The public transportation ticketing industry is undergoing significant change. In the past, buying a ticket with cash was the initial step in using a public transport system, which has now changed to utilising a preloaded smart card to gain access to the public transport system with the Closed Loop Ticketing system. However, this system requires, for example, that you bring three prepaid smart cards, one for each transport company, if you must travel via a metro and then two buses of different companies.

The Open Loop concept eliminates preloaded smart cards and quite revolutionarily also eliminates the ticket itself in public transport. The open-loop system provides a new level of passenger convenience, where you can simply use your regular credit or debit card to make purchases at stores to travel on the go on the buses and the metro. And that too, not only in your area or city but all around the country. You can also use your mobile phone instead of a bank payment card if you do not have one. 

This article understands the closed-loop and open-loop ticketing systems in public transport., describing the operation of the open loop ticketing system, how it serves passengers without bank accounts, and how mobile devices are linked.

 

Closed-Loop Ticketing System

The closed-loop ticketing system was among the earliest uses of the smart card for ticketing systems in public transport. A few examples of closed-loop ticketing systems are The Navigo Card in Paris, the Octopus card in Hong Kong, and the early Oyster card in London.

The ticketing system makes use of the rechargeable smart card. Cash, a credit or debit card, a vending machine, or another method is used to load the smart card. Once the card is tapped at a terminal of the transport provider, the terminal reads the card and deducts an amount from the stored value of the card.

The smart card in the Closed Loop System can only be used at the Transport Provider's terminals. Unless they are also a part of the Transport Provider's "ecosystem," the smart card or other paper tickets that the Transport Provider issues are not valid at other terminals.

Thus, the distinguishing features of the Closed Loop System, especially vis-à-vis the Open Loop System are:

• The smart cards utilised are rechargeable, stored-value proprietary cards, and the system has the ability to deduct and modify the value on the cards. All of the passenger's money, travel privileges, and data are held on the card itself
• Interoperability is limited because the system limits the use of the smart card for travel to the services of the Transport Provider that issued it
• The Transport Provider is responsible for the entire smart card and associated infrastructure management process

 

Open-Loop Ticketing system

What has changed most between the closed loop and open loop systems, then? 

It comprises a number of crucial components:

Smart Card to Payment System

The "card centric" closed loop system gives way to a more open "payment" mechanism in the open loop system. The commonly used credit and debit cards, as well as mobile phones and other wearable technology, are all part of the payment system. Passengers will no longer need to carry separate tickets or separate smart cards as a result.

Sharing responsibility of Ticketing System: New Players on Board

Under the Closed Loop scheme, the Transport Provider bears complete responsibility for the ticketing system. This includes revenue collection, ticketing, hardware and software administration, infrastructure, equipment, and smart card management. That is quite a wholesome responsibility. It needs knowledge, experience, and managerial prowess. This is not granted to the typical public transport companies, particularly in developing nations, where the latter are additionally more cautiously managed, bureaucratic, and slow to embrace such new initiatives.

The trend these days is to shift part of the ticketing responsibilities away from the Transport Provider. The whole system is unbundled, allowing new players to manage individual components of the system.

For the transport provider, the entire system is often managed by an Automated Fare Collection System Provider. Financial Institutions are in charge of the credit and debit card components, while Mobile Phone Service Providers handle the mobile phone component.

Credit and Debit Cards as Payment Media

The same contactless credit and debit cards that travelers already frequently use in their daily lives are utilised in the Open Loop system. To access the transit system, these are used for tapping at the terminals.

Under this arrangement, a significant portion of the card management burden is transferred to the banks and other financial institutions. In utilising the banks' and financial institutions' current payment infrastructure this lowers the operating expenses for the Transport Provider.

Tapping at the Terminals

The system recognises the contactless credit or debit card as a credit or debit card when it is tapped at the terminal (authentication exercise). The system maps the trip made and deducts the money from the card's account when the card is tapped once again at the exit terminal.

It should be mentioned that, unlike in a closed loop system, there is no written back information or credit balance modification on a credit or debit card. In this case, the credit or debit card is only used to identify a credit or debit card account. The computed fare is charged to the bank card at the conclusion of the journey.

Coverage of the System

Because credit or debit cards are widely accepted, travelers can use the same cards in several transport systems or modes, at least within the national borders of the country, provided that the necessary terminals and systems are present.

 

Issuing and Acquiring Banks

As we previously stated, the Banks now bear a major portion of the burden for administering the cards and collecting fares under the Open Loop system, leaving the Transport Provider with less responsibility in these areas.

So, what is the role in this process, of the Banks that issues the contactless payment cards (Issuing Banks) and the Banks that represent the Transport Provider ensuring collection of the revenues (Acquiring Banks)?

Issuing Bank

Under the open loop system, card issuance and management are under the responsibility of the issuing institution, typically a bank.

Therefore, the issuing institutions (banks) would be:

• Issuing credit/debit (payment) cards to clients upon request and connecting the card to the client's bank account;
• Completing the required screening in order to gain access to bank services.
• Checking whether there are enough cash or credit available to the cardholder when the card is touched at the terminal.
• Posting completed transactions to the accounts of cardholders.

There would be many issuing banks because multiple passengers would be paying for their fares using credit or debit cards from various banks. Every bank would take care of the money transactions related to its cards.

Acquiring Bank

For its part, the Acquiring Bank acts as the middleman between the Transport Provider and the Passenger’s Issuing Bank.

When a passenger taps his card:

• The payment information is initially received by the Acquiring Bank.
• The information is then forwarded to the Issuing Bank, which authenticates the card, confirms the passenger account, approves the transaction, and deducts the amount from the passenger's account
• This information is retransmitted to the Acquiring Bank which then registers the transfer payment. The money, less any transaction costs, can be moved in real time to the Transport Provider's account. It is more likely that the Acquiring Bank transfers all transactions in bulk at the end of the day. 

 

Unbanked Passengers

In the Open Loop system, the cashless credit and debit card is a key component. What about those who lack a bank account, or those who are unbanked? Children and those who do not satisfy the standards to use banking services are in this category.

Such is the situation in the majority of developing countries, who aspire to implement a modern ticketing system for their public transport.

In here, the features are combined with the Closed Loop system’s characteristics: the use of prepaid smart cards for unbanked passengers to get access to the transport system.

A system is set in place for prepaid smartcards that are not connected to a banking account. These cards are available for purchase at specific ticket booths, vending machines, and retail locations where they can also be topped up.

 

Mobile Ticketing and QR Codes in the Open Loop system

A significant fraction of people in developing countries lack bank accounts. One option for this category would be the prepaid smart cards. 

Nonetheless, a more common and suitable payment method that is quickly gaining traction in developing countries is the smart mobile phone. For those who are not banked, a very practical payment method might be a mobile phone.

There are three main ways that mobile phones can be used in the open loop system:

• Firstly, as mobile wallets. By tapping or scanning their phone, users can use money from their mobile wallet to purchase tickets at various locations around the public transport system.
• Secondly, as a ticket repository. Using the apps of the transport provider or other third parties, passengers can purchase tickets and save them to their phone for use at a later time.
• Thirdly, making use of the phone itself as a digital ticket. Mobile phones equipped with Near Field Communication (NFC) or QR code capabilities can interact with the validators or ticketing devices.

 

Single rides and Passes in the Open Loop system

How can the Open Loop system accommodate the conventional uses of passes and single rides in public transport?

As a matter of fact, the Open Loop system provides a variety of ticketing methods. These include circumstances in which passengers who want single rides or passes could be served.

Three approaches or models are provided by the Open Loop system:

Known Fare (single ride) Approach

This usually applies to rides on a single mode of transport only and is most appropriate for one-way trips or brief visits. For a single ride, a fixed fare is typically already known and has been set. When a passenger taps a loaded smart card, a bank card, mobile phone, paper ticket, or other payment medium at the validator, a transaction is completed. 

Accumulated (multi fares, multi-mode) Approach

The bank card or mobile is only used as credential to get access at the entry validator. Under this approach, the final transaction, unknown at the start of the journey, is only determined when the full journey is completed and the fare is then clear. This is applicable for both single and multimode transportation.

This approach, which is the commonest under the Open Loop system, allows for application of flexible fares: fixed fares; distance- and time-based fares; multi-modal fares; and features like fare capping.

Pre-purchase (travel pass) Approach

This entails paying for a fare product (a monthly or yearly subscription travel pass). Since the money has already been paid, the fare product is only verified by the system upon tapping the card on the validator.

This method enables subscriptions of any kind, whether monthly, yearly, or otherwise, into the Open Loop system.

 

Open Loop system and Validators

The Transport Provider must have the appropriate entry gates and validators in order to accept the Open Loop system. This is because the system provides a certain number of approaches and takes various payment media.

These methods and payment media must be supported by such validators and gates. These would include the mobile phone wallet system and its QR codes, the bank card contactless system, the loaded smart card system, the smart card used by infrequent passengers, and the paper tickets (daily trips) that carry travel QR codes.

 

Challenges with the Open Loop system

Despite offering an array of benefits, there are still challenges with the Open Loop system.

• Firstly, when they switch to the Open Loop system, Transport Providers who have previously established Closed Loop systems might need to maintain both systems for a while.
• Secondly, there is still work to be done in terms of handling passengers who are not banked. For this category, the prior rechargeable/preloaded smart card model must be retained under the Open Loop system. Therefore, even though the Banks have assumed most of the duty for administering and issuing bank cards, the Transport Provider still needs to build up a system of preloaded/rechargeable smart cards for the unbanked population.
• Thirdly , the issue of Passes and Concessions is not fully addressed.
• Fourthly, the issue of merchant service commission and fees in connection with utilizing bank cards and banks receiving fare money is a major source of concern, especially for Transport Providers in developing countries.
• Lastly, because the data is sent to the banks when a passenger uses a bank card for travel, the Transport Provider does not fully profit from the data collection process used to arrange the client's itinerary.

The financial institutions and the public transport sector are earnestly investigating ways to address and overcome those obstacles.

 

Conclusions

The issue of passengers paying for their travel is addressed differently by the Closed Loop and Open Loop systems. While the Open Loop system mostly uses bank credit and debit cards, the Closed Loop system makes use of rechargeable and preloaded smart cards. Public transport agencies tend to favour the Open Loop concept due to its enormous comparative advantages. The technology, though, is still at work with the Open Loop system to find ways to conveniently and fully embrace the Unbanked, the Concession passengers and the Data issue.