It’s about time. Somebody from outside Japan finally took in the big picture of the Japanese Transit Platform model and wrote a business outline of it in English. Egon Terplan of the San Francisco Bay Area Planning and Urban Research Association (SPUR) came to Tokyo and liked what he saw: Falling in Love With the Trains of Japan.
By 2017, Japanese trains carried nearly 30 percent of all rail passengers in the world, more than all of Europe. But unlike many European countries, Japanese rail companies are privatized, with for-profit publicly traded companies running separate rail lines all around the country.
JR East, the largest of the JR companies, carries 17 million passengers per day on 12,300 trains. (By comparison, Amtrak carried just 31.3 million passengers during all of 2016, a record year in ridership; the New York City subway averages 5.5 million daily rides and BART, 430,000.) And JR East’s $26 billion in annual revenue includes no government subsidies.
Terplan then lists what he thinks are the major components:
Allow rail operators to become real estate developers to capture the value they bring to the stations.
Turn stations into major destinations.
Build over tracks to create new land opportunities.
Dramatic reductions in travel time between cities can lead to major increases in rail’s market share.
Interoperable rail cards (Suica, etc.) are key to making rail easy to use nationwide.
Essential points all, but Terplan doesn’t explain the importance of how all the different infrastructure pieces not only integrate (Shinkansen, regular lines, subway, buses, station retail, services, Suica, etc.) but also create a whole that is much larger than the sum of parts, and why. Perhaps he is only outlining the model and will return with a deeper analysis later. I certainly hope so because it’s a great transit model for other countries to adapt and adopt. Hong Kong already has a similar system on a smaller scale as does South Korea and Taiwan.
The last component, nationwide interoperable Japan Transit IC prepaid cards for transit and store purchases aka Apple Pay Suica, is the secret sauce binding everything together into a tight slick business model. That is the missing why and it’s just starting: interoperable features like Shinkansen e-ticketing, commuter passes, local loyalty point systems and hosting everything on digital wallets are still weak points. JR East and Sony are busy creating the next generation ‘Super Suica’ format that aims to integrate everything while reducing costs and taking it to the next level.
Year over year contactless payments use in the first slide basically covers the same period of the MMD Labo report but with different questions. The Rakuten data shows Rakuten Pay in the lead, naturally, at 15.2% and Apple Pay in 2nd place at 12.9%. The MMD numbers showed Rakuten Pay at 13% and Apple Pay at 20%. Google Pay only added Japanese payment support in May 2018 so the full impact will take time to play out, the 30% Osaifu Keitai use figure from the MMD report suggests a possible outcome.
As I explained in the earlier post, Apple Pay use is highly regional and tied to Suica compatible transit routes. In major metropolitan areas Apple Pay use is higher than Rakuten but Rakuten has done a good job building an ecosystem of e-commerce, travel reservations and other services that offer members large discounts and points. That’s the reason behind the robust growth from 3.4% and the larger nationwide average use figure.
Apple Pay Suica is the entry point for Apple Pay use, the more incentives that customers have to use Suica the faster Apple Pay use in Japan will grow. Sachiko Watatani pointed out that only 27% of Apple Pay Japan capable device users actually use Apple Pay, that represents a lot of potential users sitting on the fence. The Rakuten Pay growth rate shows that points and discounts are great incentives but Apple Pay Suica, convenient as it is, doesn’t offer that. At least not without going to the trouble of getting the right Apple Pay credit cards for the right points. And even then, as setting up and using the JRE POINT app makes clear, it’s not user friendly.
The next big opportunity for Apple Pay Suica growth is ‘Super Suica’ that will unite transit cards, commuter passes and various transit point systems in a single format for plastic and mobile. Unfortunately this doesn’t happen until April 2021. Until then Apple Pay Japan needs to add the other e-money prepaid cards (WAON, nanaco, Rakuten Edy) and as many point system reward cards to Wallet as possible to keep growing. Not only that but also make them work better together than they do on their own. Think PONTA card with the kinks ironed out.
And then there is PiTaPa. PiTaPa is the main transit smartcard for non-JR ‘private’ rail companies in the Kansai: Hankyu, Keihan, Nankai and Hanshin. The excellent Japanese Transit IC map graphic on Wikipedia perfectly captures the problem of PiTaPa incompatibility and isolation: the background blue is transit only compatibility, the red is transit and e-money compatibility.
The PiTaPa Story
PiTaPa has an interesting history but not a particularly happy or successful one. It’s the perfect case study of what happens when banks and credit card companies call the shots on transit ticketing system infrastructure instead of letting transit company management make those decisions. It’s also a story of how most Japanese transit companies, except for JR East, failed to see the coming revolution of mobile digital wallet platforms.
The PiTiPa founding members originally planned to build a transit IC smartcard system just like Suica: pre-paid stored value (SV). Then Sumitomo Mitsu stepped in with a seemingly good idea: a Sumitomo Mitsui credit card + transit card post-pay combo card to save transit users from having to recharge the transit card smartcard at all. A credit card transit card for transit and shopping. What could go wrong? The Kansai area is home town for Sumitomo Mitsu, the Kansai banking indsutry Godzilla for over a hundred years, how could transit companies, Sumitomo Mitsu borrowers all, resist?
And so PiTaPa was born in 2004 as a Frankenstein credit card grafted with a transit card appendage that was supposed to do it all, but never delivered the benefits of either one. Sumitomo Mitsui imposed all the hoary old credit card conventions on the shiny new creation: credit checks and spending caps. It immediately shrunk the PiTaPa user base from everybody to people with good credit ratings who passed Sumitomo Mitsui credit checks. Compare this to Suica where everybody from kids to retirees with a ¥1,000 bill can buy Suica card at a station kiosk. That’s the beauty of stored value cards, simple immediate purchase and use.
The original PiTaPa did not sit well with a lot of transit users so a ‘PiTaPa lite’ card with deposits instead of credit checks, without the e-money function, was added in 2007. Unfortunately since PiTaPa was post-pay, PiTaPa didn’t work with the Japanese Transit IC e-money standard and was shunned by payment networks and merchants. Good luck trying to use PiTaPa credit outside of its core transit ghetto at 7 Eleven, other convenience stores or anywhere else.
Japanese customers do not need another contactless payment network solution. Reader #1 is the main one for Apple Pay Suica and credit cards, #2 is PiTiPa only, #3 is WAON only, #4 in back is Rakuten Edy only.
The 7 Eleven acceptance mark collection
If you want to know how well PiTaPa is doing in 2018 all you need to do is check the commuter pass pages of the PiTaPa member railroads: Keihan and Osaka Metro offer ICOCA commuter passes. Not only that but Osaka Metro and Keihan have moved away from PiTaPa commuter passes for general issue and use ICOCA instead.
Osaka Metro uses ICOCA for commuter passes
Nankai uses ICOCA and PiTaPa for commuter passes along with old style magnetic strip passes
Hankyu offers PiTaPa commuter passes along with old style magnetic strip passes
Keihan offers iCOCA commuter passes along with old style magnetic strip passes
The decision to let Sumitomo Mitsui call the shots instead of transit management killed any viable future for the PiTaPa system. PiTaPa uses the same FeliCa technology behind the highly successful Mobile Suica and Apple Pay Suica, but the unique one-off system architecture, limited user base and transaction volume mean PiTaPa will never be hosted on any mobile digital wallet platform. PiTaPa transit partners don’t want to spend resources to build a cloud and host mobile service because there is too much cost for such little return. And Sumitomo Mitsu will certainly never foot the bill to clean up the mess they created.
Now that JR East and Sony have announced ‘Super Suica’ for April 2018 that will incorporate all Japan Transit cards into one card system for transit, e-money and mobile, the PiTaPa participants face a choice: junk the old PiTaPa and get onboard the Super Suica express or be left behind in isolation with no future.
Transit payment platforms
The basic unsolvable problem is that banks and credit card companies want different things than transit companies. Banks and credit card companies want credit checks and caps, transit companies need as many people going through the transit gate as efficiently and safely as possible. These fundamental business differences will never be resolved, there will always be tension. That is why banks and credit card companies should never be in charge of running transit gates. They simply want to take their credit card cut and run, leaving the scene of crime, and the cleanup bill, to others.
You can see the similar things playing out on other transit systems such as Hong Kong’s Octopus system with AliPay and other QR Code ‘virtual banks’ putting pressure on operators to change transit ticketing system infrastructure to suit their needs, all paid by the transit operator of course.
It’s wasteful nonsense and who needs it? It’s last century credit card vs. smartcard, open loop vs. closed loop thinking. Digital wallet platforms like Apple Pay and Google Pay conveniently collapse the differences of open loop vs. closed loop rendering the whole argument pointless while offering a whole new game. Build a transit payment platform instead, in the long run it’s a win-win for transit companies and the banking industry.
It’s very simple: transit companies and a finance industry that stick with the old ways of thinking will miss the major unique new business opportunities offered by transit payment platforms hosted on digital wallet platforms, opportunities that build on transit but also extend it to exciting new places, a transit platform that grows and benefits everyone.
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.
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.
Keep it Closed
Transition from transit only to transit + e-money use (Suica, Octopus, EZ-Link. etc)
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)
Native card digital wallet support: Apple Pay Suica, Smart Octopus on Samsung Pay, etc.
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.
It’s this mix and match flexibility of the Apple Pay + Suica approach that neatly collapses the open 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.