The Fundamentals of Transit Payments Explained

Introduction to Contactless Payments (cEMV) in Transit 

written by Amin Shayan 

Introduction 

As CEO of Littlepay, the first payment service provider specialising in public transit, I have the privilege of meeting with hundreds of public transit agencies, operators, consultants and vendors - an ecosystem that plays a vital role in the daily life of millions of people.  

Through these interactions, I’ve come to realise that there is still a lot of confusion and misinformation when it comes to contactless open payments.  So I decided to put pen to paper and write this primer, providing a broad overview of open payments, and the key considerations in the design, implementation and procurement of such a system.

This was written primarily for the benefit of transit authorities, agencies and operators who are considering the addition of contactless payment acceptance to their ticketing systems.  I hope that by sharing the experiences we’ve gained in over 250 deployments around the world you can better navigate this complex domain.

We start with a high level introduction, and gradually delve into more technical detail.  By the end of the series, you should have a good grasp of the lingo (lots of acronyms), the component parts of the systems involved, and a better understanding of the key pitfalls and red flags you need to navigate in procuring a contactless system.

I hope you find this useful, and would appreciate your comments and questions so we can further refine the content. 

Series Structure:

There’s a lot to cover, so we’ve broken this into a 6 part series.  The sections are as follows:

Part 1: Introduction to Contactless Payments (cEMV) in transit

• The journey - From Cash to Open loop to Closed loop

• Challenges of Open Loop Systems

• Benefits of Open Loop, and Contactless EMV

Part 2: Architecture of an Open Loop Transit System

• Overview of the system

• Bespoke v Productised v Modular systems

Part 3: Fare Systems in Contactless

• Systems to manage fares: What is AFC , ABT, and MaaS

• Fare Requirements:  Retail, KFT, PAYG,  Tap on Tap Off, Capping and adjustment

• How to handle concessions in Contactless Payments

Part 4: Hardware - Point of Sale Validators

• Requirements:  Cash, Device Interaction, Printers

• ETMs, Stand-alone Validators

• Hardware components: Readers, Validators, Optical Readers, Interfaces

• Certification and Security

Part 5: The Role of the Payment Service Provider

• Basics of Processing a Payment

• Transaction Fees

• Merchant of Record

Part 6:  Procurement Pitfalls

• Prime v Parcel procurement case studies

• Structuring a procurement

• Setting up evaluations

The journey - From Cash to Open loop to Closed loop

Transit ticketing and fare collection has evolved through 3 major phases over the decades; Cash, Closed Loop and  Open Loop. Cash fareboxes were introduced in the 1880s, followed by token-based systems in the 1930’s which reduced the need for cash handling. In the 1990s, magnetic stripe cards, like New York’s MetroCard emerged enabling stored value and convenient swiping at fare gates, marking a shift towards smartcard based systems.

Closed Loop systems (Smartcards)

A closed loop payment card is a type of card that can only be used at a specific set of merchants or locations, rather than being accepted widely like a credit or debit card. These cards are typically issued by a specific organisation, and can only be used to make purchases within that organisation's network of products or services.     

An example is a transit card, which is used for transportation systems such as buses, subways, and trains, and can only be used within the transit system's network. There are many examples of these around the world such as: Oyster Card (London), Myki (Melbourne), Clipper (San Francisco), Leap Card (Dublin). The Octopus card in HongKong is a somewhat unique example of a transit closed-loop card that was then opened up for use by other retailers.

Closed Loop cards are sometimes referred to as Smartcards, or Stored Value Cards. The card itself usually holds data about the amount of funds currently held by the customer, and is adjusted through a back-office, or ledger system for the application.    

The value on the card can be ‘topped up’ by the customer by cash (at a Kiosk or Retail outlet) or through an online payment using an Open Loop card.

Open Loop Systems (Bank issued cards)

Open loop payments are typically associated with payment cards such as credit cards, debit cards, and prepaid cards. These cards are usually issued by financial institutions such as banks.  

Open loop payments are processed via payment card networks (also referred to as “schemes”) that facilitate the transfer of funds between the merchant's bank and the customer's bank, and provide security and fraud prevention measures to prevent loss.

These systems (sometimes referred to as ‘payment rails’) have been developed over several decades and billions of dollars of investment. Visa and Mastercard are the two largest open card networks.

When we refer to ‘contactless payments’ in transit, we are usually referring to a particular type of Open Loop payment - that doesn’t require card insertion or a swipe. 

Challenges of Open Loop Systems

Open Loop, Contactless Payments (cEMV) - A road paved by the retail sector

In 2007, the UK card industry set contactless payments in motion to provide a fast and frictionless payment experience in retail. Shoppers could now buy their groceries, the weekly newspaper or a pair of socks all with a simple tap of their card at the checkout. 

Today, contactless accounts for 50% of global in-person transactions handled by Mastercard ^1, and the global contactless payment market is projected to garner $32.75bn by the end of 2024 ^2.

The speed at which customers could just tap and pay proved ideal in fast-moving industries such as events, retail and hospitality. Any merchant with the right payment terminal (hardware), whether at a sports event or convenience store could now deliver a more frictionless payment experience, improving efficiency and customer satisfaction.

It’s a trend that further exploded in the early months of the pandemic. Mastercard saw over 40% growth in contactless transactions globally in the first quarter of the year ^3. For Visa in 2020, the percentage of transactions that were contactless more than doubled year on year in parts of Europe ^4. While over in the U.S., 19% of consumers made their first contactless payment in May 2020 ^5.

What is cEMV? And how can it make catching a bus, train or tram as easy as buying your morning coffee?

Rerouting from retail to transit

The challenge 

While contactless payments are widespread in the retail world, they have been slower to catch on in public transit due to a number of challenges:

• Payments need to be processed instantly. Retail stores can still afford a slight delay of a few seconds between the moment a customer taps their card and the moment the payment is authorised. In transit, the standard is 300 milliseconds. Even a third of a second pause per passenger can cause congestion at a station gate. Acceptance with this speed means payments processors can’t check if the customer has adequate funds in their account. This in turn has implications for risk.

• Values are often unknown at the point of sale. When a customer taps to pay at a retail store, the value of the payment is known. With transit, the value will differ depending on how far they travel, what zones they go through, whether they are eligible for discounts or whether they have hit a fare cap. There can be thousands of different fare variations, which require a set of complex rules to manage. 

• The system needs to work online and offline. Retailers are usually connected to Wi-Fi or a mobile network. If the point of sale device is down, the customer has to wait. In public transit, it is sometimes necessary to take payments underground or in remote, rural areas, where connectivity isn’t guaranteed.
• There is risk to manage. Given the speed of processing, variability of transaction values, and wide range of globally issued bank cards, there are a range of risks to manage. If the transaction fails somewhere along the process, you need a system that can recover the debt payment and prevent the passenger travelling again to reduce losses. 
• Transaction costs must be managed. The average transaction value (ATV) of a retail transaction is $20-$50 depending on the market. In transit the average value is an order of magnitude smaller, $2 - $5. The ability to aggregate transactions before processing, to minimise fixed interchange fees can have a big impact on overall cost in some jurisdictions.

London was one of the first cities to rise to the challenge, with Transport for London (TfL) introducing a contactless payment system to London’s buses in December 2012, which expanded to cover Tube and rail services in September 2014.

The unique characteristics of contactless EMV payments for transit add a layer of complexity when compared to retail tap and pay. Solving these problems is the role of a specialist. 

London: a brief stop

Contactless payment cards, phones and smart watches have been used on London’s transport systems for over 10 years, and to great success. In 2017, 40% of all pay as you go journeys were made using contactless payment⁶ in 2021 that figure was at 70%^7, and now contactless payments revenue has already returned to pre-pandemic levels.⁸

It’s a model that many want to replicate. Chicago and Salt Lake City were the first to adopt the technology in the U.S. but as Bloomberg reported, they were quickly hamstrung by “long-term equipment contracts.”⁹

Few operators can afford a bespoke system like TfL. And few cities want to wait years for a ticketing system integrator to develop it for them. Agencies and operators with enough resources, such as New York’s MTA, the largest transit authority in the U.S., can achieve similar results to TfL. But this type of built-from-the-ground-up system cannot feasibly scale across a country or state in the way that is now being seen in California. More on that in later chapters.

Open payments are a crucial step in meeting the needs of the modern passenger and luring them back to public transport. So another answer was needed.

A fast lane for the wider world

At Littlepay, we set out to create something that was affordable and easy for public transport operators and agencies of all sizes - a simple, modular, contactless open-loop system that was vendor agnostic and could work with all suppliers. All you need is an EMV capable card reader, a bank account and our standard contract, and you’re good to go.

Open payment technology offers a simple solution for passengers, reducing the hassle of having to carry around multiple cards, or tickets. Your own payment card effectively becomes your ticket to travel. We asked: “Why does it have to be so complex and expensive to set up payment acceptance in transit when it can be done in minutes for retail?”

After successfully creating this platform, and helping hundreds of operators to deploy contactless, Littlepay built on this foundation with additional capping and concession features. These features deliver convenience for the passenger, and enable operators to keep existing fare structures whilst maintaining transit equity for their customers. We’ll unpack these features further in later sections.

The second connection: Open loop payment systems

Making travel payments easier for everyone

The closed loop past

Legacy closed loop payment systems are still found in cities all over the world. 

Closed loop systems can make travelling easier for passengers that use the same network every day, and they are especially convenient for children and passengers who don't have a bank card. They also give the operator complete control of their fare collection system and its data. 

That control comes at a cost, however. Closed loop systems often require the issuance of millions of pieces of plastic, not to mention ticketing machines and the costs of handling the cash that goes with them – up to 15%¹⁰ of each sale. And while the pre-pay nature of the system means that operators can benefit from unspent funds (there was over £550 million on unused Oyster cards in March 2021¹¹), this is hardly a pro-passenger approach. 

For cities with legacy systems, open payments are usually adopted in parallel with a closed loop payment system.

The open loop future

We know that the benefits of open loop have the potential to solve many of the problems facing modern mass transit – for operators and passengers.

Unlike closed loop cards, they don’t require passengers to prepay. That means they don’t need to find a fixed kiosk to top-up or struggle for five minutes through an app’s UX before they can get on a bus or train. They can simply step aboard.

It also means transport providers don’t have to fret about offering bespoke card management systems, reducing their costs. Transport for London’s revenue collection costs fell from 14.3% in the 2005-2006 fiscal year to 9.6% after the introduction of contactless payments, and the cost has only continued to drop. ¹² 

Sheryll Ricketts, Solutions Consultancy Lead at Littlepay, says, “We’re looking to blow complicated closed loop payments out of the water. With closed loop, you have to invest in all the backend systems yourself, but with open loop the bank is taking care of the security and the tech and the card issuance. This makes the total cost of ownership significantly lower“

“If passengers have a pre-paid closed loop experience, it’s sometimes lucrative for the operator. But making travel more cost-effective for the passenger will encourage  passengers to use transport more often, which adds further value and is better value for operators in the long term.”

Benefits of Open Loop, and Contactless EMV

Good for passengers

One card, one tap. Passengers can easily tap their contactless card, or contactless-enabled smartphone or smartwatch on a payment reader to access transit services. 

Uncomplicated. Ticketing complexity is the bane of many riders’ public transport experiences. But with EMV, flexible fare models can be calculated in seconds. Taps of a bank card can be aggregated together over a given period. Simple flat fares, fare caps or concessions for students or pensioners can be applied, with the best value fare automatically calculated. 

Convenient. Passengers can pay for public transport trips using the same bank card or mobile wallet they carry day-to-day. This benefits low-income riders in particular, as a pay-as-you-go solution means you don’t have to stress about forking out the upfront costs of a weekly or monthly pass.

Adaptive. With pay-as-you-go contactless EMV, passengers can travel irregularly and still get the best value from automatic fare caps, an essential for a hybrid-working world. Buy now, tap later EMV options are also possible for passengers who prefer to get organised up front. 

Good for operators

Lures riders to transit. Contactless EMV payments make the rider experience effortless, and increases customer satisfaction. It’s simpler to use the system for the first time, and passengers are more likely to return. Tourists don’t need to wrap their heads around local ticketing systems, or talk to the driver in an unfamiliar language to pay for a paper ticket.

Inspires more frequent travel. Dynamic fare caps can be automatically applied to reward frequent travel. These can be daily, weekly or monthly caps that mimic period passes, or they can be flexible, applying incremental discounts with each tap until a cap is reached.

Quick. A simple, tap and pay system, instead of using cash, speeds up boarding. Dwell times are reduced by an estimated 25%¹³ , improving public transport efficiency and traffic.

Works anywhere. Taps are securely processed offline, it doesn’t matter whether you’re in a remote rural town, or underground with no signal, payment can still be settled.

Saves the planet. Decreased dwell times means less time spent stationary. Idling for more than 10 seconds contributes more emissions than stopping and restarting the engine.¹⁴ Contactless EMV payments reduce this impact considerably. It also reduces the need to issue additional plastic smartcards that are required in closed loop systems, further reducing the environmental impact of transit.

Save on infrastructure. EMV cards are issued by personal banks, not transit operators, so issuance and replacement costs are non-existent. Phasing out closed loop infrastructure means that operators won’t have to allocate budget for maintaining ticketing kiosks or issuing cards. 

Save on cash. Cash is costly, with leakage and handling costing. With contactless EMV payments, operators will no longer need to spend as much as a whopping 15%¹⁵ of each sale on cash handling. Going cashless reduces operating costs and also prevents theft, removing a security risk for bus drivers.

Less revenue lost. With a open loop partner like Littlepay managing near-real time deny lists and debt recovery, operators can keep fare losses at an ultra-low 0.2%

Go to Part 2: Architecture of an Open Loop Transit System >>