Here at APCA we have been thinking about network innovation a lot lately – not least because the Reserve Bank is also thinking about it, in their Strategic Review of Innovation in the Payments System. There is a lot of management theory on innovation: diffusion of innovations, disruptive and sustaining innovation, even plenty of recent thinking about clustering of expertise and innovation networks (not the same thing as innovation IN networks, by the way). But none of the theory I’ve read so far really grapples with the special problems of services that have a network effect – ie where the number and kind of other users of a service affect its attractiveness to any one user. Payments is a classic network service – merchants want to accept a card with the biggest possible issued base (or perhaps issued to lots of high net worth people); consumers want a card that is accepted in every shop near their home, and so on.
Sydney commuters will now be able to use their contactless payment cards (or devices, such as a smart phone or wearable) to pay for passage on the Manly ferry, in the Contactless Transport Payments trial announced by Transport NSW.
This ‘open loop’ payment initiative will allow commuters to pay for transit just as they would for any other purchase made with their contactless debit or credit card. Opal on the other hand is a ‘closed loop’ system, meaning that an Opal card can only be used to access public transport and only in NSW.
Australian Payments Network (AusPayNet) has been instrumental in developing the first version of the framework for open-loop transit, in partnership with Transport NSW for the trial. AusPayNet is now developing a second version, which will be an Australia-wide framework, for use by other transport authorities.
As the home of payments innovation and cross-industry collaboration, we brought our network of issuers, acquirers and card schemes, and our payments expertise to the initiative. AusPayNet is the catalyst for change in the public transport space, connecting our existing network of payments stakeholders with Transport NSW and other transport authorities across Australia.
The Sydney approach mirrors that of London, where open loop was successfully rolled out to buses in 2012 and then to rail services and the underground in 2014. Open-loop payments now account for 40 per cent of pay-as-you-go journeys in London. The UK Cards Association worked with Transport You London to develop the open-loop framework for London, and the Association has now extended the framework to transit authorities elsewhere in the UK.
A number of other major centres around the world have also set the scene for Australia, including Chicago, Utah, Philadelphia, Madrid, and a number across Russia, Eastern Europe and Turkey.
Public transport is an interesting use case for contactless technology. Typically, a transaction takes a few seconds to process, which at the checkout is not usually an inconvenience. However, with the sheer number of commuters needing to ‘tap on’ and ‘tap off’ in a short space of time, such a delay would be unacceptable in the transit environment. With Open-loop Transit, processing time will be around 400 milliseconds. This is possible because while the customer will be authenticated , funds availability will not be tested (i.e. it will be an ‘offline’ transaction).
This does, however, pose the risk that a commuter will have insufficient funds to cover their trip. Nonetheless, this ‘first ride risk’ would only be realised if the commuter never again used the same payment card to travel, as the transit authority will debit the card at a point in the future when the commuter has funds in their account.
To better understand the benefits and challenges of open-loop transit, AusPayNet spoke with Mike Tuckett of Transport for London in June 2016 to discuss the London experience. Tuckett commented that commuters, the transit operator and the payments industry have all benefited from open loop. Commuters who have moved from Oyster (Opal’s English cousin) to open loop are no longer inconvenienced by having to buy, register or top up an Oyster card. The transit operator no longer has to issue Oyster cards and provide top-up solutions, thus reducing costs. And the payments industry has also experienced higher use of cards and mobile.
Challenges identified by Tuckett include the need to upgrade terminals to be EMV-enabled and PCI-compliant.. In contrast to Oyster, the Opal system was designed with open loop in mind. Opal terminals have been capable of accepting contactless technology since deployment, smoothing the transition to open loop.
So now you really can tap, and go!
If you’d like to know more about our work in this area, please get in touch.