Here is my take on how Groupon’s cloying text will read:  “See Chicago the CTA way with unlimited 3-day travel by bus and train.  Go like a local with all the convenience of Chicago’s transit system on the ground or overhead on the L-evated trains for just $9 for three days, five dollars off the vending price.”

The Chicago Transit Authority is now on Groupon.  CTA had a bunch of slow-selling 3-day passes to unload and found a ready buyer in the social couponing website, which bought 250,000 passes, with the option to buy another quarter-million, at the wholesale rate of $7.53 each.  CTA has to be excited about this because clearly they over-ordered by about a half-million 3-day passes.  But this highlights a particular problem the transit industry has: payment.

For those not in the know the phenomenon of dwell time is murder on a schedule.  Dwell time is the period from the moment the transit vehicle comes to a complete stop and when it departs again.  In the best scenario of a subway, fares are paid before passengers get to the train.  At the platform multiple doors on multiple cars open simultaneously and hundreds of people board and alight in the space of a few seconds; in some stations passengers board and alight on opposite sides of the car making the process even faster.

On the other side of the spectrum is the workhorse of the transit business, the motorbus.  Passengers at the curb are told to wait until others alight (although some agencies encourage passengers to get off at the rear door and leave the front for boarding only) and then new passengers may board, but always through the front door in order to pay the farebox, which is monitored by the driver.  Like recalcitrant soda machines, fareboxes often reject dollar bills and coins get stuck; cash payments extend dwell time which wastes time on a schedule.  Fare cards (monthly, weekly, 3-day, and so forth) provide a bulk discount for passengers but more importantly magnetic stripes and RFID (contactless, proximity, or “prox”) cards tend to work very quickly at the farebox and unlike time-consuming wheelchairs and traffic, the transit property has some control over the farebox.  Fare cards, as a result, have become a staple of the industry (see box).

There is a down side, however, to the cards: it costs a lot of money to sell them.  The purchase price can range from a few cents per unit to as much as $3, and it requires vending machines and/or staff to sell them.  As Chicago shows us, sometimes the agency gets the balance wrong and has too much supply on hand.  Island Transit in Island County, Washington, for example, abandoned the farebox altogether because the cost of collecting fares exceeded what they expected in farebox revenue (their website cites a first year cost due to charging a fare of $7,325,283).

A while ago I spoke to Conrad Sheehan, founder and CEO of Mpayy, and he pointed out this great inefficiency in the transit industry.  “In the world of general retail, payment is decoupled from hardware,” he explained.  Visa and Mastercard are almost universally accepted from regional malls, to corner bodegas, to taxi cabs.  “Only in mass transit are proprietary hardware and software integrated.”  In other words, only transit makes its own payment system—the farebox—using its own currency, fare cards.  U.S. legal tender is still the currency for accessing the system, but if you think of it this way, buying fare media is more like exchanging currency in a foreign country than it is purchasing a service.

Sheehan was a banker at JP Morgan, responsible for their consumer payments division, so he is a transaction guy, and Mpayy is trying to solve the problem of micropayments, the Gordian Knot of the internet age.  If you have ever gone to a local coffee shop with debit card in hand to buy a $1.50 cup of coffee only to meet the “$5 minimum on debit card purchases” sign, you have experienced firsthand the impetus for micropayments.  Micropayments, to use a familiar example, were supposed to save journalism by allowing readers to pay for content in very small amounts, say a dime to read an article, instead of relying on advertising or long-term subscriptions.  (This could run the other way with advertisers paying a few cents for websurfers to read their ads.)  But the applications are much broader. 

Forty years ago cash transactions were for small purchases and larger ticket items were paid by check.   Nowadays television sets and cups of coffee alike are bought with credit/debit cards.  All merchants negotiate their credit/debit fees with the card companies and the larger the company the better the terms.  Since a Target or Walmart will be paying lower per-transaction fees—and coming out well ahead on tickets averaging over a hundred dollars—they can stomach the occasional debit purchase for just a gallon of milk.  Not so the indie coffee shop and buck-fifty cup of Joe.

Enter Mpayy (now a part of NTT Data Corporation).  The company does not want to replace debit cards, but they want to move into debit and credit’s tiny corners where costs to merchants are higher.  As a cash replacement, Mpayy’s system would not require a pin for transactions less than $5 and the focus is transactions of $20 and under.  When I talked to Sheehan he was trying to work his model into the transit industry and that is smart.

Mixing credit cards and fare purchases has not been a problem for rail systems: I have enjoyed convenient, easy purchases at subway stations and light rail platforms.  But when bus transit agencies accept credit cards they typically do it online and then mail the card to the purchaser, either passing along a “convenience fee” for the expense the credit card companies charge or swallow the cost; the former results in more expensive fare for the passenger (making it less attractive), the latter a blow to the transit agency’s bottom line.  Is the efficiency gained from online purchases worth the two or three dollars of lost revenue on each card?  Maybe.  Dwell time is a problem, but there is certainly room for an alternative.

Some transit agencies have experimented with paying individual fares on buses with plastic.  In 2009 Nashville MTA accepted credit and debit cards at the farebox for single-trip and day passes.  They downloaded all the transactions at night (or every other day) and then ran the cards.  If the card was bad it was added to a database that was uploaded to all fareboxes to avoid repeat false uses; since transactions were run all together in batches, not individually, NMTA got a discount.  It lasted less than a month after riders figured out how to use expired gift cards and stolen credit cards to ride.

Mpayy has a product that works on cell phones or on plastic cards with an RFID.  Sheehan has observed that paying with a phone is “not a technology challenge, it’s a business model challenge.”  Starbucks now offers payment with a phone, but this is a “stored value” system where the money on the phone can only be spent at Starbucks.  Sound familiar?  It does to transit insiders because in addition to time-value unlimited cards (31-day, 7-day, etc.), many transit agencies also offer stored value cards; these can be electronic cards that use the farebox to count off trips or paper cards that the driver ticks off with a simple hole punch. 

But unlike the closed systems a transit agency or Starbucks uses, Mpayy is designed to work anywhere that a person might want to spend small amounts of cash.  I’m rooting for Mpayy because I think this is a great model for transit payments: no pins, little exposure, no transit agency specific equipment or fare media.  Mpayy is headquartered in Chicago, also the home base of Groupon, and, of course, CTA.  Few transit agencies are going to have the resources to move hundreds of thousands of fare cards through social media.  It is a shame that CTA even needs that, but maybe micropayments can fix the fare problem so the rest of us don’t need to worry about it.

[See a video with Mpayy's Conrad Sheehan explaining how Mpayy works]