney card, the transit company earns interest on the ‘float’, the combined total of all those unused prepaid balances sitting in all of those transit cards in the system. The next transformative step is mobile, which is key.

Digital Wallets: extending the reach
The most powerful transit card incarnation is the digital wallet transit card with a flexible recharge backend, where any bank card can attached in an app, or on the fly (Apple Pay, Google Pay, etc.), or even cash recharge at stations, convenience stores and such. The addition of digital wallets means there’s ever more e-money transactions moving through those cards with short term parking…more float for transit companies to earn interest.

Once the transit card goes mobile it can extend beyond the restraints of plastic card technology. It can have a flexible front-end that can be NFC, UWB Touchless or even QR. My basic position regarding open loop bank cards for transit is that doing so eliminates these options for the transit company. I say it’s better for the transit operator to decide what payment technology works best for their long term needs and how to deliver better customer service with new payment technologies, not banks. More on that in the open loop section below.

Value Capture
Value Capture applies to rail and transit operators with the rights to develop the land around their stations, I include station retail development and operations. Owning a transit + payment card like Suica or Octopus combined with retail opens up a whole new levels of value creation and capture.

It’s also important to remember a few other dynamics, (1) Transit is the golden uptake path for contactless payments, (2) Contactless payments are most successful when a transit payment platform, like Suica, is matched with a mobile wallet platform, like Apple Pay. The key is building better payment services tied to transit platform cards that benefit customers and businesses of the entire transit region.

The limitations of Open Loop ‘One Size Fits All’
Open Loop is sold as the cost effective future of transit ticketing but it adds a layer of complexity and cost that stymies native digital transit card support. Complexity and higher cost means fewer choices, delays, and mediocre performance. Steve Jobs explained it best in his last public appearance: a great product or service comes down to focus and choices, either you can focus on making certain technologies work great on your platform versus just okay when you’re spreading yourself too thin. Open Loop means transit system resources too thin, simple as that.

My basic position is that the arguments for open loop are plastic era constructs that ignore how mobile digital wallet platforms and mobile apps have changed everything. For example the oft cited open loop benefit of plastic smartcard issue cost savings completely overlooks the cost savings of digital transit cards on smartphones.

Regarding detailed questions such as attaching commuter passes to EMV cards and special ticketing, I am no systems expert but a few things come to mind. First of all we have not seen Open Loop commuter passes because the EMV spec doesn’t store anything locally and there are always security and performance issues to consider when everything is done in the cloud with soft-linked registration to system outside numbers.

The classic catch 22 here is that when the soft-linked number changes on one system, everything attached to it on the other system stops working. This is a constant weakness of the SmartEx and new JR East Shinkansen eTicket service. And what happens if the bank cancels a card mid-transit? These things happen. They are endless headaches when linking to any outside system, for this reason Open Loop sticks with the simple stuff while transit operators keep the more complex stuff in-house. In general the more complicated the fare configuration, the less likely it can be synced with an outside system or be hosted on Open Loop.

Paper ticketing and NFC passes
For low volume specialty ticketing, QR codes are the easiest step up from mag strip paper and QR can be printed on ordinary paper for transit users without smartphones. This is why JR East is deploying QR code readers in some gates as they prepare to end mag strip ticketing.

NFC Contactless Passes might sound like a good idea but Apple Pay VAS and Google Pay Smart Tap were designed for retail and are far too slow for transit use. The transit gate reader system has to juggle different protocols. It could be done, but from my experience of using Apple Pay VAS PONTA and dPOINT cards the technology hold promise but the current version isn’t there yet. QR Codes are faster and easier to implement.

Summary
In the long run there are no easy solutions which demands a clearly defined strong but flexible business vision. The most important take away is balance with each piece of technology doing what it does best to create a greater whole. For mobile transit this is: 1) a credit/debit/prepaid on the recharge backend, 2) a stored value micro bank account in the middle with a rich set of services attached, 3) a fast flexible NFC front end with fast tap times that can evolve to Touchless and other technologies.

The risk of Open Loop is that it is sold as a monolithic ‘fix all’ mobile solution, which it is not. This lulls transit operators into complacency instead of improving Closed Loop ticketing systems and services, extending them to the mobile digital wallet era for long term gain and sustainable transit.

The simplest sum up: if you ignore Closed Loop and mobile digital payments, you’re ignoring a business opportunity.

Relevant Core Posts
The Contactless Payment Turf Wars: Transit Platforms (an intro)
Transit Gate Evolution: Do QR Codes Really Suck for Transit? (a deeper dive into transit cards, gates and technology)
Road to Super Suica (evolution of the Japanese transit platform business)
Value Capture and the Ecosystem of Transit Platforms (the bigger picture)
The Japanese Transit Platform Business Model (an outside perspective)
The Open Loop transit privacy question