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Competition between transit and payment operators may slow down efficient payment systems

Week 49, 2006

In the retail area, contactless payment is just beginning to occur on a global basis. Even if MasterCard announces 11 million PayPass cards have been deployed, this is still a drop in the ocean of magstripe and contact chip payment cards.  On top of this, many voices express uncertainties on the opportunity of the switch from contact to contactless in a retail environment.

There is only one market segment where the contactless option is widely acclaimed; it is the mass transit payment. As the main concern for mass transit operators is to increase the throughput of their payment system, they see the contactless card (or even contactless devices with other form factors) as being the best solution.

Implementations of contactless payment schemes started as closed environment systems placed under the management of transit operators. This is for instance the case in Seoul or in Paris. The alternative is the open-environment payment system, and the natural manager of such a system is a financial institution. In such a case, the transit operator just becomes a special merchant in a global payment system. The positive side is that it allows the transit operator to concentrate on its original role: to move people from one point to another point. The negative side is that as the details in the implementation are to be decided jointly between the transport operator and the payment operator, the latter may have a strong leverage on transport payment policies in place of local authorities. The best example of this situation is the current experiment in the New York Metropolitan Transit Authority (MTA), where the cards are issued by Citibank, following the MasterCard PayPass specification. In this case the details of the payment application have had to be negotiated between the MTA, Citibank and MasterCard. The last option is the case where the transit operator becomes a payment operator, just because of the huge float amount it manages. This is what has been happening in Hong Kong with the Octopus card owned by the MTR, and Singapore with the EZ-Link card owned by the Land Transport Authority. In both cities, the transport card is widely accepted as a means of payment at kiosks, fast food outlets, convenience stores, etc… The inevitable effect is that the issuer starts to get into competition with the financial institutions.

The possibility for ambitious transport operators to become payment operators may be a sufficient deterrent to prevent existing financial institutions to collaborate into transport schemes. If this happens, another opportunity for interoperability, thus efficiency will have been lost.

Thierry Spanjaard
Smart Insights