Preliminary Strategic Analysis of Next Generation Fare Payment Systems for Public Transportation (2015)

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13 Chapter Overview This chapter describes the four primary characteristics or design attributes that, when aligned together in different combinations, comprise the range of transit fare payment system typolo- gies. These four sets of attributes are: 1. Transit system scope: single agency or multiagency (e.g., lead transit agency with partners, or regional authority); 2. Design and technology: proprietary or standards-based technology; 3. Fare system architecture: card-based or account-based; and 4. Payment architecture: closed payments or open payments. Typology: the Architecture of Transit Fare Payment Systems The system elements and the functional flows of information by which a transit agency col- lects fares or funds from payment media relate to a transit agency’s fare payment system archi- tecture. This has been described as: “. . . the basic fare collection and distribution approach, as well as the specific equipment and payment media. . . .”7 The transit fare payment system architecture is a key component in establishing the opera- tional, business, and financial relationships between the transit agency and the rider, and between any third parties involved in the financial transaction. It is the overall roadmap that describes the technical design approach to the transit fare payment system. Transit fare payment system architectures are governed according to the processing, storage, or communication capabilities of individual elements within the system, or specific system con- nectivity requirements.8 Regardless of specific factors, the operational methodology by which a transit agency collects fares and the physical elements used for fare collection comprise a transit agency’s transit fare payment system architecture. This report describes different types of transit fare payment system architectures in terms of “typologies.” Each of the four sets of attributes has inherent strengths and operational requirements. In some combinations of attributes, different choices may be compatible or scalable, so decisions are not necessarily “either A or B.” This lets a transit agency combine multiple approaches in order to leverage strengths of individual attributes in order to meet current or future fare system objectives. C H A P T E R 3 Design Attributes of Transit Fare Payment Systems

14 Preliminary Strategic Analysis of Next Generation Fare Payment Systems for Public Transportation Transit System Scope: Single Agency or Multiagency Understanding the existing, planned, or potential relationships between regional transit agen- cies is critical when evaluating payment system designs options. This is due to inherent flex- ibility that certain attributes provide in a multiagency application. In a single agency structure, the transit fare payment system is intended for use by a single transit agency. In a multiagency system, three design approaches can be considered. • Lead transit agency with regional partners. In this scenario, a single transit agency (often a large urban transit system) has primary responsibility for transit fare payment system design and implementation, but shares the transit fare payment system design and specifications with participating transit agencies in the region. Transit agencies in this scheme use the lead transit agency fare card and send transaction data to the lead transit agency central computer system to settle revenues among the partner transit agencies. The lead transit agency applies the business rules and manages transactions. Participating transit agencies typically adopt the same system technology and vendor for their transit fare payment system as the lead transit agency. In planning for regional systems, the participating transit agencies can even piggyback on the procurements of the lead transit agency. This is by far the most common approach to achieving seamless regional transit fare payment systems. • Regional transit authority. In this arrangement, a regional transit authority or metropolitan planning organization (i.e., a central transit agency that does not operate its own transit vehicles) replaces the lead transit agency in the scenario above. The regional transit authority issues and manages the regional fare media, promulgates the institutional rules of the system and clears and settles the transactions that are processed by the individual transit agencies. An example of this approach is the Metropolitan Transportation Commission’s role in the San Francisco Bay Area Clipper Card System. • Peer-to-peer. In this arrangement, usually found in an open payments environment, two or more transit agencies share the same transit fare payment system. A joint coordinating inter- agency committee develops the transit fare payment system design, as well as business rules for managing travel between multiple transit systems. Design and Technology: Proprietary or Standards-Based When designing a new transit fare payment system, it is important to determine whether the system will use proprietary designs and technology or be designed to the standards of the financial payments industry. This may appear to be an acquisition decision, but choosing a pro- prietary approach can restrict future system development and interoperability. Proprietary Fare Payment System In a proprietary transit fare payment system, the system is developed and owned by a com- mercial entity and typically licensed to a transit agency. Proprietary transit fare payment systems can be highly customized to meet specific customer requirements, and can be robust and reli- able. A proprietary fare payment system may also include design features that meet common industry standards. For example, contactless fare cards and fare card readers share the same communications technology used by contactless bankcards. However, in a proprietary environment, there is no requirement for inherent compatibility or interoperability with other devices or transit fare payment systems from other suppliers. In proprietary fare payment systems, the system designer or manufacturer maintains control over their intellectual property and their products. The use of proprietary hardware (cards, readers, etc.) often precludes the transit agency from procuring new or replacement equipment from other manufacturers. Similarly, changes to fare rules or other adjustments at the back-end’s

Design Attributes of Transit Fare Payment Systems 15 central agency computers also involve device updates, both of which require the involvement of the original system vendor, and usually include an additional cost to the transit agency. Standards-Based Fare Payment System Standards-based transit fare payment systems adhere to data and technology specifications for the financial payments industries, as well as other technical standards regarding communica- tions, data security and physical characteristics. In the case of transit fare payment systems, these standards typically include: • Financial transaction standards, such as exchange of merchant and cardholder information, transaction amount and transaction type; • Communications protocols, such as the transmission frequency for contactless fare cards, (e.g., ISO standard 14443, Part 2) or the communications modes for Near Field Communica- tions (ISO 18092:2013); • Physical characteristics of devices, such as the length, width and thickness of a contactless bankcard (e.g., ISO standard 14443/Part 1 or ISO 7810); • Security of information, such as how data is stored or transmitted to prevent tampering or theft; and, • Data requirements, such as the sequence and format of a data exchange between a contactless fare card and the card reader. For the purpose of this report, a “standards-based transit fare payment system” is designed to meet the ISO standards and specifications used by the financial payments industry for contactless bank cards, which can support open or closed payments architectures. Financial payments standards are established by groups such as EMVCo or the Payment Card Industry (PCI) Security Standards Council. EVMCo—a global consortium representing American Express, Discover, JCB, MasterCard, UnionPay, and Visa—manages the global Europay MasterCard and Visa (EMV) Specifications used for contact chip, contactless chip, common payment applica- tion (CPA), card personalization, and tokenization used by the financial payments industry. Other technical specifications used in standards-based fare payment systems include those established by national and international standards associations such as the International Standards Organization (ISO) and the National Institute of Standards and Technology (NIST), or by transit industry orga- nizations such as the American Public Transportation Association (APTA). One common set of standards used to define the communications technology used for con- tactless smart card fare media is ISO 14443 “Identification cards—Contactless integrated circuit cards—Proximity cards.” Both the transit industry and the financial payments community cur- rently use this standard for their contactless fare media and contactless bank cards. In order to ensure interoperability between fare payment systems and devices, national transit initiatives and consortia have established common electronic ticketing standards, including APTA’s Con- tactless Fare Media System,9 Germany’s VDV,10 and France’s Calypso.11 The global financial payments industry is in the final phases of implementing payment card speci- fications that will provide greater security and global interoperability. The “EMV specification” will apply to virtually all payments cards, including contactless cards.12 The U.S. is scheduled to imple- ment the EMV standards for nearly all merchants by October 2015, so transit agencies implement- ing a contactless fare card solution must ensure that card readers and other devices comply with the EMV standards if they want to be able to accept cards issued by financial institutions in the future.

16 Preliminary Strategic Analysis of Next Generation Fare Payment Systems for Public Transportation Standards-based transit fare payment systems tend to provide greater flexibility in system design, acquisition and operation, which can be seen in such areas as: • System-wide interoperability and compatibility between devices from different manufac- turers, or from other transit partners. • Integration across multiple agencies, through acceptance of common payment media. • Front-end technology: the cost or availability of new or replacement equipment such as fare cards, card readers, fare boxes, TVMs, etc. • Back end technology: the ability to perform updates and changes to system software (e.g., changes in fare rules; adding transit agency partners). Fare System Architecture: Card-Based or Account-Based Systems Card-Based Fare System Architecture A card-based fare system is the traditional transit fare collection system architecture, in which the transit card serves solely as the fare medium. Value is carried on the transit fare card, and decremented as the rider as granted access to the transit system. Value is added by the rider using a separate payment medium such cash or a personal bank card or by a third party (e.g., through an employer transit benefit program). Fare value may be added in the form of a dollar amount (to pay single fares) or in the form of a period pass (e.g., a monthly pass). Once a fare card has been loaded, the card “carries” that value or pass. Since the fare card itself holds fare value, the rider will lose any value remaining on the card if it is lost or stolen, unless the fare card has been registered (see discussion box). In a card-based system, all fare transactions take place at the front-end of the system, at the card reader located at the farebox, barrier, or other transit system point-of-entry (POE). At the card-to-reader interface, the transit fare payment medium (i.e., the payment card) and the card reader interact and two transactions take place to: • Authenticate the card, to ensure that the card is “valid,” and • Transit fare payment/grant transit system access. In the case of a stored value card, the card and reader interact to calculate the fare; decrement the card (transit fare payment transac- tion); and permit entry into the transit system. In the case of a period pass, the card and reader interact, business rules are applied, and entry permitted. Discussion: Registering a Fare Card in a Card-Based Transit Fare Payment System Many card-based systems allow riders to register their cards through an online portal and create an “account”; the WMATA SmarTrip card and MBTA Boston’s CharlieCard are two examples.* Through that account, riders can use their own credit or debit cards to add value or schedule automatic reloads to their fare card. Value added through an online transaction may take up to two days before it “appears” on a rider’s fare card, since the data must be downloaded from the transit agency’s central computers to individual card readers or bus/station com- puters. Registering a fare card can also protect a rider in the event of card loss, allowing a lost card to be canceled and the rider issued a new card loaded with the pre-loss balance. While a rider may create such an account, these fare systems still operate under a card-based architecture. *See www.wmata.com/fares/smartrip/index.cfm or https://charliecard.mbta.com/

Design Attributes of Transit Fare Payment Systems 17 Account-Based Fare System Architecture In an account-based fare system, the fare medium functions as a single credential to identify the rider to the transit system (for access) and to associate that rider with an account (for transit fare payment). All transit fare payment transactions take place at the back end, within the rider’s account, rather than on the fare medium itself. For ease of understanding, the reader should think of the automated toll collection (ATC) systems used throughout the toll industry (e.g., E-ZPass). No value or products are stored on the toll “tag” itself. Rather, it functions as a “token” or credential that identifies the tag-holder to his or her account within the central computer of the toll system. All toll calculations and charges take place at that central computer. An account-based transit fare payment system operates in a similar manner. When a fare card or other fare medium is presented at the card reader, the medium and reader communicate in order to: • Authenticate the card/grant transit system access, to ensure that the card is “valid” and then grant access to the transit system, and • Authorize the fare transaction. The reader communicates with the transit agency’s cen- tral payments system, provides necessary information to associate the card with a payment account, calculate the fare, and charge the rider’s account. The account-based approach de-couples the access and payment function, and makes a num- ber of other design alternatives available. Advantages of an account-based approach include: • Permits the simultaneous use of a number of fare media options (transit agency smart cards, contactless credit and debit cards, mobile devices, ID cards, mobile applications, etc.); • Eases partnering across transit agencies, other transportation operators, and non-transpor- tation organizations; • Increases the modularity of the front-end (i.e., decouples sales transactions from fare/business logic from card reader); • Simplifies administrations of government transportation benefits, by moving payment func- tions to a centralized computer; and, • Enhances ability to provide incentives and promotions across transit operators, and with other modes of transportation and non-transit organizations. Payment Architecture: Closed Payments or Open Payments Closed Payment Architecture A closed payment (or “closed loop”) architecture utilizes a fare card that can only be used within that transit system or on other transit systems that accept the same fare card. Transit fare payment has traditionally operated in a closed payment system, similar to a university campus card.13 Closed loop payment systems were pioneered in cities such as Ventura, CA, Washington, DC, and in the San Francisco Bay Area, and remain the most common form of payment system currently in use by transit agencies. In a closed payment, account-based system, a rider’s account is within the transit agency’s control. The Chicago Card Plus was an example of this type of payment system. Open-Payment Architecture An open payment (or “open loop”) architecture is a payment system in which an outside entity’s card or other form of payment (e.g., bank cards) is accepted for use by a transit agency. Open payments do not necessarily preclude the use of a transit agency’s own, account-based

18 Preliminary Strategic Analysis of Next Generation Fare Payment Systems for Public Transportation transit fare card, but the underlying premise is that all fare media must utilize the same non- proprietary communications and data exchange protocols used by the financial payments indus- try, as well as standardized technology platforms and devices.14 In the case of an open payment system, a rider’s account could be held by the transit agency (in the case of transit agency-issued fare media), by a bank (using a bank-issued contactless credit or debit card or mobile applica- tion), or by another entity that uses open payment compatible fare media, such as a prepaid card. This allows the use of contactless bankcards, mobile payment applications, and other compatible technologies for transit fare payment, reducing or eliminating the need for a separate transit agency-issued fare card. Ubiquitous nature of the payment medium Card issued and managed by banks and other issuers, not by the transit agency Standards for cards, points of sale, business rules, and security Transit agency can “outsource” fare collecon and become a merchant Achieving cross transit agency interoperability Addressing occasional riders in a contactless system Can equitably serve all customer markets through the use of account-based agency fare cards, including: o Unbanked and underbanked o Seniors, students, and disabled Can accommodate financial payments industry requirements through o Use of off-line transacons o Authencaon vs. authorizaon o Aggregaon of payments o Use of micropayment pracces Open Payment Benefits Open Payments Capabilies Table 3-1. Benefits and capabilities of open payment fare system. For the purpose of this report, an “open payments” transit fare payment system is designed to accept any form of compatible payment media. This could include payment media issued directly by the transit agency, by a financial institution, or by any third party. Acceptance of open payments has been an area of intense research and development, study, and field piloting, with successful implementations in Salt Lake City, Chicago, and London. The major benefits seen by transit industry professionals and the capabilities these systems offer appear in Table 3-1. Approaches that address these challenges, such as targeted prepaid or general purpose reload- able transit fare payment cards for unbanked and underbanked riders which limit transac- tion fees, have been successfully implemented at the Utah Transit Authority and other transit agencies. Additionally, there have been a number of significant developments within the financial pay- ments industry that address the increasing number of low-value, electronic payment transactions (known as “micro-payments”). These include altering the signature rules for micro-payments (see discussion box); implementing new approaches to authorize transactions in off-line envi- ronments; and aggregating or batching multiple small purchases together in a single financial transaction.

Design Attributes of Transit Fare Payment Systems 19 Chapter 3 Review • The typology of a transit fare payment system is comprised of four attributes: – Transit system scope: single transit agency or multiagency? – Design and technology: will the system be of a proprietary design or use proprietary tech- nology? Or will fare media, readers, and other devices and software systems be compatible with the financial payments industry standards? – Fare system architecture: will the system be card-based or account based? – Payment architecture: whether the system accepts only transit agency-issued fare media (closed) or will it accept open payments? • Some design approaches are compatible with each other, while others are not. Discussion: Serving Up Electronic Payment Cards in America’s Quick Service Restaurants The first general purpose credit cards were introduced in 1966, and saw wide- spread acceptance amongst many types of merchants. Retailers, restaurants, and other higher-value vendors found that accepting credit cards increased both transaction volume and average sales. Merchants with smaller average transaction values, such as quick service restau- rants, were much slower to adopt electronic payments. They were concerned with the higher cost of accepting credit cards (as a percentage of sales), and the impact on slowing service speed, while cashiers waited for credit card authorization and patrons signed receipts. To overcome these hurdles, the payments industry developed two solutions. First, they developed lower pricing structures for merchants with small-dollar- value transactions, to lower the relative cost of accepting credit or debit cards. Second, the payment associations such as Visa, American Express and MasterCard adjusted their business rules to dispense with signature requirements for these smaller transactions. Before these measures were implemented in 2001, payment cards were accepted at only 10 percent of quick service restaurants. By 2006, that figure had risen to 67 percent. Today, virtually every quick service restaurant accepts electronic payment cards. Adapted from James C. McGrath, “Micropayments: The Final Frontier for Electronic Consumer Payments,” Payment Cards Center, Federal Reserve Bank of Philadelphia, June 2006