Open-Loop Systems Help Modernize Transit Payments

Transit systems around the world are moving away from cash and paper tickets.

Instead, they are moving toward modernized payments tied to bank-issued contactless cards and digital payments that let riders tap and pay with what they already carry.

Bank-issued contactless cards and digital devices such as smartphones and wearables are becoming the way people pay for buses, subways and trains, reducing waiting times at the fare gates and turnstiles while modernizing fare collection. Riders already use these same payment methods for everyday purchases, from coffee to groceries, making contactless transit a natural extension of familiar behavior.

Contactless payment adoption has redefined what payment infrastructure means for transit. It’s no longer just about the back-office function to collect fares. The new emphasis is on speed, reliability and risk management in environments where throughput matters as much as security.

How Open-Loop Transit Payments Work

Most modern contactless systems are rolling out open-loop payments, meaning they accept the same bank-issued cards and digital wallets that run on global payment networks.

The process is simple. A rider taps their card or phone, the system authenticates the payment method in real time, and the fare is calculated based on the transit agency’s fare rules. Unlike traditional retail, transit environments often rely on deferred authorization.

Network connectivity can be inconsistent in underground stations or moving vehicles, and fare gates must process riders in a fraction of a second to avoid bottlenecks.

In practice, the system has less than 300 milliseconds to respond to a tap, so riders can keep moving. That requirement makes real-time, online authorization impractical at the gate, even though the transaction is ultimately routed through the payment ecosystem.

When a rider taps, the card is authenticated offline and checked against deny lists to confirm it remains in good standing. The transaction is then routed through the merchant’s back office to the issuer, where it is evaluated for available funds, account status or potential fraud. Open-loop models also support first-ride risk management, where transit operators can attempt merchant-initiated recovery for unpaid fares over a defined period. If these efforts fail, network-supported risk-sharing mechanisms can help cover limited losses.

Open-Loop Payments Don’t Introduce Fraud—They Reduce It

A common misconception is that shifting to open-loop contactless payments increases fraud exposure to transit agencies.

Concerns over fraud have hampered procurement decisions in some markets, slowing adoption despite clear operational benefits, but those concerns deserve reexamination. Open-loop payments don’t eliminate fraud risk but give agencies better tools to detect, isolate and respond to fraud than legacy systems.

Open-loop transit payments operate within global payment networks designed to detect anomalies, flag misuse and block compromised credentials quickly. Deny lists, issuer feedback and standardized transaction flows allow unusual patterns to be identified early, often before losses escalate. This is a fundamental shift from legacy systems, where fraud could persist undetected across delayed reconciliation cycles.

When an issuer flags a card as invalid or determines a transaction is fraudulent, that response flows immediately back to the transit operator, who adds the card to a deny list to block further taps. The process allows agencies to identify and stop misuse after the first denial, even in a deferred authorization environment built for speed. Because transactions ultimately flow through systems designed for large-scale, real-time monitoring, agencies gain clearer visibility into when and why loss occurs—a capability that closed-loop or cash-based systems simply cannot match.

Importantly, not every declined transaction reflects fraud.

Insufficient funds, an overdrawn account or a card that has hit its daily contactless spending limit can trigger the same controls, allowing systems to respond quickly without disrupting legitimate riders. Open-loop systems bring risk into the open, where it can be managed in near real time, rather than hidden inside delayed reconciliation cycles.

Fraud Concerns and How the Network Manages Them

As with any payment channel, transit payments raise legitimate concerns about fraud. High transaction volumes, low ticket values and rapid throughput create a unique risk environment. Lost or stolen cards, account misuse and attempted fare evasion are realities agencies must address. But it is precisely because open-loop payments are embedded in global network infrastructures, including Discover® Network, that these risks are better contained than under previous models.