By Andy Williams, Associate Editor

More banks are issuing contactless payment cards and more retailers are also starting to accept the tap go payments, but will these cards replace the proprietary contactless transit cards used in major cities around the globe?

If recent progress is an indication, the answer may likely be ‘yes.’ A number of transit agencies are looking to accept contactless MasterCard and Visa cards as well as other forms of payment. Both MasterCard and Visa are experimenting with credit cards in public transit, and for one transit agency it’s full steam ahead.

MasterCard has had a trial underway with the New York transit system since 2006 and is moving ahead with additional trials with the city’s Port Authority and in New Jersey. Visa is looking at something similar, but its Los Angeles trial is limited to specially-issued Visa credit cards that have a dedicated transit application preloaded. Only the Utah Transit Authority in Salt Lake City has aggressively moved forward, implementing a system that accepts not only contactless credit cards of all stripes, but its own transit fare cards as well as employee or student IDs.

New York gets off to an early start

“The purpose (of the New York transit project) was to demonstrate that PayPass could be used to pay at the fare gate,” says Adam Gluck, MasterCard’s vice president, Global Transportation Solutions. “We’re looking to demonstrate to the transit world that accepting payment cards is an attractive option.”

Gluck says that most transit agencies operate closed loop systems, meaning only specific transit tokens, cards or tickets are good. “By accepting MasterCard, you get a different proposition. The purpose was to demonstrate that MasterCard could be used instead of closed-loop cards.”

Some 86 New York Metropolitan Transportation Authority gates are involved in the trial. None of them had contactless readers at the beginning, just readers that could handle the MetroCard, a mag-stripe card that has been in use for more than ten years. This pilot, however, is limited to Citibank customers, one of MasterCard’s partners in the experiment.

While MasterCard’s branding strategy normally includes MasterCard and PayPass logos appearing side by side to let customers know contactless was accepted, the PayPass logo wasn’t used at the MTA gates. “We created a special throw away brand, a green circle with a white asterisk,” says Gluck. “We did this purposely so Citi Bank card holders with a PayPass card knew which gates to use.”

Citi customers could choose to prepay for their rides, and receive a 20% discount, or they could choose the pay-as-you-go option that works just like a normal contactless credit card.

“MTA is pleased with it,” says Gluck, noting that the trial was scheduled to end at the close of 2006 but has been continued ever since. “MasterCard was looking to demonstrate that this is a valid thing. Our first proof point was, ‘will it work?’ and could we get fast enough transactions? The system worked like a charm. Installations took 20 minutes per turnstile and consumers love it. The biggest complaint we got from consumers was that there weren’t enough stations. As a project manager, this was heaven on earth.”

Gluck was also happy with what he calls the lift … where people tend to buy more. “One of our biggest surprises was that we saw people riding a little more, because it became more convenient to take the subway.”

In the first quarter of 2009 New Jersey will try a similar program for select bus routes and its transit railway.

The New York Port Authority will also begin an eight-month trial this year where travelers will be able to pay for fares using MasterCard PayPass. After a period of time though the trial will open up to other contactless brands.

Utah takes the lead

The Utah Transit Authority, which first experimented with contactless credit cards two-years ago, is pioneering the use of the cards in the transit arena.

“Our investigation of the different types of electronic fare collection systems available convinced us that a system based on the open payment network was the best choice,” says Craig Roberts, UTA’s manager of Technology Program Development.

Speed of deployment and lower costs were two major motivators for UTA, says Roberts. “Cost were considerably less than building a closed system. More importantly, it provided UTA with more flexibility in product development, including opportunities for co-promotion with banks and other vendors that accept contactless media,” Roberts says.

UTA’s electronic fare collection system officially went live Jan. 1 after a testing period last year. Credit card use isn’t being actively promoted yet, but a marketing campaign will get under way later this year to make people aware of their choices, says a UTA spokesperson.

UTA doesn’t intend to increase fees to its riders even though there will be credit card processing fees like those other merchants incur. “Our cost analysis shows that the savings to UTA from reduced cash handling and the increased revenue from attracting new riders will offset the loss of revenue incurred from processing fees,” says Roberts.

While using a credit card can definitely be a convenience, especially for visitors to the state’s ski slopes, the agency is going to continue to accept other payment forms as well. “The UTA will continue to offer all existing transit pass products until they can be transitioned to smart cards that work with our electronic payment system,” Roberts says. “Two electronic pass products–Eco Pass and Ed Pass–are being launched simultaneously with our acceptance of contactless credit/debit cards. We will also continue to accept cash for the foreseeable future.” Eco Pass is issued by businesses to help their employees get to work, while Ed Pass is handled by universities.

Two other agencies involved in the UTA implementation were automated fare collection company, ERG Group and MetraTech, a Boston-based billing and settlement provider.

ERG had the inside track when UTA first put the project up for bidding because the company had operated the pilot program. “We were one of the only respondents who were willing to do things that UTA wanted,” says Michael Cook, ERG’s vice president of business development for the Americas.

The pilot involved UTA’s ski buses. “The idea at the time was that you could get on a bus with a ski pass and use the same pass to ski all day. Credit cards were made available, but at the time we didn’t know there were contactless credit cards available in the region,” says Cook.

Utah was ERG’s first foray into this type of public transit payment mechanism. “It’s the first and only one we believe that’s been fully deployed,” says Cook. “There are other systems out there that use a credit card, but it’s really a transit application embedded in the card that gives the appearance that someone is using a credit card. We view Utah as our future. It’s similar to what they’re doing in New York, but on the subway it’s a flat fare structure. Here we can accommodate all types of fares.”

Cook says that in phases two and three in Utah other fare options will be explored. For example, if a customer rides the bus at least four times in one week, he’ll be eligible for the weekly pass rate instead of having to pay a full fare for each of those rides.

“As a regular user of the system you wouldn’t even have to make the decision of what fare is best,” Cook says. “All you need to do is tap on the reader in the vehicle you’re riding and we’ll know if you’re a regular user. Once you reach a certain threshold, you’ll no longer be charged for the longer trips.”

Figuring all this trip structure is where MetraTech comes in, says Cook. This is the first mass transit deal for ten-year-old company, says MetraTech CEO and founder Scott Swartz. The solution built around MetraNet enables the UTA system to accept a variety of smart cards to be used for fare payment including UTA’s own cards, employer provided smart cards as well as the contactless credit cards, he adds.

MetraTech’s software lends a hand in determining discounted journeys, or the even more complex ones involving both buses and trains. “The system has to figure out that I took a bus, then switched to a train. Initially it would look like two different fares, but if it happened in one section of time, you’d normally get a discount,” adds Swartz.

ERG is also working on “onboard rapid authorization” of the contactless cards. What that means, explains Cook, is that credit card companies are looking at eliminating some of the card validation processes for small sales. “Because rides average $2, does it make sense to step through all these processes? What’s the likelihood of someone stealing a $2 fare?”

The time saved with quicker validation would only amount to about one-half second, “but in public transit,” stresses Cook, “that’s still long.”

Right now the rider’s charges are authorized in real time when they board the bus or pass through the turnstile. “They simply tap and get on the vehicle. If the card is later rejected, it will be hot listed on the entire UTA network because the reader will identify that the card was earlier rejected,” says Cook.

The UTA eventually will be able to accept contactless fare cards from other transit agencies as well, says Cook. “We can set the system up so it works, but you’ll have to register the card. We’re not going to seek out the New York or LA rider for a $2 fare but the system does allow the use of any type of smart card as long as it’s registered.”

Los Angeles adds a separate transit purse to a Visa contactless card

Los Angeles is taking a different tact with its transit card. Los Angeles’ Transit Access Pass (TAP) is a Visa branded card that has a payWave chip, but a separate transit application is stored on the chip along with the payment application.

“In LA, you basically have two purses on the card. One is the Visa purse, the other the transit purse,” explains Sandy Thaw, senior business leader in Visa’s Global Product Innovation Group. “You can move money from one purse to the other. When the card shows up, money will be taken from the transit purse.”

The card can be refreshed via the Internet, direct deposit and with cash at a kiosk.

The LA pilot, scheduled to launch in 2009, will run for 12 months with the option to continue afterwards, says Thaw.

Still, from a pragmatic viewpoint, Visa’s see an open model for transit and an evolution similar to that of payment and private label cards. “It’s much the same way as it was 30-years-ago that if you wanted to use a payment card at a gas station, you needed that card. Eventually they started accepting bank cards, and started to make less and less use of their proprietary product. We think transit will go in a similar direction.”

Money is what’s most likely going to hold this back for now. “If a transit agency had just invested millions of dollars for a proprietary solution, it’s not practical to change,” says Thaw. “Where a transit agency has an installed a proprietary contactless infrastructure, the agencies are comfortable with it. The best way to work with the agency is to enable their riders to have retail and transit payments on the same card so they don’t have to change their infrastructure.”

Relying on credit cards, like the UTA model, “makes more sense if you don’t have an infrastructure in place. The biggest agencies have an existing proprietary smart card system. The smaller agencies don’t have the resources to put in their own system,” adds Thaw.

Visa is also working with France’s transit system, known as RATP. “It will be an open model. We’re looking at enabling payWave acceptance at the RATP fare gates,” says Thaw. However, no specific timeline has been established on when that pilot will launch.

“In this capital-strained market, we need to help transit agencies figure out the right business case,” says Thaw. Long term, the open model “is a win-win for everyone. We want transit agencies to focus on the core business of moving people and not running their own proprietary payment system.”

MasterCard’s Gluck agrees with Thaw that credit card usage “will fundamentally change the way transit agencies get paid for a ride. They get to move the people and we get to move the money.”

When will it become commonplace in transit environments?

Gluck believes that as transit agencies with legacy applications upgrade, they’ll move to contactless. “They all see the benefit of the reduced expense of distributing cards and accepting cash, while MasterCard sees better penetration and acquirers and banks see opportunities to do more of what they do today.”

One hard-to-measure advantage from the credit card company’s perspective, says Gluck is that the more a customer taps with his card the more likely it will become “top of wallet. If a commuter reaches for that card twice a day to pay for transit, he’ll reach for it in other instances, too.”

As people start tapping in New York, “they start appreciating the value we bring them. As we start talking to transit agencies around the country, they’re quite excited.”

ERG, too, would like to migrate this system to other transit agencies. “Our strategy is to go after mid-tier agencies, between 50 and a thousand vehicles. This industry is legacy-driven and very slow to change. We feel we’ll be able to leverage the UTA implementation, but it’s like the snowball rolling down the hill, it takes a while to build up momentum. It’s also politically driven. Agencies don’t want bad press, so it’s easier to make decisions that others have already made.”