June 29, 2020
From just paying for your train or bus ride to the whole commuting experience.
It seems counterintuitive to talk about and to analyze the transit payments sector at a time when most metro trains, city buses and other public modes of transportation are running at their lowest capacity in years, and the majority of daily riders for work, studies, or leisure are at home maintaining social distance norms.
But this stillness gives us the vantage point from which to observe, analyze and predict future trends of this killer app that made contactless cards feasible for contactless payments, generates amongst the highest contactless transaction volumes, is a big shaper of mainstream consumer behavior towards payments and commerce, the source of big pools of data linked to the movement of residents and their patterns throughout much of the 24 hours and also one of the largest collection of out-of-home advertising billboards in the heaviest footfall corridors in our urban sprawls.
Rapid urbanization and the rise of city-states as the core unit of economic activity in this century has resulted in higher congestion and pollution, and consequent fall in the quality of life for city dwellers. Even if private vehicles find a resurgence in the recovery phase next year, public transport will likely continue to be the primary option for many of our megacities. As we battle the exceptional situation in 2020, there are more than 60 cities, many in developing Asia and Latin America, that are building out some variant of a mass transit metro or bus network over the next three years. That’s an increase of roughly 80 million daily riders in five years from now, by 2025, as these public transport projects go live and scale-up. Or, if you like bigger numbers, around 30 billion new payment transactions annually. To put that in the perspective of a baseline, the People's Republic of China alone has more than 30 cities with live mass transit systems.
In this pause, we will observe and analyze with the help of our guest speakers in coming weeks—each of them a proponent and expert in representing the industry value network—that transit will eventually rebound; mobility-as-a-service will likely still be the new norm and paying for your ride will be transformed into a smarter, simpler mobility experience as online giants start partnering retail banks, transit authorities, and operators to create a digital commerce-like experience in this online to offline to online commuting experience for riders that will entail a fundamental business model disruption.
Setting up and operating a transit fare collection system has traditionally been an expensive capex-driven proposition that had to cater to a diverse and fragmented set of services, routes, acceptance points, and access control mechanisms. The cost of the fare collection system, i.e., of being able to issue, check, and consume ride tickets to commuters, used to be 14%–18% of the average price of a ticket.
With the advent of new players getting interested, the growing number of cities worldwide adopting such transit payments systems, advances in cloud computing, secure and smarter portable computing available for less, and overall, the maturing scope and scale economies of the industry, these equations are changing. This has huge implications for retail banks, FinTech firms and their investors, digital giants, and regional digital platforms.
It used to take at least a couple of years to deploy a fully operational transit fare collection system in a mass transit deployment. The business and technology were geared towards treating these as block boxes over a long contractual duration obviating periodic updates to the system and also did not benefit from the recent advances in open APIs and flexible modeling of services that allow partner third parties to benefit or contribute to the deployment—as a result, integrating with any external interface like a website or a mobile application used to be difficult, time-consuming, and expensive. This has changed in the last five years and has gained momentum, especially in emerging markets.
The speed of payment transactions was paramount given the focus on moving rush hour traffic through the gates and any innovation used to break this holy grail threshold invariably. Advances in internet data connectivity and on-device computational capability have started to make this less of a bottleneck.
Transit payments represent one of the biggest set of transaction opportunities for credit/debit products in developed markets and pre-paid/pull payment products in emerging markets that will see interest from mobility & smart city startups, their early-stage investors and global digital giants alike, seeking to boost their transaction frequency and volume. If the transit operators move smartly, not only will they be able to reduce the cost of operations but also gain from a share of value-added services revenue introduced by partners ranging from retail banks to digital wallet companies and telcos. More importantly, they will still be sitting near the center of the new business configuration for their commuters.