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AFC in the US: Progressing to open-payment systems [free access]

March 1, 2011

Over the past two decades, US transit agencies have increasingly invested in closed-loop smart card-based automated fare collection (AFC) systems. Transit agencies that are currently in the process of replacing their old AFC systems have encountered certain limitations of the closed-loop AFC systems in achieving key goals such as regional integration, interoperability, device neutrality, customer convenience, fraud reduction, operating cost efficiency, and the availability of certified standards for bank cards and web-based language (to avoid proprietary communication protocols of single vendor devices and facilitate responses to market-driven technological developments). 


The transit industry is now evaluating newer payment methods such as account-based payment systems (ABPS) using credit, debit and prepaid bank cards. Simultaneously, the US financial industry has displayed increasing interest in catering to industries dealing with micropayments (less than USD5 per transaction) such as fast food, movies and public transit. This parallel interest of transit and financial industries presents a unique opportunity for progressing to open-loop payment systems using available tested and certified bank card standards.  


AFC development background


The advent of AFC for public transit in the US is largely a consequence of the US Department of Transportation’s Intelligent Transportation Systems (ITS) Initiative, which called for the deployment of interoperable systems that support intermodal integration for seamless travel. The National ITS Architecture designed in the late 1980s and incorporated in 1991 surface transportation authorising legislation called ISTEA provided the basic framework for integration and interoperability. At the 1995 ITS World Congress, a commitment was made to pursue universal standards for highway-and-transit-electronic- payment systems and to encourage convergence of transit and retail payment systems.


While highway programs moved towards open electronic payment systems, transit moved in the direction of customized close-loop payment systems. The transit direction came about in part because the National ITS Architecture did not address subway systems. The Federal Transit Administration (FTA) issued a policy which promoted regional architectures instead of a single national architecture. Along with the American Public Transport Association (APTA), the FTA led the path to transit smart cards, which explains the current dominance of closed-loop AFC payment systems in the US transit industry.


Deployment of contactless smart cards


The first contactless smart card system using radio frequency identification (RFID) technology in the US was piloted in 1996 at the Washington Metropolitan Area Transit Authority (WMATA) with FTA funding. It was initially called the Go Card, the smart card system that involved proprietary software and hardware owned and operated by the US-based transit technologies provider Cubic Transportation Systems. The card has since evolved into the WMATA SmarTrip system.  


State-of-the-art proprietary smart card payment systems have become fully or partially operational in the metropolitan areas of Atlanta, Baltimore, Boston, Chicago, Houston, Los Angeles, Miami, Minneapolis, Philadelphia, San Diego, San Francisco, Seattle, and New York City-New Jersey.  


Recent drivers for ABPS


Lately, select transit agencies in the US have begun to explore ABPS for fare collection, creating a potential market for open-loop payment systems for public transit applications in the US. Various factors are fostering an environment conducive to the emergence of ABPS and the convergence of the interest of the transit and financial industries. The key drivers are:


Increasing regional integration and system interoperability


There has recently been an increased focus on regional integration between systems operated by different transit agencies and other transportation services such as parking, railroads and airports. Since regional integration requires free flow and exchange of data, multiple regional agencies have started forging cooperative alliances to establish regional fare collection systems. In the absence of uniform (open) standards, efforts to set up regional fare collection systems in the Washington D.C. and San Francisco Bay area suffered significant delays and cost escalation.        


The US transit industry’s response was to develop its own payment card standards.  In 2007, the US DOT awarded a USD1.9 million grant to APTA to become an American National Standards Institute (ANSI)-certified Standards Development Organisation (SDO) and develop transit industry standards inclusive of contactless fare media system (CFMS) standards. The CFMS aimed to develop standards for proximity integrated circuit smart cards and for communication between regional central system and at transit agency’s central computer. The transit CFMS standards were developed but have not been tested and certified. 


The continued emphasis on regional integration and systems interoperability led the transit industry to adopt existing bank card technical standards – the ISO/IEC 14443 international standard – for the contactless smart media-to-reader interface.  


Opportunities for financial linkages and cost savings


In the US, major players including American Express, MasterCard and Visa have adopted the uniform bank card standard as the single contactless-card standard in the US. As a result, transit agencies are considering partnerships with financial institutions, payment equipment providers and systems integrators. A primary goal of these partnerships is overall cost reduction (capital and operations) as partners benefit from shared infrastructure, more cost-effective asset ownership arrangements and more equitable risk mitigation measures.


Since each stored-value closed-loop payment system requires establishment of exclusive infrastructure and support systems, the operating and maintenance (O&M) cost often exceeds those of the baseline fare collection system. For example, at the Chicago Transit Authority in 2004 before the Chicago Card (smart card) system was fully deployed, the baseline fare collection system O&M costs were USD37.6 million. By 2008, when the smart card system was in full operation, fare collection system O&M costs had increased by 35 per cent to USD50.61 million.


This is particularly challenging considering the fact that revenue from fare collection on an average covers only 50 per cent of the O&M costs. It has been shown that ABPS platforms can decrease the need for installation and maintenance of ticket-vending/card-reloading machines as well as for collecting, securing, counting, and banking cash and managing smart card inventory. Box 1 outlines the various platforms that can be used for hosting a contactless bank card-based fare payment system. Of the three systems mentioned, the direct bank card charge (DBC) platform offers the best opportunity for cost savings, with the bulk of transaction handling and processing transferred to the card issuer.


Another aspect of using open-payment bank card platforms is that the bulk of fare processing happens at the central system, which allows for greater cost efficiency in processing low-value transactions. This is possible for three reasons:


  1. New payment models allow passenger access without the wait for online authorisation; thus transferring actual payment processing to a later time in the back office.
  2. The transaction aggregation minimises the per-transaction-cost to be borne by the transit agency while reducing the processing time at the fare gates.
  3.  Prepaid accounts minimise payment risk in absence of online authorisation.



Box 1: Bank cards and platforms for hosting them


Bank cards (credit, debit and pre-paid cards) are a means of electronic payment. Such cards are popular globally for retail payments, with acceptance at 29 million locations in 170 countries. The issuing bank is responsible to ensure that the cards adhere to the safety, hardware and software standards defined by the financial industry. Transit fare collection using bank cards involves operations on an open architecture which can be achieved through different platforms as indicated below.


  1. Transit value account (TVA) platform: The transit agency issues the payment medium, which is linked to a stored-value account recorded within a central computer. The TVA is automatically replenished from the bank card designated by the patron.
  2. Indirect bank card charge (IBC) platform: The agency issues the payment medium, with each card or token linked to a bank card to be charged against.
  3. Direct bank card charge (DBC) platform: Bank cards issued by the bank are enabled for direct use in the transit system, with financial statements prepared directly by the bank.


Source: Global Mass Transit Research and APTA


Generation of new revenue is another reason why transit agencies are seeking these partnerships with financial institutions, equipment vendors, systems integrators, and retail establishment.


Increasing popularity of payment cards


A high penetration of payment cards including credit, debit, prepaid, gift, payroll and government benefits cards in the US has further fuelled interest in the transit industry to implement new systems that allow direct use of such cards for fare payment. Figure 1 highlights the rapid growth in payment cards in the US during 1995-2004. As of 2004, the Federal Reserve estimated that 90.4 per cent of all US households use some form of bank card, regardless of income, education and age. In particular, consumer awareness of prepaid cards is very high and in 2006, consumers were spending up to USD100 billion through such cards.


Figure 1: Payment card usage in the US (%)


Source: Philadelphia Federal Reserve Bank, Second Quarter 2006 Business Review


Financial industry’s interest in the micropayments market


The interest of transit agencies in contactless payment cards has coincided with the interest of the financial industry in expanding its share in the micropayments market.


The financial industry is undertaking necessary changes to its business practices to facilitate small financial transactions. For instance, with the introduction of contactless cards, the requirement for the patron’s signature and online authorisation has largely been waived for payments below USD25 to allow faster card-based transactions that were earlier dominated by cash transactions. This can be expected to benefit mass-transit as well, where each transaction must be processed in 300 milliseconds (ms) or less to allow an average of 2,500 transit customers per hour through fare gates per hour and thereby prevent delays.


Another key adaptation by the industry has been the introduction of contactless bank cards and fobs (small items to carry with one’s keys on a ring or chain). A technology, piloted in 2003-04, resulted in retail point-of-sale (POS)-based micropayments for car washes, fast food, newspapers, pay phones, parking meters, purchases from vending machines, transit fare, etc., amounting to revenues of USD1.32 trillion in 2003.


In 2005, bank card issuers in the US announced the broad roll out of contactless bank card programmes (see Box 2 for the working of such cards). The rollout was sponsored at the national level by MasterCard (PayPass), American Express (ExpressPay) and Visa. Issuers include Advanta, American Express, Bank of America (MBNA), Citibank, Citizens Financial, HSBC Bank, GE Consumer Finance, JPMorgan Chase, KeyBank, and Wells Fargo. Over 32,000 merchant locations in the US accept contactless bank cards compliant with the ISO/IEC 14443 standard. These include large national retail chains such as CVS pharmacies, 7Eleven convenience stores, Ritz camera stores and Regal Theaters. As of mid-2006, over 13 million contactless financial payment devices were issued in the US.



Box 2: Working of contactless payment cards


Contactless financial payment transactions in the US follow the same flow as traditional (magnetic stripe) card-based payments, with the following exceptions:


  • Cardholder payment information is transferred to the POS system wirelessly, using radio frequency (RF) technology.
  • The contactless transaction uses triple DES encryption to protect against fraudulent card use and includes additional security information that prevents the replay of transactions.
  • In many cases, merchants accepting contactless payment cards also participate in programmes for low-value transactions (described in the following section) in which the consumer completes the transaction without signing a receipt.


Source: Smart Card Alliance Transportation Council


Lately, newer payment methods such as and mobile smart phones with near field communication (NFC) capability have also been devised.


Other advantages for bank card issuers


Expansion into the micropayments markets including public transport would allow bank card issuers to enjoy various advantages, especially with a DBC platform, as follows:



Initial open-payment investments


Two of the earliest fare collection projects in the US with contactless financial payment products in direct-fare payment (at turnstiles or fare gates) were in New York City as a pilot and Salt Lake City, Utah as a full deployment. Each is described below:


New York City: Phase 1 of the Metropolitan Transportation Authority (MTA) New York City Transit (NYCT) bank card demonstration project has recently been implemented. The NYCT was chosen for the pilot deployment of bank card fare collection in 2006 because 60 per cent of fare revenue was collected by ticket-vending machines that dispensed magnetic stripped MetroCards. In addition, 40 per cent of those transactions involved the use of credit/debit cards to reload the MetroCards. For the Phase 1 pilot, the MasterCard PayPass platform was used in the stations along the Lexington Avenue subway line.


Under the business model, the transit agency retained the responsibility for setting fare prices and fare policy, transit planning and financial reporting, while the issuer (Citibank) was responsible for managing customer accounts, replacing lost payment devices and addressing billing and payment-related complaints. ACS provides the back-office processing system and some operating support. The back office processing system is very similar to what is used for account-based highway toll collection systems. Transactions were processed by the payment processor (MasterCard). Reportedly, user reviews were favourable and ridership improved. In addition to the external operating support provided by MasterCard and ACS, NYCT adapted internal systems to enable comprehensive review and reporting on the trial.


On the operations side, no accounting issues were reported, transactions at the fare gates were accurately completed in 300 ms or less, and there was no rise in the payment claims rate compared to the previous system. Transaction aggregation was used to reduce transaction time and clearing or settlements costs. A pre-payment option was also offered. The project reduced capital costs by half compared to a traditional close-loop smart card system. It also reduced fare collection O&M cost by half, from 5.2 per cent of total O&M costs to 2.6 per cent. For NYCT that amounts to a nearly USD50 million per year in O&M cost savings.  


In June 2010, Phase 2 of the pilot project was launched.  It was expanded to include all NYCT transit modes including buses, as well as the New Jersey Transit (NJT) systems and the Port Authority Trans-Hudson (PATH) system. Recently, the MTA announced its plans for full deployment of a bank card fare collection system commencing with the development of a comprehensive concept of operations.


Salt Lake City, Utah: In January 2009, the Utah Transit Authority (UTA) launched its pilot payment system easy and open (eO), developed by Australia-based AFC developer Vix ERG, on 35 train platforms and 500 buses. The system enables riders to pay fares with cards issued by the UTA, student and employee ID cards, and bank-issued credit cards. The system uses secure 3G wireless communications, moving fare calculations to a central back office. The APTA recognised UTA’s unique initiative with the Innovation Award in October 2009 for the successful deployment of eO. The cost reduction benefits are likely to be observed over time.


The above-mentioned two successful pilot projects have encouraged transit agencies in the US, which are interested in regional integration or cost-reductions, to implement fare-collection projects based on open standards. The following sections detail the near-term and long-term opportunities for open-payment systems based on these recent announcements.


Recent competitive transit ABPS procurements


Washington D.C.: In 1998, with the support of its regional partners, WMATA launched a regional fare collection programme involving 17 transit independent operators based on the SmarTrip platform. After encountering substantial delays and cost overruns for the project, WMATA conducted an audit in 2008. The audit discovered that the delays were due to SmarTrip’s proprietary technology and an absence of clear responsibility in the scope for systems integration. More recently, some progress has been achieved. In September 2010, the Maryland Transit Administration introduced the CharmCard, a rechargeable fare-payment card based on the SmarTrip platform creating one of the largest integrated transit fare-payment systems in the US. Many of the other bus operators in the region have also installed SmarTrip readers on their buses. However, elements that enable full regional integration such as revenue reconciliation and online account management have not been achieved.


To enable further regional integration and expand customer services, WMATA initiated two-step procurement for a New Electronic Payment Program (NEPP).  The Step 1 request for proposals (RfP) was issued in January 2011. The RfP calls for a bank card fare collection system in addition to continuing with the existing smart card system. The NEPP will have a centralised account management and a central data processing system instead of data being processed at field devices as is the case with the SmarTrip system. The NEPP will accept chip-enabled debit, credit and pre-paid cards (which banks are already distributing to customers); federal identification cards; and smart phones equipped with NFC capability. A key feature of the NEPP procurement is that the systems integrator has to develop a series of agnostic, standardised web-based application program interfaces.


Philadelphia, Pennsylvania: The Southeastern Pennsylvania Transit Authority (SEPTA) decided to replace its existing fare system of tokens, cash and passes with an open payment system in 2008 called the New Payment Technology (NPT) system. It is to be implemented in multiple phases. Research indicates that the SEPTA system comprising commuter-rail, heavy-rail, light-rail and buses accounts for 1.1 million trips per day. It was expected that about 78 per cent of SEPTA riders are likely to use their existing bank cards to pay transit fares. A single card, as opposed to separate transit smart card and bank card (used to recharge the transit smart card), was expected to reduce travel times considerably.


A proposed innovative project delivery approach for the NEP is expected to reduce implementation time, as well as capital and operations costs, compared to implementing an exclusive smart card system. Estimates suggest that a bank card-based system could reduce SEPTA’s operating expenses by up to USD10 million or more per year, allowing the new system to pay for itself in 10 years’ time.


In 2007, SEPTA received additional capital assistance from the state of Pennsylvania through Measure 44 that included a new transit fare-collection system among the high-priority capital projects. SEPTA allocated funding for the new system in its FY2009 Capital Plan, and a two-year schedule was expected for full deployment of a bank card system. However, after failing to secure necessary federal approval to convert an Interstate highway to a tollroad, SEPTA secured a low-interest loan of USD175 million for the project. The loan would be repaid over 25 years. Having prequalified three suppliers - ACS Transport Solutions, Scheidt & Bachmann and Cubic Transportation Systems - the contract is expected to be signed by June 2011.


Chicago, Illinois: In August 2009, the Chicago Transit Authority (CTA) announced plans to transition to a new open payment fare collection system involving contactless credit, debit and prepaid cards. The existing fare-payment system, which involves the use of the Chicago and Chicago Plus smart cards as fare media, was started in 1997. The open fare-collection project is aimed at reducing the cost of issuing fare media, increasing customer service and improving management accountability. A two-step competitive procurement process is underway.  Step 1 is completed, and Step 2 proposals are being evaluated. Various public-private partnership options for developing, financing, operating and maintaining the open standard fare system are currently under consideration.


It is worth noting that the CTA procurement involves a comprehensive marketing and customer communication effort focused towards understanding the needs of and reaching out to unbanked and under-banked customers and availability of a robust media distribution network.  This emphasis is based, in part, on lessons learned from the challenges faced in launch of the Chicago and Chicago Plus smart card systems.


Dallas, TexasIn February 2011, the Dallas Area Rapid Transit (DART) initiated the procurement for the Regional Area Payment Interchange Device (RAPID) Card project.  Its goal is to reduce cash handling by creating a region-wide electronic payment system for transportation and other services such as water bills, access to recreational/cultural centre and sports venues as well as retail purchases.  A group of regional transit, toll road, and city services organisations is assisting DART. DART is especially seeking a robust media distribution network (to address the needs of unbanked and under-banked customers) and a back-office processing system (to process and reconcile accounts for the various regional partners).


Non-competitive ABPS acquisition


Port Authority Transit Corporation (PATCO) high-speed line: In early-February 2011, a pilot programme was jointly launched by PATCO and Cubic Transportation Systems to test open-payment technology on the high-speed line between southern New Jersey and Philadelphia. At present, over 70 per cent of commuters boarding the system use the Freedom smart card. The pilot for the proposed system will operate parallel to the existing system without affecting its operations. Initially, Cubic's banking partner will issue a branded reloadable contactless prepaid card to be used for PATCO rides in addition to retail purchases at participating merchant stores. The second half of the pilot project would involve expanding the system to accept all types of bank cards.




Studies by the Center for Financial Service Innovations (CFSI) and the Payment Card Center of the Philadelphia Federal Reserve Bank support the view that one of the key concerns in the adoption of contactless financial payment cards for transit fare payments is ensuring that unbanked and under-banked customers have access to fare media. This market segment is most dependent on transit and comprises low income workers, school age children and college students. According to the Federal Deposit Insurance Corporation, the Federal Reserve and other private organisations, around 15 per cent of the households in the US do not have a checking account and less than 10 per cent have no bank account of any kind. This segment, often dependent on public transit, needs to be catered to while transitioning to bank card-based systems.  


The move to openness also requires choosing the right variant amongst the available bank card platforms such as TVA, IBC or DBC as described in Box 1. Each variant has its own set of benefits and costs. Some general concerns regarding platforms for openness are related to business and operations rather than technologies. An impediment in the 1990s related to the transaction ‘dwell’ times where transit agencies wanted fast transaction speeds (less than 300 ms per transaction) while financial institutions were more concerned with fraud prevention. This problem has almost been overcome with a distinction between validation and authorisation. A concern from the transit agencies’ perspective could be managing the transaction fee payable to the card issuer for each transaction made with the card. 


Another concern is the anonymity and information security for public transit customers. A transit customer using a financial payment device would no longer be anonymous. While the issuing bank earns an advantage by finding a means to identify fraudulent users, the openness of the system raises concerns for misuse of collected information. This can potentially be mitigated by technology solutions for privacy of information by limiting access. 


Long-term business opportunities


Deployment in bus-transit - With success in deployment of pilots for rail systems, transit agencies are exploring their options for buses. The UTA has already launched a pilot on 500 buses and the second phase of the NYCT bank card project also involves expansion of the system to the city’s buses. In the long term, bank cards do have the potential to go beyond tolls, subways and bus systems (including Bus Rapid Transit) to implementation of congestion pricing.


New revenue generation – Transit agencies continue to seek opportunities to generate additional revenue and are using open payment projects in partnership with the private sector to explore new sources of revenue.  For example, fare collection equipment, which includes media display, allows advertisements as a potential source of revenue.


Integration with human service programmes - Introduction of memory chips in government benefit cards can provide the mechanism for coordinating human service transportation programme of the US Department of Health and Human Services (DHHS) with public mass-transit programme funded by the US DOT. Integration of the DHHS’ programmes with those of the US DOT such as Medicaid transportation and paratransit requires coordinated client-based financial and cost accounting which bank card payment systems provide. 


Financial inclusion –With the emergence of prepaid cards and open standards, a convergence is occurring where transit agencies, employers and government bodies are making wider use of prepaid cards.  Some employers are issuing payroll and social service agencies are issuing benefit payments on prepaid bank cards.


The penetration of bank cards is expected to increase at a higher rate than that of smart cards, based on historical growth rates (the use of the former increased by a staggering 489 per cent between 1995 and 2001). In June 2008, the Center for Financial Services Innovation (CFSI) indicated in its study that prepaid cards are popular with unbanked and under-banked customers because of convenience, accessibility, immediate liquidity, simplicity, transparency, value and built-in discipline.  


Prepaid cards are also beneficial from the transit perspective in mitigating the risk of fraudulent card use. Finally, since over 90 per cent of all US households have mobile phones and NFC capability exists, more consumers are expected to use mobile phones to make payments for goods and services, such as public transit service.


The way forward


With existing fare systems experiencing challenges when policy expectations confront the limitations of proprietary smart card technology, transit agencies are gearing up to upgrade their AFC infrastructure with open payment systems. As each transit agency seeks the best payment platform suited for it, a standard implementation approach with available technical standards, acceptable level of risks for both the transit agency and its partners, and equitable allocation of awards is warranted.


Stakeholder consultation is also important to ensure public acceptance of the new payment methods. This requires involvement of commuters from the conception and planning stage itself. Recognising this need, transit agencies pursuing open payment systems are requiring extensive media distribution networks and stakeholder and customer involvement throughout project development and implementation.


Another recent development is the use of web-based application program interface (API) for a variety of customer and organisational services.  The benefits of web-based applications in transit fare systems are indicated in Box 3.



Box 3: The benefits of web-based applications in transit fare systems


The API’s require the use of Service Oriented Architectures (SOA) and associated agnostic, standardised web-based languages. Their benefits are as follows:


  • Increased interoperability or free flow of data across systems regardless of device proprietary communication protocols.
  • Increased departmental independence where IT continues as an enterprise activity but departments play a greater role in designing their services and application programs.
  • Increased vendor diversity or plug-and-play capability with devices from different vendors.
  • Increased organisational agility to changing market conditions such as changes to fare structure or policy.
  • Increased operational efficiency such as increased ROI on IT projects and reduced IT, cash management, card inventory management, and equipment O&M costs.


Source: Information provided by co-author Mr. Edward Thomas


The move to open standards requires transit agencies and card issuers/payment processors to adopt security mechanisms such as firewalls and data encryption to ensure proper handling of consumer information as well as privacy notice requirements. Going forward, as the technology evolves, it is important to fine-tune standards and business practices further through constant dialogue between the transit agencies and the financial industry. Adoption of uniform standards and policies which facilitate competitive markets for payment system solutions is expected to accrue multiple fiscal and social benefits in the long run.


(The spotlight has been written with inputs from Mr Edward Thomas, former Associate Administrator for Research and Technology with US Federal Transit Administration, former Assistant General Manager for Planning, Property and IT with Washington Metropolitan Area Transit Authority, and presently an independent public transit consultant with 200consult of Rockville, MD.)