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: 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 for all kinds of payments
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. 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. Once the transit card goes mobile it can extend beyond the restraints of plastic card technology. It can also 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 needs and how to deliver better customer service with new payment technologies, not banks.

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 EMV cards
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 risk of Open Loop is that it is sold as a general easy ‘fix all’ and mobile solution, which it’s not. This lulls transit operators into complacency instead of improving Closed Loop ticketing systems and extending them to the mobile digital wallets. The bigger and more complex the transit system, the less Open Loop can accomplish.

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)
Value Capture and the Ecosystem of Transit Platforms (the bigger picture)
The Japanese Transit Platform Business Model (an outside perspective)

Open loop wishful thinking trashes Apple Pay Express Transit reputation

The latest OMNY bump in the road perfectly captures the downside of making contactless credit/debit cards a one size fits all solution. As the New York Post piece (via MacRumors) points out, some Apple Pay Express Transit users are being double charged for fares. Perhaps they didn’t know that Express Transit was enabled in the first place, perhaps the iPhone passed too close to the OMNY transit gate reader. It’s a classic “you’re holding it wrong” situation that has nothing to do with Apple Pay Express Transit and everything to do with the current EMV architecture and how banks implement it.

Part of the problem is that OMNY is new, it’s not working across the entire MTA system yet, and open loop EMV bank cards will never replace all classic MetroCard fare options. That job is for the MIFARE based OMNY transit card due in late 2021. Until the system is complete Metro users will have to juggle different cards and deal with a very long transition. Transport for London (TfL) users have had MIFARE based Oyster cards since 2003, contactless credit/debit cards have been ubiquitous since the 2012 London Olympics when open loop was added to the TfL Oyster fare system.

To Biometric or not Biometric?
Open Loop credit/debit cards on transit gates instead of native transit cards always come with banking and credit industry baggage. Even in the contactless card heaven that is said to be London, there are a surprisingly number of gotchas: minimum limits for using cards, max limits that require PIN codes. It’s an endless loop of banks pushing one way and merchants pushing back.

The golden uptake for Apple Pay in Japan was Suica and is the same story everywhere: it’s all about getting rid of coins for transit, coffee, sandwiches, etc. The small stuff. This is the 20,000 JPY prepaid heavenly region where Apple Pay Suica sings and banks so desperately want to shut out all other players and keep all the marbles. But bank cards have an authorization problem: banks set spending limits not the card architecture. The line is always changing, what works today might not work tomorrow. The prepaid Suica architecture itself is the firewall that does away with user authorization because local processing transaction at the transit gate or store reader is all the authorization necessary.

Express Transit was developed for Apple Pay Suica in 2016, it remains the best matchup because the feature is a basic part of the Suica card architecture that is not a bank card. Apple Pay Express Transit for EMV payment cards that appeared with iOS 12.3 is a retrofit job that I predicted would have problems because retrofits are about dealing with baggage, not creating a better long term solution. 7 months later we are already there. This problem isn’t going away, not as long as banks and EMV keep operating the way that they do.

Remember QR Codes? Well they’re the future…again

Hacker News and Reddit have very different user audiences but each have their share of ‘my experience is the world’ navel gazers. This is a plus: the comments are fascinating to read. The Andreessen Horowitz site posted a piece by Avery Segal, Remember QR Codes? They’re More Powerful Than You Think. Somebody posted it to Hacker and somebody else posted a link to my Transit Gate Evolution piece in the comments. I think it’s hilarious and insightful that somebody can look at the same QR code transit video in the piece and write, “The QR code video shows a ton of people going through the turnstiles quite fast.” A ton? Fast? I guess the commentator never experienced rush hour Shinjuku station gates.

Segal’s piece is a simple Mainland China travelog highlighting all the things people can do with a WeChat/Alipay account and WeChat Pay/Alipay integrated QR Code smartphone apps there. There is very little analysis and the opening paragraph reads more like PR, which it probably is. After all, Andreessen Horowitz is a venture capital firm though I can’t figure out if Segal is trying to sell WeChat/Alipay or QR.

Companies in the US have been slow to adopt QR codes, but those who dismiss them as having “been around forever but never taken off” underestimate their wide-ranging potential. Camera-based solutions like QR codes (or facial recognition, for that matter) can make traditionally clunky user experiences seamless and intuitive. QR codes connect our online identity to the offline world, allowing users to essentially log in to physical locations—and bring their data with them. This delivers a number of benefits: brands learn user preferences, while customers gain a more tailored and social experience, as well as perks like automatic loyalty programs built into every transaction.

The Hacker News crowd discusses the pros and cons of QR vs NFC, but I think that they along with Segal completely miss the point: it’s not the technology, it’s the service layers built on top of it and how well they integrate that really matters. Actually it’s the only thing that matters.

The Suica example. FeliCa is great NFC technology but nothing great by itself: the Suica card format built with FeliCa, the nationwide Transit IC card inter-compatibility built around the Suica card format, the Transit IC eMoney standard built on top of that, Mobile Suica, Apple Pay…each new service layer builds on the previous layers and adds value to the whole. The value is the quality of integration, a sum greater than the total of parts.

There are multiple layers in Apple Pay Suica but they all work as one.

The Transport for London Oyster card by comparison is not compatible with other UK transit cards. Oyster can be used for transit in the London pay as you go area (but reaching its limit) but does not integrate with anything else. TfL has put effort into EMV contactless bank cards for transit instead of developing new services and growing Oyster, but it’s interesting to ponder what the UK could have built by following a Suica-like transit platform business model.

China is a very different country and transit infrastructure isn’t a business. I’m sure that Alipay and WeChat Pay were allowed on host their QR code services on ‘public infrastructure’ because it also benefits the Chinese Communist Party in some way and helps the CCP steer society where it thinks it should go.

There is another important aspect that Segal and the Hacker crowd fail to see or discuss: central processing vs. local processing. The whole point of Transit Gate Evolution was explaining the Apple Pay Suica secret: a great local processing front-end (FeliCa/NFC-F/Suica) integrated with a great central processing back-end (Mobile Suica + Apple Pay EMV credit/debit cards). Segal assumes that central processing is everything and that the internet, mobile networks and cloud services are always going to work everywhere 100% of the time. They don’t.

Nobody talks about the implications of NFC tag Apple Pay that Apple is already field testing either. These topics would make for a great discussion. Unfortunately nobody seems up to the challenge.