Yes, NFC, That Speeding Train is Headed Your Way

What's Next In Payments®
4:42 PM EDT April 9th, 2012

**For PYMNTS.com by Andrew B. Morris – Director, Market Platform Dynamics**

Near-Field Communications (NFC) technology has been discussed as the future of payments for a number of years now and yet we’re still waiting for things to get rolling.  We’ve all been anticipating the day when consumers will simply tap their NFC-enabled smartphones at the point-of-sale to seamlessly access their mobile wallet stored securely in the phone and complete the purchase transaction.  Purveyors of NFC payments remain optimistic, but it’s a challenging road ahead.

RELATED: NFC Payments to Take Over Another Subway System

Perhaps the route to NFC adoption is the road less traveled.  Instead of driving to the local shopping mall to find mobile payments success, let me suggest that NFC mobile payments companies should ride public transit to get to their destination!  Transit fare payments are uniquely suited to the application of NFC technology, much more so than are payments in most retail venues.  In fact, for NFC payments, transit just may be the killer app, but not necessarily in the way you expect.

Getting on Board

The payments industry has been fond of train metaphors for years.  We often speak of the payments ‘rails’ provided by networks like Visa and MasterCard.  And so, perhaps it was only appropriate that Isis, the mobile payments joint venture of three major wireless carriers, announced on April 4, 2011 that its first market (in summer 2012) would be Salt Lake City and that an important component of that launch would be a deal to enable the Utah Transit Authority (UTA) for mobile fare payments. 

In October 2011, Google Wallet actually became the first to deploy NFC transit payments with their partnership with New Jersey transit.  Google Wallet is currently available at two train stations in the New York metropolitan area – New York Penn Station in Manhattan and Newark Liberty International Airport Rail Station, which shuttles people from the Newark train station to Newark International Airport.  Several bus lines in the metro area also are leveraging the new system.

About Our Route

It’s interesting to note that public transit has become a pretty interesting and important venue for payments industry innovation.  As a consultant, I’ve spent a fare (fair, sorry couldn’t resist) amount of time advising various stakeholders in public transit relating to two important transitions:

  • Transition #1: From closed-loop proprietary transit-only smart card systems to open fare payments using contactless bank cards as the fare media, and
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  • Transition #2: From card-based fare payment systems to mobile payments.
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Historically, transit fare payments were predominantly cash based.  The patron would either purchase a little metal coin known as a ‘token’ and that would be presented as fare for the train or bus ride.  The problem with these systems is that a large amount of fare revenue never made it to the transit agency’s accounts due to patron fraud and employee theft.  As a result, transit agencies began to implement more secure automated fare collections systems whereby patrons would purchase either prepaid fare or passes stored on smart cards dispensed from ticket vending machines and agents.  Contactless readers were then installed on fare gates and buses to read the cards along with sophisticated fare accounting systems to authorize fare payment and manage the complicated fare products and rules.

Nearly every major U.S. transit system invested tens of millions of dollars to upgrade to smart card systems with a supporting business case based on the greater efficiency of revenue collection.  But now, amazingly enough, the same group of transit agencies have become enamored with a new approach (see Transition #1 above).  Wouldn’t every other merchant category love to have 100% of payments being made with a proprietary prepaid payment product (see Starbucks)?  But a series of events over the last several years (long story) has led many transit agencies to believe that they would be able to lower their costs, enable more flexible open procurements for fare collection systems, and provide a more convenient experience for patrons if those contactless readers on fare gates and buses could be used to accept contactless bank cards as fare media.

Full Speed Ahead

With the history lesson complete, this leads us back to NFC payments.  It just so happens that the first commercial deployment of this ‘open fare payment’ approach using contactless bank cards was at the Utah Transit Authority in Salt Lake City.  Today only a very small percentage (single digits) of UTA total ‘taps’ are currently from bank cards, but the account-based systems required to authorize bank card payments at fare gates have been installed by the UTA and received a good test drive.  And certainly the UTA will welcome mobile payments as a means to further enhance their value proposition for transit patrons.  New Jersey transit is implementing a small open fare payments pilot which allowed Google Wallet to come along for that ride – but this is just the starting point.

Just in the last half of 2011, two of the largest transit systems in the U.S., Chicago and Philadelphia, awarded contracts for new open fare payments systems.  And more of these procurements are on the way from other large transit systems, including New York and Washington, DC.

It will be interesting to see how well Isis and Google can ‘tap’ (sorry again) into the opportunity presented by public transit – and transit is beneficial for NFC in a number of ways, including:

  1. Ideal use case for the speed and convenience of ‘tap and go’ mobile payments.
  2.  

  3. Contactless readers already installed at every point of sale.
  4.  

  5. Core customer base with two transactions every weekday.
  6.  

  7. Opportunities for retail spend at merchants along transit routes.
  8.  

  9. Location-based marketing opportunities powered by both GPS and transit system data.
  10.  

  11. And on, and on…
  12.  

Potential Detour

We opened by saying that transit could be the killer app for NFC payments, but not necessarily in the way you would expect.  Here’s a little detour we could encounter for NFC transit payments.

There are two primary options for deploying NFC technology for transit payments:

  • Option #1: With an open-loop payment card stored in the secure element of an NFC phone.
  •  

  • Option #2: With a closed-loop transit app stored in the secure element of an NFC phone.
  •  

Since transit agencies are moving to “open fare payments” models which use contactless bank card as the fare media, most in the industry have assumed that Option #1 (bank card on the phone) will be the logical progression for NFC payments in transit.  With Isis and Google Wallet stalling a bit for all of the reasons outlined above, there may actually be cause for greater consideration of option #2 (transit app on the phone) as the way to deploy mobile transit payments.

With Option #2, a cloud-based digital wallet (i.e. PayPal or the patron’s payment accounts stored on transit agency’s own proprietary fare system) could be used to “top-up” prepaid transit accounts or buy fare products (e.g. passes, etc.) that are stored in the transit app on the secure element of the NFC phone, which is brings us to the interesting twist.

With cloud-based wallets, there is actually an Option #3.  That is, that NFC could be used just as a way to activate the account-based credentials in the cloud, rather than storing the actual value in the secure element in the phone.  The account-based systems that are being implemented to support “open fare payments” with open-loop bank cards could actually enable this “closed-loop” mobile payment approach.  In many ways, it’s reminiscent of PayPal’s in-store checkout solution.

In any case, transit is one of the rare use cases where NFC payments add some real value to the user experience simply because it is more convenient to tap your phone as you rush through the rail gate or board the city bus rather than fumbling to find a contactless bank card or transit smart card.

Public transit may indeed be the killer app for NFC payments – are you listening Google and Isis?

Let us know with your comments below what you think about this exciting ride to mobile payments.  I could go on and on about this stuff, but I need to run now or I’ll miss my train.


Andrew B. Morris is a Director in the Atlanta office of Market Platform Dynamics.  His recent consulting work has focused on alternative payments, mobile financial services, mobile retailing, and the role of loyalty marketing in emerging payments trends.  Mr. Morris has deep expertise with payments innovation in a variety of merchant categories including emerging models of fare collection in the public transit industry, including mobile technology and contactless bank cards.

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