How debit cards can save the subway

Cut service, raise fares. Cut service, raise fares. Cut service, raise fares. If you’re one of the millions of Americans who rely on public transit to get to work, this may be the refrain pounding in your head to the accompanying rattle of the subway car on the Monday morning commute.

Faced with flagging revenues, falling subsidies, rising costs and massive capital requirements, transit agencies all across the US are seeing their budgets shrink. And the prospect of government help is nowhere in sight. In June, the Federal Transit Administration unveiled a report telling transit agencies they’d collectively need $78 billion to bring their systems up to a state of good repair – followed by silence on the question of how to pay for it.

It doesn’t have to be this way. Buried in the pages of one agency’s recent request for proposals is a creative solution that could, over the long term, help transit providers everywhere cut costs and raise revenues without costing taxpayers a penny.

Sound too good to be true? Under traditional methods of procurement, it might. But not as a public-private partnership. And that’s exactly how the Chicago Transit Authority (CTA) is rolling out a so-called “Open Standards Fare System”.

The idea behind the venture is simple: a transit agency is just like any other retailer. It provides a service – transportation – in exchange for money. So it shouldn’t expect customers to carry special currency in the form of fare cards just to get through the turnstile.

“There is a trend to make sure that you in the transportation industry concentrate on what you’re good at and what your purpose in life is, which is optimised transportation,” explains Toni Merschen, a chip card expert who used to head up MasterCard’s chip centre of excellence. “And whatever is marginal to your business, like fare collection and issuing passes, leave that to the people who are good at it.”

That’s precisely what the CTA hopes to accomplish. Instead of continuing to issue proprietary fare payment cards – with all the costs related to their control, circulation, storage and collection – it will install a new system that will allow commuters to use any regular debit card or credit card to pay their fares on its 2,222 buses and eight subway lines.

A private partner is being sought to finance all the major steps of Open Standards Fare System, which includes the design, acquisition, installation, operation, maintenance, repair and replacement of the system over the course of a 12-year period. The only cost to the CTA is a monthly transaction fee it will pay the private partner over 12 years once the new system goes live.

But the benefit could be huge: in addition to the added convenience of being able to get through the turnstile at the swipe of any debit or credit card, commuters will also be able to purchase cards for use on the CTA or any other vendor, such as Starbucks or Dunkin Donuts. The CTA would capture a portion of the transaction fees resulting from these sales.

How big would the fees be? It’s unclear at this point. But Merschen, the chip card expert, points out that “the CTA is a big retailer with a big purchasing power. So it might be able to end up with a reasonable deal with the banks in the region.”

FEES COULD ADD UP

And once the system is up and running, there are revenue-enhancing measures that can be added to make it even more profitable. “You can always add loyalty schemes where a customer earns points on these things,” Merschen says.

These fees could add up for the CTA. The transit system – the second-largest in the US, after New York City – already processes 1.6 million transactions per day. That’s about 500 million transactions annually. If even a portion of them translate to outside purchases at non-CTA vendors, the CTA could at least get some extra money to bolster its operations – not to mention the cost-cutting from not having to issue specialised fare payment cards.

The larger point is more important. Public-private partnerships provide the public sector a way to acquire revenue-producing assets at a value to taxpayers. Chicago’s open fare standard system – which the agency says it would not be able to afford on its own – is a case in point.

If even a fraction of the nation’s transit providers implemented fare systems using the same approach, they might soon find the $78 billion needed to get their assets up to a state of good repair. All it takes, as Chicago shows, is a little vision and creativity.