Transit Cooperative Research Program Sponsored by the Federal Transit Administration RESEARCH RESULTS DIGEST June 1997--Number 16

Subject Area: VI Public Transit Responsible Senior Program Officer: Stephen J Andrle

Multipurpose Fare Media: Developments and Issues

This TCRP digest presents the interim findings of TCRP Project A-14, "Potential of Multipurpose Fare Media," conducted by Multisystems, Inc., in collaboration with Dove Associates, Inc., and Mundle & Associates, Inc. Included in the digest are (1) a summary of the emerging developments, (2)a discussion of key issues and concerns, and (3) a technicalappendix presenting the results of a survey of transit operators fare collection practices and plans.

CHAPTER 1--INTRODUCTION These may overlap, and in particular, the latter two approaches are often pursued together. This digest contains examples of multipurpose TCRP Project A-14, Potential of Multipurpose transit fare programs and discusses Fare Media, is intended to identify issues and institutional, technological, and financial issues that concerns on the part of transit agencies and financial must be addressed to implement such programs. This institutions, assess customer and financial will be of interest to transit managers, transit implications associated with various approaches, planners, transit financial officers, and other financial monitor emerging developments, and assess the professionals. The desire on the part of both transit potential of increasing the role of the banking agencies and financial institutions to reduce the use industry in transit fare payment and collection. This of cash for and improve customer research is intended to provide both transit and convenience has dovetailed with advancements in the financial services professionals (1) an understanding payment technology area to facilitate various types of of the nature of the costs and potential benefits of "multipurpose" media. Specifically, the development such arrangements, as well as the issues that must be of ("smart") cards and the use of addressed in forging new alliances; and (2) specific stored value has opened up new opportunities for guidelines to allow each to pursue common interests reaching more than one market with a single payment in the payments arena. option. Multipurpose transit fare media can take three This digest presents the findings from the TCRP basic forms: Project A-14 Interim Report. This digest identifies the full range of issues and concerns inherent in the

TRANSPORTATION RESEARCH BOARD NATIONAL RESEARCH COUNCIL 2

CONTENTS

CHAPTER 1 Introduction, 1 Background: Definition of Terms, 1 Types of Issues and Concerns, 3 CHAPTER 2 Examples of Multipurpose Effort, 4 Transit Multipurpose Programs, 4 Financial Services and Other Programs, 8 Summary, 11 CHAPTER 3 Institutional Issues, 12 Alternative Institutional Arrangements, 12 Roles in a Multipurpose System, 12 Basic Institutional Approaches: Open Versus Closed Systems, 12 The Impetus for Multipurpose Media Programs, 16 Transit Agencies, 16 Financial and Other Institutions, 16 Management Strategies, 17 CHAPTER 4 Operational and Administrative Issues, 17 Pricing of Media, 19 Sale and Distribution of Media, 19 CHAPTER 5 Legal and Regulatory Issues, 20 Authority to Issue Prepaid Cards, 20 EFT Regulations, 21 Expired Value and Abandoned Property Laws, 21 Responsibility for Lost or Stolen Cards, Card or Equipment Malfunction, or Issuer Insolvency, 21 Privacy Issues, 22 Summary, 23 CHAPTER 6 Technological Issues, 23 Types of Smart-Card Technology, 23 Contact Versus Contactless Smart Cards, 23 Combined Contact-Contactless Cards, 24 Selecting and Implementing a Technology, 25 Fare Collection Needs, Goals, and Costs, 25 Standards and Compatibility with Other Systems, 26 Other Technology Issues, 27 CHAPTER 7 Financial Issues, 28 Cost Effects, 28 General Cost Concerns, 28 Current Transit Agency Fare Collection Costs, 28 Cost Categories, 29 Operating and Maintenance Cost Effects, 29 Capital Cost Effects, 31 Revenue Effects, 32 Types of Benefits, 32 Potential Revenues, 33 Summary, 35 CHAPTER 8 Customer Acceptance Issues, 36 Transit Stored-Value and Multipurpose Market Research, 36 General Reaction to the Stored Value Concept, 36 Reactions to Multiple Use, 37 General Purpose Market Research, 37 General Reaction to the Stored-Value Concept, 37 Barriers to Use, 37 REFERENCES, 38

APPENDIX A: TRANSIT AGENCY SURVEY, 39 3 media describes any payment option There are two major issuers' cards--can be used for more that can be used for more than one classifications of smart cards: contact than one service. The integrated fare agency (but a single application, such and contactless cards. Contact cards card or the expanded utility/multiple as transit) or for multiple applications. require a physical contact between the use transit card is an example of such a Multiple-use media and card and the read-write unit, and must system. There is something of a integratedfare media are subsets of be inserted into a slot. Contactless continuum between open and closed; multipurpose media; the multiple-use cards do not have to be inserted into a moreover, a system may evolve from concept has sometimes been referred to slot, but rather can be read by passing closed to open. The types of issues and as expanded utility. One of the key the card close to (i.e., within a couple concerns that must be addressed in functions of such cards is an electronic of inches or some other specified establishing a multipurpose purse, which is essentially the stored- distance of) the read-write unit. arrangement are reviewed below. value portion of the card. A card may Contactless--or proximity--cards be dedicated to an electronic-purse commonly refer to cards using two function (and a card may contain more different communication techniques. TYPES OF ISSUES AND than one purse) or may also contain One type uses a contactless interface to CONCERNS other functions (e.g., identification or provide power to the card and transfer information); the latter is known as a data using inductive and capacitive Development of any type of multi-application card. There is a techniques; these cards are of two basic multipurpose payment system probably fundamental difference between a card forms: remote coupling or close requires a fundamental change in the that can be used for several different coupling, depending on the particular way the participants have operated in types of applications (e.g., banking interface and data transfer process. the past. These changes apply to the services, health care records, and RFID cards, meanwhile, transfer data customer, the transit agency, the vending) and one that has a single between the card and the read-write financial institution, the participating application (e.g., stored value) and can unit using radio frequency techniques; merchant, the equipment vendor, and be used for multiple merchants or power is supplied using a battery or by any other entities considering services; the technology implications of means of received magnetic energy. involvement in the venture. Issues and the different types of media are Finally, one type of hybrid card concerns may be related to the discussed in this digest. An combines a with a integration of multiple service electronicpurse-only card may also be magneticstripe, while a newer option providers and card issuers, as well as to called a prepaid or cash card. Finally, (better known as a combi--card or the development or implementation of integrated fare media have been called dual-interface card) combines the advanced payment media in general. universal tickets in some locations. attributes of contact and contactless Some concerns will be specific to each All these terms have come to refer cards--either using two separate chips participating entity, while others will be primarily to variations of smart cards, or a single chip capable of being common to all participants. The issues although other technologies (e.g., accessed in either fashion. (The and concerns that need to be addressed magnetic-stripe cards) may also be able characteristics and uses of the different can generally be categorized as to support multipurpose applications. types of cards are discussed in Chapter follows: The memory and security capabilities-- 6, Technicological Issues.) as well as processing capabilities, One of the fundamental issues is < Institutional: who are the though not necessarily needed in the whether a multipurpose card is issued participants in the program, how is the types of applications presented here--of and used in an open or closed system. program organized and operated, and smart cards have made them the An open system is one in which there what are the legal and regulatory technology of for virtually all are multiple card issuers and multiple requirements that must be addressed? recent multipurpose efforts. service providers or merchants; for < Technological: what type(s) Technically, a smart card is an instance, credit and debit cards operate of card will form the basis for the integrated circuit (or chip/card that in an open system. A closed system is program, what are the design has an onboard microprocessor and one in which the card is issued by a requirements, how will the new built-in logic; however, the term has single entity and can be used only for technology be integrated into the come to be used to describe a range of that entity's services; transit fare existing system, and how can automated card technologies, including payment has traditionally operated in a compatibility with future technological memory cards (without closed system, for example. What is advancements be ensured? microprocessors) and radio frequency emerging with the development of < Financial: what are the identification (RFID) cards and tags various types of multipurpose cards, expected costs and benefits of the (also often without microprocessors). however, is a partly open or closed program to each potential participant? In this study, the term smart card in this multipurpose system, in which a < Customer-Related: to what more general sense is used. single issuer's card--or a few related extent will customers participate in the 4 program, and how will their concerns Phoenix, MetroCard (New York MTA), multipurpose projects involving transit; be addressed (e.g., related to privacy)? Wilmington (DE), Toronto, Manchester as indicated, most of these projects use (GB), Sydney (Australia), Honk Kong, (or plan to use) smart cards. Because multipurpose payment and Seoul (South Korea); and Examples of multipurpose transit systems are in their infancy, there is projects in place or planned are limited experience in addressing these < Financial or summarized below. issues. Various types of programs have telecommunications industry-initiated been developed overseas, but even stored-value and electronic-purse many of these examples are still in trial programs: VISACash (United States Atlanta MARTA/VISACash or pilot phases. In North America, and Canada), MasterCard/VISA Project--The Metropolitan Atlanta development of several multipurpose (United States), (England), Rapid Transit Authority (MARTA) is programs has begun, but in-service DANMONT A/S (Denmark), participating, with VISA and three applications are of limited scope to Banksys/Proton (Belgium), PTT banks (NationsBank, First Union Bank, date. Thus, the means of resolving Postcard (Switzerland), Quick-Link and Wachovia Bank), in the VISACash many of the questions that must be (Australia), EPS/SmartCash, Europay stored-value (contact) card rollout. answered can only be speculated on at Clip (multinational, multi-currency VISA covered the cost of installing this point--based on comprehensive card), Chipper (Netherlands), card read-write units in two turnstiles in feasibility studies or preliminary Postchecque (Belgium). each MARTA station in mid-1996, and assessment by individuals intimately the VISACash card (initially issued as a involved in the development of the The second group consists prepaid disposable card, later to be programs. Chapter 2 presents examples primarily of programs that have been or issued as a reloadable card) is accepted of the programs in place and under will be introduced in multiple locations for direct fare payment; the system development; Chapters 3 through 8 in different parts of the world, while the went live in May 1996. Card vending discuss the various issues and concerns. transit examples are specific projects. machines (selling only the NationsBank These projects and programs are card at this point) are located in key discussed here briefly and will be stations. This pilot project is testing the CHAPTER 2--EXAMPLES OF reviewed in greater depth in the project institutional and operational feasibility MULTIPURPOSE EFFORT final report. of an arrangement in which the transit agency does not produce the payment Extensive development in all types media, but rather participates as a of multipurpose payment programs has TRANSIT MULTIPURPOSE "merchant" in a multiple-use card and occurred in the last few years. PROGRAMS electronic-purse program. MARTA is Advances in electronic payment media planning to issue a Request for have spurred the development of Multipurpose fare programs are a Proposals to enter into an agreement stored-value and prepayment relatively new phenomenon in the with a single entity (e.g., a bank) in a approaches and multiple-use transit industry; however, there are multiple-use arrangement. The overall arrangements in both the transit and growing numbers of regional fare VISACash program is discussed briefly financial and telecommunications integration and multiple-use efforts below, under "Financial Services and sectors, and this parallel interest has led throughout the world. In North Other Programs." to the consideration of joint-payment America alone, there are smart-card- structures. Efforts are in various stages based regional integration projects at this point: some programs are in under development or partially in place San Francisco Bay Area widespread use, some are in limited in northern and southern California, TransLink Program--This project trial, some are in the planning stage, Seattle, and Toronto. Washington, DC, involves development of a regional and some have been derailed (at least is the site of a multipurpose integrated stored-value card system for temporarily). This chapter reviews transportation project (involving transit transit operators in the Bay Area. several major developments in this and parking). Multiple-use projects Initially, the project was to use area; the projects and programs (with banks, universities, retail magnetic tickets, similar to the existing addressed are divided into two establishments, or other entities) have Bay Area Rapid Transit (BART) ticket, categories: been implemented in Atlanta and Ann and the original TransLink ticket was Arbor, and are being or have been tested at BART and two bus systems < Transit-initiated or transit considered in Cleveland, New York (BART Express and Central Contra oriented multipurpose programs: City, and Wilmington, DE. Costa County) in 1994 and 1995. MARTA/VISACash, TransLink (SF Multipurpose transit projects have been However, following a trial period, it area), Central Puget Sound (Seattle initiated in the United Kingdom, was decided not to proceed with the region), Washington (DC), Ventura Co. Australia, Korea, Hong Kong, and original plan. The Metropolitan (CA), Cleveland, Ann Arbor (MI), elsewhere. Table 1 shows the range of Transportation Commission (MTC), TABLE 1 Current and planned multipurpose transit projects

* contact & contactless Type of Program: R=regional Integration NA= data not available T=transit and parking or tolls TBD=to be determined M=multiple use 6 the lead agency, commissioned a study October 1996) on bus routes at King smart-card read-write units on buses at to determine the most appropriate Co. Metro and Pierce Transit. the seven transit operators in Ventura technology. This study, completed in Following completion of the trial, the County. The Passport is a monthly pass late 1995, evaluated technology and plan is to proceed with implementation and stored-value card (smart card) that clearinghouse options, including the throughout the region over the next 2 can be used on any bus in the county. potential for private sector years. All but one of the participating involvement. This study has led to a operators (South Coast Transit, the recommendation for a regional largest operator in the county) allows integrated system based on contactless Washington Metro Go-Card on-board recharging of the smart cards; smart cards; it has also been Project--In December 1994, the after notifying the agency in advance, a recommended that private entities be Washington Metropolitan Area Transit card is activated for the month on the invited to participate in a range of Authority (WMATA) began testing the first use that month. The program went system management and operational feasibility of a contactless card (using into service in March 1996. In the elements, particularly related to Cubic's Go-Card) for use on rail and previous phase of the project, Echelon clearinghouse and equipment bus, as well as at park-and-ride lots. had tested these units (at three maintenance functions. A trial is The project included installation of agencies: Gardena, Torrance, and LA planned for early 1997, with full read-write units in 24 rail mezzanines, DOT) with contact cards on some buses regional implementation by the end of 21 buses (on 3 routes), 1 bus depot, and and contactless cards on others, in 1998. 5-park-and-ride facilities, and tested the order to evaluate the user acceptance Seattle/Central Puget Sound ability to use the Go-Card as a common and performance of the two types of Area Regional Fare Integration--The payment instrument. Automated cards. transportation agencies (bus, railroad, vending machines (AVMs) can read and ferry) in the Central Puget Sound and display the value remaining on a region recently completed a Regional Go-Card and add value to the card Ann Arbor Transportation Fare and Technology Integration when payment is made in the AVM. Authority (AATA) Smart Card Feasibility study. This study The Go-Cards are used in the fare gates Project--In conjunction with a recommended development of a to enter and exit the Metro system. On multifaceted FTA-funded Advanced contactless smart-card-based system the bus, the maximum fare is deducted Public Transportation System (APTS) that would facilitate easy transfers on entry by the "target reader" (3-zone project, AATA has introduced a smart- between the different systems and fare, for example). The passenger must card system for use on its bus system. modes. Other key goals are to improve check out on leaving, using either the University of Michigan campus cards the operating efficiency of each front or rear door; if a one or two zone (a contact card) provided on the Ann individual agency and to expand ride is taken, the appropriate value is Arbor campus is accepted for fare market opportunities within the region. restored. The same concept is used to payment. A total of 35,000 campus On the basis of the results of the pay for parking fee collection. Data cards have been issued to date. The feasibility study (completed in mid- from rail, bus, and parking subsystems demonstration is designed to test, 1995), a detailed analysis of smart is transmitted via modem to WMATA's among other issues, the feasibility of cards was undertaken, involving a central computer system to apportion the cards on buses and, ultimately, the business needs assessment and revenue. The test began with 5,000 Go- potential for integrating the cards with feasibility analysis for the Cards given to Metro employees and an automated vehicle location system. recommended regionwide fare payment 1,000 to selected Metro riders. On the system. Concomitant to this analysis, basis of the successful completion of Cleveland Multiple-Use Transit three related efforts have been initiated: the demonstration, WMATA has Program--The Greater Cleveland (1) the Washington State Ferries is decided to proceed with the use of Regional Transit Authority (GCRTA) developing a fare collection system that smart cards on the entire rail system. is developing a multiple-use smart-card is intended to be compatible with the As of late 1996, the agency was program. GCRTA has been exploring regionwide system; (2) the seeking interest on the part of financial possible multiple-use arrangements Transportation Operators Committee is services companies in some type of with a range of potential partners in the identifying policy issues associated multiple-use arrangement. area; discussions have been held or are with regional fare integration; and (3) planned with banks, colleges, retail the participating agencies are Ventura Co. (California) establishments, hospitals, sports teams, undertaking an assessment of issues Passport Program--As part of Phase museums, other transit agencies, and and opportunities related to III of the Advanced Fare Payment the Ohio Department of Human establishment of a regional revenue Media Study (funded by the FTA and Services. GCRTA envisions use of a clearinghouse. On the basis of the California Department of combination contact-contactless card in findings of these efforts, the agencies in Transportation), the contractor, an initial demonstration planned for the region have initiated a trial of Echelon Industries, has installed 1997. contactless smart cards; the technology contactless is being tested (as of 7

Phoenix Program-- stations and nearby retail units in funds (i.e., stored value) directly on the Valley Metro in Phoenix, Arizona has specific denominations, and can be cards--probably through on-site been accepting commercial credit cards recharged as value is used. The project addvalue machines or automated teller (MasterCard and VISA) for fare was designed with the intent of machines (ATMs). Because of delays payment on its 400 buses since May expanding the use of the card to the in getting the overall SmartCash 1995. On each boarding using a credit other transit operators in the region as program off the ground, the DART card, a single full fare ($1.25 for local well as for tolls and other uses such as project has been on hold since mid- service, $1.75 for express service) is telephone and retail. The MTA 1995; however, EPS recently renewed recorded in the database under the established a subsidiary, the MTA Card discussions with DART. (The overall credit card account number. The cards Company, to carry out the expanded EPS/SmartCash program is discussed are swiped through the same card utility plan by entering into a joint in the next section.) readers used for the passes. At the end venture with a private company; the Toronto Regional Fare of each week, all trips for each card are joint venture was to be responsible for Integration--The Ministry of "batched" and submitted to the credit implementing and administering the Transportation of Ontario has for card clearinghouse; the cardholders are multiple-use arrangements--and for several years been considering various then billed for their trips as part of their distributing the MetroCard in general. approaches to introduce fare integration normal monthly bill. The clearinghouse The MTA selected a prospective among the agencies serving the Greater reimburses the transit agency the next partner (Chase Manhattan Bank) and Toronto Region. Early initiatives day for the trips submitted. The key to entered into negotiations over the terms involved the introduction of integrated making use of commercial cards viable of the partnership agreement. passes ( and magnetic) for use on were the decisions (1) not to perform Unfortunately, the two sides were multiple operators. The most recent online verification of each account and unable to agree on the financial terms effort involves tests of integrated smart (2) not to issue a receipt with each (i.e., the transaction fees the MTA cards on buses and commuter rail. boarding. Valley Metro accepts the risk would pay to Chase Manhattan Bank), Contactless smart cards are used on of fraudulent cards, but only for a and negotiations were terminated in buses in Ajax and Burlington and are maximum of 1 week's worth of trips May 1996. The MTA would still like to planned for use in Mississauga. per card; the clearinghouse informs the proceed with integration with other Equipment will also be installed at GO agency if any of the cards used are transportation services in the region, Transit commuter rail stations stolen or otherwise invalid, and Valley and is still considering multiple-use interfacing with these routes. These Metro then enters the fraudulent options, but the mechanism for trials are part of the region's long-range account numbers into the card-reader administering these functions had not development effort, that is, to test database. Thus, a subsequent attempt to been decided as of this writing. different technologies and use a bad card will be rejected. Valley Wilmington (DE) SMART arrangements and determine the best Metro claims that there have been no DART Project--This multiple-use regional integration approach. problems with the program, as of its project is intended to use the Manchester (England) One- sixth month. The agency also reports EPS/SmartCash card (issued by the Card Project--This contactless smart- that the program has been wellreceived Wilmington Trust Bank) on Delaware card system, in testing on buses, was by users, although use has been limited Authority for Regional Transportation developed with the intention of to date. There were approximately (DART) buses. The plan is for the 135 expanding to a wide variety of purchase 1,100 uses during the initial month of DART buses to be equipped with applications ranging from transit, the program (May 1995), and this had smart-card readers (attached to the commuter rail and taxi fares, and risen to roughly 1,900 in the second existing fareboxes). The stored-value parking charges to supermarket month. Valley Metro has not yet cards would be provided to bank purchases and telephone calls. The actively marketed the program. customers, and would also be made project is being financed by a joint available to non-customers, i.e., for use venture ( Manchester New York Metropolitan on the transit system, as well as for Limited) owned by the transit agency Transportation Authority (MTA) other services at specific locations. The Greater Manchester Passenger Metro Card Program--The MTA is U.S. DOT is funding the cost of the Transport Executive (GMPTE) and the implementing an automated fare farebox modification on the bus fleet. fare system integrator (AES Prodata); collection system. The fare medium for The project is designed to demonstrate each partner owns 50% of the system. the new system, MetroCard, is a the use of contact smart cards on buses, AES provided the equipment at no magnetic-stripe stored-value card, and the bank/transit institutional charge, and the transit agency will pay read-write ticket processing units have arrangement, and also the potential for a transaction fee for full-fare rides; been installed on all buses and will be employer involvement. Participating there is no fee for "concessionary" installed in all rail stations. The cards employers would provide cards to (half-fare) rides. At least initially, the can be purchased at interested employees, and would place card is used to pay for the fare, rather than for direct fare payment; in other words, on 8

buses, the rider tells the operator his or than 1 million cards (in March 1996) conjunction with Lucky Goldstar Credit her destination (this is a zonal system) for full rollout of the system. Card Corp.). and the operator enters the appropriate Hong Kong Contactless Card Other transit agencies and regions fare, which is then deducted from the Project--The Mass Transit Railway are also considering multipurpose fare card. Unlimited ride passes will (MTR), Kowloon Canton Railway options, and these will be reviewed in also eventually be available on the (KCR), and three other transportation the next phase of the study. Financial cards. The system is being tested by operators in Hong Kong have services and other programs are 5,000 people who are entitled to established a joint-venture company-- discussed in the following section. concessionary fares (i.e., reduced fare Creative Star Ltd.--to introduce a for seniors and disabled.) This testing common fare medium (contactless phase began in February 1994 in a card) encompassing all major forms of FINANCIAL SERVICES AND single suburb of Manchester. The plan public transport in Hong Kong: both OTHER PROGRAMS is to extend the test to more than 3,000 heavy and light rail, bus, and ferry. The buses (operated by several different contract to install the system was Several banks and other types of agencies), schools, and retail businesses awarded to AES Prodata (using SONY institutions (e.g., telecommunications throughout the greater Manchester area. cards) in late 1994. The system trial and postal companies) are developing, began in early 1996, and more than testing, and rolling out stored-value and Sydney, Australia Integrated 20,000 cards had been issued as of electronic-purse programs in various Card System--Another joint public- September 1996. The full system will parts of the world. Several universities private multiple-use venture is being involve approximately 3 million cards have also introduced stored-value developed in Sydney, Australia. This and 4,000 pieces of processing campus cards (using smart cards); program is being developed by Card equipment. Considerable interest has current U.S. examples include five Technologies Australia Limited and also been shown by many non-transport branches of the University of Michigan service provider Transcard Australia; organizations for potential future card system and Florida State University. participants in the pilot project include applications. The United States is behind Europe and the transit operators, McDonald's, Seoul (South Korea) Contactless Australia in seeing trials of stored- Shell, Coca Cola, Australia, Card Project--In what is currently the value programs, but one public trial is and leading banks. The initial trial was largest multipurpose transit application, in place (Atlanta) and several others are conducted in a major transit corridor in contactless card terminals have been being tested by individual banks (e.g., St. Mary's in western Sydney. Although installed on all of the 8,700 buses at their own headquarters). Other trials the system is based on a contactless operated by the 86 bus companies are planned, including the joint card, a key aspect of the integrated card (serving 449 routes) that make up the VISA/MasterCard project in New York system (WICS) is that it is designed as Seoul Bus Union. Intec Ltd., a Korean City. In all, there are more than fifty an open system to allow eventually (1) system integrator, built and installed electronic-purse projects in place or the use of different card technologies the bus units and is handling the planned around the world. Key (contactless, contact, and magnetic), as clearinghouse function; the cards, examples, either already in use or in or required, and (2) any terminal/reader produced by GemPlus using Mikron's near the testing stage, are summarized manufacturer to integrate WICS into its MIFARE system, are issued by a below; more extensive discussion of own units. A range of terminals (i.e., financial institution, Lucky Goldstar several of these and other programs read-write units) is being developed Credit Card Corp. More than 1 million will be presented in the final report. and will be tested in the system; these cards have been issued (as of October VISACash--VISACash was the include bus-ticket issue machines with 1996), accounting for more than first stored-value smart-card open integrated validators, rail validators, 800,000 transactions per day. The system program to be launched in the taxi terminals, retail agent terminals system installation was completed in United States. VISA formed an alliance (with bank certification), retail July 1996. Intec has been awarded a with three banks to develop and purchase terminals, vending machine contract to place terminals on an implement the program: First Union, integrated readers, toll booth integrated additional 4,300 buses outside of Seoul, Wachovia, and NationsBank. The readers, and fast food outlet driveway and the plan is to issue a total of 4 initial VISACash card operating system integrated readers. One of the features million cards in Korea by early 1998. was licensed from DANMONT, the of the system will be the ability to use In addition, operational tests on the Danish electronic-purse system (see the existing banking systems for adding Seoul subways were scheduled to begin below). VISA is serving as the network value to cards; clearing and settlements by the end of 1996, and other (no- operator, performing transaction will also be done through the banking transit) applications for the cards are clearing and settlement for all the system. Following completion of the planned as well; these uses include ID financial institutions. Financial initial trial in early 1996, CTA ordered cards for city officials, customer loyalty institutions are responsible for card more cards, and electronic purse (in management functions, merchant solicitation and 9 servicing, as well as transaction significant step towards working on the capability to add value processing and settlement. Because interoperability. VISA has indicated through the Internet using a personal merchants transmit individual that the same system being used in computer with a . Because transactions as part of the settlement Atlanta will be used in New York City merchants will transmit only a total process, the VISACash system should (through CitiBank); MasterCard amount during the settlement process, be regarded as an "off-line, recently announced plans to use the the Mondex system would be regarded accountable" under the definitions Mondex system (through Chase as "off-line, unaccountable" under the proposed by the Federal Reserve Bank. Manhattan Bank) in the project, rather definitions proposed by the Federal VISA and the three banks worked than its own MasterCash system that Reserve Bank. Under current proposed aggressively to recruit merchants and had been demonstrated in Australia. Federal Reserve regulations, the customers. First Union projected that it Although disposable cards will not be product would be exempt from would sign 5,000 merchant locations used in the pilot program, they may be Regulation E. before the Summer 1996 Olympic required in a full rollout to reach those At this time, about 10,000 cards Games. First Union planned ultimately consumers who bank at a financial have been issued in Swindon. This is to issue 1 million disposable and institution that is not participating, or 20% of the customer base of the 300,000 reloadable cards; the bank who are unbanked. National Westminster and Midland planned to introduce a reloadable card Mondex--Mondex is a smart-card Banks. Mondex is seeking to make the to its customers later in 1996. electronic-purse program developed by card issuance process more efficient NationsBank sought to appeal to the Midland Bank, National Westminster and will market the program to non- card collector market with 18 different Bank, and British Telecom (BT)in issuing institutions promoting the fact cards and was the only bank allowing 1990. The initial pilot for the card is that the consumer does not have to telephone orders with payment by taking place in Swindon, England, banks to participate. Mondex check, money order, or VISA credit although trials are in place or planned has signed up approximately 750 card. The banks targeted the standard for several other parts of the world, merchants in Swindon. Currently, the cash-intensive merchants (i.e., fast including the United States (in the retailer has to use a separate terminal to food, gasoline, and telephone) to accept MasterCard/VISA New York project accept cards, but Mondex is developing the card. It is estimated that, during the and at Wells Fargo Bank's San a single terminal that will also handle Olympics, VISACash was used for Francisco headquarters), Canada magnetic-stripe credit-card cards. more than 200,000 transactions, (Royal Bank of Canada and Canadian Transactions are stored individually in accounting for more than $1 million; Imperial Bank of Commerce are the terminal and the merchant can print this translates into an average of 11,000 planning a pilot in Guelph, Ontario), out a transaction register if desired. At transactions per day, with an average and Hong Kong (Hong Kong Bank is settlement, the retailer inserts his or her value of approximately $5.50 per planning two pilots). Following the card into the terminal, where the value transaction. By August 1996, 4,200 recent purchase of 51% of Mondex by of the transactions is transferred to his terminals had been installed. MasterCard International, seven or her card. The merchant can then VISACash trials are also underway in American companies (Chase transmit the total to the bank for three locations in Canada: Vancouver, Manhattan Bank, Wells Fargo, Dean deposit or use the card for the purchase Toronto, and the Province of Quebec. Witter/Discover, AT&T, First Chicago of goods and services. VISACash will also be used in trials NBD, Michigan National Bank, and DANMONT A/S--In 1991, the elsewhere, including New York City, MasterCard) have agreed to form a Danish banks and telephone companies as described below. company (Mondex USA) to market agreed to establish an independent MasterCard / VISA Project-- Mondex in the United States. Mondex company, DANMONT A/S, as the MasterCard and VISA, along with has been developed to represent a "System Operator" of their central Chase Manhattan Bank and CitiBank, "true" form of electronic money. The clearinghouse for a national payment announced in April 1996 that they basic Mondex products are a smart card card. The objective was to introduce a would be jointly implementing a (card balance can be checked with a nationwide prepaid smart card that stored-value pilot program in New reader the size of a key fob) and a could be used for purchases from York City. The pilot will be conducted "wallet" the size of a small hand-held vending machines, telephones, trains, in an area on the Upper West Side of calculator; the wallet can be used to buses, and parking meters. Cards are Manhattan in 1997. The program is check card balances, view the last ten sold in denominations of DKK 100, expected to include 50,000 cardholders transactions of a card that is inserted in 250, and 300 (the equivalent of and about 500 merchants, and is the wallet, or transfer value from a card between $20 and $50). One-time cards projected to run for 6 months. The and either store it temporarily in the (i.e., there is no capacity to add value) commitment of both card associations wallet or transfer it to another card. are used primarily to simplify the to develop a single merchant terminal Value can also be added to a card at an electronic money tracking logistics; the capable of accepting multiple cards is a ATM or a designated screenphone. cost of the one-time cards is borne Mondex is largely by 10

advertising revenue. In Phase II, it is US$6.00. Although Banksys receives a including telephone calls and fare cards expected that rechargeable cards and record of all transactions performed by from terminals at rail and bus stations add-value machines will be introduced. a card, it only retains the transaction throughout Biel/Bienne. The pilot The system is offline and the user record to verify the card balance and project has shown the Postcard remains anonymous. The system is then discards the specific transaction program to be profitable as well as managed by the "system operator" information. This procedure was technologically feasible. The system (DANMONT A/S), which provides the implemented to address concerns by has been operated at costs lower than sole link between the card issuers, card cardholders that a record of their cash originally expected, indicating that and equipment suppliers, and service purchases would be maintained. How such a system could be run profitably. providers. This allows even small the Federal Reserve Board would Vendor acceptance of the card product retailers to join the system as service classify this system is unclear, because has been varied. Service providers have providers, even if they are not large the system can store all the transactions given mixed reviews--vending enough to be independent card issuers. and be an "accountable" system. providers found the Postcard to be a Seven different manufacturers have A national rollout of the program relief from dealing with high coin invested in and operate different in Belgium was initiated in February volumes, while other POS vendors services. Eight banks and a telephone 1996. Beginning in 1997, the plan is believed the card was not flexible company issue cards, and other that all existing debit and credit cards enough to accommodate high-value manufacturers and card issuers have will have a chip added to the card and transactions. expressed interest in the system. will support the electronic purse. (Australia) National implementation was begun in Banksys has also licensed the Proton QuickLink--The QuickLink Card March 1993. The program operates in operating system to electronic-purse System, a stored-value pilot program, 39 cities throughout Denmark. programs in other parts of the world has been operating in Newcastle, New including the Netherlands, Switzerland, South Wales, Australia, since late 1995. Banksys / Proton--The Proton Australia (QuickLink pilot, see below), QuickLink uses the Proton system. electronic-purse program, developed by Brazil, and Canada. For instance, the Approximately 18,000 reloadable cards the Belgian banking association Bank of Montreal and Toronto have been distributed to consumers, Banksys, is the largest such program in Dominion Bank planned to begin and 50 reload points are available. the world. Banksys, owned by the testing the system (as the Exact card) in Cards can be reloaded either online or major Belgian financial institutions, Kingston, ON, in late 1996. American offline through POS terminals. The owns all 1,000 ATMs in Belgium. Express has recently licensed the plan is ultimately to make the cards Banksys also operates an online point Proton system for use in the United available anywhere they can be used. of sale (POS) service throughout the States. Banksys planned to issue a No fee is currently associated with country with a cardbase of 6 million multi-application card in September obtaining or using the card, but fees cards. Unlike most other programs that 1996 that could handle as many as may be imposed at some future point, develop specifications and certify eight different applications. Regarding that is, as the program expands to terminal manufactures, Banksys has transit applications, Banksys has stand- include additional vendors and been the exclusive supplier in Belgium alone terminals on several buses applications. Approximately 300 for both magnetic-stripe and smart-card operating in Leuven and hopes to QuickLink terminals are available and terminals; the supply of terminals is integrate this process into the farebox. cover various applications, including considered a major source of revenue. Banksys will install automated payphones and POS terminals. The Proton electronic-purse program ticketing machines at several bus University of Newcastle Union students was launched in February 1995 in two terminals by the end of 1996. can use the card in the dining halls. cities, Leuven and Wavre, located Vending machine applications are also outside of Brussels. Cards are loaded Swiss PTT Postcard--The Swiss being considered. Regarding transit through ATMs or through the Post, Telegraph, and Telephone (PTT) applications, the New South Wales approximately 300 reload terminals implemented a smart-card electronic- state bus system planned to install located at bank branches. All banks purse program in Biel/Bienne, terminals on every bus by the end of operating in the pilot cities are Switzerland, in 1991. Initially, 13,000 June 1996, and a pilot program was to equipped to issue and reload cards. The consumers were given the Postcard, a be launched then. This is not a fare Proton program has a terminal base of contact smart card; more than 1.3 collection application per se; rather, approximately 30,000. As of early million Swiss consumers carry the tickets are purchased with cash on the 1996, card acceptance terminals were Postcard. For almost the last 2 years, card. operating in approximately 1,500 of the the Postcard has been co-branded with EPS/SmartCash--Electronic 3,600 possible merchants. By March the MasterCard logo, giving the card Payment Systems (EPS) was 1996, more than 850,000 transactions wider acceptance than it had originally established in 1992 to provide had been completed using the cards; the received. The Postcard can be used to transaction processing support for the average transaction amount has been purchase various items and services, MAC ATM network and to develop additional card and banking-related products and services. 11

In 1995, EPS announced plans for underway, including use by retail very recent developments, and, so far, SmartCash as a nationwide stored- chains, provincial authorities, and have produced more questions than value smart card. EPS' partners in this transit operators (e.g., the regional answers. venture were major payment systems transit authority in Rotterdam). As in the transit arena, the companies, including MasterCard, multipurpose program focused on Bank of America, Chase Manhattan Postchecque--La Poste, the financial transactions (i.e., the stored- Bank, Chemical, Wachovia, First Belgian post office, has developed a value or electronic-purse system) is in Union, Wilmington Trust, multifunction, multi-client electronic its infancy. Unlike transit, NationsBank, GemPlus, and VeriFone. purse called Postchecque; the card is developments in the financial arena, EPS is owned by five financial considered competition to the other with global effects at stake, have been institutions: CoreStates Financial Belgian purse, Proton. Postchecque is marked by both fierce competition and Corporation, National City available for use by any interested new alliances, often involving the same Corporation, KeyCorp, PNC Bank entity. As of October 1996, agreements parties. With basic electronic-purse Corporation, and BancOne had been signed with several major systems taking several different forms Corporation. As of November 1996, retailers and were being negotiated (e.g., the Mondex cash substitute model EPS had fully developed its system and with Belgian Telecom, oil companies, versus the VISACash credit/ was demonstrating the system for the and transit operators in Belgium. model versus the SmartCash traveler's member financial institutions. check model), the major system operators are vying for the allegiances Europay Clip--Europay of new programs. Ultimately, a International, the European payments SUMMARY shakeout among the competing systems association, recently (June 1996) is probable, because the desire for announced creation of the first interoperability--coupled with multinational, multicurrency, smart- As shown by the number of preferences expressed by the card electronic-purse system. The card projects reviewed here, there is marketplace--should considerably product, called Clip, incorporates a considerable activity in developing and reduce the number of competing still-unpublished version of the implementing multipurpose payment operating systems. Europay/ MasterCard/VISA (EMV) programs. In transit, electronic payment The degree of acceptance, first by interoperability specifications. media, particularly smart cards, have individual card issuers, then by Associations or banks in several facilitated the consideration of new merchants, and finally by consumers, countries (i.e., Italy, Iceland, the Czech approaches to regional fare integration, will also affect the success of specific Republic, and Austria) have indicated as well as integration of transit and programs, as well as many of their that they would use--or are strongly other payment methods. Various operating parameters (e.g., the pricing considering--the Clip system in their models are being considered for each of transactions and card use). This own electronic-purse systems. type of multipurpose arrangement. acceptance has only recently begun to Chipper--PTT Telecom and Efforts to date have had modest be tested in many parts of the world Postbank in The Netherlands have successes and setbacks. For example, in (including North America), although a introduced the Chipper multi- one case (MARTA/VISACash), a joint few programs have been in place for at application electronic-purse system. transit-financial institution program least 2 years. The early results from The system is open to a broad range of was successfully implemented in a very these efforts have been positive, but use card issuers, and several different short period, whereas another joint has grown more slowly than functions can be combined on a card; effort (MTA/Chase Manhattan Bank) anticipated. There are important these include reloadable purse, home failed to come to fruition. The two questions in the minds of all banking, ID, Internet , retail programs, however, clearly differ in prospective participants (i.e., issuers, loyalty programs, parking charges, and scale, complexity, and level of merchants, and consumers) in a stored- transit. Cardholders can load value onto expectation and risk (on both the transit value smart-card program. the cards from bank accounts via public and the financial sides). Furthermore, telephones. The system also offers the the background and settings are very Issuers will also want to know the Telechipper, a low-cost card reader that different in the two projects. Thus, it following: can be attached to a private telephone cannot be concluded--on the basis of or personal computer; the Telechipper these limited results--that one approach

< Will merchants and the program (e.g., transit agency versus < Clearinghouse--an entity or consumers accept this program? financial or other institution) and the organization responsible for managing capabilities and constraints (e.g., many of the support functions for the Merchants will want to know the financial, administrative, legal, and multipurpose program, including card following: technological) and goals (e.g., reduce management (e.g., issuance and costs and increase revenues) of that distribution), revenue management < How will I benefit from entity. (e.g., collection, reconciliation, and accepting these cards? The key institutional parameters settlement), customer service, and < How much will it cost to that need to be established in a marketing. accept these cards? multipurpose payment program include < Will my customers use the the following: The clearinghouse concept tends card? to differ in scope from one project to < Whether the system will be the next, but is key to any multipurpose Finally, consumers will want to know closed or open; transit fare program. In a closed system the following: < Whether the system will be in particular, the clearinghouse may administered by the transit agency (or carry out the requirements associated < How convenient will it be for group of agencies) or by a financial or with issuer, distributor, and acquirer. me to use the card (where can I get it, other private entity; and where can I refill it, and where can I < The types of entities use it)? involved, their roles, and their legal and < What happens if I lose the organizational relationship. BASIC INSTITUTIONAL card, or if the reader does not work? APPROACHES: OPEN VERSUS < Will my privacy be ROLES IN A MULTIPURPOSE CLOSED SYSTEMS compromised by using the card? SYSTEM < How will I benefit from using As indicated above, the decision to the card? In general, a multipurpose pursue an open versus a closed system < How much will it cost to use payment system will involve the (or something in between) for the card? following basic roles: multipurpose payment media is driven by several factors, including who is As different types of programs < User--anyone who uses the initiating the program, the goals of the continue to roll out and additional payment media to purchase services or initiating entity, and the capabilities of experience is gained, these questions products from merchants; this entity. From a transit agency's will be answered. Complete answers < Merchant--an entity (e.g., a point of view, the options for a will not be available until this new transit agency or a retailer) that will multipurpose program can be concept is understood and implemented accept the media as payment for the categorized as follows (the basic on a broad scale. Chapters 3 through 8 provision of a service or a product; structures are depicted in Figures 1, 2, identify and describe the issues raised < Issuer--the entity (e.g., the and 3, and are summarized in Table 2): by these questions in order to provide transit agency or a bank) that provides at least a framework for addressing the media (and is identified on the < Closed (transportation- them. media) and pays the merchants on the only) system--In this option, a transit basis of the stored-value they have agency or a group of agencies (possibly CHAPTER 3--INSTITUTIONAL received from users; including other, non-transit, ISSUES < Distributor--a point of sale transportation providers) issues fare and recharge location of the media; the media usable on any of the agency's (or ALTERNATIVE INSTITUTIONAL media are received from the issuer, and member agencies') services. Individual ARRANGEMENTS records of transactions are sent to the functions (e.g., card production and issuer; a distributor can be a bank distribution, revenue reconciliation and A multipurpose payment program ATM, a transit ticket vending machine, settlement, equipment procurement, can be established in a range of a transit agency ticket agent, an outside and perhaps maintenance) can be institutional settings, including a vendor, or a participating merchant; contracted out or provided by one or transit-only environment, a more < Acquirer--an entity that more of the member agencies. general public transportation setting, or obtains card transaction information Examples of this general approach a broader "open" environment. The from merchants and transmits it to the include the Hong Kong Creative Star institutional setting and arrangements appropriate issuer; acquirers may not project, the Ventura County Smart will depend largely on who is initiating be needed in a closed system; and * may be partnership with financial institution or equipment vendor/integrator

Figure 2. Closed multipurpose payment system. * or other entity ** may also be card issuer (------if transit agency is card issuer)

Figure 3. Open payment system.

TABLE 2 Comparison of roles in closed vs. open payment systems 15

Passport project, and the regional although not involving stored-value cash fares (at least on buses) or tokens integration project being developed in cards, Valley Metro's (Phoenix) and tickets to accommodate occasional the Seattle area. acceptance of commercial credit cards riders. Agencies may decide that the < Closed multipurpose is a key example of transit's benefits of administering their own system--In this option, the transit participation in an open system. multipurpose programs outweigh the agency(ies)-issued fare media can be benefits of participating in an open used for certain other purposes (e.g., The closed system option is an system. For example, in the Seattle vending, telephones, newsstands) as expansion of the current fare collection regional fare integration project, it has well as for transportation purposes. system in place at every transit agency been recommended that the Again, the support functions can be to incorporate neighboring transit multipurpose fare system be provided by the agency(ies) or services and, perhaps, other modes administered by the consortia of transit contracted out; however, in this (e.g., parking, ferries) as well. As agencies in a relatively closed system arrangement, a partnership with a shown in Figure 2, the second option is initially, with possible expansion to a financial institution, equipment vendor, essentially an extension of the first, more open system once smart cards or other private entity becomes a because the fare card's use is expanded become more widespread. possibility as well. Examples include to include functions beyond The San Francisco TransLink the proposed MTA MetroCard transportation services. In New York project, although developed as a closed expanded utility project, the City, for instance, the MTA introduced multipurpose system, is envisioned as Manchester (GB) smart-card project, the stored-value MetroCard for transit being open to compatible media issued and the plan for the expansion of the use only, but planned to add the by outside entities. The TransLink Seoul (Korea) smart-card project. expanded utility capabilities through a Program Plan calls for the system to < Open system--In this partnership with a private firm. The "accept for payment of transit services approach, the transit agency(ies) third option--the open system-- with cards issued by any entity accepts media from multiple issuers. represents a fundamental change from provided: (1) the cards meet the There are several possible models for a the way transit agencies manage fare TransLink standards, (2) the issuing transit agency's participation in an collection activities. Although some entity has been properly investigated to "open" system, including (1) the transit transit agencies will have an interest in ensure its legitimacy, and (3) a agency becomes a participating participating in such a program and not satisfactory business arrangement is "merchant" in a general electronic- issuing their own electronic fare media, reached between the issuing entity and purse and stored-value card program or others will prefer to retain full control operators (individually or an application in a multi-application over their fare systems and will not collectively)"(1). This plan also program, and thus probably pays wish to participate as a merchant in an recommends that the TransLink transaction fees for its customers' use; open program. An agency or group of program maintain maximum flexibility (2) the agency becomes a formal agencies considering an appropriate in terms of media technology, that is, partner in the arrangement, sharing approach must weigh the advantages the system should be designed to accept both the benefits and the financial risk and disadvantages of the alternative contact as well as contactless cards in involved in the venture; or (3) the approaches against its own goals and the future; the card-reading devices agency (or consortium) administers its constraints. The relative advantages are should be able to accommodate readers own payment program, but allows summarized in Table 3. for both types of cards, although it is outside issuers' cards to be used What may occur in certain suggested that only the contactless provided they meet the program's instances is an evolution from a fully readers be installed initially. This requirements. In the first scenario, the closed system to a closed multipurpose flexible strategy will facilitate transit agency does not issue cards system to an open system. This would movement toward an open system itself. In the second scenario, the transit probably occur over several years, approach. agency may be one of multiple card because an agency (or integrated As reflected in the Seattle and San issuers or may "co-brand" the cards regional program) might wish to wait Francisco plans, the availability of a issued by others-that is, the card would until bank-issued cash cards were well- viable alternative (i.e., to an agency carry the transit agency's name as well established. Another path is for a transit developing and administering its own as the issuer's name. In the third agency to enlist in a bank-initiated program) is an important consideration scenario, the agency(ies) issue(s) cards. multiple-use or multi-application for the transit agency in choosing an Examples of the general open system program, but to provide its own approach. In Atlanta, for instance, the approach include the MARTA/ multipurpose media as well. At least rollout of the VISACash card by the VisaCash project in Atlanta and several for the foreseeable future, most transit three banks enabled MARTA to take projects abroad (e.g., DANMONT, agencies will need to remain in the fare advantage of the opportunity to accept Swiss PTT, Sydney). The proposed San collection business to some extent, the cards for fare payment. Until such Francisco project will probably pursue because they will have to collect programs are introduced elsewhere, an "open system perspective." Finally, transit agencies do not have a similar 16

option available to them. Although the instance, some agencies may be legally cards as the future standard technology opportunity for transit agency entry prohibited from entering into for all payment-related media (e.g., into the multipurpose payment world partnership-type agreements with credit cards, electronic benefits can dovetail with the implementation of private entities. In other cases, an transfer, medical claims processing, electronic-purse programs by financial agency may be unwilling to relinquish and retail loyalty programs) as well as institutions, those agencies unwilling to direct control over its fare payment access and identification media for wait for the arrival of electronic-purse system. The availability of resources online transactions in the near future. and multi-application cards must will also influence the decision; an Another goal in offering stored-value initiate their own efforts. Several agency (or group of agencies) with cards is to expand the range of services financial institutions and other entities insufficient funds to acquire and provided to consumers, as banks seek involved in payments products and implement a new fare system will be to improve their status in the services have expressed interest in more interested in a scheme that increasingly competitive payments assisting them in this process, through reduces its own financial requirements. environment. partnership or contracting In general, tying in with a large arrangements. Possible arrangements Financial and Other Institutions transit agency offers a bank or other are discussed below. entity several benefits, including the The growing interest in following: THE IMPETUS FOR multipurpose payment arrangements in MULTIPURPOSE MEDIA the transit industry has been paralleled

PRICING OF MEDIA unlimited ride passes (on fare cards) newsstands. However, this will still that can only be used for transit. result in availability problems for some Electronic fare technology allows riders (e.g., those boarding in suburban individual agencies to maintain their areas and not having ready access to a own fare structures in an integrated SALE AND DISTRIBUTION OF sales point or the "un-banked," as is system. However, the provision of MEDIA discussed below). Other possibilities discounts and bonuses on purchase (or include the following: reloading) of stored-value cards can One of the most important factors significantly complicate a multiple-use likely to determine the success of any < Employer distribution, arrangement; this is because every stored-value program is the availability < Purchase at home (i.e., via expenditure--transit or other--will be of the cards and the ease of reloading-- telephone, mail, or computer), and subject to the same discount. The and checking remaining value--on < Sale on board buses. prepaid stored-value concept makes it them. This is a crucial concern to difficult to allocate the discount just to potential card users, particularly those Although there may be problems transit. (In a multi-application card, bus riders who do not use rail in related to restricting subsidies to transit where transit is a separate application, multimodal systems or riders in bus- use, as mentioned above, employer this problem is avoided.) only systems. In rail stations, cards can distribution remains an option for any Several ways exist to circumvent be sold and reloaded by "ticket" agents, prepaid (or post-paid) fare medium; in this problem; these include (1) offering through AVMs or, possibly, through some cases, the smart card may be a a discount on rides taken, rather than bank ATMs (e.g., in an open system). monthly pass, as is in the Ventura offering a bonus on the amount of In New York, the stored-value County program. purchase, and (2) introducing a (magnetic) MetroCard is sold and The sale of payment media at "loyalty" program that rewards reloaded by ticket agents-as well as home is one of the key emerging frequency of transit use. A multiple-use through a series of remote vendor developments in banking. "Virtual arrangement will be simpler if no locations. In Atlanta, the NationsBank banking" is being facilitated by the discount or bonus is offered; however, VISACash card is sold through in- development of home-banking services a discount or bonus--particularly when station vending machines. Although (e.g., using software such as Intuit's adding value--can encourage a transit NationsBank is the only bank Quicken, Microsoft's Money, or Meca rider to keep the same card for an authorized for in-station vending, Software's Managing Your Money) and extended time. VISACash cards are available from electronic commerce over the Internet A similar issue relates to the use First Union Bank, Wachovia Bank, and in general. Some banks have also made of transit vouchers (such as New York's NationsBank tellers; the cards available remote "terminals" that use TransitChek or CommuterChek in eventually will be sold through ATMs the telephone lines to provide direct several other cities) to purchase as well. Card readers can also be access to the bank and to one's account. multiple-use stored-value cards--or provided in stations to allow users to Regarding a stored-value application of direct employer provision of cards (i.e., check remaining value; New York uses this approach, Mondex users can load in lieu of monthly flash passes). such devices. Thus, card availability in value onto their cards through special Because there is no requirement that a general should not be a major issue for Mondex telephones in their homes or multiple-use card be used for transit, an rail riders, although there can be delays offices. Mondex cards can also be employer providing vouchers or actual if high-volume stations do not have loaded at cash machines, through fare cards might be subsidizing retail enough vending machines. In an open specially equipped public telephones, purchases or telephone calls rather than system, the transit agency can and from a cardholder's own Mondex transit use for some employees. One maximize the availability of cards to its "Wallet"; the wallet contains stored solution to this problem would be to riders by arranging for issuing entities value and allows the owner to transfer prevent the use of subsidized vouchers to install vending machines or ATMs in value (i.e., enough for that day) onto in purchasing multiple-use stored-value the stations. This is less important if the his or her Mondex card. Similarly, fare cards; in such a case, the vouchers stations are close to ATMs or other VeriFone has introduced the "Personal could be used only for buying transit- sales outlets. ATM"; this is a low-cost, palm-sized, only fare media. Similarly, subsidized Ensuring sufficient availability of card-accepting device that can be fare media provided directly to cards for bus riders is more connected to a telephone line. It allows employees would have to be restricted problematic. One option is to establish the user to download value to a smart to transit use in some fashion. This a widespread remote sales network card, to transfer funds from one could take the form of a post payment- (e.g., sell cards through ATMs and at account to another, and to perform employer billing option, for instance. common remote sales locations such as other banking functions in a secure Another possibility is to offer drug stores, supermarkets, and environment. The ability to load value 20 at home could be a key factor in Alternatively, cards could be sold and < Abandoned property and successfully introducing stored-value reloaded through bank ATMs if cash escheatment laws; cards in general and will be especially were accepted (i.e., rather than < Responsibility for lost or useful for bus riders. requiring users to transfer value from stolen cards, card or equipment Another potential option for their own bank accounts). malfunction, and issuer insolvency; and reloading, if not initially purchasing, In summary, the pricing and < Privacy. cards is on board the buses. In Ventura availability of cards must be addressed County, for instance, all but one of the in establishing multiple-use programs. participating transit agencies permits The transit agency must consider the AUTHORITY TO ISSUE PREPAID on-board recharging of the smart cards; effect on its revenue and ridership if it CARDS these cards are monthly passes and are cannot incorporate key elements of its activated for the month on the first use fare structure on a multiple-use card; One of the key issue areas that month, that is, after notifying the this may be a factor in deciding either concerns the legal authority of banks to agency in advance of a desire to do so. to issue its own card or not to issue prepaid media, as well as the Cards can also be loaded on board in participate in such a program. The authority of non-banking institutions to London. A similar approach has been ready availability of cards and the issue payment instruments. These suggested for consideration in the convenience of reloading them are vital questions center on both banking smart-card program in the Seattle to the success of any prepaid program. regulations and general business law. In region: once the cardholder has Emerging developments in at-home the United States, there is no clear established an account with the transit banking may be an important authority for either nationally or state- agency, he or she would be able to breakthrough in promoting the use of chartered financial institutions to sell a request via telephone or personal stored-value cards for transit and for prepaid card, because such activity is computer that a certain amount of value general commercial use. The next not expressly empowered in the be added to the card; the requests for chapter reviews legal and regulatory Banking Act of 1933. On the other value would then be downloaded to the issues that may affect multipurpose hand, no legal challenge has been buses each day, and the cardholder's payment programs. made, and the Comptroller of Currency card would be loaded with the has upheld the ability to sell traveler's requested amount of value the next CHAPTER 5--LEGAL AND checks. A key difference between time he or she boarded a bus. While REGULATORY ISSUES traveler's checks and prepaid cards is such an approach resolves the problem that the former are redeemable in of where to reload cards, it complicates The development of stored-value currency, while the latter can be used the fare collection system. Beyond the and prepaid card applications has only for the purchase of goods and significant communications and resulted in a range of legal and services. The regulations potentially processing requirements, many regulatory questions. Because prepaid affecting banks' issuance of prepaid agencies will not want to permit on- applications are new to the financial cards (e.g., Regulations E and Z) are board loading because of operational services industry, many of the legal discussed below. considerations such as (1) the negative issues are in areas where the existing The issuance of prepaid media by effect on overall in boarding times, (2) statutory and regulatory authority and non-banking entities, such as telephone the limited space available for an case law are scant or nonexistent. The carriers and transportation (e.g., transit, additional piece of equipment at the legal treatment of stored-value media is toll, and parking) agencies, has begun front of a bus, (3) the additional under review (e.g., by the Federal to raise certain legal questions as well. maintenance requirements associated Reserve Board and the Federal Deposit In general, the courts have recognized with that equipment, and (4) the Insurance Corporation). Although that businesses engage in operations possibility that the operator would have many of these issues may not apply similar to banking functions without additional responsibilities (i.e., if he or specifically to transit-only media, the constituting banking. One of the she had to handle reloading). move toward open payment systems fundamental issues concerning prepaid In an open system, distribution necessitates their consideration by cards relates to whether the issuing and reloading through ATMs (or any transit agencies. Key legal and body is "receiving deposits" in selling other bank-related source) is a problem regulatory issues dealing with prepaid the cards. The Federal Deposit for riders who do not have products include the following: Insurance Corporation (FDIC) is accounts. To address this problem, the expected to issue a ruling that most transit agency will have to provide < Authority of banks and non- stored-value card balances will not cards through its own sales banks to issue prepaid cards; qualify for deposit insurance. It is mechanisms or facilities (i.e., AVMs, < Electronic funds transfer expected, however, that there will be an ticket agents, outside vendors, (EFT) regulations (i.e., Regulations E exception for certain stored-value employers, on board buses, or via and Z); programs, allowing banks to offer telephone or mail). 21 deposit insurance for cards in those and the operating rules that will have to property law. The issue of refunds for programs. It could turn out that only be established for these programs. expired value is also related to the cards intended for use on very small question of providing for refund or purchases will be uninsured, while reimbursement for card theft or loss, or cards marketed to consumers who will EXPIRED VALUE AND for card or terminal malfunctions. maintain larger amounts on their cards ABANDONED PROPERTY LAWS The three banks participating in will be insured. the Atlanta VISACash program have Another important issue skirted the expired value constraints by underlying the success of prepaid card establishing "maintenance fees" of as EFT REGULATIONS programs is the treatment of expired or much as $5.00 per month that begin to unused card value--the dollar value (a) be assessed against the card's remaining The key Federal Reserve Board that remains on a card after it has value once the card expires. Thus, any regulation that deals with EFT and expired or (b) that is never used (e.g., expired value will soon become might affect prepaid card issuance is because the card is thrown away or maintenance fee revenue to the issuing Regulation E. Regulation E provides kept as a collectible). The revenue bank. Resolving the issues associated consumers protection in arising potential associated with expired card with expired value is crucial in from EFT transactions. Federal value makes this issue an important determining the financial benefits of a legislation essentially exempting component of the card issuer's overall prepaid card program. stored-value cards from Regulation E is business case. The possible regulatory pending in both the House and Senate. barriers to the issuer being able to In response to the proposed legislation, retain the expired card value are that RESPONSIBILITY FOR LOST OR the Federal Reserve Board recently (1) the expired value may have to be STOLEN CARDS, CARD OR recommended that certain types of turned over to the state and (2) the EQUIPMENT MALFUNCTION, stored-value cards continue to be cardholder may be able to apply for a OR ISSUER INSOLVENCY subject to certain portions of refund of the expired value. The Regulation E. In April 1996, the applicability of the abandoned property Because there is no legislation Federal Reserve Board published for law (commonly referred to as governing stored-value cards, there are comment its recommendations as to "escheatment") to prepaid cards, no regulations related to the handling of which sections of Regulation E, if any, especially those that do not have lost or stolen cards, card or equipment should be applicable to stored-value cardholder registration features, is malfunction, or bankruptcy or failure of media. uncertain at present. Most states have the card issuer. The types of regulatory The Federal Reserve Board has enacted abandoned property laws that questions associated with these issues recommended that, as a general rule, dictate that "unclaimed property" be include the following: offline card systems (transactions take given to the state after a specified time. place offline and transaction records In some cases, transit agencies planning < Lost or stolen cards--Is the are maintained on the card or in a to institute stored-value card programs issuer responsible for replacing or central database) should be exempt as are seeking exemptions to the state law refunding a card that is lost or stolen? long as the card value does not exceed to enable them to keep the expired Stored-value cards are intended to $100, but that online card systems value. This issue has not yet been serve as "," and the (transactions are authorized online and resolved. consumer must bear the loss of cash; transaction records are maintained in a A related issue is the cardholder's thus, the cardholder would reasonably central database) should be subject to rights to a refund of expired value. If be expected to absorb the loss of the certain provisions of Regulation E. The the purchase of the card is considered a card value. On the other hand, given general preliminary recommendations contract, many lawyers argue that the the $50 limit on liability for a lost are summarized in Table 5. While the value to a cardholder of an expired credit card, consumers may push for a Federal Reserve's regulations have not prepaid card would terminate by similar provision for stored-value been finalized--and the proposed agreement, rather than becoming cards. federal legislation has not yet been unclaimed property subject to escheat. < Card or equipment malfunction- passed--there are several unanswered In other words, this is similar to a -If a card or the card-accepting questions related to defining the sporting event that gives the equipment malfunctions, is the issuer parameters of different card systems. ticketholder the right to exchange the responsible for the associated loss? The How these questions are resolved--and ticket up to the time of the original issuer should probably cover any indeed the exact nature of the final event. Furthermore, lawyers may argue equipment-related loss, and would Regulation E statutes affecting stored- that value that does not exist for the probably be responsible if the card value and prepaid media--may affect cardholder, that is, that which is itself is shown to be faulty. However, the specific types of stored-value unclaimable, cannot be described as there may be questions as to systems that are pursued "unclaimed" for the purposes of the (a) whether the cardholder has abandoned damaged 22

1 Exempt only if cardholders are provided a means to check their balance and a summary of recent transactions is provided on request. the card and (b) who decides which Japan has passed similar regulations in optional "Fare Protect Scheme" that party is at fault. Issuers may have to its 1990 Prepaid Application protects the buyer against loss of a guarantee replacement of Legislation; this legislation includes the card. malfunctioning cards, regardless of following requirements: who is at fault, if they are to attract PRIVACY ISSUES consumers to the product. < Prepaid card issuers must register with the Ministry of Finance Information privacy rights < Bankruptcy or failure of when the accumulated unused value (of constitute a major issue that will be issuing entity--If the issuing bank or the pool) exceeds US$69,000. In raised by consumers with the other institution files for bankruptcy practice, issuers have to lodge a introduction of smart cards for stored protection or fails, who is responsible guarantee or deposit of 50% of the value and other applications. Consumer for (1) the value remaining on stored- unused value at the end of every March privacy in general is becoming a key value cards and (2) payments to and September. concern in conducting financial merchants that have accepted the card < Organizations issuing prepaid transactions. Because a stored-value for purchases or services? cards to their employees must advise card carries the use information on the the Ministry of Finance when the card, a key question is, who has the There is clearly a need to instill accumulated unused value exceeds right to control or use the data on the consumer confidence in stored-value US$48,000. card? Another question is what are the card systems if this new product is to < Prepaid cards should be so rights of the consumer when be widely accepted. Therefore, marked to reflect that they comply with information passes from the original regulations covering the rights and the legislation. party in a transaction to third parties responsibilities of card issuers and (i.e., "redisclosure")? The right to users are likely to be introduced. The Simultaneously, a Prepaid Card privacy is protected by federal and state evolution of such legislation can be Association was formed in Japan to laws and has been upheld by the courts. seen in several foreign countries where review system integrity and to ensure Various federal statutes addressing the prepaid concept is more advanced. adequate protection of consumers. specific applications (e.g., For instance, in Denmark, the Payment Transit agencies may or may not communications and computer use) and Cards Act of 1984 included the be subject to the same types of many states have passed legislation to following provisions: regulations as banks will be when they provide consumer protection in are issuing closed system payment financial transactions and other areas. < Limited cardholders liability media. Even if they are not, however, The privacy of an automated payment for the loss or unauthorized use of the transit agencies introducing stored- system is viewed as crucial by many card, value media will have to decide on consumers, and the banking system, in < Regulated the solicitation of their own policies regarding consumer most cases, has been very sensitive to cardholders, rights and refunds and reimbursements. this issue. Transit agencies, on the other < Controlled the use of Policies among existing smart-card hand, have not had to pay attention to cardholder and merchant information, programs vary. In Ventura County, the the need for customer privacy. This is and Passport (a monthly pass) will be partly because, excluding those who < Established a maximum replaced for a payment of $5.00. In purchase period passes, agencies have value that could be placed on the card. London, cardholders can purchase an not maintained information about the user 23 of a specific card. With stored-value largely be a function of the success and

* SPECIAL NOTE: The Transportation Research Board, the Transit Development Corporation, the National Research Council, and Federal Transit Administration (sponsor of the Transit Cooperative Research Program) do not endorse products or manufactures. Trade or manufacturers' names appear herein solely because they are considered essential to the clarity and completeness of the project reporting. 25

although the major source of interest in contact or contactless card alone. This SELECTING AND IMPLE- a combined contact-contactless card is raises the question: who will pay for MENTING A TECHNOLOGY from the transit industry. the card? In an open system, will a There is considerable interest in bank pay the cost differential (i.e., In general, the key concerns in combined cards. Such cards are being compared to a contact card) to issue a choosing a particular type of media or developed (and tested in some cases) to combined card so that it can be used on equipment for a multipurpose program provide a card that can be used in either transit in the contactless mode, or will may include the following factors: type of system. These cards-- the bank issue contact cards, leaving combicards or dual interface cards-are the transit agency to provide the < The agency's fare media of two basic types (see Figure 4): two combined card (i.e., including the needs and fare collection goals, separate chips (and thus separate bank's contact card and its applications) < System costs and the funding purses), and a single chip (and purse) for its riders? This remains to be seen. available, and that can be accessed through either the In a closed multipurpose system, the < The technology to be used by contact or contactless interface. The transit agency would presumably issue other entities in the region-coupled first type of card, now available (e.g., the cards, which could then be used for with concerns regarding card standards the GemPlus GemTwin card) and being other (nontransit) purposes in either the and interoperability. tested by Bank of America and others, contactless or contact mode as needed. is considered an interim solution, Another longer-term possibility is that Fare Collection Needs, Goals, and because the two functions are "blank" cards will be sold at consumer Costs completely separate; in other words, the electronic or other stores, and user cannot load value through the purchasers will add applications (e.g., The transit agency's fare collection contact portion and use that value on stored value, transit fare payment, and needs and goals--along with the transit. The other type of card allows prepaid telephone use) as desired; in funding available--will dictate to a such transactions: value can be loaded this scenario, the consumer would buy large extent the type of technology it and used through either means. Such a contactless, contact or combined card, will select. An agency's interest in chips and cards are being developed by as needed. Depending on the demand establishing and operating its own or several companies and joint ventures, for combined cards, the unit cost could perhaps a regional payment system including Philips/Siemens (based on ultimately drop to a point close to that allows the consideration and selection the Mikron MIFARE contactless card), for contact cards, but at least initially, of any technological solution. In the Racom/CP8 Transac (based on the the differential could be substantial integrated regional program in Ventura Racom contactless card), Inside (e.g., 1.5 to 2 times the cost of the County and those being developed in Technologies, and Motorola. The contact card, depending on the amount the San Francisco and Seattle regions, Racom/CP8 Transac card will be tested of memory and processing capability of for instance, contactless cards have on the French National Railway in the cards in question). There is also an been chosen as the most appropriate Valenciennes later in 1997. issue regarding the power requirements medium. An alternative approach, The combined card is a more for the contactless portion of the card if participating in a more open system in complicated device--and hence likely to a microprocessor (i.e., to handle the collaboration with a bank, may dictate be more expensive--than either a financial or other applications) is use of contact cards--as is true in needed. Atlanta and Ann Arbor. It is to be 26 hoped that the combined card will for certain contact card parameters, developed with ATMs and credit or eliminate the need to make this including the size of the card, the size debit cards. distinction, although this will raise and location of the contacts, and With regard to contactless cards, additional financial, technological, and several other aspects of the card and standards are being developed to institutional issues, as mentioned chip design. In addition to these address certain parameters. However, above. standards, a set of specifications is there are several distinct types of cards Another key factor that comes into being developed to address the on the market; they differ for such play--and that may strongly influence interoperability of card acceptance, physical and operating parameters as the agency's basic goals and needs--is security, and payment functions. The power generation technique, type of the cost of alternative approaches and jointly developed EMV specifications memory technology, radio frequency, the availability of sufficient funding. govern financial (debit and credit) data transmission rate, internal logic, An agency (or consortium) that transactions using contact smart cards and memory capacity. A comparison of believes it can afford to finance a new and have evolved in three parts: four of the more widely used transit payment system on its own probably contactless cards is shown in Table 6. will be less interested in pursuing a < Definition of the mechanical As indicated, these cards have partnership or participatory and electrical characteristics along with somewhat different combinations of arrangement with a financial institution card and terminal transmission characteristics. The key parameters than an agency that cannot afford such protocols; affecting potential interoperability at a system. For instance, agencies that < Definition of the terminal this point are the memory and have committed large sums to installing commands, applications, and data processing technology and the radio new magnetic-based automated fare elements; and frequency. The major memory collection (AFC) systems (e.g., CTA < Definition of how the card, technologies in existing contactless and MTA) are unlikely to be able terminal, and settlement processing cards are electronically erasable (politically, as well as fiscally) to network will work together. programmable read-only memory immediately pay for installation of their (EEPROM) and ferroelectric RAM own smart-card systems. Thus, MTA These specifications address only (FRAM). FRAM is a relatively new sought to establish a partnership with a debit and credit transactions, although technology. EEPROM is used for both private entity to finance its multiple-use they may ultimately include prepaid contactless and contact cards; as the smart-card program; CTA has begun to and stored-value and electronic-purse name suggests, data are erasable and explore a similar arrangement with a cards. Several other organizations are modifiable, allowing the cards to be local bank. (Financial issues associated working to produce standards for reloaded and reused (i.e., until the card with introducing multipurpose prepaid and electronic-purse cards; the itself wears out). In contrast, disposable programs are addressed in Chapter 7. Smart Card Forum, the European prepaid cards (contact only) are Commission for IC Card Standards, electronically programmable read-only and the European Committee for memory (EPROM); once data have Standards and Compatibility with Banking Standards (ECBS), among been encoded, they cannot be erased. Other Systems others, are considering such areas as These cards can be updated by adding data definitions, security protocols, and data (e.g., value) to unused sectors of Compatibility with the payment technical card specifications. the card--if there are any; once capacity systems of other transportation Nevertheless, neither standards nor has been reached, the cards must be operations in a region will also specifications promoting discarded. The relative advantages and influence the technology choice. The interoperability among prepaid and disadvantages of the different concern here goes beyond a simple stored-value card schemes do not exist. technologies are a matter of debate, and choice between contact and contactless The several stored-value systems in it is unclear which--if any--will become cards or magnetic cards. The question operation or trial (e.g., VISACash, the industry standard. With regard to of standards and interoperability must Mondex, Banksys, DANMONT, radio frequency, however, 13.56 MHz be addressed: can a card issued by one Chipper) all use ISO-compatible has been recommended as the standard entity be used by another entity that contact smart cards, yet none of these for power transmission, and as may not have the exact same system? cards work in any of the other systems. indicated in the table, this frequency Standards are being developed for both The forthcoming VISA/ has been adopted by the major contact and contactless cards, but as of MasterCard/Chase Manhattan Bank/ contactless chip and card makers. yet there is no real interoperability CitiBank venture in New York will The smart-card industry is moving among the various cards and operating require a certain level of toward the adoption of standards for systems. International standards exist interoperability between two different both contact and contactless smart systems. This will be a key step toward cards. Although the existence of widespread interoperability, as has standards as well as specifications for 27

* EEPROM=electronically erasable programmable read-only memory ** FRAM=ferroelectric random access memory various card parameters and operating media (discussed earlier), sale and a new fare system, it may be possible to procedures will help move toward distribution of media (including plan for the addition of or transition to interoperability, certain de facto employer involvement), marketing, smart cards. The CTA, for instance, standards probably will develop also. collection and reporting of data, specified its new AFC equipment to be Besides interoperability, the primary settlement among participating smart card-capable; thus, every fare benefits of standardization will be an agencies, training of operators and gate is equipped with a contactless card increase in the number of sources of other agency personnel, and "target." Of course, these readers are chips for card manufacturers and of maintenance of equipment (e.g., do designed to work with the Cubic Go- cards and equipment for system users; current maintenance personnel possess Card; if the CTA ultimately opts for this should result in lower costs, the technical capabilities to maintain another type of card, these units may particularly for the chips themselves. and repair smart-card readers). have to be replaced (or at least In some cases, the transit agency modified). OTHER TECHNOLOGY ISSUES or group of agencies will consider the The latter point underscores the smart-card system as a separate difficulties inherent in planning for Beyond the factors discussed element of the overall fare collection future flexibility. The card technology above, other issues that a transit agency system, with its own pricing, is still developing, particularly in the or consortium should consider in distribution, and data collection area of combined cards, and an agency selecting and implementing a new functions. This is likely to be the developing a smart-card system may payment technology include the situation in an open system such as at wish to maximize its ability to migrate following: MARTA, because the transit agency to a newer technology once it becomes accepts an outside card for fare available. One of the initial < Integrating the new payment. However, even where the recommendations in the TransLink technology into the existing fare transit agency provides its own cards, study, for instance, was to procure collection system and the smart-card readers may be equipment that would allow future use essentially stand-alone units that do not of contact as well as contactless < Ensuring flexibility regarding directly interface with the existing technology, that is, once the use of future technology developments and collection elements of the farebox or commercially provided stored-value planning for migration to new fare gate; this has been the case at cards becomes widespread (3). Until technologies. WMATA, for instance, with its Go- that time, only the contactless readers Card pilot project. The alternative would be active. The development of Unless an agency is replacing its approach is to fully integrate the new combined cards, however, has entire fare collection system with a new technology into the existing system. advanced considerably since the system, a key concern will be how the This requires retrofitting equipment and completion of that study, a little more new portion of the system (i.e., the the data transmission infrastructure; the than a year ago. The designers of the smart cards) will be integrated with the complexity of this task will depend on TransLink program must decide current system. This issue includes not the size of the transit system, the modes whether to continue following the only direct equipment interfaces, but of service and types of fare collection initial recommendation, thereby also administrative and operational equipment in place, and the complexity retaining maximum flexibility, or to elements, including fare policy and of the various system elements. Finally, assume that combined cards will pricing of media relative to existing if an agency is just now procuring and obviate the need to accept contact cards implementing for transit uses. The rapid pace of 28 technological developments, along with COST EFFECTS access to or choose not to use the open the parallel developments in potential system media. institutional arrangements, has added General Cost Concerns Cost is also an issue for financial new complications to the process of institutions in contemplating stored- choosing the most appropriate path to The costs associated with fare value or multi-application programs, follow. collection are a significant concern to particularly given the uncertainty transit agencies. As funding for transit surrounding the acceptance of the becomes increasingly limited, concept and the size of the return on minimizing all types of expenditures what will be a major investment. In the CHAPTER 7--FINANCIAL ISSUES gains importance. Thus, cost is a major survey of 98 financial institutions consideration in assessing potential fare undertaken by Dove Associates to find A fundamental factor affecting the collection approaches. In the survey of out about plans to issue smart cards, potential of multipurpose media and transit agencies conducted for this respondents expressed strong interest in joint transit and banking arrangements study (see the appendix), "reduce cost smart cards, but also expressed is the nature of the financial of producing/distributing fare media" significant concerns about the costs of implications of such efforts from both and "reduce cost of fare collection/ providing smart cards; cost concerns the cost and the revenue side. There processing equipment" were each rated were almost unanimously cited as a will be various capital and operating "very important" or "important" by disadvantage of issuing smart cards, costs and benefits associated with about two-thirds of the respondents. In and, in fact, represented the single most implementing any new fare technology an earlier survey of 150 transit important component of a potential or payment system, and the net effect agencies, 83% of the respondents cited issuer's decision. The benefit to the on the transit agency and any cost as the most important--or at least institution was the second most participating financial institutions will one of the most important--factors important issue. Specific financial depend on the multipurpose program related to fare collection (4). concerns included the economic and any institutional arrangement, as Cost is likely to be of particular justification for spending much more well as the level of current fare concern in implementing a on the cards themselves ($3.00 to $6.00 collection or payment system costs. multipurpose media program if this was the expected range reported in the The key financial issues fall into the program is being added to an existing survey) than is spent (i.e., roughly following categories: electronic fare payment system or one $0.10 for a magnetic-stripe card), as being implemented. As mentioned well as the cost of upgrading < What is the nature of the earlier, several transit agencies are cardaccepting devices so that customers capital and operating costs? installing magnetic-stripe AFC can use the cards. Thus, developing a < Who will pay for which systems. It will in most cases be reasonable business case was deemed items? difficult for an agency to justify (to the crucial to these institutions' < What is the nature of public and to political decisionmakers) participation in smart-card programs. potential cost savings, new revenues, paying to add smart-card capabilities to The remainder of this chapter and other (nonfinancial) benefits? a new system promoted as "state of the describes current transit fare collection < Who receives which types of art." Some agencies, such as those in costs and the types of capital and benefits? the Seattle area, are planning new fare operating costs that can be expected in < How can a multipurpose systems based largely on smart cards. multipurpose fare programs. arrangement be structured financially However, even in such situations, there so as to produce a "win-win" situation is still a need to provide alternative Current Transit Agency Fare for all participating entities? lower-cost payment options--tokens, Collection Costs tickets, magnetic cards, or at least cash; This chapter reviews the various given the high unit cost of smart cards, The costs associated with transit types of costs and benefits associated it is not cost-effective to offer smart fare collection can be substantial, with implementing and administering cards for one-time or occasional users. although the range is large. On the multipurpose arrangements. This Similarly, even in an open payment basis of the survey conducted as part of includes consideration of the direct system, where the transit agency this study, some agencies spend less capital and the operating and accepts outside cards, the agency than 1% of their total fare revenue on maintenance costs and the potential probably will always have to maintain fare collection and related costs, while savings, as well as revenue implications its own fare collection equipment to others spend as much as 20%; the related to multiple-use card programs. accommodate riders who do not have average for all agencies responding to 29 the survey is roughly 6%. The < Training (e.g., maintenance, accounting personnel. A complicating percentages reported in the survey are operations, customer service, revenue, factor, however, is that labor summarized in Table and finance). agreements effectively prevent most 7. As indicated, agencies in all immediate staff reductions (2). categories tend to spend less on In an open system and possibly in Although it may be possible to reassign production and distribution of media a closed multiple-use system in which a the affected staff to other functions, than on collection and processing of private entity or a public-private certain projected personnel savings fares; the average for all agencies is partnership is managing the system, may be fully achievable only over a just less than 2% for the former and some of the above items may be relatively long period. On the other more than 4% for the latter. replaced by the following costs: hand, where services are contracted out or performed through outside agents (as < Transaction fees and with off-site sale of media), the costs Cost Categories < Loss of revenue currently can be readily reduced as appropriate. received from "float" (from prepaid In Manchester, for example, the annual media sales) and unused value (from amount paid in commissions to the The cost elements associated with stored-value media). primary vendor selling fare media is developing, implementing, and expected to be reduced from $400,000 administering a multipurpose fare Each agency will categorize to $200,000. program will vary to some extent specific costs somewhat differently, but In the area of maintenance depending on the specific type of the fundamental issues to be addressed personnel, the use of contactless cards program (e.g., open versus closed are and readers is expected to reduce costs system), the modes of service and type (1) how the new system will affect the because of the low maintenance of fare collection (i.e., bus/pay on current operating and maintenance cost requirements anticipated for this entry, rail/barrier, light rail/proof of structure, and equipment. The increased payment, commuter rail/pay on board), (2) what are the capital costs for the sophistication of electronic fare the nature of the existing equipment new system. equipment in general will, on the other and the extent to which the new hand, create new challenges for an equipment will be integrated into the Operating and Maintenance Cost established maintenance organization, current system. In general, however, Effects possibly requiring more highly trained introducing a closed (i.e., agency- personnel. At a minimum, considerable initiated) smart-card-based system will Transit-Operated Program retraining will be necessary. The net include many, if not all, of the effect of contactless card programs on following types of items: The operating and maintenance operating and maintenance costs has cost effect of introducing a not yet been ascertained, because of the < System design and multipurpose payment program will lack of long-term operating experience development effort (i.e., staff or depend on (1) changes to existing cost with the technology, although some consultant time), including elements, including cost savings, and agencies have projected significant specifications for equipment, media, (2) new cost elements. Potential maintenance cost reductions with such and clearinghouse processes; changes in existing elements include programs. < Procurement and installation automating certain sales, distribution of fare collection and dispensing and processing functions, as well as Another area often cited as equipment (e.g., card reader and maintenance requirements. Cost offering potential cost savings with the processors, card dispensing, and savings may be achievable in terms of use of smart cards is on-board data recharge machines); agency personnel needed to carry out collection. The storage and processing < Procurement and installation these functions, as well as in expenses capabilities of smart cards offer of computer system (including such as sales commissions for prepaid potentially significant cost savings over software); media or contract services for data existing data collection activities. In < Installation or modification collection. For instance, several transit Manchester, for instance, it is believed of communications infrastructure and agencies implementing new electronic that the smart-card system will largely system; fare systems (e.g., the CTA, MTA and replace the existing manual rider < Purchase or production of MBTA, as well as GMPTE in survey effort, saving the transit agency fare media; Manchester) have projected significant nearly $1 million per year. In the < Day-to-day administration; savings in fare collection labor costs. southern California smart-card trial < Maintenance and repair; Most of the savings are expected to (Gardena, Torrance, and Los Angeles < Marketing (promotion and result from eliminating the need for rail DOT), the system integrator also education of customers); station ticket agents, as well as estimated a significant data collection < Sales and distribution; reducing the need for revenue savings. < Revenue accounting; and processing and 30

Source: survey of transit agencies (June 1996)

A comprehensive analysis of the private partnership, the cost effects will $1.50 transaction versus approximately cost effects of implementing a be very different from those discussed 2.5% for the others), although the exact multipurpose fare system was above. The chief cost for the transit rate is individually negotiated. In undertaken as part of the Central Puget agency may be a transaction fee per use accepting credit cards, Valley Metro in Sound regional fare study (5). This of the multipurpose card to the system Phoenix has reduced the amount it has study compared new versus existing operator or card issuer. The extent of to pay in transaction fees by batching costs for the King County Metro transit this cost--as well as the effect on other transactions, rather than sending them system, and estimated that the effect of costs--to the transit agency will depend one at a time. Once the stored-value the recommended smart-card system on on the specific institutional card becomes a common commodity, it Metro's fare collection operating and arrangement and operating agreement is possible that more standardized fee maintenance costs could range from an as to which entity covers the cost of arrangements will develop, as they increase of $139,000 per year (roughly which elements. This is crucial for both have for credit and debit cards. 4% of the total current annual cost) to a the transit agency and prospective Regardless, the transaction fee is an reduction of $309,000 (more than 9% partners in developing a business case important concern, either as a cost (to of the current total). The estimated for a multipurpose system. As can be participating transit agencies) or as effect on the existing cost elements is a seen in the dissolution of the revenue (to the issuing financial savings of $495,000 to $804,000 per MTA/Chase Manhattan Bank institution or partnership); the revenue year (at full system implementation), or negotiations, the structure of the aspect of the fee is included below, 14% to 22% of these elements. The transaction fee agreement is under "Types of Benefits." cost categories in which significant fundamental to the development of a Another "cost" associated with savings were projected include workable partnership. The revenue paid transit participation in an open system "information production,", "pass to the issuer must be weighed against or private partnership arrangement is program administration and sales," the perceived risk in the endeavor, and loss of revenue from interest on float "general accounting," and "customer all parties concerned must be and unused or expired card value. As service office." The study estimated convinced that the agreement is defined in a recent article in the New that new cost elements (i.e., mutually beneficial. In New York, York Times Magazine, "Float is wealth clearinghouse costs and costs for differences in expectations regarding in transit, money that has been parked operating and maintaining new onboard the extent of the risk led to an inability temporarily in a place where someone, equipment) would add between to reach agreement on the level and probably not you, can earn interest on $495,000 and $635,000 per year, or nature of the transaction fees. it"(6). Transit agencies have benefited 14% to 19% of the current total. The Because of the limited experience from this source for years through the net effect of the new system on Metro's in instituting multiple-use programs, sale of period passes and other prepaid costs also includes an estimate of new there are as yet no established fee media (i.e., multiple ride tokens or revenue expected. models. Each program has its own tickets or stored-value cards). Thus, unique arrangement. In Manchester, for agencies must consider the effect of instance, the transit agency pays fees forfeiting this revenue in entering a only for use of the cards by its full-fare new type of arrangement. Although use Open System or Public-Private riders-not for concessionary riders. of stored-value media is limited among Partnership MARTA pays a slightly lower fee per transit agencies, the potential loss of transaction than do other merchants for revenue from unused value must be In open payment systems or use of the VISACash card considered if an agency is closed systems involving a joint public- (approximately 2% of the value of each 31 relinquishing control over issuance of depend on the volume being procured. smart-card system. Until transit riders its stored-value media. For instance, the disposable prepaid are accustomed to treating fare media Regarding the overall effects, a contact cards being used in the like credit and debit cards, however, transit agency participating in an open VISACash pilot in Atlanta cost some type of financial incentive (e.g., a system (or in a closed system operated approximately $1.50 each; the bonus on recharging the card, or some by a private entity) should experience reloadable version of the card costs form of rider ) will be cost savings in several of the elements about $3.00. Contactless cards used in important. discussed above (at least sales and transit applications currently range Incentives and card charges are distribution of media and revenue from $4.00 to $12.00, depending on feasible for riders who use the card accounting). The net effect will card configuration and volume. regularly. However, occasional and therefore be determined by the level of Combination cards are not yet one-time riders will neither benefit cost savings--operating and capital-- available, but they are expected to be from nor be interested in keeping a card compared to the transaction fee and any competitive in price with contactless for a long time, and they are unlikely to loss of float income. cards. In contrast, the unit cost of a be willing to pay a charge for acquiring magnetic-stripe card is less than $0.50. the card. To maintain any reasonable Capital Cost Effects The prices of smart cards should drop cost-effectiveness in its fare collection somewhat over time, as more vendors system, an agency introducing smart Capital cost elements for a transit enter the market and card use expands. cards will also need to provide a lower- agency include the following: Although smart cards are unlikely to cost fare option for these riders. A cost- approach the purchase cost of magnetic effective approach may be to offer < Fare media, media in the foreseeable future, smart smart cards only for riders interested in < Fare collection and cards are more reliable (in terms of maintaining high stored values and to distribution equipment (i.e., card read- failure rate) and have a much longer continue to accept cash--and perhaps write units and card vending and useful life than magnetic cards. Thus, if magnetic cards, tokens, or paper tickets recharge machines), and users retain their original smart cards as well--for use by one-time or < Clearinghouse and for an extended time, the life-cycle cost infrequent riders. The final option for a communications equipment and can become comparable to that of transit agency to minimize the media systems (e.g., computers and magnetic media. cost is to communications). The key to a transit agency in (1) become a participant in an open providing smart cards in a cost- system and accept a commercially The first two categories will be effective manner requires (1) having available multiple-use payment card or necessary regardless of the type of users pay the cost of the cards (2) use some form of vendor institutional arrangement; at issue will themselves, (2) providing centives financing; in either approach, the be who pays for what. The need for (e.g., in the form of discounts or agency would not have to purchase the items in the third category will depend bonuses) for users to hold onto them cards itself. on the arrangement in place; for for an extended period, or (3) having instance, much of the an outside entity (e.g., a bank) provide Equipment clearinghouserelated system will not the cards. Analyses of cost and benefits have to be installed at the transit of smart-card-based systems, such as The costs for equipment in a agency if a bank or other entity is that for Seattle, have typically assumed multipurpose fare system will depend responsible for clearinghouse functions. an average life of 5 years for a smart on several factors such as the system card. The Seattle study also size and modal configuration, the Fare Media recommended consideration of a charge nature of the existing equipment and for the card, perhaps $5.00 to $10.00; systems (and the extent of changes to The cost of the fare media is an this would also serve as a "buffer" or it), and the nature of financial important element in identifying the reserve in case the rider had insufficient agreements among the project costs and benefits of a new fare system. stored value to pay a particular fare. As participants (i.e., who is paying for The current unit cost of a smart card is acknowledged in that study, it is what). In general, for a closed transit much higher than that of a important to demonstrate to cardholders agency-run program, the following magneticstripe card, although the life- that the card has value in order to basic types of equipment are likely to cycle cost is the key consideration. The encourage retention of cards. People be required: production cost of a smart card varies are used to holding onto credit and widely, depending on the specific debit cards for long periods, but fare < Card-accepting devices or technology (contact versus contactless media are rarely held for more than 1 transaction processing units (i.e., bus or versus combination), the amount of month at a time. Consumer education rail read-write units), memory, and the processing will be an important element in < Card vending and recharge capabilities of the card; the purchase implementing a machines, price will then 32

< Improved revenue cost savings)? As discussed above, assumption that some riders will accountability and security, in terms of there will be savings where personnel expand their use of the system if they improved ability to track transactions costs can be reduced and where capital have stored-value (or any prepaid) and discourage employee theft or costs can be avoided (e.g., where an cards. In surveys of reported (or mishandling of fare revenue; outside entity is paying for equipment intended, in a new system) use of < Reduced fare abuse, or cards). Additional revenues can stored-value media, riders have including reduction of counterfeiting of result from an increase in use, a indicated the likelihood of making media and short payment or illegal reduction in fare abuse or evasion, and some additional trips because of the reuse of media; through the creation of new revenue convenience of having the cards. For < Improved ridership data sources such as unused value, float, or example, in a survey in Chicago generated from fare payment; transaction fees. The sources of regarding intended use of the new < Reduced operator and rider potential revenues are described in the stored-value cards, respondents interaction and administrative and following section. indicated that they expected to increase operational requirements, that is, their tripmaking on CTA after related to the need for operators to sell Potential Revenues purchasing the cards; analysis of the and verify the validity of media (e.g., results produced an estimate that the flash passes and transfers, in For transit agencies, the potential fare cards can be expected to induce particular); sources of additional associated with 2% to 5% increase in trips among these < Improved convenience for multipurpose payment programs are as riders (7). Use of the transit system will riders, for purchasing and using the follows: also grow if the customer base is media; expanded. For instance, holders of an < Ancillary revenue from float < Increased fare revenues (from open system payment card may decide and unused value on stored-value cards, increased ridership and from reduced to use transit because they already have and perhaps from transaction fees (in a fare abuse or evasion), the fare media in hand, whereas they multiple-use program); and < Float on prepayment or card might not otherwise go out of their way < Expansion of employer balances and unused or expired value, to purchase a transit-only fare programs, which will result in and instrument or gather the exact change additional revenues from people who < Transaction fees (from needed to ride. The greater convenience buy passes because they are subsidized merchants). of transferring between transit systems and who would not otherwise use offered by an integrated fare card transit regularly. For financial institutions issuing should also generate some additional stored-value cards or involved in rides. Contactless smart cards in settlement or other clearinghouse Finally, another potential source particular also offer additional benefits, functions, potential revenue sources of fare revenue is the expansion of including the convenience of not overlap with those for transit with other employer-subsidized fare programs. having to insert or swipe the card; this types of fees added to the list. These The fact that a smart-card-based pass is believed to be especially important sources include the following: could be issued for more than 1 month for elderly or disabled riders who may at a time would result in a smaller have trouble using another medium. < Reduced card fraud or abuse, monthly administrative requirement for Other contactless card benefits include < Float on card balances and an employer, which could attract the following: unused or expired card value (or additional companies to a pass maintenance fees on expired cards), program. Because of the subsidy, some < Faster throughput (i.e., and employees will buy a monthly (or other boarding of buses and passing through < Transaction fees (from period) pass even if they do not use fare gates); merchants) and other types of fees (for transit every day; the difference < Lower maintenance costs, reloading, settlement, reporting, etc.). between the amount an employee because there is no physical contact formerly paid (i.e., in cash or individual with the turnstile or farebox and the The specific type of additional tickets) and the full price of the pass readwrite unit has no moving parts; and revenue sources will depend on the represents additional revenue to the < Improved reliability of fare parameters of the payment system and transit agency. The Central Puget collection equipment and media; this the function(s) of the institution in Sound study concluded that the planned can result in forfeiting less revenue question. The different revenue sources smart-card program could generate a because of equipment malfunctions. are described below. 20% increase in the number of passes Increased Ridership--The first of sold through the Employer Pass The question is, to what extent can these sources, higher fare revenues Subsidy Program, resulting in an these benefits be translated into from increased ridership, is based on annual revenue increase of $450,000 to financial benefits (i.e., new revenues or the 34

$750,000 (5). While the increase in regardless of any additional revenues assumption regarding the loss of float transit use in any one of these scenarios that might be generated from new card on existing prepaid media ($150,000). may be relatively small, they are not services (e.g., float). The resulting estimate of interest mutually exclusive and could combine Float on Prepayment or Card income (assuming an annual return of to result in a significant boost to fare Balances--Float on card balances or on 5%) is $43,000 to $65,000 per year. revenue. any prepaid sum is another source of Unused or Expired Card Value- Reduced Fare Abuse or revenue for card issuers. A key issue in -In any prepaid or stored-value card Evasion--Because of their enhanced a public-private multipurpose payment program, a certain portion of some security characteristics, smart cards are arrangement is who owns and manages cards' value will never be spent (i.e., expected to reduce the potential for the float pool? In a closed system, any for transit trips or purchases). In some abuse or fraud and evasion. In the agreement must carefully define cases, the cards will reach their survey for this study, the average whether the float (from stored-value expiration date, while in other cases, amount of revenue reported lost cards) accrues solely to the initiating some of the value will never be used. through "theft, fraud, counterfeiting" entity (e.g., the transit agency or People may throw away cards before was approximately 1% for all consortium of agencies) or to the actual they are fully expended, or they may respondents, or an average of roughly issuing entity (e.g., the bank or other keep the card as a collectible. This is $1 million per year; this amount was private partner), or is it shared between more likely to occur with a prepaid significantly higher for the larger the parties. In an open system, there (non-reloadable) card than with a systems, an average of approximately also must be a specified arrangement reloadable card, although, depending $1.8 million, or 1.6%, for the heavy rail for apportioning float revenues among on the pricing incentives associated and commuter rail systems. the various card issuers; potential with reloading a card, reloadable cards Counterfeiting of magnetic cards has approaches are being studied by the can certainly generate unused value as not been found to be a significant Smart Card Forum. The relative effect well. In the absence of (1) a discount problem in the transit industry; because of float as a revenue generator will or bonus or other loyalty program advances in protection technology have depend on the average card balance for associated with retaining and reloading made magnetic cards increasingly a program. This is difficult to calculate, the same card or (2) a replacement difficult to duplicate (2). However, because it depends on several factors: charge for the card, many cardholders there has been substantial abuse of (1) the average initial purchase or will throw cards away as they approach flash passes, through counterfeiting and reload amount, (2) the average zero value. use of invalid passes. The reduction or remaining value at the point at which This unused value is not new prevention of fraud is often cited as a cards are typically reloaded, and (3) the revenue, because it has been prepaid--it primary reason for deciding to use average length of time a cardholder is revenue that is not expended. As smart cards. The Central Puget Sound takes between reloading actions. The explained previously, this places study estimated the potential revenue average balance can be influenced by unused or expired value in the category effect from reducing fraudulent pass the discounts or bonuses offered for of abandoned property, which may use at $120,000 to $180,000 per year, purchase and reloading. make it subject to being returned to the assuming that smart cards would cut For a transit-operated program, cardholder or turned over to the state. the extent of pass-related fraud by 50%. any estimate of income from float on a This has led to the establishment of a In Manchester, an annual increase of at new fare medium must consider the variation on the revenue source: a least $2.5 million is anticipated through loss of float on existing media that are maintenance fee that begins at the time the reduction of abuse in the use of being replaced or from which riders are of the card's expiration; such an concessionary (half-price trip) cards. switching to use the new medium. For arrangement has been instituted by the For financial institutions, the instance, the Central Puget Sound study banks taking part in the VISACash reduction of fraud is envisioned to be assumes that float on smart cards would demonstration in Atlanta. the largest source of anticipated derive from two sources: (1) a Merchant Transaction Fees--The additional revenues. The European card nonrefundable buffer (envisioned to be major source of new revenue associated association, Europay International, for $5.00 to $10.00 in the feasibility study) with many multiple-use card programs example, has estimated that moving to on each card created by requiring is likely to be the fee per transaction a smart cards (for credit and debit cards, cardholders to pay the cost of the card merchant pays the card issuer. The as well as the introduction of a stored- itself; and (2) any stored value held on merchant can be a retailer or other value card) will result in a benefit a card. This study calculated potential vendor paying a fee to a bank, a transit (from reduced fraud as well as cost income from float on the basis of the agency, or a public-private partnership savings) of $2.9 billion over the 7-year estimated fare buffer value of issuing cards or the merchant can be a conversion period (8). Europay outstanding cards ($600,000 to transit agency accepting a card issued executives believe that this benefit is $750,000 per year), the stored value on by another party. The latter case significant enough to warrant cards ($400,000 to $600,000 per year), represents a cost to a transit agency, as conversion to smart cards, and an well 35 as a revenue source for the card issuer. "wallet" are charged US$5.25 per facilitate new types of arrangements There is no set structure for fees in a month. and functions currently unforeseen. stored-value program--rates are being A transit-managed program is less Although the full extent of the possible negotiated with each merchant in some likely to charge such fees on a regular benefits--and costs--has yet to be programs as the card issuers seek to basis, although it could establish an demonstrated in a long-running, enlist participants. In the VISACash initial charge for the card. Some transit broadscale, transit-oriented program, program, for instance, the typical rate is smart-card programs charge--or are several studies have determined that the approximately 2.5% per transaction, considering--an initial fee for the card anticipated benefits outweigh the although MARTA pays somewhat less, that is higher than the stored value expected costs. Financial issues will be about 2%. The transaction fee is a contained on the card. In Manchester, addressed further in the next phase of fundamental element of the business for instance, the cardholder pays a this study. case for most multiple use or stored- minimum of $5.00 on receiving a card; value programs. Of course, not all such this includes $3.00 worth of value and programs rely on transaction fees. $2.00 to cover the cost of the card. In SUMMARY Mondex, for instance, makes its the Central Puget Sound area, it was revenues on cardholder fees, because suggested in the feasibility study that merchant transaction processing is cardholders would have to pay the cost The costs and benefits associated optional; this is discussed below. of the card (assumed in the analysis to with a multipurpose payment strategy be $5.00 to $10.00); this nonrefundable depend on the type of program and the Other Types of Fees--Besides deposit would serve as a buffer to be details of the arrangement among the fees for merchant transactions, there accessed if the amount of stored value participating entities. Although may be a range of other fees in an open is insufficient to cover the cost of a analyses of possible programs have system (e.g., related to use of the card, particular trip. This buffer is assumed indicated positive cost-benefit ratios, handling transactions, reporting, or to be a key source of float. In the each prospective participant must be other functions). These may accrue to financial services arena, banks using convinced that it will in this net the issuer, or perhaps to an acquirer or the Banksys card make their own benefit. Therefore, the single most clearinghouse network operator, and pricing decisions, but some charge important issue that must be resolved in may take the following forms: customers up to US$5.00 to obtain the establishing a joint transit-bank (or card. other private entity) payment system is

APPENDIX: TRANSIT AGENCY SURVEY

This appendix presents the results of a survey of transit agencies conducted as part of the study; the questionnaire and cover memo are presented at the end of the appendix. The focus of the survey was on current fare collection practices and costs, plans for use of emerging technologies, agency goals for improving fare collection systems, and issues and concerns regarding possible multiple-use payment arrangements. A questionnaire was sent to 86 transit agencies throughout North America. These include all agencies operating rapid rail, commuter rail, or light rail service, as well as a range of bus-only systems (small, medium, and large). A total of 54 transit agencies, or 63% of the total sent, responded to the survey. The respondents are shown in Table A-1, separated by modal classification (see below); annual systemwide ridership is presented for each. The results of the survey were processed using the Statistical Product for the Social Sciences (SPSS) software. The responses are summarized as follows.

OVERVIEW OF THE TRANSIT AGENCIES

All modes of public transportation are represented among the respondent agencies. Although many of the responding agencies operate only one mode, some of the agencies are multimodal. To prevent counting an agency's response more than once for results that are presented by mode, each agency was categorized according to the following hierarchy:

< Bus-Only-This category consists of those agencies that operate motorbus-only. The only exception is the Detroit Transportation Corporation, which only operates automated guideway. < Light Rail/Streetcar-This category consists of those agencies that operate light rail or a combination of bus and light rail. < Commuter Rail-Agencies in this category operate either commuter rail only or a combination of commuter rail with bus and/or light rail. < Rapid Rail-As a minimum, agencies in this category operate rapid rail only or a combination of rapid rail with any of the other modes already mentioned.

Using these categories, the modal breakdown for the survey respondents is summarized in Table A-2. As shown in Table A- 2, most survey respondents (57.4%) are bus-only systems. Rapid Rail is the next largest category with 18.5% of the survey respondents. The remaining 24% of the respondents consists of light rail and commuter rail systems.

PRESENT FARE COLLECTION SYSTEM

In the survey, each agency was asked a set of questions about its current fare collection system. These questions addressed the areas of media, payment options, and fare collection and issuing equipment. Each of these areas is described below.

Types of Media

Each agency was asked to identify the types of media accepted on its services. The responses are summarized in Table A-3. The total in Table A-3 is the number of agencies that submitted at least one response. The numbers and percentages do not add up to the total because multiple responses are possible. For example, an agency may accept cash, tokens, and magnetic-stripe cards. As such, this agency is counted once for every response and once in the total. By far, cash is the most widely accepted medium for transit travel with 98.1% of the agencies accepting it. Onehalf of the agencies report that tokens are accepted. The next most widely accepted medium is magnetic-stripe cards. Nineteen (35.2%) of the survey respondents accept swipe cards. Very few agencies accept credit cards (nine respondents), debit cards (five respondents), stored-value cards (eight respondents), or smart cards (three respondents). "Other types," which constitute 46.3% of the survey respondents, includes flash passes, paper tickets, transit checks, and photo ID cards.

Payment Options

In addition to the types of media, each agency was asked to identify all available payment options, that is, the different products (e.g., passes and multi-ride tickets) that it offers. The responses are summarized in Table A-4. As

41

Note: Question permitted multiple responses

Note: Question permitted multiple responses 42 with media types, the numbers and percentages do not add up to the totals because multiple responses are possible. As shown in Table A-4, a significant number of agencies offer some form of prepayment option. The most widely available form of prepayment appears to be the monthly pass. A monthly pass option is available at 88.7% of the systems. Multi-ride tickets are the next most widely available with 43.4% reporting these as an option. Weekly passes are offered by 26.4% of the respondents and stored-value cards are offered by 17%, a relatively low proportion. Twenty agencies reported the availability of payment options other than those mentioned. These consisted primarily of day passes, group passes, and specific multi-ride punch cards and tickets. In addition to listing the payment options, the respondents also provided data on the percentage of fares paid with prepaid media. These data are summarized by type of system in Table A-5. As shown in this table, rapid rail and commuter rail have the highest proportion of prepaid fares, with 57.5% and 53.3% prepayment, respectively. Light rail is next with 49.6% prepayment. Bus-only systems have the lowest proportion of prepayment.

Existing Fare Collection Equipment

Each agency was asked to indicate its existing types of fare collection and issuing equipment. The responses are summarized in Table A-6. Because multiple responses are possible, the numbers and percentages do not add up to the totals. Electronic registering fareboxes are the most widely used pieces of fare collection equipment. Of the respondents, 82% indicated that electronic registering fareboxes are part of their existing fare collection equipment. Magnetic-card swipe readers (i.e., monthly pass verification) are the next most widely used, with 32.7% of the respondents indicating that these are part of their existing equipment. Nonregistering fareboxes are used by only 28.8% of the agencies. In terms of fare issuing equipment, TVMs appear to be the most widely used. Of the 52 agencies responding to this item, 34.6% indicate that TVMs are part of their existing equipment. A relatively small percentage indicate that read-write equipment (both smart-card and magnetic media) is used. The category of other equipment includes turnstiles, ticket validators, and token-vending machines.

PLANS FOR NEW FARE COLLECTION SYSTEM

Each agency was asked to indicate the media technologies and equipment that it is likely to use within the next 3 years. The emphasis of these questions was on emerging technologies such as stored-value, smart cards, and proximity cards (contactless smart cards).

Fare Media Technologies

The media technologies that the respondents indicated they are likely to use within the next 3 years are summarized in Table A-7. Forty-one agencies provided responses about planned media technologies. A magneticstripe, stored-value card technology was the most often cited with 70.7%. Contactless and contact smart-card technologies are expected to be implemented by 34.1% and 29.3% of the respondents, respectively. More than 24% of the respondents are planning to use either credit or debit card technologies.

Fare Collection and Issuing Equipment

The fare collection and issuing equipment that the respondents indicated they plan to use within the next 3 years are summarized in Table A-8. Electronic registering fareboxes and TVMs are the two largest categories with 66% and 54%, respectively. Just below these are magnetic and smart-card read-write equipment. Of the respondents, 46% plan to use magnetic- card read-write units while 44% plan to use smart-card read-write equipment. Other equipment planned for use includes ATM machines, multi-use debit cards, discount phone cards, and credit and debit TVMs.

FARE SYSTEM COSTS

The survey respondents were asked to provide the costs in actual or estimated dollars for the following: production and distribution of fare media, fare collection and processing, fraud, and counterfeiting. In addition to providing the costs in dollars, respondents also provided the percentage of total fare revenue that each of these costs represented. The three categories of costs as a percentage of total fare revenue are presented by type of system in Table A-9. Each cost category is discussed separately below. 43

Note: Question permitted multiple responses

Note: Question permitted multiple responses 44

Note: Question permitted multiple responses 45

< Production and Distribution-As a percentage of total fare revenue, the average cost (for all survey respondents) of production and distribution of fare media is approximately 2.5%. Rapid rail systems have the highest relative costs. Fare media production and distribution costs for rapid rail systems is 7.4% of total fare revenue. < Commuter rail systems are the next highest with 2.7%. Bus-only and light rail systems are approximately the same, with production and distribution costs that are slightly more than 1% of total fare revenue. < Collection and Processing-Of the three categories of fare system costs, the costs of fare collection and processing constitute the largest portion with an average of all systems of 4.2% of fare revenue. Collection and processing costs are about equal for rapid rail and commuter rail systems at approximately 9%. Light rail system collection and processing costs are 3.4% of total fare revenue. Bus-only systems have the lowest collection and processing costs at 1.9% of total fare revenue. < Theft, Fraud, and Counterfeiting-The responding systems' average estimate for revenue lost to theft, fraud, and counterfeiting is very low-less than 1%. Rapid rail systems report the highest level of lost revenue (1.7%) followed by commuter rail systems (1.3%). Light rail systems report that just less than 1 % of revenue is lost through theft, fraud, and counterfeiting. Bus systems report the lowest level of lost revenue at 0.3%.

RATING OF GOALS FOR IMPROVING FARE SYSTEM

Each of the survey respondents was asked to rate 14 goals related to improving its fare system. Each goal was rated on a scale of one to five of overall importance-one being not important and five being very important. The results of the ratings were compiled by goal by type of system to arrive at a mean rating. The mean ratings for each goal are presented in Table A-10, and the overall ratings are shown graphically in Figure A-1. The table includes the average rating for all respondents as well as the mean rating by type of system for each goal. Each type of system is discussed separately below.

All Systems

Overall, the highest rating of 4.6 was given to the goal of improving convenience for riders. Immediately below rider convenience was improving the ability to collect needed data-a rating of 4.3. The following are the five highest rated goals for all systems:

< Improve the convenience for riders, < Improve the ability to collect needed data (e.g., origin and destination data), < Improve the ease of administering fare collection by bus operators and other personnel, < Improve fare system security and accountability (e.g., reduce fare abuse, fraud, and theft), and < Improve card read-write unit reliability.

The remaining goals were rated within a range of 3.5 to 3.8, indicating that these goals also are relatively important. The only two exceptions were the goals for integrating payment with other transportation providers and integrating payment with nontransportation uses, which rated 2.7 and 2.5, respectively. This would indicate that the responding agencies believe these goals are less important.

Bus-Only Systems

Among bus-only systems, the goals for improving rider convenience and improving the ability to collect data were rated equally at 4.5, indicating that the bus systems hold these to be the two most important goals. The following are the five goals rated highest by bus-only systems:

< Improve the convenience for riders, < Improve the ability to collect needed data (e.g., origin and destination data), < Improve the ease of administering fare collection by bus operators and other personnel, < Improve the ability to integrate with other on-board technologies (e.g., automated vehicle location [AVL] or automated passenger counter [APC] system), and < Improve card read-write unit reliability.

Figure A-1. Rating of goals. 48

With two exceptions, the remaining goals were all rated within a range of 3.2 to 3.8. Integrating payment with other transportation services and integrating payment with nontransportation uses were rated 2.6 and 2.5, respectively.

Light Rail/Streetcar Systems

As with bus-only systems, light rail systems rated the goal of improving rider convenience the highest, giving it a 4.6 rating. The next highest was a 4.5 rating given to improving the ease of administration. The following are the five goals rated highest by light rail/streetcar systems:

< Improve the convenience for riders, < Improve the ease of administering fare collection by bus operators and other personnel, < Improve fare system security and accountability (e.g., reduce fare abuse, fraud, and theft), < Improve card read-write unit reliability, and < Maintain ability to use existing fare system equipment.

The goals rated lowest by light rail/streetcar systems were integrating payment with other transportation services (2.6 rating) and integrating payment with nontransportation uses (2.7 rating). The remaining goals for improving fare systems were rated within a range from 3.3 to 3.8, indicating that these are relatively important to light rail/streetcar systems.

Commuter Rail Systems

The goals most important to commuter rail systems are improving the ability to collect needed data (4.8 rating) and maintaining the ability to use existing fare system equipment (4.7 rating). The following are the six most important goals for commuter rail systems:

< Improve ability to collect needed data (e.g., origin and destination data), < Maintain ability to use existing fare system equipment, < Improve the convenience for riders, < Improve ability to modify fare structure and policies, < Improve card read-write unit reliability, and < Create seamless transit travel in the region.

The last three in the list above were rated by commuter rail systems as having equal importance-each was given a 4.3 rating. With only one exception, the remaining goals were considered relatively important, with ratings ranging from 3.0 to 4.0. The lowest rating of 2.3 was given to the goal for integrating payment with nontransportation uses.

Rapid Rail Systems

The most important goal for rapid rail systems is that of improving rider convenience, which received a rating of 4.6. Three goals shared the next highest rating of 4.1-reducing the cost of producing and distributing fare media, improving fare system security and accountability, and creating seamless regional transit travel. The following six goals were considered most important by rapid rail systems:

< Improve the convenience for riders, < Reduce the cost of producing and distributing fare media, < Improve fare system security and accountability (e.g., reduce fare abuse, fraud, and theft), < Create seamless transit travel in the region, < Maintain ability to use existing fare system equipment, < Reduce cost of fare collection and processing equipment, and < Improve ease of administering fare collection by bus operators and other personnel.

The last two goals in the list above were given equal importance by rapid rail systems-each received a rating of 4.0. The goals rated lowest by rapid rail systems were integrating payment with other transportation services (2.6 rating) 49 and integrating payment with nontransportation uses (2.7 rating). The remaining goals received ratings within a range of 3.2 to 3.9.

RATING ISSUES AND CONCERNS RELATED TO POTENTIAL MULTIPLE-USE ARRANGEMENTS

Respondents were asked to rate issues related to multiple-use arrangements according to the same scale used for the goals for improving fare systems. Multiple use was defined as the use of media (e.g., a smart card) for the services of more than one entity (i.e., transit system, retail outlet, bank, and so forth). Six issues were rated. The ratings for each of these issues by type of system are presented in Table A-11 and shown in Figure A-2.

All Systems

Institutional issues were rated as the most important for all systems. Institutional issues received a rating of 4.2. The next most important issues were cost issues and card technology issues, each receiving a 3.8 rating. The following list presents each of the issues in the order of importance from most important to least important: < Institutional issues (e.g., maintaining control over the fare system, including the ability to modify fare structures), < Cost of providing electronic fare media and of participating in a multiple transit use or joint banking and transit program (e.g., the need to buy new equipment or the high unit cost of smart cards), < Card technology issues (e.g., the need to accept technology selected by other agencies), < Privacy issues for riders (e.g., addressing rider concerns with use of electronic fare media), < Clearinghouse/settlement issues (e.g., related to apportioning revenues among participating agencies), and < Legal and regulatory issues (e.g., constraints on an agency's ability to enter into agreements with other entities).

The privacy and clearinghouse issues were rated equally important, with a 3.6 rating.

Bus-Only Systems

Bus-only systems rated institutional issues as the most important (4.0 rating). Cost issues and card technology issues were next in order of importance, each with a rating of 3.7. The following list presents the issues in order of overall importance:

< Institutional issues (e.g., maintaining control over the fare system, including the ability to modify fare structures), < Cost of providing electronic fare media and of participating in a multiple transit use or joint banking and transit program (e.g., the need to buy new equipment or the high unit cost of smart cards), < Card technology issues (e.g., the need to accept technology selected by other agencies), < Privacy issues for riders (e.g., addressing rider concerns with use of electronic fare media), < Clearinghouse/settlement issues (e.g., related to apportioning revenues among participating agencies), and < Legal and regulatory issues (e.g., constraints on an agency's ability to enter into agreements with other entities).

Light Rail/Streetcar Systems

Light rail/streetcar systems rated institutional issues and clearinghouse/settlement issues as the most important (4.3 rating). Cost issues and privacy issues were rated equally important-each was given a 3.8 rating. The following list presents the issues in order of importance to light rail/streetcar systems:

< Institutional issues (e.g., maintaining control over the fare system, including the ability to modify fare structures), < Clearinghouse/settlement issues (e.g., related to apportioning revenues among participating agencies), < Cost of providing electronic fare media and of participating in a multiple transit use or joint banking and transit program (e.g., the need to buy new equipment or the high unit cost of smart cards), 50

Figure A-2. Rating multiple-use issues. 51

< Privacy issues for riders (e.g., addressing rider concerns with use of electronic fare media), Card technology issues (e.g., the need to accept technology selected by other agencies), and < Legal and regulatory issues (e.g., constraints on an agency's ability to enter into agreements with other entities).

Card technology issues and legal and regulatory issues were rated equally at 3.3.

Commuter Rail Systems

Institutional issues also were rated most important by commuter rail systems. Institutional issues received a rating of 4.8. Cost issues, card technology issues, and legal and regulatory issues were rated equally important. Each was given a rating of 4.5. The following lists the various issues in order of importance to commuter rail systems:

< Institutional issues (e.g., maintaining control over the fare system, including the ability to modify fare structures), < Cost of providing electronic fare media and of participating in a multiple transit use or joint banking and transit program (e.g., the need to buy new equipment or the high unit cost of smart cards), < Card technology issues (e.g., the need to accept technology selected by other agencies), < Legal and regulatory issues (e.g., constraints on an agency's ability to enter into agreements with other entities), < Clearinghouse/settlement issues (e.g., related to apportioning revenues among participating agencies), and < Privacy issues for riders (e.g., addressing rider concerns with use of electronic fare media).

Rapid Rail Systems

Institutional issues received a rating of 4.6 from rapid rail systems and were considered the most important of the issues. Rated equally at 3.8 were card technology issues and clearinghouse/settlement issues. The following list presents the issues in their order of importance to rapid rail systems:

< Institutional issues (e.g., maintaining control over the fare system, including the ability to modify fare structures), < Card technology issues (e.g., the need to accept technology selected by other agencies), < Clearinghouse/settlement issues (e.g., related to apportioning revenues among participating agencies), < Cost of providing electronic fare media and of participating in a multiple transit use or joint banking and transit program (e.g., the need to buy new equipment or the high unit cost of smart cards), < Privacy issues for riders (e.g., addressing rider concerns with use of electronic fare media), and < Legal and regulatory issues (e.g., constraints on an agency's ability to enter into agreements with other entities).

Cost issues and privacy issues for riders were rated equally important at 3.6.

SUMMARY

A survey of North American transit agencies was undertaken as part of TCRP Project A-14 to identify fare collection practices and costs, plans for use of emerging fare technologies, goals related to improving the fare collection system, and issues related to multiple-use arrangements. The key findings are as follows:

< Prepayment is very widespread. Almost 90% of the responding agencies offer monthly passes, and 26% have weekly passes as well. More than 43% offer discounted multiple-ride options. The average percentage of fares paid with one of these prepaid media is 46%; for the largest agencies (those with rapid rail), the average is 58%. < The use of electronic fare payment methods has spread slowly to date, but is expected to increase over the next few years. The survey revealed that relatively few transit agencies in North America have electronic fare payment systems: 15% use magnetic stored-value media and 6% use smart cards; 17% use credit cards, however, all but one of these are for purchase of fare media. In contrast, 50% of the respondents use tokens. Many agencies believe, however, that 52 they "are likely to use" electronic media within the next 3 years: 26% indicated likely use of contactless smart cards, 22% contact cards, and 54% magnetic stored-value cards. < Agencies consider a wide range off are collection goals to be important, although multiple use is not considered very important. The highest rated goals are "improve convenience for riders" (4.6 of a possible 5 in terms of relative importance), "improve ability to collect needed data" (4.3), "improve ease of administration" (4.2) and "improve fare system security and accountability" (4.0). The lowest rated goals are "integrate payment with nontransportation uses" (2.5) and "integrate payment with other transportation services" (2.7). All of the other goals presented were rated as being relatively important (3.5 to 3.9). < Regarding possible multiple-use arrangements, all of the issues and concerns presented were considered relatively important. Agencies rated "institutional issues" the most important issue; it received an average of 4.2 out of a possible 5 in terms of relative importance. "Legal and regulatory issues" was the lowest rated item, but it received an average of "3.3." The other issues were rated about the same (3.6 to 3.8).

On the basis of the survey results, many transit agencies (more than half of the respondents) are considering new fare technologies for the relatively near future; the options under consideration include smart cards and the use of stored value in general. These plans are consistent with the importance placed on fare system goals such as customer convenience, ease of administration, data collection capabilities, and security and accountability. However, although "create seamless regional travel" is considered relatively important, most agencies do not currently view multiple use as a major goal.