Consumer expectations for contactless payments have shifted dramatically in recent years. What was once a convenient option has now become a requirement for the majority of passengers using public transit. Visa’s latest research indicates that global demand for contactless payment technology is at an all-time high, with over 94% of transit riders stating that they expect public transit to offer contactless payment options moving forward. Advancements in transit technology have provided new opportunities for innovation and progress and cities must evolve and adapt to create sustainable, inclusive, and rider-friendly urban mobility ecosystems. In an increasingly connected and digital world, this means integrating a variety of transit options—from buses and trains to scooters and bicycles to meet the unique and diverse needs of urban residents while simplifying how they pay for these services.
Cities and transport providers can work together to ensure a safe and convenient rider experience by adopting contactless, open-loop payments. These systems allow riders to tap their preferred credit, debit, or prepaid card, with the additional option of using a payment-enabled device such as a smartphone to purchase transit fares. Closed-loop systems, by contrast, demand that riders purchase and reload a designated card that can only be used to make payments to a single service provider. While closed-loop systems have been the standard in transit for many years, transport agencies are shifting their focus to adopting open-loop payments as an attempt to cater to user preferences as well as modernize their operations, increase revenue, and accelerate their digital transformation. In this article, we’ll compare closed vs open-loop payment systems, which solution is better for agencies, and their role in shaping the future of mobility.
The Evolution Of Ticketing & Payment Systems In Transit
Ticketing and payment systems in public transport have evolved rapidly in recent decades, creating a dramatic shift in the way transit agencies handle fare collection. Traditional paper tickets typically sold at vending machines, counters, or by transit staff are becoming increasingly replaced with Automatic Fare Collection (AFC) systems, including closed-loop smart cards, as is the case with the prominent Oyster Card System in London and NaviGo in Paris. AFC systems eliminate the need for manual ticketing and payment systems, contributing to a network where transactions are faster, more hygienic, efficient, and convenient for both passengers and transit operators. AFC systems incorporate several components, including fare gates, ticket vending machines, and smart cards, all of which work together seamlessly to enable a hassle-free payment experience for riders. In the case of closed-loop payments, when a user enters a fare gate, they simply tap their smart card, which deducts the required fare from the account. Ticket vending machines make it possible for passengers to purchase and reload their smart cards, while transit operators engage in monitoring and managing these systems through a central control center. Such solutions do come with certain disadvantages, however, as Public Transport Operators (PTO) are often left with the responsibility of maintaining the systems along with the additional costs that come from issuing physical cards.
Open-loop ticketing systems remove the need for passengers to purchase multiple transport cards or tickets. Riders can use their EMV bank cards or smart devices to pay for their journeys. Contactless cards enable fast, easy, and secure payments via contactless chip technology. Instead of purchasing a ticket from a machine or using a closed-loop travel card, travelers can simply use what’s already in their pocket such as a credit/debit card, smartphone, or an e-wallet to pay for rides. This method of payment incorporates several advantages over closed-loop payments, where physical tickets or transport cards can only be used for fare payments. By eliminating common frustrations for passengers such as queuing for tickets, running out of funds, having limited transport options, and missing out on better-value fares, traveling can become faster, simpler, and frictionless. Open-loop payment systems enhance the efficiency and connectivity of public transport by simplifying fare collection and facilitating seamless transit experiences. Current data shows that 51% of public transit riders use four or more payment methods for their monthly travels. By enabling open-loop, contactless ticketing, transit agencies can eliminate the friction associated with multi-payment systems by removing the need for physical tickets, leading to better service provision and increased ridership over time. Visa’s research further indicates that nearly one-third of transit riders began using public transport more frequently due to the availability of open-loop payments.
Understanding The Difference Between Closed & Open Loop Payment Systems
Closed-loop payment systems are often associated with transit operators or authorities bearing the responsibility of issuing specific payment cards or tickets using their private ticketing systems which may require specific infrastructure and maintenance. Closed loop systems depend on their own devices to validate, secure, and manage the payment card ticket value and can only be used for that particular transit authority. Closed-loop payment technology has limited interoperability since the payment network is reserved for that single transit authority. Furthermore, since closed-loop systems store data regarding payments on a designated card, riders face a higher risk of losing funds if they misplace their card or ticket. Another challenge for riders is the constant need to have sufficient funds loaded into their card and the results of failing to maintain this requirement. A balance with little remaining value could send them scrambling to a ticketing kiosk while remaining funds that aren’t utilized promptly could impact discretionary spending, leading to an increased financial burden for low-income residents. If a passenger happens to lose their card or have it stolen, they will unfortunately also lose any remaining value that was stored within the card. Closed-loop systems do come with benefits, however, as they are often considered more affordable due to their lower transaction fees when compared to open-loop systems. They also provide more control over consumer data, which can be beneficial to merchants when creating specific loyalty programs or marketing campaigns.
Open-loop payments, on the other hand, are often looked to as a more convenient method of paying for transport and other services. Open-loop refers to any method of payment that can be used to complete a purchase without the need to be part of the system itself. In essence, a customer can use their existing contactless cards to pay for transit journeys even if they are not affiliated with a particular transport network. An open-loop payment system is capable of facilitating transactions across various networks, allowing broader merchant acceptance. Unlike closed-loop systems, open-loop payments are not restricted to a specific retailer or service provider network. They usually incorporate different debit or credit cards issued by various financial institutions and are valid within accepted card networks, such as Visa or MasterCard. This universal payment method provides users with superior flexibility and convenience. An open-loop system depends on an extensive network of banks and payment processors to ensure interoperability is possible between involved entities. While they do provide broader access, open-loop systems often involve higher transaction fees and much less control over consumer data when compared to closed-loop systems. Open-loop payments also incorporate Account-based Ticketing. This enables each customer to have an account held in the cloud which carries all the necessary data to determine their fare. Standards are set by operators and with automated capabilities, providing instant payment. Through their account, customers can get a 360-degree view of their activities through an app even if they use multiple payment methods.
How Open-loop Systems Make Cities And Transit Better
Embracing advancements in payment technology serves as a powerful tool for cities by aiding them in accelerating their efforts toward meeting climate targets. By adopting open-loop payments, a substantial amount of carbon emissions can be reduced from the transport sector, along with other forms of pollution which will result in cleaner air, healthier communities, and the creation of more resilient and livable cities. Studies show that contactless payment systems onboard diesel buses can cut emissions by over 20% due to shorter dwell times and faster boarding of passengers. Digital payments and Account-based ticketing plays a crucial role in also helping operators capture and extract valuable data regarding journeys, user preferences, and potential areas for improvement. Passenger information contained within the same account reveals previously hidden insights into ridership trends which can be leveraged to optimize existing services, meet the unique requirements of passengers, and improve the overall rider experience. This approach surpasses costly customer behavior surveys and improves the accuracy of revenue apportionment calculations. Furthermore, many open-loop systems offer prepaid cards for riders who don’t own a card of any kind, whether that’s prepaid, debit, or credit. This provides an opportunity for unbanked and underbanked individuals to start participating in the digital economy.
Transport authorities can also extend their capabilities by adopting more flexible, configurable, best-fare ticketing options for riders who travel frequently on their networks. Targeted programs may also be deployed through partnerships between public transport operators and governments to subsidize fares for particular groups of riders such as low-income users or the elderly, offering them greater access to transportation networks and savings. Agencies can benefit financially from the use of digital payments since they offer the opportunity to shift sales from higher-priced retail channels, such as ticket vending machines or kiosks. For instance, switching to a contactless payment system can reduce fare collection expenditures by more than 30%. When it comes to improving operational efficiency, open-loop payments have the potential to reduce long queues at travel locations such as rail stations, leading to better performance and efficiency of transit fleets. This will ultimately save both time and resources for agencies as well as improve customer satisfaction. According to Visa, 84% of travelers in major U.S. cities experienced frustration due to time wasted purchasing a ticket while 67% reported missing a train as a result of long ticket lines. Account-based ticketing (ABT) systems aid operators in managing their customers’ right to travel by storing their account information as opposed to keeping them on a card as is the case of card-centric, closed-loop systems. With ABT systems, agencies can settle revenues within the same day, including those from multi-operator or multi-modal caps or ticketing solutions, even if the operator apportionment process is automated.
Should Public Transport Agencies Invest In Open Loop Payment Solutions?
It seems plausible to assume that every transport agency would be looking to migrate to open-loop systems as quickly as possible, however, this isn’t always the case or the most feasible option for some transport providers. Open-loop systems do come with certain drawbacks that need to be addressed before they can become a universal solution for the majority of transit agencies. Proprietary open-loop EMV systems can be somewhat costly and difficult to build. It’s possible to overcome this by procuring a modular solution with multiple vendors that offer integrated solutions that plug and play together resulting in simpler deployment. Another big issue with open-loop systems remains the notion that there’s no viable payment alternative for customers who don’t own an EMV card and would prefer not to use one. Agencies already using open-loop systems still need to provide an alternative payment solution for unbanked users such as prepaid open-loop cards. Furthermore, open-loop platforms cost agencies merchant service fees that they have to pay to banks. It’s possible to finance this by reducing cash handling which would essentially lower operational expenses such as ticket offices and kiosk maintenance. Agencies of bigger size and scale might also be able to negotiate favorable rates with banks and have the finances to do so, however, smaller agencies don’t always have this option. Additionally, a substantial amount of passengers qualify for concessions, but the majority of open-loop systems don’t currently have the technology in place to properly identify and support these customers. The technology is slowly starting to appear, but mass adoption is still somewhat a long way into the future.
While open-loop payments are continuing to gain momentum, some agencies are looking for a more feasible way of overcoming these challenges while still leveraging the best of open-loop payment systems. Account-based Ticketing Systems provide a better and more comprehensive method of resolving multiple issues relating to payments in transit by integrating data formerly stored on both fare and validation devices and transferring it into a back office. Modern ABT solutions incorporate multiple types of fare media such as contactless smart cards, barcodes (on paper or screen), contactless payment cards (EMV), along mobile devices. Additionally, they implement simplified validation devices that only need to read and authenticate any available travel media. This reduces the reliance between the ABT back office and the validation devices, allowing transit agencies to seamlessly make any needed updates while still giving riders the freedom they want. Riders can use standard agency-issued smart cards, open payments, and even combine them with their digital wallets, integrating the best of both worlds. ABT can also be applied in solving the concession problem that has long been present in open-loop systems. New York’s transport authority is a sterling example of a large-scale transit system that has managed to successfully link concessionary discounts to open-loop cards and wallets, by calculating discounts in the back office. Riders can add a concession, such as student credentials or pensioner status, directly to their bank card giving them a concession price every time they travel, just as they would on a closed-loop smart card.
Overcoming The Biggest Challenge Regarding The Adoption Of Open-loop Payments
One of the biggest hurdles for transport providers considering adopting open-loop payment systems is how they will provide services to members of society who are unbanked and underbanked. Available research suggests that 78% of unbanked passengers who use public transit with cash are willing to switch to prepaid or government-issued cards, and about a third are considering purchasing a smartphone. However, statistics also show that around 4% of the population is currently unbanked with no checking or savings accounts and another 9% are underbanked. This means that they may have a bank account but rely on alternative financial services such as payday loans. Furthermore, an additional 15% of the population does not own a Smartphone. There’s also a direct link between those who are experiencing financial difficulties and those who rely on public transportation daily. A report by the American Public Transportation Association (APTA) states that out of all transit users, 21% of riders earn less than $15,000 in annual income and 12% make between $15,000 and $24,999. What this essentially tells us is that the widespread adoption of open-loop payments could reinforce inequalities in particular communities and create barriers to using public transportation, affecting members of society who might need it the most. If we want people to get out of their cars and use public transit, we need to ensure that they have equitable access to essential transit services and that their experience is both affordable and as frictionless as possible. This will create a far better impact in terms of meeting sustainability targets than any high-tech solution.
Transit agencies considering adopting open-loop payments can ensure no rider is left behind by incorporating reloadable open-loop card payments as part of their service offerings. This way any rider who wishes not to carry cash and doesn’t rely on traditional banking services can still benefit from open-loop card payments. Prepaid open-loop cards alleviate the concerns of unbanked and underbanked members of society by providing easy access to transport services. This is also a great alternative to closed-loop smart cards for parents or guardians of young people who can use these prepaid open-loop cards as a shared account for family members. Users can simply reload open-loop cards anywhere they purchase fares with cash, such as TVMs and APOS terminals. While decreasing cash collection in transit does have its advantages such as increased sustainability, reduced agency operational costs, and shorter dwell time, they may be the only option for some riders. Cash payments are increasingly common among people under the age of 25 and seniors above 65. Eliminating cash payments onboard public transit could disproportionately affect these particular groups as well as low-income, minority, and disabled communities. Since a portion of riders onboard public transit still rely on cash payments to complete their journeys, agencies should continue accepting cash through fareboxes as a way of ensuring equitable access to transport services or invest in another alternative.
Why Both Payment Systems Have A Role To Play In Transit
Global adoption of digital payment platforms is set to increase in the years to come. Data shows that the global contactless payment market is predicted to expand at an average annual growth rate of 19.1% from 2022 to 2030. Open-loop technology is beneficial for transport agencies since it enables transit payments across all networks. Since these payment systems are designed in accordance with international EMV® standards, they are a universal solution that can be used by any passenger with a bank-issued contactless EMV® credit/debit card. They’re also compatible with a wide range of smart devices and can be applied to purchase fares wherever open-loop payment systems are present. The availability of Prepaid EMV® cards provides additional leverage for agencies in expanding their customer base and promoting inclusivity in transit. Taking things further, an Account-based Ticketing System offers agencies a new type of ticketing that facilitates smarter and ticketless traveling for the public. The ability to store passenger data in a reliable, secure, and cloud-hosted back office gives transport providers newfound flexibility and efficiency to make better choices regarding how riders’ fares are calculated and what rules and conditions apply. This solution essentially gives riders the agility they want and an abundance of choices as to how they pay for rides.
Passengers can pick a validation method that best suits them and their travel needs, such as tapping a smart card or scanning a QR code through their mobile phone. ABT models generally accept paper tickets and cash, however, ticketless validation is seen as a more practical option for the future of ticketing in transit and many fare collection systems strive to provide this benefit. In a typical scenario, ABT systems are frequently rolled out alongside Contactless EMV where a user can pay for their travel with a bank card or smartwatch without the need to even buy a ticket. However, even with all of these solutions being available to transit agencies, it has become clear that there is no one-size-fits-all solution. Transport providers need to decide which solution applies best to them and the communities they serve and they will have to evaluate how their decision will impact members of society who are reluctant to use these payment systems. After all, public transportation should serve the public and aim to provide accessible and equitable services to all members of society, not just tech-savvy ones. The best approach would be to carefully consider all options, and engage in conversation with local communities to find out what people think and want. Furthermore, some agencies might experiment with hybrid solutions and scale up gradually based on results. Some transport authorities might introduce open-loop payments while still keeping other options such as physical tickets or pre-paid cards in circulation. At the end of the day, the most successful solution is the one that gets people to use public transit and gets them to where they need to go while being convenient, affordable, and accessible.
Final Thoughts
The introduction of open-loop payments has served as a viable solution to various issues in transit, becoming an attractive alternative to traditional payments along with paving the way toward the emergence of Smart Cities. The evolution of open-loop payment systems is further reinforced by the concept of Mobility-as-a-Service (MaaS) which is rapidly gaining momentum worldwide. Passengers are demanding comprehensive and rider-friendly transport solutions as they navigate between multiple modes of transit (trains, buses, bikes, rideshare). Contactless, open-loop payments have a crucial role to play in initiating the shift toward MaaS which will help solidify a future for transport providers where commuters can gain access to affordable, flexible, and on-demand mobility options. It’s widely expected that in the near future, mobility services will incorporate a single, integrated digital platform that is capable of seamlessly accommodating the diverse needs of riders while making traveling a more convenient and pleasant experience.
AUTHOR
Ilina Chipilska is a marketing expert with more than 10 years of experience being involved in a wide range of projects. At Modeshift she manages all marketing activities and the company's online presence.
