Contactless Payment Turf Wars: EMV closed loop transit dumb cards

  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

Prepaid transit smart cards are micro bank accounts on a card. What started as plastic in the mid 1990’s first transitioned to the cloud based mobile digital card era with Mobile Suica in 2006. Transit cards on mobile digital wallets are much more powerful and malleable than their plastic forebears, and occupy a coveted position in the mobile payments market. Credit card companies and banks spend enormous resources and effort to capture this transit fare business.

Background
Many smart cards use FeliCa and MIFARE. The technology has been on the market since 1994 and one of the reasons for platform popularity and longevity are the rich application development environments they offer (Calypso is also popular but limited to transit applications).

Developers can design a card architecture as ‘smart’ (like Suica) or as ‘dumb’ (like iD) but they are all smart cards because they contain an IC chip. In Japan FeliCa powers not only company ID cards, but also transit cards (Suica, PASMO, etc.), bank payment cards (iD, QUICPay) and rechargeable prepaid eMoney cards that anybody can buy and recharge at convenience stores (WAON, nanaco, Edy). Mobile FeliCa has been in place since 2004.

Smart/Dumb card architecture depends on use case, system processing cost efficiency and need. In a transit fare system, a dumb card use case is slower centralized processing, like waiting at the store checkout for card verification to clear. A transit smart card use case is instant locally processed stored value to keep people moving through the gates because centralized processing isn’t up to the task. This is why transit cards have used the stored value local processing model…until now.

Open Loop 1.0
EMV contactless credit cards arrived on the payments scene starting in 2007 but uptake was slow. Since EMV contactless uses the same NFC A as MIFARE based transit cards, the big EMVCo members (VISA, Mastercard, American Express) came up with a great marketing idea: use EMV contactless credit cards as a transit card. Thus EMV open loop transit was born.

EMV Open Loop 1.0 transit that debuted on Transport for London (TfL) Oyster system in 2014 filled mutual needs for TfL and bank card companies. Despite the success of Oyster, TfL wanted to reduce plastic card issue and management costs:

The current Oyster system, though very popular, is expensive and complex to administer. Contactless bank cards use existing technology, responsibility for issuing cards would lie with the banks rather than TfL, and the operating costs should be lower.

The Future of Ticketing London Assembly (2011)

In 2017 there was a push to nudge people away from their Oyster cards and towards contactless. One announcement rang out all over London’s tube stations: Why not use your contactless bank card today? Never top up again, and it’s the same fare as Oyster.

How Long Does The Oyster Card Have Left? Londonist (2018)

Using bank cards in place of MIFARE Oyster cards accomplished that and because MIFARE was late to the mobile party TfL management decided decided their mobile strategy would be Apple Pay and Android Pay EMV card support. Meanwhile the bank card companies captured transaction fees from mundane transit fares at the gate, got the benefit of using the float instead of TfL, and got people into the habit of using credit cards for tiny purchase amounts. Our parents thought buying coffee with a credit card instead of small change was ridiculous because credit cards were reserved for ‘serious purchases’. Not anymore.

TfL Open Loop was judged a big success and got rave reviews from tech journalists around the world who hailed it as the future of transit ticketing: time to dump those proprietary transit smart cards and go all in with ‘open standard’ EMV open loop if you want the latest and greatest transit fare system. This gave transit agencies and the governments that run them the wrong idea that EMV is a cure all transit fare system solution.

1.0 shortcomings
The problem is that EMV is not an open standard, it is owned and managed by the proprietary EMVCo that is wholly owned by the major credit card companies. EMV is a ‘one size fits all’ payments technology created for the needs of credit card companies and banks. It was never designed as a transit fare solution and will never evolve to incorporate transit needs. Experts agree:

A universal truth is that each transport market is highly unique. While EMV may be the best solution for some, the reality is that a standardized deployment of this model is not best suited to everyone.

Transit systems shouldn’t confuse open loop pay with EMV

The U.S. has been a tough market for transit agencies to deliver successful open-loop systems into, as banks have not been in step with these ambitions.

Is now the time for open-loop transit in the United States?

There is no escaping the basic reality that EMV is a slow dumb smart card. It works well for what it was designed for: store purchases where card transaction latency is not a problem while the checkout terminal communicates with the bank system that has your account information.

Transit fare systems don’t have your bank account information on file, and there are limits with what the backend transit fare system can do when an anonymous bank card number appears on gate reader where long transaction latency is unacceptable. There are tradeoffs: the card gets verified but the transit bill gets settled long after the transit. This is why EMV open loop 1.0 only works for simple or flat fare structures. The result was a 2 layer fare system on London Oyster, Sydney Opal and Chicago Ventra:

  • Plastic and digital EMV open loop dumb card with basic fare transit for users with approved bank cards
  • Plastic transit MIFARE smart cards covering all fares including special fare discounts, commuter passes, etc., for everybody else

Oyster, Opal and Ventra wanted to add mobile support across the board but this meant supporting EMV and MIFARE. All of these are managed by Cubic Transportation Systems who worked with the bank card companies and came up with a new product to solve the dilemma: EMV closed loop transit dumb cards.

Open Loop 2.0
Apple Pay Ventra is this new EMV closed loop mobile transit card product, the launch gave us a first glimpse of the 3 layer fare system:

  • Plastic and digital EMV open loop dumb cards with basic fare transit for users with approved bank cards
  • Digital EMV closed loop dumb cards that cover regular fares and commute passes with special fares to be added later
  • Legacy plastic MIFARE transit cards for everybody else

It’s still a mixed EMV and MIFARE environment but MIFARE is limited to legacy plastic transit cards that can be bought with cash at station kiosks. But we can be sure that MIFARE will be phased out at some point.

The Apple Pay Ventra model is being used for digital Opal trials on Apple Pay and Samsung Pay, and is on tap for digital Oyster and digital OMNY. A basic outline:

  • The transit card is actually a EMV Mastercard prepaid debit card issued by 3rd party bank
  • The Mastercard as transit card is ‘closed loop’ and can only be used for transit and nothing else
  • The user must create an account to use the digital card. The transit account and prepaid/debit information is centralized and managed by the card issuer, nothing is stored value
  • All digital transit card management and housekeeping (adding or transferring cards, recharge, checking the balance, etc.) must be done in a separate app (Ventra App, Opal App, etc.), nothing can be done directly in Wallet
  • Express Transit is not part of the native EMV card architecture and has to be added as part of broader open loop support on the backend fare system by the operator and Apple, this is why Express Transit is missing in the initial test phase of digital Opal: the current Opal fare system does not support it

As this is an EMV bank card dressed up as a transit card, it is still limited by EMV card architecture and bank card network protocol. In place of local stored value it uses the bank card account model. On mobile this means all card housekeeping is in the app, users can’t create, transfer or recharge transit cards directly in Wallet like Suica, PASMO, SmarTrip or TAP. Apple Watch users can’t recharge EMV transit cards without the iPhone app. And like all cloud dependent services everything stops when networks goes down.

Mobile Suica does an excellent job of balancing and combining the strengths of local processed stored value performance, usability and reliability with the power of cloud attached services. It’s the gold standard of what a transit payment platform on mobile can achieve: leveraging transit card micro accounts to attach services and build business instead of giving it away to banks. Digital Opal testers familiar with Suica notice the difference and missing features:

Open Loop 3.0?
For centralized cloud proponents, including Junya Suzuki, the ultimate dream is having one cloud based account using facial recognition for all payment and transit needs. Cubic and centralized account proponents are already looking to speed up London transit gates beyond slow EMV card technology with barrier free face recognition transit gates:

according to CUBIC…their ‘fastrack gateless gateline’ concept, which is currently conducting small user testing, eliminates physical barriers to form an extended corridor-like gateway that between 65 and 75 users can walk through in a minute, whilst their faces are being scanned and synced for payment with their smartphones

Facial recognition to be your future ticket on the London Underground

The joke here is that, (1) JR East achieved those over 60 people per minute walk through levels with FeliCa based Suica cards and open barrier transit gates long ago, (2) the COVID face mask era is a huge challenge for face recognition systems, (3) Touchless transit, Express Transit on steroids, is already in the works.

Personally I think the Ultra Wideband Touchless approach that leverages personal biometric authentication from the user’s smartphone secure enclave instead of having it hosted on somebody else’s cloud system is the safer and more practical way to go. Privacy advocates will agree.

Speed is safety
Tap speed matters more than even in the COVID era

The next installment of the Contactless Payment Turf Wars
If nothing else closed loop EMV transit dumb cards reveal how bankrupt the ‘open loop is open’ argument really is. All Cubic and the card companies did was swap MIFARE for EMV, neither of which are open. And tap speeds are slower than ever with EMV the supermarket checkout protocol, so now we need Face ID transit gates to speed things up.

It’s fake debate. The real debate is online centralization for fare processing where everybody is forced to have a mobile account whether they need it or want it or not. And once everybody is forced to have an account to use transit the next step is forcing facial recognition.

The short term lesson here is that when transit agencies let banks and card companies run the transit fare concession they will never be free of them: there’s too much private money to be made off of running the backend services attached to public infrastructure. The long term lesson is that the mobile digital wallet solutions for Ventra, Opal, Oyster and OMNY are not about transit user convenience and all about convenience for misguided transit operators and their subcontractors.


Reader Questions
Instead of answering questions or comments via Twitter etc., I’ll answer here for the benefit of all readers.

Q: Not being able to recharge within Apple Pay has nothing to do with EMV vs. stored value though, right? If anything, that should be easier (just move money between accounts).

A: It’s true that MIFARE stored value transit cards such as HOP Fastpass force users to recharge via the app. The point of the piece is that EMV transit card features are defined by the EMV format, bank card protocols and how it’s all implemented on digital wallet platforms. In short, bank issuers control the feature set on the backend. I have yet to see a recharge button on any EMV prepaid card in Apple Pay Wallet, I suspect we’ll always see most operations limited to bank issuer apps, even for transit.

C: The open loathing of banks and credit card companies is honestly quite nauseating (but understandable, considering what Japanese banks are like, apart from the credit card companies).

A: Banks and card companies have an important place in transit, but card company ‘one size solves all’ open loop marketing is misleading and profitable mischief. A good transit fare system is all about balance, flexibility and incorporating innovation such as mobile wallets, for the benefit of transit users and safe operations. Bank cards for example are a wonderfully convenient recharge backend, this is where they shine and add real value to the transit user experience.

But swapping out a native transit fare system with an outsourced bank card account system and tech package that the transit company doesn’t ‘own’ is asking for trouble. How much is the long term cost when it doesn’t solve everything as promised? Who really benefits: the transit user, the transit company, or the system partners and consultants?

These are the questions I think people should be asking and discussing. Hopefully my posts outline the issues clearly so people can discuss them to find the best fit long term solution based on local transit region conditions.

Apple Pay Ventra: the closed open loop card

Apple Pay Ventra finally launched October 26, 2020, a very long wait after the March 25, 2019 Apple Event announcement. I wrote about the delay blaming it on open loop when the Washington SmarTrip and LA TAP cards landed on Apple Pay first.

Ventra has a long glitchy open loop history from its debut with the ill-fated Mastercard debit Ventra. Streets Blog had this to say about it in 2017.

Arguably it’s a good thing that the Ventra prepaid debit card is going the way of the dinosaur. The debit card function debuted with a long list of fees that had the potential to siphon of much of the money stored on the card, including:

A $1.50 ATM withdrawal fee
A $2 fee to speak to someone about the retail debit account.
A $6.00 fee for closing out the debit balance
A $2 fee for a paper statement
A $2.95 fee to add money to the debit account using a personal credit card
A $10 per hour fee for “account research’’ to resolve account discrepancies

“These fees were probably not any different than other bank cards offered by Money Network or Meta Bank or other predatory banks,” says Streetsblog Chicago’s Steven Vance, who reported on the issue at the time. “But it was shameful for the CTA to be aligned with that.”

After a backlash, most of these fees were reduced or eliminated, but CTA retail outlets were still allowed to charge Ventra card holders a fee of up to $4.95 to load cash on the debit sides of their cards. So maybe it is for the best that the CTA is getting out of the bank card business.

StreetsBlog Chicago December 2017

Getting Ventra out of the bank card business is easier said than done when the whole system is designed around open loop. Mastercard stopped issuing Ventra branded prepaid debit cards in 2017 but they have managed Ventra account services all this time. The Ventra plastic card is MIFARE DESFire EV1 which fits the standard Cubic Transportation Systems management style: all of the various transit card systems they manage around the world were designed and built with MIFARE stored value cards at the core. These include Chicago Ventra, London Oyster, Sydney Opal, Washington SmarTrip, LA TAP, etc.

An Apple Pay Ventra Wallet screenshot from a Japanese Twitter user revealed a fascinating bit of information. Apple Pay transit cards like Suica, SmarTrip and TAP all show a stored value card balance. Apple Pay Ventra does not, it shows a card number like a Wallet credit card. This means Apple Pay Ventra is a reincarnated Mastercard prepaid debit card, but this time it’s disguised as a mobile transit card with Mastercard running card account services.

Apple Pay Ventra: the closed open loop transit card
Tech blog coverage of the Apple Pay Ventra launch only mentioned Express Transit but there are important limitations:

  1. Ventra Card on iPhone 6S and later / Apple Watch Series 1 and later, can only be used on the CTA and Pace bus services, but not Metra or Pace Paratransit. RTA and Student Reduced Fare cards, including U-Pass cards, and free ride Ventra Cards cannot be added to Apple Wallet yet. (from StreetsBlog Chicago)
  2. Reload/Recharge in Wallet is not supported, you have to do it in Ventra App. This really sucks for Apple Watch Ventra users. In the United States only Apple Pay TAP and Apple Pay SmarTrip support Wallet recharge, interestingly those systems are closed loop.

We have the following pieces: open loop, Cubic fare system management, Mastercard managed Ventra account services, MIFARE for plastic cards , EMV for mobile digital cards with a closed reload/recharge model that limits everything from card issue and recharge to Ventra App, and slow tap speeds.

The result is a centralized account processing mishmash of open loop and closed loop parts, ‘heavy’ in every performance aspect that pales in comparison to the local stored value process speed and flexibility of a user friendly Apple Pay Suica•PASMO. The mishmash only works because only CTA fixed fares are transit gate ‘live’ in the system, distance based METRA fare are outside of the system with one time ticket purchases shown to the train conductor. Because everything is centralized account processing, all Ventra housekeeping must be done in the Ventra app unlike Apple Pay Suica•PASMO users who can live without an app or account: everything from recharge to card creation can be done in Wallet.

Simply put, Apple Pay Ventra is the digital rebirth of the problematic open loop based Mastercard Ventra prepaid debit card that is closed and only works on the Ventra system. The Sydney Opal card is about to enter digital wallet tests with Mastercard running the show with a similar set of Ventra pieces: Mastercard EMV issue for mobile, MIFARE plastic cards, Cubic management, etc. Expect similar results.

EMV transit cards: next installment of the Contactless Payment Turf Wars
If nothing else Apple Pay Ventra reveals how flimsy the ‘open loop is open’ argument really is: the Apple Pay Ventra prepaid debit card as transit card can only be used on the Ventra system. How open is that? All they did was swap MIFARE for EMV, neither of which are open. And tap speeds are slower than ever with EMV, aka the supermarket checkout protocol.

It’s fake debate. The real debate is online centralized fare processing where everybody is forced to have a mobile account whether they need it or want it or not, versus offline local fare processing where mobile accounts are optional. Guess which model delivers faster tap speeds while doing a better job of protecting your online privacy.

The lesson here is that when transit agencies let banks and card companies run the transit fare concession, they will never be free of them: there’s just too much private money to be made off of running the backend services attached to public infrastructure. And the bank card industry has no interest in improving their slow EMV supermarket checkout card spec for transit. Nobody in Sydney will bother asking who ends up getting the float interest from Opal cards when Mastercard runs the account backend. Card issuers like it that way.

The only question remaining is this: now that we know the Ventra EMV Mastercard prepaid debit card as mobile digital transit card is same one for mobile Opal…will it be the same for MTA mobile OMNY and TfL mobile Oyster? I suspect so: this is the new Cubic mobile transit card business model with NXP MIFARE the loser in this latest installment of the contactless payment turf wars.

UPDATE

A reader was kind enough to scan his Apple Pay Ventra card with a NFC tag reading app. Results confirmed what I outline above: Apple Pay Ventra is a EMV Mastercard prepaid debit disguised as a transit card. This officially marks a migration away from stored value MIFARE transit cards to stored in the cloud EMV prepaid debit cards for mobile digital transit card systems managed by Cubic.

Specifically it means the local stored value information that was held by the MIFARE plastic card has been migrated to an online Mastercard managed account for Apple Pay Ventra as the EMV credit card format wasn’t designed for local stored value. Just like the title says: Apple Pay Ventra is a closed open loop card.

We all float

The float is essentially double-counted money: a paid sum which, due to delays in processing, appears simultaneously in the accounts of the payer and the payee.

Individuals and companies alike can use float to their advantage, gaining time or earning interest before payment clears their bank.

Investopedia

One of the great tragedies of the NYC MTA is that it’s a too-much-public-not-enough-private transit cash pipe with too much exposure to local NY politics. NYT has a wonderful video on YouTube that explains the critical MTA flaw: politicians cleverly borrow against the MTA cash pipe for pork barrel projects that have little or nothing to do with MTA, but leave it highly leveraged and helpless to fix it’s own problems or invest in infrastructure.

Think of what MTA could really do if it was effectively protected from political interference, with full control of its own money and a Suica-like transit+payment empire, free to use the float of all those MetroCards soon to be OMNY transit cards.

One of the many things never discussed about open loop is who uses the float, but banks hold the money until the user account is settled with the transit company and they take a cut of the fare. It doesn’t take much imagination to see why banks and credit card companies really like promoting open loop.

Closed loop Japanese transit companies don’t talk about the float either but Japan IC Transit cards are like micro bank accounts with unused e-money balance and plastic card deposits sitting in all those Suica, PASMO, ICOCOA, manaca, etc. Japanese transit companies love to put all those micro bank accounts to work earning interest.

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. The addition of digital wallets like Apple Pay Suica and Apple Pay Octopus means there’s ever more e-money moving through those cards with short term parking…more float for transit companies to earn interest.

It’s a wonder why more transit companies haven’t followed the transit payment platform model to capture more business in the digital wallet era, but it’s testament to how little control they have over their own business destiny. Next time when you hear the praises of open loop over closed loop, remember to think about who’s floating in that business arrangement…and who’s not.

Apple Pay PASMO and the coming transit IC card rush to mobile

Mobile PASMO was announced in January 2020, launched on Android Osaifu Keitai in March and will land on Apple Pay with the iOS 14 update this fall. As early as April Apple was already dropping hints that Apple Pay PASMO was on the way.

9 months is a quick turnaround for announcing and launching an entirely new mobile transit service across 2 digital wallet platforms: Android (Osaifu Keitai) and Apple Pay. It sure beats Cubic Transportation Systems who have yet to get Apple Pay Ventra out the door more than a year after it was first announced in March 2019 on the far less complex Chicago transit area.

While many Apple Pay users in Japan are happy to have PASMO, there is always that nagging question: if I already have Apple Pay Suica that works nationwide, what’s the point of Apple Pay PASMO? All the major transit cards are cross compatible, the only difference is commuter passes…and reward points. As FeliCa Dude so astutely explained in his excellent Reddit post, Mobile PASMO is a boondoggle, the result of JR East and PASMO Association failing to cooperate and mutually host commute plans…and points.

All Japanese transit cards are slightly different versions of Suica. There could easily be one national transit card and Japanese users absolutely would love having it, but ICOCA, TOICA, manaca, SUGOCA, Kitaca, nimoca and Hayaken want to hang on to commuter passes…and points. The good news is that (1) Mobile PASMO got off the ground in a very short time, (2) JR East is providing Mobile Suica cloud assets. I suspect Mobile Suica is likely hosting Mobile PASMO as well but whatever deal they cut is hush-hush.

Suica growth, the CASHLESS tax rebate effect, COVID and all that
Junya Suzuki beat me to the punch today with an excellent piece that covers the Apple Pay PASMO announcement and several recent Suica trends including the recent addition of Suica to Square. The most important one to me is the July 2020 edition JR East factsheet Suica section: “Number of e-money available shops”. The number of Suica ready stores increased 50% YOY by 324,000 in the March 2019~March 2020 fiscal year with store growth outside of station areas increasing the most.

This is a direct result of the CASHLESS Tax Rebate program which provided merchant subsidies for cashless infrastructure. That program ended June 30 but there is talk in government circles of implementing a similar program to boost the economy and drive cashless use in the COVID era.

JR East factsheet Suica Section

Suzuki san points out what I have said in other posts, Mobile Suica growth from the October 2016 Apple Pay Suica start point is remarkable: 9.3 million users as of March 2020. And the growth rate is accelerating. Smaller and less expensive mobile devices like Apple Watch with Apple Pay Suica and Garmin Suica make the mobile transition attractive for a wider number of users.

JR East factsheet Suica Section

With restricted travel in the COVID era every single transit company in Japan is facing tremendous pressure to reduce costs. Moving away from high cost plastic transit cards with cut and past Mobile Suica IT assets and next generation Suica card architecture will be the easiest way to do that.

The rush to mobile
It starts now. Apple Pay PASMO marks the start point of a transit IC card rush to mobile digital wallets. Mobile PASMO is rebranded Mobile Suica. With next generation aka Super Suica coming in 2021, at the very least I think we’ll see similar arrangements from JR West ICOCA, JR Central TOICA and other major transit IC cards. With the addition of MaaS NFC Tag Suica, we’ll see a faster, wider uptake of Mobile Suica and sister services for payments everywhere.

And for those Open Loop advocates out there Junya Suzuki has some surprising analysis regarding the Japanese transit scene: despite some limited installation such as Okinawa Monorail, he does’t see transit companies going in for Open Loop in any big way. Mag strip paper ticketing will gradually be eliminated as next generation transit gates go into service over the next few years but mobile transit cards and paper QR Codes will be the replacement, not Open Loop.

As I have said before, the whole ‘Open Loop vs Closed Loop aka EMV contactless bank cards vs Native IC transit cards’ debate is pre-mobile plastic era out of date thinking. Mobile wallets and apps have tossed that whole game out the window for good. Why do you think QR Code payments and UWB Touchless are coming to Apple Pay in iOS 14? It’s a whole new crazy game. Better get used to it.

Transit Platform Basics

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 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. 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)