28-07-2025
Why The Push For Open-Loop Payments In Transit Could Backfire
Miroslav Katsarov is the CEO of Modeshift, a technology company bringing intelligent transportation to small- and mid-size transit agencies.
Open-loop payments have emerged as a high-profile trend in the modernization of public transit. This approach allows riders to purchase fares using their existing credit or debit cards and mobile wallets, eliminating the need for separate transit cards or apps. The result is a streamlined fare collection process, alongside a more convenient and user-friendly experience. While the technology's appeal may seem attractive to policymakers and the public, it's essential to recognize its shortcomings in certain areas.
Fare collection involves more than just choosing a payment method. Careful consideration is required regarding how a system integrates with existing infrastructure, its ability to accommodate various payment types and how it handles data and revenue.
Attempting to oversimplify a complex system can lead to costly and inflexible outcomes. True innovation in fare collection occurs when creating responsive, adaptable systems that meet user needs, rather than enforcing adoption based on new trends and technology.
Why Open-Loop Is Not A One-Size-Fits-All Solution
Open-loop payment systems offer several key benefits to transit agencies. They can help lower costs associated with issuing and managing transit cards and tickets. Fewer components in the payment system mean less maintenance is required, leading to additional cost savings and increased operational efficiency.
Riders benefit from purchasing fares through various payment platforms, smart devices and bank-issued cards. Passing through gates is faster; they simply have to tap a card or scan a mobile phone at the terminal. There's no need to purchase tickets or carry change.
However, neglecting to consider factors such as flexible fare structures and user base could lead to open-loop payment projects being unsuccessful. In Budapest, Hungary, over 70% of riders use monthly passes that open-loop does not support, and were pressured to adopt open-loop payments, despite it not being practical. The city faced numerous challenges in implementing open-loop, with the majority of riders still preferring to use cash or a digital wallet. This highlights a critical point: Transit technology that ignores existing user behavior is destined to fail, regardless of how modern or sleek it may be.
When Pressure Overrides Product Strategy
Open-loop payments are important, but pushing them as a replacement for other fare media is shortsighted. They can serve as an enhancement to existing fare collection systems, offering additional payment options. Agencies are being politically or publicly pressured into adopting open-loop without considering their rider base, operations or revenue structure. The smarter path forward is a flexible, account-based system that supports both open- and closed-loop payments to meet the needs of riders while future-proofing infrastructure.
There's a common myth regarding agencies being a merchant of record (MoR). The reality is that it's no different from the transactions they already handle. When an agency takes on the role of MoR, it becomes recognizable to the cardholder as the merchant that has sold them goods or services. This decreases requests for chargebacks. A direct relationship with the payment processor also means agencies can negotiate better deals.
Another issue arises when agencies attempt to offer discretionary discounts to eligible riders, like seniors. Bank cards can be used to apply discretionary discounts, but it adds another level of complexity. Since discretionary discounts imply a closed-loop process, agencies could have riders undergo a registration process.
This way, the system will know who to assign these discounts to. The other option is to introduce white-label EMV cards that mimic the functions of a bank card, although this can be very costly. The bottom line is that leaders need to advocate for what works, not just what markets well.
Digital Equity And Behavioral Reality
A sizable portion of transit riders are unbanked (4%) or underbanked (9%). While many are open to switching to prepaid cards or smartphones, forcing open-loop systems without alternatives risks leaving behind the most vulnerable populations. Not every rider prefers to tap a card, and they won't be inclined to regardless of what technology is introduced.
Frequent riders gravitate toward fare products that offer value and predictability, like discounted monthly or daily passes. Furthermore, when presented with other options, such as QR codes and mobile ticketing, many would prefer those over a bank card.
Open-loop systems lack support for more flexible fare structures unless layered with complex eligibility processes or closed-loop add-ons. Technology must be built with inclusivity in mind from day one. Tech leaders should be wise to focus on developing solutions that prioritize this, collaborating with cities and transit authorities to establish responsive, future-proof technology. Adoption happens when tools reflect how users already think and behave. Complex tech must serve simple, human needs.
The Case For Flexible, Account-Based Systems
For transit agencies, the best approach would be to have an account-based ticketing system capable of facilitating both open-loop and closed-loop processes. ABT systems allow for EMV card payments, QR codes, mobile tickets and closed-loop cards. In this instance, tokens become the core mechanism, which enables true backend flexibility.
Such systems are built for flexibility due to their ability to adapt to a range of front-end formats while standardizing the backend. Account-based systems ensure that unbanked users, mobile-limited users or digitally hesitant customers are not excluded from using transit services. Improved sustainability, reduced cash handling and enhanced UX are also among the benefits of using an ABT system.
In Conclusion
Open-loop payments have value, but only when they're used in the right context. Transit technology succeeds when it's built around how people live and work, solving basic mobility issues as opposed to quickly deploying new tech and tools. Public leaders and transit authorities need to ask the hard questions before buying into trends. This means taking into account the existing rider base and who might be excluded from using the technology.
A payment system based on open-loop could prevent certain people from using transport services. What public transit needs are flexible, scalable and inclusive systems, capable of аdapting to future challenges as well as shifts in population's behavior.
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