Transportation Deployment Casebook/Life cycle of Smart Cards

Introduction

Octopus Card reader installed on a bus in Hong Kong. The high rate of public transportation use in the city provides an early market niche for the smart cards.

Transit systems around the world have adapted contactless smart cards as a ticket issuance media. Smart cards are widely used both in the private and public sector. The most common deployments of smart cards are found in education, healthcare, financial, telecommunication, and transportation sectors. The use of automated fare collection systems and smart cards has many advantages over previous fare collection systems. These systems are widely adapted by transit systems around the world because they deliver fast, easy access to riders and reduced operating costs and improved efficiencies .

Contactless smart cards that are commonly used by transit riders and providers are integrated circuit (IC) card with embedded microcontrollers and internal memories. Computer chips in smart cards allow them to store large amounts of data, carry out their own on-card functions and interact intelligently with a smart card reader . Transit smart cards do not need direct contact with card readers. Riders only need to place their cards in close proximity with the card readers. The reader and the card communicate using radio frequencies (RF). The use of smart cards reduces passengers' time and effort when boarding bus or rail transit. Stored value smart cards eliminate the need for carrying cash and queuing for ticket machines in rail stations. The overall travel time on buses is also shortened as fare payment for each passengers only takes about one second.

Urban areas with sizable transit systems are the main markets for smart cards. Cities in the developed world do not appear to have higher demand for smart cards than cities in developing countries. The implementation of smart cards is found in urban centers on all inhabited continents. Population and income level of cities have minimal effects on the market potentials of smart cards. European and North American cities were not the earliest adaptors of smart card systems. Hong Kong's Octopus Card and Seoul's Upass are two of the earliest examples of smart cards introduced in the 1990s. Most smart card systems in operation are adapted during the first decade of the 21st century. Smart card payment systems are not only found in major European cities, but also smaller metropolitan areas. Residents of many urban centers in Asia, Africa and Latin America use smart cards to pay for their transit trips daily. The main markets of smart cards are urban centers with high level of transit ridership; especially cities possess multiple transit modes. The adaptation of smart cards provides a more seamless boarding process for riders and allows transit service providers to offer a wider range of fare options. Data collected by the Smart Card Automated Fare Collection system can be very useful for transit planning. Utsunomiya et. al. (2006) studied on the benefits of data collected by smart cards in demographic and travel behavior analysis in Chicago. A greater capability of data collection allows transit agencies can better predict travel demand and evaluate fare policy . More accurate information also enables the Chicago Transit Authority to identify distinctive market segment and development different target market strategy.

Oyster was chosen as the name of the London smart card because of the association of London and the River Thames with oysters, and the well-known travel-related idiom "the world is your oyster".

Table 1: Years of introduction of smart card systems in urban centers

Continent	City	Smart Cards	Year of Introduction
North America	New York	SmartLink	2007
North America	Chicago	Ventura	2013 (Chicago Card in 2002)
North America	Boston	CharlieCard	2006
North America	Toronto	Presto	2009
Europe	London	Oyster	2004
Europe	Paris	Navigo	2001
Europe	Brussels	Mobib	2008
Asia	Hong Kong	Octopus	1997
Asia	Seoul	Upass	1996
Asia	Tokyo	Suica	2001
Asia	Delhi	More Card	2011
Latin America	Rio de Janeiro	RioCard	2005
Latin America	Santiago	Bip!	2003
Africa	Cairo	Gemplus	1997
Africa	Cape Town	My Connect	2011

The Evolution of Transit Payment

Technology of fare collection evolved from cash bag and coin dispenser to the automated systems today. Until early 1980s, bus fares were commonly collected by conductors. While tickets are still sold by conductors in some commuter rail in the United States, operators have taken the role of collecting fare in most bus systems. Cash, token, paper ticket, magnetic ticket, smart card, debit card, credit card and transit voucher are all fare payment media with different level of flexibility. Cash as a payment media is inefficient because it is only applicable in single-ride fare option. Tokens enable multi-ride option but they cannot serve as stored value tickets. Paper tickets can serve as single-ride ticket, multi-ride tickets and period pass, but they cannot be used as stored value tickets. The introduction of magnetic tickets drastically improves the flexibility of fare payment option. Tickets equipped with magnetic stripes not only have all the functions of cash, token and paper ticket, they also can be used as stored value ticket . Since 1904, riders of the New York City Subway paid the fare with tokens purchased from a station attendee . Fare collecting machines were designed to only recognize tokens, rather than multiple types of coins. Fare increases were more easily implemented due to the use of tokens. Riders can also prepay transit trips by purchasing tokens for multiple trips. Tokens are more cumbersome than other types of transit tickets, and hence they were not widely adapted by other transit systems. The New York City Subway eventually phrased out tokens in 2003. Due to greater portability and flexibility, magnetic tickets were widely adapted by transit systems across the United States and the world. Modern transit buses are equipped with fareboxes that offer options for cash payment and magnetic stripe tickets. Figure 1 shows a commonly found fare box in buses across the United States.

Vancouver bus farebox

The development of fare collection in heavy rail transit differs from that of bus transit. Tickets were issued by machines in the London Underground as early as the 1940s. Riders had to show their tickets to the inspector at the barrier before boarding the train at the platform . Inspectors were later replaced by automated ticket gates, but ticket machines are still used today.

Ticket Machines in Singapore

The invention of magnetic stripes revolutionized the development of fare collection technology. Tickets with magnetic stripes were largely deployed in public transportation after World War II. The introduction of magnetic tickets automated the validation process. Inspectors at barriers separating the paid area in heavy rail stations were replaced by turnstiles. Information related to each trip is stored in the magnetic stripe, and ticket readers at fare gates validate passengers' ticket. The deployment of magnetic stripe tickets also enables the fare integration in different transit mode. Riders can use the same ticket when transferring between bus and rail without repurchasing tickets. The ability to store information in the magnetic strip enables transit agencies to offer different products or packages, instead of offering only single trip tickets. Travelcard in London was introduced as an intermodal ticket. Passengers can still purchase a travelcard that is printed on magnetic ticket. The use of magnetic stripes in transit tickets was largely standardized in cities around the world. Due to standardization and relative low production cost, magnetic stripes have been used for decades until the recent development of smart cards.

Limitations of the magnetic stripes led to the development of integrated circuit card, or smart card, in public transportation. The main disadvantages of magnetic stripes are limited storage capacity, low durability, and lack of security. Our experience in magnetic stripe tickets is important to the development of smart cards because it demonstrates the possibilities in the functionality of transit tickets. Magnetic tickets offer some flexibility such as stored value tickets and multi-model interchange. Smart cards are gaining popularity because they perform the same functions in better ways as magnetic tickets. Although smart cards are replacing magnetic stripes as the choice of technology in transit tickets, the pattern of fare collection will largely remain. The implementation of smart card is unlikely to change the ways we pay for our transit trips. Greater flexibilities and efficiency stirred the interests in smart card adaptations. Increasing computerization in the transit information system also stimulate the possibilities of a higher functioning transit ticket system. Magnetic stripes were used in many types of tickets, such as stored value and monthly passes. Smart cards embedded with computer chips have greater capabilities of storing values, which allows passengers to use the card for a longer period of time without recharging it. The more powerful technology in smart cards also allows transit tickets to be multifunctional. A smart card can be a stored value ticket or an unlimited ride passes for a certain transit mode. The adaptation of smart card systems offer transit agencies around the world an unprecedented opportunity to analyze network performance and transit demand of different demographic groups .

Smart cards evolve from the “mother logic” of the magnetic stripes tickets. Prior to the advent of the smart cards, magnetic stripes were used to store data and validate fare payments. The standardization of magnetic stripes led to little changes in transit payment methods. Smart cards offer new possibilities in transit tickets based on the building blocks of previous methods.

Invention and Early Adaptation of Smart Card in Transit Systems

Smart Card Schematic

The concept of implanting microchip into a plastic card was first developed by two German inventors, Dethloff and Grotrupp, in 1968. The Japanese version of smart card was registered a patent in 1970. The use of smart card grew exponentially in the 1990s due to the advancement of computer and mobile communication technologies . Although smart cards were not used in any public transportation until late 1990s, Germany has been using smart card for health care since 1992. The success of smart cards in the health care, telecommunication and financial sectors prompted transit agencies to adapt the smart card automated payment system.

Technological expertise in computer information system was brought into the existing fare collection system. Octopus card in Hong Kong was one of the first major smart card systems in the world. Prior to the introduction of Octopus card, the two rail systems (now merged) had separate fare payment systems. Both systems used magnetic tickets and required passengers to purchase tickets from station attendees or ticket machines. The two rail systems introduced the Common Store Value Ticket, which allows passengers to use one ticket and travel on the two systems interchangeably. The Common Store Value Ticket closely resembled with the Octopus card, which was the first common ticket that can be used in all transit modes in Hong Kong. The transit companies in Hong Kong encouraged riders the use Octopus Card as the medium of fare payment by offering discounted price . Holders of Common Stored Value Tickets were required to replace their tickets with Octopus card or have their tickets made obsolete, which contributed to the early popularity of the smart card. Each bus route in Hong Kong has a different fare. Before the introduction of Octopus, riders had to prepare the exact fare before boarding. The installation of Octopus card readers made bus boarding more convenient and shortened passengers’ boarding time.

The shift from previous payment methods to Octopus did not require major revamp of the fare infrastructure. Smart card readers were added on the fare gates at rail stations, and besides the fare box in buses. Options of buying magnetic tickets to ride trains and paying cash to ride buses were remained. The hardware of the smart card technology remains largely unchanged since it was introduced, which mainly involve embedded microchip in plastic cards and radio frequency identification (RFID) in card readers. Contactless cards were chosen from the beginning of the “smart card era” of transit. As the system matured and was recognized by transit systems around the world, little technological change was taken place over the hardware. The software of the smart card systems can be more easily changed because the system is largely computer-based. Octopus can now be used not only in transit, but also vending machines, convenience store and parking meters. The wider range of use is a result of software advancement of the smart card system. The development of smart card automated payment system allows transit systems to offer ticket options with greater flexibility.

Life Cycle Analysis – S-curve

A life cycle analysis model is used to identify the periods of birthing growth, and maturity. The status (S), or the independent variable, is the accumulated global shipment of smart card in millions. The annual global smart card shipment for transportation is provided by Smart Card Alliance. The amount of accumulated smart card shipment is likely to overstate the actual number of transit smart cards currently in use because some smart card shipments made for transportation are not used in urban transit. Replacement cards due to loss and damages are also counted in the number of total shipment. The predicted shipment is calculated by the following three-parameter logistic function:

$S(t)=K/[1+e^{(-b(t-t_{0})}]$

where:

S(t) is the status measure (millions of smart card)

t is time (years),

t0 is the inflection time (year in which 1/2 K is achieved),

K is saturation status level,

b is a coefficient.

A linear regression was needed to determine the coefficient (b) and inflection point (t0) in order to use the S-curve equation. This was done through the equation:
$Y=\ln \left({\cfrac {S(t)}{(K-S(t))}}\right)=bt-bt_{0}$

Table 2: Excerpt of data analysis result.

Year	Actual shipment (million)	% Change	Predicted Shipment (millions)
1999	40	n/a	44
2000	50	25%	63
2001	77	54%	90
2002	137	78%	128
2003	187	36%	180
2004	247	32%	250
2005	320	30%	340
2006	460	44%	451
2007	620	35%	582
2008	780	26%	727
2009	940	21%	877
2010	1005	7%	1021
2011	1085	8%	1152
2012	1220	12%	1263
2013	1380	13%	1352

Actual and predicted global smart card shipments for transportation.

Market Development

Early Market Development

Ticket gate in Boston equipped with CharlieCard Readers

Hong Kong’s Octopus is one of the earliest smart card systems in the world . Besides Hong Kong, the earliest large deployments of smart card systems are found in Seoul and Washington, D.C. The success experiences from the early adapters served as examples for other transit systems. Most smart card systems currently in use were initiated during the 2000s. Global shipment of smart cards had grown rapidly throughout the first decade of the 21st century. The fastest growth in the worldwide shipment for transportation use occurred from 2005 to 2008. Transit smart card found its initial market niche in high density urban centers with multiple modes of public transportation. Cities with high ratio of transit mode share are likely to be successful markets for smart cards. Complex transit systems are good markets for smart card to enter because riders benefit the most from the increase in efficiency. The growth of the technology is contributed by both functional enhancement and functional discovery. Functional enhancement can be achieved by serving existing markets better. The wider range of smart card payment availability increases the demand for smart cards. The subscription of smart card is also a “positive feedback loop.” As a higher share of the population pays by smart cards, the benefit of using one increase since infrastructure is likely to be modified to accommodate the growing number of users.

Birthing Phrase

The adaptation of smart card does not require the major changes in fare policies. The fare structure of each transit system differs from one another. Local transit policies have relatively small effect on the growth of smart card deployments worldwide. As the microchip and radio frequency technologies matured, transit systems took advantage of standardization and reduction of infrastructural cost. The large scale of smart card adaptation in Hong Kong was a result of decisions made my several transit operators led by Mass Transit Railway (MTR). As one of the two rail systems, MTR partnered with four other transit companies to form a joint venture to operate Octopus. The government of Hong Kong later permitted Octopus to expand its market outside of transit companies. Such policy encouraged the growth of smart card as a payment media in Hong Kong.

The growth rate of transit smart cards was relatively slow during the birthing phrase of the technology. The main reason for the slow beginning is that changes in transportation system generally take time. Transportation managers are typically risk adverse, which causes many transit systems to be late adaptors of new technologies . The long existing practices of fare collection, such as magnetic stripe tickets, were “locked in” at the time. While some transit systems were reluctant to changes, others were determined to be on the cutting edge in transit technologies. Even though transit systems decided to move forward in their fare collection infrastructure, it took time to gather financial resources to implement the smart card system. Modifying the existing infrastructure in a large scale cannot be done overnight. Funding is another factor for the slow growth in the beginning stage of the technology.

Growth Phrase

Oyster reader on tram platform in London. (Note the different fares between cash and Oyster)

Global shipment of transit smart card started to take off in early 2000s and grew even more rapidly after 2005. Most transit systems adapted smart cards between 2000 and 2005 are located in Europe and Asia. Early adapters, such as Singapore, Tokyo, Taipei, Paris and London, contributed to the growth of the technology at the turn of the century. The organized effort of Smart Card Alliance in the promotion of the technology demonstrates the role of the private sector in the implementation growth. The use of cutting edge transportation technologies to enhance their global competitiveness and identity led to strong support from the public sector (Nichols, 2010).

The growth period of the transit smart card systems continued throughout the decade (see Table 1). The successful experiences in earlier systems attract more cities to implement smart card payment system. By late 2000s, more transit systems are released from “locked ins” and are ready for infrastructure upgrades. The reduction of capital cost also encouraged more systems to adapt smart cards. Conservative transit agencies became more receptive to the new technology because it was widely adapted around the world by late 2000s. Although transit managers have little incentives to obtain the state-of-the-art technologies, most of them do not want to lag behind other systems. North American cities started to adapt smart card systems, following the examples of Asian and European cities. Besides the introduction of SmarTrip in Washington D.C. Minneapolis-St Paul's Go-To and Boston's CharlieCard were the earliest smart card systems in the United States. Montreal has the oldest systems in Canada. The growth rate of transit smart card shipment slowed down towards the end of 2000s as most major urban transportation systems had already adapted the technology.

Mature Phrase

The accumulated shipment indicates the number of smart card holders worldwide. Smart Card Alliance provides data of global annual shipment of smart card. The number of worldwide distribution adds into the number of smart cards that are already in use. The accumulated shipment figure is slightly greater than the actual number of transit smart card holders because some cards were manufactured as replacement cards.

The annual growth rate of global smart card shipment peaked in 2002 at over 77 percent. Besides a minor spike in 2005, the pace of expansion steadily declined. The technology has stepped into its mature phrase since 2010, as the total number of smart card shipment increased by about 8 percent. The total number of smart cards around the world is now increasing at a decreasing rate. Much of potential markets have adapted smart cards as a transit payment method. The rapid growth phrase occurred during the early 2000s when transit systems introduced smart cards in large scales. Since most people switched to the new payment method relatively soon after it was first introduced, the increase in total smart card shipment is bound to slow down. By 2010, most people who would obtain a smart card have already purchased one. Most recent smart card shipments are contributed by existing markets rather than new markets. As more businesses outside of transit systems start to accept smart card payments, the demand for smart cards will continue to increase. Replacements due to loss and damage also contributes to the steady growth of the existing market. Although the rate of growth has slowed down, the total number of smart cards is unlikely to maximize in the near future.

The life cycle analysis model shows that the market saturation point is at 1.6 billion cards. Approximately half of the total human population live in cities, with the total urban population today at 3.5 billion . The market for transit smart cards is constrained by the total urban population. Further, a segment of the urban population will be unlikely to have a strong demand for smart cards. Among the growing number of urbanites, frequent transit users who live in large urban centers are the major markets for smart cards. Strategies to expand beyond transit to other businesses would increase the demand in existing markets. Widening the acceptability of smart card as a payment method and effective marketing can also increase the demand for smart cards. The life cycle analysis according to the current data shows the market is nearly saturated. If the market saturation point remains unchanged, the total number of smart cards will not grow further than 1.6 billion.

The Future of Transit Smart Cards

The total number of smart card can possibly grow beyond 1.6 billion. The World Bank projects 5 million people in developing countries migrates to urban areas each month. The growing urban population and urbanization rate both raises the market saturation status level. The total number of smart card is unlikely to peak at 1.6 billion and start its decline as cities continue to expand. Standardization and mass production of smart cards and other related infrastructure allows more cities in the developing world to afford the technology. Transit smart card has reached its maturity stage, but the mature phrase will not end in the near future as its primary market grows.

To better serve the needs today and the future, transit smart card systems should reinvent themselves to allow passengers using a single card across transit systems. As smart cards expand its functionality from simply a stored value transit ticket to a widely acceptable media of payment, smart cards has become more similar to debit or credit card. Further development of smart card systems may allow passengers to use their debit or credit cards. Credit cards equipped with microchip has been developed and is now in use in some parts of the world. Smart card readers within transit system can directly charge passengers from their credit cards. Speedy transaction provided by the contactless smart cards is not currently available for credit card users. Unlike credit cards, transit smart cards are not universally accepted as medium of exchange. Combining the advantages of transit smart cards and credit cards provides an opportunity for the reinvention of the technology. The potential problem of such reinvention is that transaction costs may increase. Consumers may not want banks to involve in their transit payments. A viable alternative of reinventing smart cards is to create an integrated payment system among transit systems. Under an integrated system, travelers are able to use the same smart card from their home city while traveling in another city. A universal transit smart card provides more time saving and convenience for frequently intercity travelers.

Conclusion

Similar to any types of transportation modes and technology, transit smart cards go through a life cycle (birth, growth, maturity and decline). The accuracy of the S-curve model in predicting the number of smart card shipments shows that transit smart card is following the path of the technology life cycle. As a relatively new technology, transit smart card only took a short period of time to develop from birth to maturity. Computer and software technology typically have a shorter life cycle than transportation technology. The intensive use of information technology in transit smart card contributes to the speed of the deployment.