Transit payment systems have undergone a rapid transformation in recent years, shifting from cash/tokens to contactless taps (cards/phones), mobile wallets, QR codes, and Account-based Systems (ABT). This change is driven by shifting consumer habits, along with evolving data needs to create seamless “tap-and-go” experiences and multi-modal journeys, all powered by NFC tech and APIs. Both open-loop and closed-loop systems offer distinct benefits for agencies, with open-loop systems providing wider accessibility, revenue, and interagency coordination. In contrast, closed-loop systems offer detailed customer insights, tailored loyalty programs, cost control, and operational simplicity. The result is hybrid payment models that blend universal acceptance with brand-specific advantages.
In this article, we’ll discuss the primary benefits of adopting a hybrid payment system in transit and how agencies can leverage this approach to achieve optimal results. We’ll also examine some common myths and challenges surrounding open and closed loop systems and how cities can overcome them.
Financial & Operational Benefits Of Adopting Open-Closed Loop Payments In Transit
Open-loop payment systems can lower costs associated with fare collection by reducing or eliminating the need for ticket machines, fare cards, and cash handling. By simplifying fare collection and backend processing, agencies can reduce the complexity of managing multiple payment methods and dedicated ticketing systems. Collecting fares through open-loop systems (such as tapping a credit/debit card or using a phone) helps authorities reduce costs associated with managing cash and maintaining separate ticketing infrastructure. Leveraging open-loop systems to accept credit cards, debit cards, and mobile wallets ensures maximum convenience, making transit accessible to both tourists and locals without the need for dedicated transit cards. This speeds up boarding times dramatically by eliminating the need for riders to fumble with cash, line up to use ticketing machines, or worry about purchasing multiple tickets before their journey.
Closed-loop transit systems, which include proprietary smartcards/apps, boost operational efficiency for transit agencies by automating fare collection, reducing cash handling, speeding up boarding (less dwell time), and reducing fraud. Automated Fare Collection (AFC) automates tasks, shifting them from staff to technology, thereby reducing manual workload and errors. This allows agencies to manage everything under one account, eliminating the costs and risks associated with handling large amounts of physical cash. As a result, fare rules such as automatic fare capping are simplified while enabling tailored loyalty programs, which leads to additional cost savings, higher customer satisfaction, and better service planning. Real-time data on rider movement plays a crucial role in helping agencies optimize routes, schedules, and service frequency.
Considering The Limitations Of Open-loop Payment Systems
Open-loop payment systems come with certain limitations, including higher transaction fees, potential for fraud, and difficulties in offering discounts and concession fares. The involvement of multiple intermediaries, such as banks and card networks, can result in higher transaction fees for the merchant compared to closed-loop systems. Transitioning to an open-loop system can also require a substantial investment in new equipment and software, posing a significant challenge for smaller transit agencies with limited budgets. Agencies may lose revenue to transaction fees, which is a major concern when deciding whether to pass costs on to passengers. In instances of fraud, a customer can exploit an open-loop system by deleting their card from a digital wallet just before a transaction is processed, then re-adding it with a new token to avoid being flagged as a repeat offender. Since the full authorization of a transaction can take time, it creates a window for the fraud mentioned above.
There is also the issue of excluding unbanked passengers. Open-loop payment systems are not suitable for demographics with a high percentage of unbanked individuals, as they rely on existing bank cards or digital wallets for payment. White label EMV cards have been proposed as a solution in the past; however, they remain a partial solution, as not all riders possess the digital literacy to issue and maintain one. Historically, institutional and concession programs have been exclusive to closed-loop systems, although some systems are now working to extend these benefits to open-loop usage. Some passengers may be reluctant or unable to adapt to new digital payment methods, necessitating the continued availability of multiple ticketing options such as reloadable smart cards and cash. If a system is entirely reliant on open-loop payments and fails to deliver the same rewards as a closed-loop system, this could severely impact ridership levels over time, resulting in lower uptake.
Why A Hybrid Approach To Payment Systems In Transit Is The Way Forward
In many parts of the world, open-loop systems are primarily used for simple, pay-as-you-go fares. They are known to lack the ability to identify users for special passes, discounts, or subscriptions, which is often the majority of an agency’s user base. Using open-loop payments can also be problematic for agencies that want to manage customer data for subscription purposes or for those with privacy concerns about linking a fare payment to a personal bank card. Furthermore, implementing and managing open-loop systems requires careful integration with existing infrastructure, including fare validators, as well as a clear understanding of the complex rules and costs involved with payment networks. As a result, many transit agencies are adopting a hybrid approach, combining open-loop payments for casual use with closed-loop options for frequent commuters who need subscriptions or other specialized fares.
A hybrid model enables agencies to provide the convenience of open-loop payments while still offering the benefits of closed-loop systems, such as user identification for passes and special programs. Offering both options enables agencies to cater to the diverse needs and preferences of customers. Some riders may prefer the convenience of using their existing bank card (open-loop). In contrast, others might opt for the potential cost savings or benefits of an agency-issued card (closed-loop). Using open-loop systems to handle the bulk of transactions from infrequent riders and tourists, while optimizing the closed-loop system for frequent, local riders, allows agencies to achieve the best of both worlds in terms of cost and customer experience. Agencies can ensure closed-loop systems complement open-loop systems by introducing online account management, auto-top-up, and a network of retail partners to facilitate easy value loading and minimize rider frustration.
How Transit Agencies Can Maximize The Benefits Of Open-Closed Loop Systems
To optimize the performance of open and closed-loop systems in transit, agencies can combine them using a flexible Account-based Ticketing (ABT) system that supports multiple payment methods and tokens. This approach leverages the widespread acceptance of open-loop payments, such as credit cards, and the convenience and data control of closed-loop systems like transit cards. An ABT system relies on tokens as the backend mechanism, allowing for standardized, account-centric fare collection while supporting various front-end payment methods, including EMV cards, mobile apps, and closed-loop cards. By utilizing tokens as the core mechanism in an ABT system, transit agencies can standardize their backend infrastructure and processes, leading to increased efficiency and cost savings. Customers can simply use their contactless bank cards (EMV) or mobile payment apps for fares.
At the same time, the ABT system calculates the most optimal fare based on usage and processes the payment through existing financial networks. In doing so, agencies can continue to support traditional closed-loop transit cards while having the ABT system manage the accounts. This provides a seamless experience for existing users while also capturing the benefits of a modernized system. An ABT system can offer improved usability and convenience for all customers, including those without a bank account, by supporting a wider range of payment options such as mobile ticketing and QR codes. By transitioning to a single, account-based system, transit agencies can streamline payments, reduce cash handling, and potentially decrease infrastructure and support costs by eliminating the need to maintain separate systems for open and closed-loop payments. EMV infrastructure, supported by ABT, can provide transit operators with more control over payment systems and customer data compared to traditional open-loop systems, where third-party networks handle data.
In Conclusion
Open-loop payments are a valuable addition to closed-loop systems, as they provide enhanced convenience for riders while streamlining fare collection for transit agencies. These systems offer passengers more options, such as using their existing bank cards or mobile wallets to pay for rides, eliminating the need for separate transit cards or cash. This simplifies travel for riders who use multiple modes of transport, as they won’t need separate payment methods for each leg of their journey. By shifting some transactions to open-loop systems, agencies can also reduce the workload and costs associated with managing closed-loop cards and fare vending equipment. These kinds of payment systems also benefit from the robust security features of major payment networks, such as tokenization and encryption, which protect customer data.
Transportation authorities should design a system that allows riders to choose the payment method that works best for them, such as using a personal debit card for a single trip and a smartcard for a monthly pass. Open-loop systems may have higher transaction costs, but they incur wider accessibility and richer data. Closed-loop systems can be more cost-effective for transit agencies, helping build customer loyalty. Marketing campaigns highlighting the benefits of open-loop systems have proven successful in the past, with Transport for London (TfL) being a prime example. London’s positive reception of open-loop payments highlights how a city can utilize new technology to modernize and increase ridership while still retaining its core products, which rely on closed-loop processes. Open-loop payments are not a perfect solution for every demographic, but they represent a significant upgrade for many users, especially tourists and occasional riders.
