20 Oct 2021

Open Loop EMV versus Closed Loop Smart Cards for Fare Collection

Five years from now, will paper tickets be retro, QR-codes archaic, and smart cards a quaint relic from transit payments’ archives? Will actual wallets be carried any more? Or will smart devices be the only thing we need to shop and pay for everything, from food to transit?

While cash remains entrenched in the fare collection ecosystem today, we can see a tomorrow not far off when the transit payments landscape could look simpler. One payment method for all your travel, shopping and other spending - the bank card or mobile wallet you carry everywhere.

The future of mobility payments

As the industry continues to debate where the future of transit and mobility payments lies, most transit operators agree that cash is no longer king. Expensive to handle and process, transaction times are slow and this leads to long dwell times, station congestion and boarding bottlenecks.

For years, the smart money has been on contactless payments displacing cash in public transit, bringing convenience and ultra-fast transaction speeds. They can be processed more efficiently than cash and transactions are traceable, reducing the burden on customer service centres.

The question is which contactless payment method should transit operators provide to become riders’ go-to solution for fast, frictionless fare payments? This post looks at two of the contenders: closed loop smart cards and open loop EMV.

Closed loop smart cards

Closed loop smart cards are typically issued by transit operators and authorities and can only be used within their private ticketing system. Some transit smart cards interact offline with devices onboard vehicles, and others act as tokens, working in tandem with a back office.

Outside of Account Based Ticketing (ABT), closed loop schemes that can work offline require smart cards to have more logic on the card. Specialised devices are needed to validate the cards, enforce security and update their stored value or pre-loaded ticket at the point of use. These devices deduct a fare or validate a ticket when the passenger taps to board a vehicle.

In Account Based Ticketing, the smart card is used as an identifier to uniquely log passengers’ access to a transit system. Decisions about what to charge are made centrally in a back office, based on information associated with their account, which is collected when they tap into the system. This might include their eligibility for concessions, or details of any period passes held.

Open loop EMV cards

In open loop EMV fare collection systems, passengers can use their bank-issued contactless credit or debit card; prepaid EMV card; mobile wallet; or smart device, to pay for journeys. This means there are no costs associated with issuing or replacing cards, as this is handled by banks.

Open loop payment methods can be used to pay within many different systems (pretty much anywhere these days), and are funded by a centralised payment source, such as a bank or credit card account. Unlike closed loop cards, they don’t require a prepaid amount to exist in the system, unless the card being used is a prepaid EMV card.

Passengers tap their contactless card, or contactless-enabled smartphone or wearable, on a payment reader to validate it and access transit services. That tap is processed by a back office, which handles aggregation, fare calculation and settlement through the banking network. Depending on the fare rules configured by the transit operator, taps may be aggregated over a given period and fare caps applied, so passengers automatically pay the best value fare.

Closed loop and open loop in ABT systems

Smart cards’ dominance in transit ticketing has been challenged in recent years, as other payment technologies have emerged and gained popularity. It has become clear that there is no one-size-fits-all solution, and this has led to increasing adoption of centralised ABT systems. With a single view of a customer, they can have one or more different types of identifiers linked to it - which could be a smart card, QR code or an EMV card.

A passenger using an ABT transit ticketing system taps or presents their supported token to travel, and the data associated with that tap is used by the ABT back office to calculate the charge to the passenger for that trip.

A key benefit of an ABT solution is that any logic can be applied in the cloud to determine the amount to be charged. In addition, validator devices can be simpler and cheaper, as their role is limited to accepting a tap from a supported token. All the complexities around fares, capping and discount entitlement are managed in the cloud.

Stored-value, card-centric, closed loop schemes work offline; and, therefore, provide a solution to eliminate the losses incurred when poor connectivity causes downtime in ticketing solutions. However, now that EMV transit specifications also allow for offline authentication and processing, there is greater interest in ABT systems using a variety of tokens to travel. They can offer two of riders’ most important must-haves - value and payment choice.

Which contactless system is best for transit?

Both closed loop smart card and open loop EMV systems have their advocates and we see many large transit operators around the world promoting their use of one, the other, or both. Here are some of the pros and cons:

Open loop EMV pros

  • Eliminates smart card issuance, infrastructure & lifecycle costs - EMV cards are issued by banks not transit operators, so issuance and replacement costs are nil. In systems where closed loop infrastructure is being phased out, the cost of maintaining ticketing kiosks and of handling cash can be greatly reduced.
  • Convenience - same card to pay for transit & retail purchases - Passengers can use the bank card or mobile wallet they carry everywhere to pay for public transit trips. For low-income riders in particular, it can be a benefit to pay-as-they-go using their bank card, rather than locking funds into prepaid smart cards.
  • Potential for universal, interoperable fare payment systems - With cEMV becoming more widely used for transit payments in cities all around the world, there’s potential for fare payment systems to be the same wherever you are. In addition, technology now exists to layer multi-operator fare caps over individual operators’ fare structures to unify the rider experience across a local authority, state, or country.
  • Flexible fare models can be configured in the back office - Ticketing complexity is one of riders' perpetual bugbears with public transportation. With EMV, fare systems can be configured to offer simple flat fares, fare caps and discounts, with the best fare automatically calculated within the back office. For the rider the experience is effortless.

Open loop EMV cons:

  • Holistic systems are expensive to build - Proprietary open loop EMV systems can be complex and costly to build. However, procuring a modular solution using multiple specialist vendors whose solutions plug-and-play together results in a more competitive marketplace and simple deployment.
  • Perceived to be less inclusive - Historically, open loop EMV has been viewed as excluding riders who don't have a bank account and an associated card. This is not the case today, however, as simple solutions such as white-label EMV cards now exist that enable operators to include unbanked riders in an open loop system.
  • Bank fees - When using open loop platforms, transit operators must pay acquiring banks’ merchant service fees. However, these costs can be offset by other savings - for instance, less cash handling and lower operational expenses (e.g. ticket office and kiosk maintenance).
  • Vendors own the system - Some transit operators fear loss of control when they don't own the payment system. This can be alleviated by working with multiple vendors providing a modular solution, rather than being wholly dependent on a single vendor. Building-in stakeholder responsibility and accountability at the contract stage is vital; and procuring a solution that's flexible and adaptable to emerging technologies can further alleviate risk.

Closed loop smart card pros

  • Ownership of the fare collection system - The transit operator owns and controls the smart card fare collection system.
  • Prepay ‘float’ - As passengers often pre-pay and load funds onto their smart cards, this injects funds into transit operators' accounts.
  • Equitable fare payment - Closed loop systems do not exclude the unbanked, underbanked (or unwilling to use bank cards).
  • Fast transaction and boarding times - When smart cards are processed offline - and a ticket has already been loaded, or value stored on the card, transaction times are ultra-fast and much quicker than cash.
  • Facilitates concessions - Within an ABT system, where smart cards are used as a token linked to an individual's account, the account can hold information such as eligibility for discounts and concessions (such as student or senior status). This is also the case when an EMV card is used as a token for travel.

Closed loop smart card cons

  • Lack of interoperability across cities and countries - Closed loop smart cards can’t easily be combined within a standardised interoperable platform.
  • Lock-in to proprietary technology - Transit operators are often locked-in to technology that has been built from scratch by a single vendor.
  • High cost of ticketing infrastructure and cash handling - The cost of purchasing and installing new equipment and producing and distributing plastic transit cards can be steep. Operators must also maintain ticket sales desks and kiosks, for passengers to buy and top-up smart cards
  • Transit providers must foot the bill for upgrades - As new technology emerges, ticketing systems can become outdated and require upgrading. The hurdle of steep cost can be a hindrance to agility and ticketing innovation.
  • Prepay cards lock-in riders' funds - paying for travel in advance can be a struggle for lower-income riders.

Improving passenger experience

Against the backdrop of rocketing adoption of contactless EMV transit payments in many countries, some of the most persistent concerns about deploying open-loop EMV systems are crumbling. Technology is advancing, rapidly opening up more rider-focused functionality.

What if EMV fare collection could allow prepayment, providing access to reservations, concessions and period passes? What if it could cater for the unbanked? What if the same contactless card could be used for PAYG and mobile payments, and this unified payment experience unlocked a channel for valuable, real-time rider notifications?

As future blog posts will explore, we’ve reached a juncture where all this is possible. It will be interesting to see whether these innovations will be the catalyst for contactless open loop fare collection becoming the number one choice to displace cash from the transit system.

Open Loop V Closed Loop Infographic.png

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