The Transit Platform Argument

A reader asked some very good questions regarding the Suica Transit Platform model and Open Loop:

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?

I tweeted a response but Twitter is a terrible vehicle for long form discussion. I have many posts on the subject scattered over 2 years, it might be convenient to summarize a few things here.

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.

Whose customer?
A vital point that many people miss in the Open Loop debate is that transit users end up as the bank card customer, not the transit company customer. That 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 the best way to own the transit customer is…

Cards
Cards are the delivery vehicle for all kinds of service goodies from transit, to points, rewards and all kinds of services. The beauty of a non-bank transit pre-paid card is its flexibility, it can be a simple ticket that customers buy with cash from a station kiosk, it can be linked to an online account with credit cards, extended transit services and beyond. Cards are convenient but not transformative however, until they land on a smartphone…

Digital Wallets
The most powerful card incarnation is the digital wallet transit card with a flexible recharge backend, where any bank card can used, or even cash, and a flexible front-end that can be any flavor of NFC, UWB Touchless or even QR. 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 services tied to transit cards that benefit customers and businesses of the entire transit region.

Other Details
Regarding detail questions such as attaching commuter passes to EMV cards and special ticketing, I am no systems design 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 pulls 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.

For low volume specialty ticketing QR Codes are the easiest step up from paper but they can be printed on ordinary paper for transit users without smartphones and needs to be there. 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 more for retail in mind, and the transit gate reader system would have to juggle a different protocol that isn’t EMV, FeliCa or MIFARE. It could be done, but judging from my experience of using Apple Pay VAS PONTA and dPOINT cards, QR Codes are faster and likely easier to implement.

In the long run there are no easy solutions. 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)

Fields of Dreams: the endlessly looping open loop vs closed loop transit debate

MacRumors reported that Apple Pay Express Transit support is finally arriving, bit by bit, on the TfL system after being announced back in May. I only noticed the piece because somebody threw a link to my site in one of the forum comments and the discussion has some interesting, and deliciously snarky, open loop bank cards for transit vs. native transit card debate.

The ‘Japan has a transit IC card problem’ angle is interesting. Yes, Japan does have a transit IC card problem, if you work for a bank credit card operation that wants to promote open loop, which I suspect is the case in the forum debate. The counter argument presentation-like power points are just too glib: to date no major transit system has junked native transit cards for bank cards, not even Oyster. Transit is a license to print money and the huge transaction volumes in Tokyo alone are mouth watering. The ‘problem’ for bank card players is how to angle for a bigger cut of the action.

Plastic era thinking in the Digital Mobile Wallet era
The debate perfectly represents the plastic era transit card vs credit card mindset that completely ignores the impact of digital wallets and mobile payments. My take is that smartphone digital wallets do away with old plastic era distinctions and create new business opportunities for transit companies, if they chose to pursue them. Most don’t.

Tech analysts love to talk about ‘value capture’. The current cashless payments frenzy in Japan is all about capturing users to sign on with a payment platform then growing the ecosystem with more and more services that users, hopefully, want to pay extra for. Nobody talks about this in the open loop vs closed loop debate. The bank that owns the credit card owns the customer going through the transit gate, not the transit company. Put it this way, JRE POINT that go back into free Suica recharges, Green Car upgrades, etc. are vastly different from bank card points, as are the business platforms they feed customers back into. Moving people are money in motion, who gets a cut and what businesses do with that cut is everything.

It an interesting paradox that Europe and America talk about privatizing public transportation in various degrees but to date only Japan and Hong Kong have built highly successful businesses based on private transit ‘value capture’. The endless open loop vs closed loop debate always comes down to this: you can argue all you want about the parts but in the end it is meaningless. To truly understand things, you have to examine the whole business model, how everything fits together, and how that can benefit everybody while growing and evolving.

Suica and Octopus Compared

Hong Kong’s Octopus is coming to Apple Pay soon, it shares the same FeliCa technology base with Suica but there are some interesting differences.

Branding
The mobile version of Suica is Mobile Suica across 3 different payment platforms: Osaifu Keitai, Apple Pay and Google Pay. The current mobile version of Octopus is called Smart Octopus in Samsung Pay but it’s not clear yet if the Smart Octopus branding will stay with Samsung Pay or be set free.

Deposits
Mobile Suica does not have deposits. Plastic Suica cards have a ¥500 deposit but is automatically returned to the stored value (SV) balance when transferred to Apple Pay or Google Pay. Octopus has a HK$50 deposit on both plastic and mobile versions. An interesting difference is that the Octopus deposit will be used temporarily if the SV balance is insufficient to pay transit fare at the exit gate.

Stored Value Balance Limits
Suica has a SV balance limit of ¥20,000. Octopus Cards Limited (OCL) just raised the Octopus SV balance limit for cards issued after October 1, 2019 from HK$1,000 to HK$3,000. In JPY this is roughly double the current Suica limit, about ¥40,000 which puts it inline with other Japanese e-money card balance limits like WAON. Suica balance limits will likely be doubled when the next generation ‘Super Suica’ card architecture arrives in April 2021.

Number of Cards
Smart Octopus is limited to a single card per Samsung Pay user account. Mobile Suica/Apple Pay Suica can have the multiple Suica cards up to the device Wallet limit.

Recharge Fees
One of the many innovations that Apple Pay Suica brought was elimination of the annual Mobile Suica ¥1,050 ‘membership fee’, Google Pay got the same deal and Mobile Suica membership fees are disappearing altogether next year. Mobile Suica does not charge any upfront fee for recharges, but Smart Octopus does: 2.5% a pop for the luxury of recharging in Samsung Pay with Visa and Mastercard card brands although Union Pay cards are apparently free.

The differences in this last section are interesting. JR East charges nothing for recharging Mobile Suica, while OCL does for Smart Octopus. Mobile Suica has been around far longer and JR East has many more online services, such as EkiNet, to offset cloud expenses. Smart Octopus only started in December 2017 and the footprint of Samsung Pay devices compared with everything else is probably small and doesn’t drive enough transaction volume to offset Smart Octopus cloud startup costs. Apple Pay will growth the transaction size of Smart Octopus considerably, hopefully enough for OCL to reduce or eliminate the Add Value Service Fee at some point.

I look forward to digging through service details when Octopus finally launches on Apple Pay.

Apple Global NFC Lineup 2019

With the removal of iPhone 7 and Apple Watch Series 2, the new 2019 iPhone and Apple Watch lineup on the Apple Store is finally global NFC across the board. The Apple Watch Series 5 S5 chip did not gain ‘Express Card with power reserve’ or NFC background tag reading this time. The former would be a very welcome addition for the eternally battery challenged Apple Watch, while the later is necessary at some point if Apple wants to use the ‘yet to be formally unveiled’ NFC Tag Apple Pay to kick QR Code payment systems to the curb.

There is something missing in the lineup however: a low cost entry level global NFC iPhone that’s even lower than the price cuts Apple implemented with the 2019 lineup. As Ben Thompson of Stratechery explains in a great post:

That means that this year actually saw three price cuts:
•First, the iPhone 11 — this year’s mid-tier model — costs $50 less than the iPhone XR it is replacing.
•Second, the iPhone XR’s price is being cut by $150 a year after launch, not $100 as Apple has previously done.
•Third, the iPhone 8’s price is also being cut by $150 two years after launch, not $100 as Apple has previously done.

The rumored A12 chip iPhone SE2 may well be pie in the sky, but that doesn’t mean that there isn’t market appeal for an inexpensive global NFC iPhone for places like Japan and Hong Kong. Those markets have highly integrated transit networks coupled with highly evolved transit card systems like Suica and Octopus. With both of these on Apple Pay there’s a good opening for a small SE size inexpensive global NFC iPhone, it would do very well.

UPDATE: What’s the best iPhone for Suica?
A reader asked for my recommendation of a good Suica use iPhone in the 2019 lineup. I do not recommend iPhone 8. The superior NFC and Suica performance, plus the Express Card with power reserve and background tag reading features of A12 Bionic and later is a huge leap over previous models. These enhanced NFC functions are important for new Apple Pay features yet to come. I think it comes down to a choice between iPhone XR and iPhone 11, and how long you plan to use it in Japan.

It’s also helpful to remember that 2019 is the last lineup of 4G/LTE only iPhone. I think iPhone 11 is better optimized for 4G in the long run as Japanese carriers start to switch over bands to 5G. There is also the much better camera to consider. Last but not least is battery. The power optimization of A13 Bionic is going to deliver much better battery performance over a longer period of time.

It boils down to this: if you plan to use the iPhone for 2 years iPhone XR is a good choice, if you plan to use iPhone for 3~4 years iPhone 11 is the better choice.

Apple Pay Octopus and the future of the Octopus Transit Platform

UPDATE: Hong Kong OCL officially announced Apple Pay Octopus

One downside of breaking a tech story on the internet is news aggregator sites. Responsible tech news sites like MacRumors and AppleInsider post outside sourced news that serves their readership and sends traffic to the original source. And then there are not so nice aggregator operations posing as news sites like The Verge, TechCrunch and 9to5Mac who craft crappy posts, lifting whole chunks from outside stories, or simply lifting without attribution, minimizing any outside contribution to keep traffic on their own site.

So it’s a bummer that SC Yeung’s excellent EJ Insight story “Why Hong Kong can expect Apple Pay support for Octopus Card,” quotes the 9to5Mac ripoff of my piece instead of the original, but it’s an interesting read with good analysis. Yeung makes the same point I did a few months ago that the expansion of Octopus to Apple Pay is an important step forward for the platform. But it can’t stop there: Octopus Cards Limited needs to continue digital wallet expansion and create new business opportunities. Unfortunately it has to accomplish this while parent company MRT Corporation is opening up its transit gates to QR Code and EMV payments which will compete with the subsidiary OCL Octopus card business:

MTR will begin accepting QR code payment starting from next year and the rail operator will also add more contactless payment systems on its gates in future. For commuters, Octopus Card will no longer be the only choice for MTR payments…

<It> is becoming clear that <OCL> needs a new business model to maintain its market-leading position. Using a specific card for payment is no longer a modern way of payment. The core issue for Octopus is transform into something bigger, moving beyond the current payment functions and offer a lot more, perhaps even a mobile banking service, to retain users.

Why HK can expect Apple Pay support for Octopus card

JR East has taken a very different approach. Suica is a central business pillar and JR East will be expanding it with the next generation Super Suica in April 2021. Suica will gain the ability to virtually host other transit card under the same Suica umbrella on plastic and on mobile. Think of it as a national transit and payment card with Express Transit anywhere, anytime. How fascinating it would be if Octopus had a similar kind of opportunity to expand outside of Hong Kong.

Even from the short vantage point of 2.5 years since the launch of Apple Pay Suica, it’s already easy to see the charges that it has brought to the Japanese payments market. It will be interesting to watch the changes that Apple Pay Octopus brings to Hong Kong.