Electronic Payment Systems
in Transportation:
What Will the Future Bring?

The following is an excerpt from the vision paper entitled Electronic Payment Systems in Transportation: What Will the Future Bring? co-authored by Tom Delaney and Don Erwin of PBS&J’s Integrated Management Solutions (IMS) Division. A complete transcript of this paper can be obtained at www.pbsj.com/its2013.

In a perfect world, the ability to make a payment for transportation services would be just about as easy as flipping a switch to turn on the lights, with electronic payment systems (EPS) that look something like this:

• Electronic payment would be ubiquitous across all modes of transportation within a region.
• Payment devices would be secure, portable, inexpensive, easily obtained (through frequently patronized merchants or the Internet), and easily replaced in the event of theft or loss (with any remaining value in tact).
• Customers would have a choice of account types and device types, tailored to their needs and preferences.
• Customers would enjoy electronic payment benefits (e.g., loyalty, discounts) seamlessly and always receive the best price possible for transportation services.
• Trip cost would be automatically calculated and deducted during the course of the trip. There would be no stopping to make a payment.
• No separate trip would be required to revalue the payment device; it would occur automatically.
• A record of transactions across all transportation modes would be available upon demand and in a consolidated statement.
• Equitable pricing would exist in policy and practice. Some customers would not get disproportionately better deals than other customers based on socioeconomic criteria.
• Ultimately, there would be no need to use cash in the payment system. There would be Zero Cash (0Cash).

Where are we today in the progression toward 0Cash?

For the majority of transportation service providers and agencies, the biggest benefits in terms of improved service and reduced costs will come when cash is eliminated from the transportation system. We refer to this as the “0Cash scenario,” under which cash fare collection devices, cash counting, and other cash-related activities can be eliminated. The progression toward 0Cash will essentially take the following path:

A preponderance of transportation providers today can be found somewhere within stages two to four within this path. There are customers at each of the stages that will have to be educated and convinced that migrating to 0Cash is in their best interest.

The challenge is that cash is universally accepted in all parts of society and that the vast majority of people continue to carry cash. Cash is also used by both the “banked” and “unbanked” populations. Many individuals who use mass transportation are in the unbanked category and use cash as their primary or only means of payment. Some of the advantages of electronic payment systems, such as automatically debiting accounts (tied to credit cards) or offering weekly/monthly usage discounts, cannot be fully leveraged by unbanked customers. A challenge to transportation service providers is to communicate the tangible benefits of EPS to the unbanked community.

While the occurrence of 0Cash in transportation is not likely within the next decade, the 0Cash objective creates a powerful focus and is a valuable structuring tool in the effort to identify, define, and create solutions for improving EPS today and in the future.

Challenges and Factors Relevant to EPS Penetration

To address the question of why there is not a line of customers “knocking down the door” of EPS, we must shift our focus from the nature of money and payment systems to the nature of human behavior. Dr. Abraham Maslow helps us to better understand human motivation and behavior. In Dr. Maslow’s Hierarchy of Needs, he theorizes that human beings are motivated by unsatisfied needs and that certain lower-order needs must be satisfied before higher order needs can be satisfied. Our prepotent needs have the greatest influence over our actions. Everyone has a prepotent need, but that need will vary among individuals.

Within Dr. Maslow’s hierarchy, base needs must be satisfied before higher needs can even be considered. The needs in order of priority are as follows:

The goal to be “all you can be” in terms of self fulfillment and sense of purpose (Self Actualization) cannot be achieved until basic physiological (food, water, shelter), safety (security, order, stability), social (belonging, affection), and esteem (self-respect, esteem of others) needs are met. Maslow referred to the needs leading up to Self Actualization as “deficiency needs.”

So it is in the world of EPS. The requirements essential to the basic functioning of any system must be satisfactorily addressed in the mind of the customer before the bells and whistles are given any consideration.

Customers will not be motivated by the advantages of EPS (e.g., “preferred customer status” or discounts) until they are convinced that EPS really works. Any transportation service provider has a hierarchy it must satisfy in the eyes of its customers. These needs include:

Looking Ahead

Over the next decade, we see federal, state, and local governments looking toward EPS in transportation as a mechanism to generate revenues (e.g., toll roads), reduce the amount of subsidies required (e.g., those required for transit), and be a mechanism for security and/or identification purposes. The congestion management demands of public and private transportation providers will concurrently generate mounting pressures to provide accelerated throughput and greater convenience for transportation customers. The statement that “the only thing worse than paying a toll is waiting in line to pay a toll” will resonate more than ever. These conditions will promulgate the implementation of new EPS systems where none exist today and the expansion of existing EPS systems, both locally and regionally.

Developments in payment systems have been largely evolutionary rather than revolutionary, so we should not be fooled into thinking that there will be a transformation to a national EPS system for transportation purposes in the next decade. We expect that several different forms of EPS will coexist over the next 10 years. Transportation customers often want different types of payment instruments for different types of transactions. The demand for different types of payment instruments will depend on factors such as the frequency of payments, time of payment (prepaid, pay upon use, postpaid), scalability, security, anonymity, interoperability, the need for payment records, and the relative size of the payments.

Within this environment of growing competitive pressures and public policy objectives, the most successful industry suppliers will likely be those that form alliances to complement each other’s strengths. The speed and scope of changes to electronic payment in transportation will also be largely dependent on who initiates them. The effect of state, local, and federal government regulation will be key to determining the extent to which non-banking entities can be involved in the transmission and processing of money. With a guiding hand, government can help to foster an environment where private industry can flourish without transgressing the boundaries of the monetary system.

The first meeting of the U.S. Consumer Electronic Payments Task Force was held in June 1997. Established in the fall of 1996 by Treasury Secretary Robert E. Rubin, its purpose is to focus on a very important dimension in the development of new electronic money and payment technologies—that is, how will technology affect consumers? The mission of the task force is to identify consumer issues raised by electronic money, evaluate the extent to which these issues are being addressed by existing laws and industry practices, and identify innovative non-regulatory responses that may be needed for consumers in this developing market. Hopefully, the government will approach transportation EPS in the same overall manner as it is approaching the broader consumer EPS market.

The market will continue to refine its product offering with input from industry consortia, transportation providers, and regulators to some extent, but it will be the customers who choose which flavor of EPS they prefer. Those products and services will continually be refined to best meet the needs of EPS constituents. Over the next decade, the number of EPS clusters (regional groups and consortia) will progress toward a transaction volume (number of clicks) that should interest traditional financial institutions. Public/private partnerships will become more prevalent as a result. The transportation service provider/agency will maintain management control in most cases. There will likely be a continued shift in the processing of payments to private (outsourced) vendors, giving the transportation provider the ability
to focus on its core business.

We expect the back-office (clearinghouse) part of EPS to most likely be based on the back-office operations of the financial sector. We can expect private commercial entities such as credit card companies and phone companies to play a more direct role in payment and processing of transportation payments. The front-end of these EPS solutions (smart cards, magnetic stripe cards, transponders, key fobs) will continue to vary widely.

EPS will become easier to use and more convenient and will continue its migration from being a novelty to a value-added instrument. Payment for transportation will be offered through devices such as cell phones, PDAs and on-board telematic devices. In the case of automobiles, we should begin to see a progression to payment devices being built into vehicles, reducing the need for customers to obtain an external payment device from the transportation service provider.

In terms of the overall payment process, we expect to see a growing use of hybrid technologies, instances where a combination of technologies (e.g., satellite/GPS, CCTV, infrared, microwave, integrated circuit chips) is used for detection, enforcement, and processing related to EPS.

EPS in transportation should also benefit from the private sector’s quest to increase payment throughput at retail merchants. This is particularly true in the arena of contactless payments. MasterCard (PayPass™), Visa (VisaCash™), and American Express (ExpressPay™) will likely continue their contactless smart credit card payment efforts and may ultimately collect and process payment directly for mass transit, parking, and toll facilities within the next 10 years. As competition increases and technology efficiencies make transaction processing cheaper, these financial services companies should be able to make a profit at increasingly lower transaction price points. As price points acceptable to both sides are reached, the door will be opened wider for private companies to process transportation payments.

We also expect to see the continuing trend of EPS devices that are initially implemented exclusively for transportation payments being used for commercial (nontransportation) payments. Some current examples of this trend include the Octopus card in Hong Kong being used for retail transactions (e.g., Quick Marts) and several pilots where toll transponders are being used to pay for parking and drive-through purchases at quick-serve restaurants. As the number of EPS devices continues to grow, so will the interest of the private sector in terms of accepting payments from a device that “the customer already has.” The public sector will see these commercial opportunities as another benefit that its customers will derive when they obtain their EPS device.