The Contactless Payment Turf Wars: tapping the potential of TAP

The recent MacRumors report that the Los Angeles Metro Transit Access Pass card is coming to Apple Pay was not entirely new information, the Source blog and Curbed reported back in May 2017 that TAP was coming to smart devices with a system upgrade:

Cubics (sic), the company handling TAP technology, is developing Nextlink, a “cloud-based connection system,” that will link the existing TAP fare infrastructure to an upcoming mobile payment app. The app is expected to be released, “as early as 7-9 months from the start of development.”

“Metro’s TAP card system is getting a major upgrade” Curbed May 2017

As Curbed explains it, Cubic is developing a backend cloud system that enables online transit accounts with credit/debit cards attached to TAP cards for anywhere anytime mobile recharge with the eventual goal of TAP cards being hosted on mobile devices. In other words it sounds just like Mobile Suica, the world’s first contactless transit card system on mobile, which has been around since 2006 and on Apple Pay since 2017.

The MacRumors Apple Pay information was new but also vague and unclear:

MacRumors can confirm that LA Metro, the transit agency that manages integration of the TAP card system in the Los Angeles Area, said it is working with Apple to support mobile payments for iPhones, with rollout scheduled for this fall…and eventual support for Android phones with NFC, although the timeframe for the latter is unknown.

The process is similar to using Apple Pay for in-store payments. Depending on the iPhone, that means double-pressing the home button or side button, authenticating with Touch ID or Face ID, and holding the device near the card reader. Apple Watch payments are also activated by double-pressing the side button. 

Cubic is the 800 pound gorilla of public transit gate and fare systems in America, Europe and Australia with long and profitable history of creating and operating fare systems. Cubic builds client IC transit card systems with MIFARE technology, which has made MIFARE a de facto standard in those regions. As Cubic literature says, “Over 60% of public transit rides in the US, UK and Australia are taken using Cubic systems.”

So far Cubic has not hosted any client transit card on digital wallet platforms like Apple Pay or Google Pay. Instead of native digital cards Cubic and clients have chosen ‘open loop’ EMV contactless credit/debit cards as their digital wallet strategy. Transit for London (TfL) went open loop in 2012, other Cubic operated systems such as Opal and Vancouver Compass have added it as well. The New York MTA and Cubic plan the same strategy for replacing the venerable New York Subway Metro Card.

There are huge business model and operational differences between the 2 approaches but from a Apple Pay user viewpoint the difference boils down to an Express Card-like experience (Suica, China Transit, Contactless Student ID cards) for going through a transit gate versus a Touch ID/Face ID credit-card-at-cash-register experience. That’s because EMV contactless was originally designed for cash registers, not transit gates. EMV contactless is a slow and very stupid smart card.

The MacRumors piece suggests that TAP on Apple Pay is Cubic TfL flavored EMV contactless, not native TAP Express Cards. But if TAP on Apple Pay turns out to be a native express card, it could be one of the largest express card deployments outside of Asia. In America and Europe there are only 4 native transit express cards on a digital wallet platform, all of them Google Pay only: Portland HOP, Las Vegas Monorail Network West Midlands Swift and Transport for Victoria Myki.

What’s fascinating to me is that smaller agencies like Transport for Victoria (TFV) are accomplishing what the mighty Cubic has not by launching native transit cards on digital wallets. Why? One possible explanation is that TFV understands the value of acquiring and managing online accounts while TfL dumps them in the Thames along with Oyster in favor of bank cards. I think we can look at LA Metro’s digital TAP rollout in the same way: if LA Metro is going to the trouble of building a cloud backend to migrate from plastic card management to online account management, does this mean they understand the business value of it? After all Apple, Amazon, Google, FaceBook and every other online business understands the value of online accounts with attached credit cards for building platforms, why not transit companies?

The Transit Platform Difference

One building block of a transit platform that follows the Japanese business model is migrating from plastic transit cards to a mobile account acquisition cloud backend that connects the customer transit card with credit/debit cards for anytime anywhere mobile recharge. The next step is loyalty reward goodies and bonus points with preferred cards, or better yet house brand cards. JR East Mobile Suica for example plugs and plays with a huge variety of cards but offers JRE bonus points for recharging with a JR East View card. Major retailers at major stations issue branded View cards with store points in addition to JRE points both of which help drive transit use and station area retail traffic.

The next crucial step is interoperable transit cards (TAP, EZ Rider, Compass, etc.) that are key to making transit easy to use statewide and eventually nationwide. This can only happen if there is good business planning and development behind the transit account acquisition process, and a management that understands the importance of how all the different infrastructure pieces need to integrate: California High-Speed Rail, regular lines, subway, buses, station retail, services, Mobile TAP, etc. The business vision has to create a whole that is much larger than the sum of various infrastructure parts.

Unfortunately this kind of business development and promotion comes hard for government run transit authorities. Egon Terplan of the San Francisco Bay Area Planning and Urban Research Association (SPUR) came to Tokyo and studied the business model:

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.

I have lived in Japan since 1984 and am lucky to have witnessed the amazing transformation from Japan National Rail, dingy stations and paper tickets punched at the gate, to JR, Apple Pay Suica, constantly upgraded infrastructure and stations stuffed with and surrounded by all kinds of retail and delicious food. The transformation and integration continues and not only infrastructure.

The next generation ‘Super Suica’ transit card format under development by JR East and Sony aims to solve cost and remaining compatibility problems with all Japanese IC transit cards. But Super Suica isn’t just for Japan, it’s part of the vision JR East unveiled at the July 2016 NFC Forum Japan meeting that starts with the Public Transportation Workshop created NFC specification to eventually create a transit payment standard that works everywhere while meeting transit operation needs. If that goal is achieved, the whole argument for EMV contactless, a standard created for retail, as an open standard for transit payments falls away.

Note how the agent keeps his punch going at a constant speed

The choice between keeping TAP transit card accounts ‘in-house’ and closed loop on Apple Pay/Google Pay vs. EMV contactless open loop may sound trivial, but the decision will reveal whether LA Metro values transit online accounts as a business resource to build on, or a giveaway to banks and credit card companies. It comes down to what the famous Japanese daimyo Uesugi Yozan (a favorite of John F. Kennedy by the way) had to say about government and economic planning: always plan 50 and 100 years ahead. Think and plan for the generations to come.

Update: edit updated with NFC Forum Public Transportation Workshop and Super Suica information

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The Japanese Transit Platform Business Model

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:

  1. Allow rail operators to become real estate developers to capture the value they bring to the stations.
  2. Turn stations into major destinations.
  3. Build over tracks to create new land opportunities.
  4. Dramatic reductions in travel time between cities can lead to major increases in rail’s market share.
  5. 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.

Apple Pay Japan Market Info Update December 2018

The Bank of Japan posted presentation material from the 7th FinTech Forum held November 30. The Rakuten presentation has some contactless payment market data for Japan that is worth a look.

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.

The Contactless Payment Turf Wars: PiTaPa Pitfalls

Japan Transit IC Mutual Use Association Map
The Japan Transit IC Mutual Use Association project started in 2007 and achieved transit and e-money interoperability in 2013. It continues to evolve and incorporate other transit smartcard systems into a single standard. Wikipedia

PiTaPa is the perpetual outliner of the major Japanese transit smartcards: Suica, ICOCA, TOICA, SUGOCA, Kitaca, PASMO, manaca, Nimoca, Hayaken. Starting in 2006 the major transit cards were stitched together into one common national platform for mutual transit and e-money use achieved by 2013. The result is the fertile ground that Apple Pay Suica is growing and thriving in. Apple Pay VP Jennifer Bailey recently said that Apple Pay is doing well in Japan. The Apple Pay Japan story is all Suica and transit reamains the golden uptake path for contactless payments on smarphones.

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.

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.

No Future
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.

The Contactless Payment Turf Wars: Transit Platforms

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.

The Japanese IC Transit Card Model: Scale, Compatibility, Regionality
Open Loop really only has one theoretical advantage: scale because it works everywhere, on paper. The reality is that not everybody has credit cards or good credit ratings and open loop support is not easy to pull off. Japanese IC Transit cards neatly sidestepped the Open scale advantage when they merged under a single interoperable compatible Transit IC SmartCard standard in 2013. Contactless prepaid SmartCard e-money use took off from there.

JR East does a good job of creating loyalty point programs for JR East area merchants tying them into the Suica e-money network. Other Japanese transit companies do the same for their regional Transit IC cards. When Hong Kong officials complain that the city is missing the contactless payments QR code gold rush in mainland China because of the success of Octopus, that only proves how deep the Japanese/Hong Kong IC transit card model has penetrated beyond transit into payments and the general fabric of daily life.

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.

Oyster cannot be used as e-money
Inbound UK visitors notice the difference
Speed is safety
By staying Closed Loop JR East controls and optimizes their system for maximum speed, security and safety.

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.

  1. Keep it Closed
  2. Transition from transit only to transit + e-money use (Suica, Octopus, EZ-Link. etc)
  3. Nationwide transit + e-money smartcard interoperability
  4. 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)
  5. Native card digital wallet support: Apple Pay Suica, Smart Octopus on Samsung Pay, etc.
  6. 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.

JR East ties in all kinds of local retail partner points and promotions which in turn drive customers to Apple Pay Suica and more credit card use. Apple Pay Suica in turn is driving Suica use and general Apple Pay use far more than credit cards on their own. The new Super Suica format coming in spring 2012 will deliver these platform advantages nationwide.

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.

Update
The San Francisco Bay Area Planning and Urban Research Association (SPUR) came to Tokyo and wrote a nice outline of the Japanese Transit Platform Business Model.