INTRO: With smart card ticketing being tested in London, Manchester, Paris and Hong Kong, the concept is generating considerable interest among transport operators. But investing in contactless fare collection has risks as well as benefits, suggest Matthew Lawson and Bill Steinmetz from the Railway Technology Strategy Centre at London’s Imperial College

THIS SUMMER sees the launch of smart card ticketing covering suburban railway, metro, bus and ferry operators in Hong Kong. With three million tickets expected to generate over four million transactions a day, Creative Star will be by far the largest commercial application to date of what is widely seen as the future standard fare collection technology.

Operators are looking at stored-value smart cards to overcome two fundamental problems with today’s fare collection methods. The first is the need for cash, or near-cash, payment, which puts public transport at a psychological disadvantage compared to the private car. Although cars are expensive to run, the high fixed element makes their marginal cost seem cheaper than the ’out-of-pocket’ expense of buying tickets. With stored-value tickets, expenditure up front replaces the perceived need to pay for each trip individually.

The other major benefit is lower running and maintenance costs. Despite advances in vending and validating technology, the cost of existing systems is high. Staff are often needed to sell tickets, and vending machines need regular attention. There are also hidden costs from congestion caused by ticket queues at stations or on vehicles.

Creative Star General Manager Barry Chambers says maintenance savings were a powerful incentive for the five Hong Kong operators to choose smart cards. The complex readers for magnetic tickets require constant maintenance, and smart card readers are estimated to have life-cycle costs around 25% lower. Processing speed is also valuable; Hong Kong MTR’s Nathan Road corridor remains one of the busiest metro routes in the world. Passing a contactless smart card over a reader is quicker and less awkward than extracting a ticket from a pocket, wallet or purse and feeding it into a gate mechanism. This can boost the throughput of station barrier lines without expensive civil engineering.

One of the main reasons behind Paris Transport Authority’s move to smart cards is the need to tackle fraud problems. RATP has annual ticket revenues of FFr7bn, yet it estimates that 12% of tickets in use at any one time are not valid. Smart cards are difficult to forge, as each card has a known identity specific to a single user.

Multiple operators

The power and flexibility of smart cards can be critical. The five Creative Star operators all have different fare structures, and the cards must be able to cope with many variations. This is also the main factor behind the trials in Britain. Bus deregulation and fragmentation of rail services have added complexity to the division of ticket revenues in all the big conurbations.

London Transport’s Travelcard is valid on the Underground, 10 ex-British Rail franchises, and over 30 operators running bus services under contract. No less than 65 bus operators receive subsidies from Greater Manchester Passenger Transport Executive, together with reimbursement for use of concessionary travel permits. Revenue assignment in both cities is currently undertaken on the basis of market surveys, which are not always representative and sometimes lead to disagreement.

London and Manchester are testing stored-value smart cards to generate precise records of the number of passengers using a particular service. This will allow operators to be remunerated on the basis of the traffic actually handled. The data-gathering capability can also be used to monitor travel patterns. Modal interfaces can be analysed in detail, and hard figures on passenger usage can be produced to support investment cases.

Smart cards enable yield management techniques such as variable fare rates, which can be used to disperse peak demand. Flattening the peaks can alleviate overcrowding, lower operating costs and push up revenue. But such a policy has a large social impact, and research is required to understand the local elasticity of demand in relation to fares.

Uncertainty and risk

Although trials have shown that smart card transactions are quicker and more reliable than with magnetic tickets, few operators have moved to full-scale implementation. This suggests that practical difficulties remain.

Some problems are managerial. Introducing a new fare collection system is always complex, and the pioneering smart card projects involve multinational consortia of operators, hardware suppliers and card manufacturers. Multi-party decision-making presents many opportunities for delay.

For example, one of the consortia bidding for London Transport’s Prestige project collapsed when one company felt that its objectives were not being met. IBM, Arthur Anderson, British Telecom and Olivetti also withdrew, leaving just one of the original four groups still bidding - Transis.

It is worth noting that the Prestige consortia were asked to bid on a design, build and maintain basis, in line with the British government’s Private Finance Initiative - which placed a greater level of risk on the bidders. By contrast, Hong Kong’s Creative Star contracted its entire design and supply to Colorado, a main systems integrator.

There are less than a dozen companies in the world supplying hardware, and only four manufacturers of the cards: Sony, Mikron, Raycon and Icon. These companies form teams to join project consortia, and competition is intense. The current bias is towards winning specific contracts, rather than marketing the generic advantages of smart cards.

With the banking industry adopting a contact smart card for its VisaCash ’electronic purse’, manufacturers are now faced with a split between contact and contactless technology, although common cards are promised. There is uncertainty as to how the industry will develop, but it seems likely that transport will hold the key to the critical mass of cards held.

With smart cards costing as much as £5 each, it is difficult to cater for occasional travellers and journeys outside the smart card area. At present it is often cheaper to run a second ticketing system in parallel, but the cut-off point will fall as large orders and economies of scale bring down the card price.

Staff may be resistant to change. Any financial case for smart card investment would certainly include significant labour cost savings, as fewer maintenance and ticket-checking staff would be required. The highly skilled development and maintenance work might well be contracted out to the suppliers.

Other disincentives include the high capital cost of a comprehensive system, the potential difficulty of extracting useful information from the volume of transactions involved, compared to the smaller trial samples, and the concerns of civil liberty groups over the security of personal information accrued by smart cards.

Future perspectives

Despite the different reasons for initiating development, Hong Kong, Paris, London and Manchester are all confident that smart cards will be a powerful force in the future. Creative Star believes the technology cannot be bettered for large urban networks, in terms of cost and customer service, but acknowledges that the business case varies from city to city.

As yet, some operators see little incentive to invest. Deregulation of the British bus industry gave rise to hundreds of small companies, who rejected the ’anti-competitiveness’ of multi-operator passes and reverted to cash fares. Since then the industry has consolidated, with three national groups now accounting for 55% of turnover. Thus smart-cards may become more attractive, although most operators are waiting to see how Prestige progresses.

Britain’s railway industry is going through a similar transition, and the Train Operating Companies do not see smart cards as a high priority. A typical franchise length of 10 years or less will mitigate against large investments for long-term benefits.

There is fierce competition between manufacturers looking to ensure that their card becomes the industry standard. A club of smart card users is taking shape in France, hoping to sell the concept to other European operators. And once smart cards are widely accepted in urban areas, it is likely that low-cost versions will be developed for neighbouring regional operators.

To see who might become the most dominant player in the longer term, it is instructive to look at the battle between Microsoft and IBM in the personal computer market. It may be expected that the software company delivering the most flexible packages will come to dominate the smart card business.

The smart card industry is still relatively young. Performance is improving rapidly, but practical application raises complex managerial and operational issues. There are potential disincentives whilst the technology is still at the development stage. The personal computer, fax machine and the Internet all took off much slower than the introductory hype suggested. Nobody doubts the huge benefits that smart cards can offer, but getting them established will not be as easy as some people imagine. o

CAPTION: AES Prodata has already installed its OSP-1000 smart card processors at stations in Australia, ahead of the company’s major contract for Hong Kong’s Creative Star project

TABLE: Table I. Smart card project summaries

City Hong Kong Manchester London Paris

Project Creative Star -- Prestige -Promoter 5 operators L T RATP

Project Contracts let Initiated Initiated Initiated started June 1994 Sept 1992 1992 1993

Current Launch due Specifications To launch To launch status in July 1997 under review by end 1999 in 2000

Cards 3 to 4 million 500 000 2 to 3 million 5 million

Transactions/day 4 million 1 million n/a 10 million

Market (cards) 5 million 2·5 million n/a n/a