Serving Unbanked Consumers in the Transit Industry with Prepaid Cards
Publication Date: June 2008
It is estimated that close to 20% of all American households–40 million households, representing 80 million people–do not have basic bank accounts. An additional segment of the U.S. population is composed of individuals who are considered to be underbanked. These underbanked individuals may have a basic savings account with a financial institution but do not use more advanced financial services, such as checking accounts, loans, or retirement savings accounts. A number of different factors play a role in why many individuals are unbanked or underbanked. In addition to economic status, several studies have pointed out that there are issues of language, trust, privacy, availability of appropriate financial products, and the cost of services that play an important role.
These large segments of the population create challenges for transit agencies who are implementing smart card-based automatic fare collection (AFC) systems. How do transit agencies provide the same easy access for transit services to unbanked and underbanked riders, while also maintaining the benefits of reduced operating costs and improved efficiencies that AFC systems deliver in reducing the use of cash for fare product purchases?
Serving unbanked transit riders involves issues both when the transit fare payment card is initially sold and during the life of the card, when additional fare value is sold. To date, many transit agencies are continuing to depend on traditional approaches for vending fare media to serve both banked and unbanked riders. While programs attempt to maximize the advantages of smart card technology through features like autoload and online sale of cards and fare value, transit agencies still invest heavily in more traditional fare media sales channels, such as in-station vending machines and retail sales outlets.
Transit agencies incur significant challenges and expense in establishing and operating fare product sales through retail outlets. Transit agencies must promote programs to retailers and persuade stores to participate. Financial agreements must be executed that specify commission rates paid to sales outlets and settlement timing. Point-of-sale (POS) terminals capable of loading value on transit fare media must be installed at participating retailers. Retailer staff must be trained on the use of the POS equipment in addition to fare product sale and reload terms.
Some transit agencies have been cautious in implementing or expanding smart card-based AFC systems because of specific concerns about the availability of smart cards to consumers without bank accounts and the difficulty of establishing broad retail sales distribution. Others (e.g., Boston CharlieCard, Washington Metropolitan Area Transit Authority (WMATA) SmarTrip®, Los Angeles TAP and San Francisco Bay Area TransLink®), however, have moved forward with aggressive plans to establish retail networks for transit fare payment card sale and reload. For agencies interested in eliminating legacy fare payment systems and creating a smart card payment infrastructure, the success of the retail sales network has been essential to creating public acceptance of the smart card and comfort among policy boards.
In parallel with the transit industry’s move to smart card-based AFC systems, the financial payments industry has moved forward with new products that could offer an alternative to the traditional transit approach for serving the unbanked and underbanked consumers. Network-branded prepaid cards are now available that serve the unbanked segment of the population. Retail stores now offer many different prepaid card types and are devoting considerable shelf space to these products. Combined with the increasing use of prepaid cards to distribute federal and state benefits, these products can reach many segments of the unbanked market.
In addition, the financial industry now offers standards-based contactless credit and debit payment cards, which are a better match to transit’s requirements for fast, reliable movement of riders through the system.
Transit agencies could partner with a prepaid card program manager to provide prepaid cards to the agency’s unbanked ridership. Agencies could also become “program managers” and issue private label cards in conjunction with a bank and a processor. While prepaid cards can support agencies immediately by allowing patrons to purchase transit fare media through ticket vending locations, it is likely to take some time for prepaid card issuers to accept the cost of adding a contactless chip to the card. This migration is likely to parallel the introduction of contactless credit/debit cards. Agencies can encourage this migration by working with banks and state agencies in their area to gain support for conversion at the time they implement programs to accept bank cards.
The simultaneous development of these three types of payment products–smart card-based fare media, network-branded prepaid cards, and contactless credit/debit cards–offers opportunities for convergence and for transit agencies to benefit from programs being implemented in the financial industry. With appropriate thought and planning, agencies can tap into the new channels for prepaid cards to reach the unbanked and lower costs for fare collection systems.
About this White Paper
This white paper was developed by the Smart Card Alliance Transportation Council to provide the transit and financial industries with an educational overview of the various methods available for providing and re-loading fare media to individuals who do not have credit or debit cards, nor checking or savings accounts, and generally lack relationships with traditional banking institutions. The white paper answers the following questions:
- What is the size of the unbanked market and what tools are available for transit agencies to determine the number of unbanked and underbanked consumers in their geographic region?
- How do transit agencies serve the unbanked rider now? What have transit agencies learned from implementing retail sales networks to support transit product sale and reload for unbanked riders?
- What are network-branded prepaid cards and how are programs implemented? How do prepaid cards differ from credit and debit cards?
- What approaches could a transit agency use to work with the financial industry to offer prepaid cards to unbanked riders?
The white paper includes case study data from the San Francisco Bay Area TransLink and the WMATA SmarTrip programs and details of the business structure and economics of prepaid card programs.
About the Smart Card Alliance Transportation Council
The Transportation Council is one of several Smart Card Alliance Technology and Industry Councils, focused groups within the overall structure of the Alliance. These councils have been created to foster increased industry collaboration within a specified industry or market segment and produce tangible results, speeding smart card adoption and industry growth.
The Transportation Council is focused on promoting the adoption of interoperable contactless smart card payment systems for transit and other transportation services. Formed in association with the American Public Transportation Association (APTA), the Council is engaged in projects that support applications of smart card use. The overall goal of the Transportation Council is to help accelerate the deployment of standards-based smart card payment programs within the transportation industry
The Transportation Council includes participants from across the smart card and transportation industry and is managed by a steering committee that includes a broad spectrum of industry leaders.
Transportation Council participation is open to any Smart Card Alliance member who wishes to contribute to the Council projects. Additional information about the Transportation Council can be found at /activities-councils-transportation.