Open payments will bankrupt public transit and it’s still a good idea

Indulge me with a personal story.

I found myself coming home from the library in the middle of the day during my week of unemployment (#humblebrag). I timed my exit to catch the bus so I could avoid the mile walk home. I got to the bus stop. And I realized I had no way to get on. Yes I had a credit card. I even had a CharlieCard. In theory I could change my American dollars to the MBTA fiat currency. But I didn’t have any cash. And the nearest fare vending machine was 3/4 of a mile away in the wrong direction. I walked.

Let’s recap the story. I wanted to pay — but I couldn’t because the only place to pay was the bus, and it only takes cash.

Purchasing a ticket on public transit in most North American cities is a “less than ideal” experience.

Even if you’re in a place that does accept your credit card, you’re stuck putting it in a weird vending machine that changes your money into the money that the transit agency accepts. The number one question any public transit employee gets is “how the [insert expletive of choice] do you use this thing?” I am convinced there is no such thing as a usable ticket vending machine for someone who hasn’t used it many times before.

So, how do customers deal with this problem?

If they’re lucky they get a monthly pass from an employer and never think about it again. Everyone else does everything they can to avoid the problem I found myself in— stuck waiting for a bus they can’t get on. Or loading dollars into a vending machine for a train that is fast closing its doors.

How do they do it? They buy monthly passes, maybe even ones that auto-reload. Not because they use all the value every month, but for the convenience of never thinking about payment.

Depending on the system, the ratio between the single fare and the monthly pass cost, and the phase of the moon, something between 40% and 50% of people in a given month lose the bet on a monthly pass. They would have been better off, on a purely monetary basis, buying single rides.

Thanks @fruminator for this decades old cumulative distribution function (CDF) of the spend (in London) on monthly passes [the red line is break even]

Are all those people stupid?

Or making bad calculations? Overestimating their use of public transit? Or just like the vanity of having a monthly pass because all the hipsters are doing it? If they were, you’d expect this ratio to change over time — more people catching on that single tickets beat out monthly passes. Or at least to see a discontinuity around the pass price in the CDF. You don’t. Why?

These people are making perfectly rational decisions. The regret model of having to spend that time or think about whether there is enough money to take the trip is not worth it. Public transit is valuable when it is ubiquitous. When it is an act that doesn’t require additional challenges to merely pay a few bucks (there are enough challenges already). Habitual riders make rational decisions to spend more money than strictly necessary in order to avoid using fare vending machines.

So what’s the problem?

Transit agencies have finally wised up to the fact that their payment systems get in the way of people riding. They (Chicago, Boston, Philly, New York to name 4 in the US) are moving or have moved to systems where you can use contactless credit cards or mobile wallets to pay directly at the gate or farebox without buying a fare card. This is a great boon to customers. It’s the right thing to do. It’s going to mean a major hit to agencies revenue.

Let’s say a one way fare costs $2 and a monthly pass costs $80. If I take 40 rides a month it’s a good deal, otherwise I should pay as I go. Now let’s say I know I only take 30 rides right now, but I’m still buying a pass (sometimes I use it more, sometimes less). Look at that graph above — that might be 30%+ of monthly pass users. From the agency’s side, they are getting $2.67/ride rather than $2. A good deal for the agency.

Now the agency introduces open payments. I can tap my phone or wallet and never visit a vending machine again. What do you think I do? I stop buying a monthly pass. With the (much much better) user experience I also save $20/month. I won twice. Except the agencies revenues just cratered. If monthly passes make up 50% of revenue, and 30% of passholders are in the situation described above, I just saw my revenues drop by 4% by making it easier for customers to pay.*

Are agencies stupid?

If they are thinking about it, here is why they are making this change anyway.

  1. They expect ridership to increase. Not that it’s all about me, but I was looking to take the bus, and I couldn’t because of the fare payment system. How large is this effect? I dunno.
  2. Digital proof of payment. In Boston, the MBTA is moving to all-door boarding everywhere and moving cash payments from on-board the bus to the curb. It’s going to speed up buses. How much? One estimate has up to a 10% increase. If that’s true, with an annual operating budget for bus at $300m that could mean the equivalent of adding $30m in service. How much is a 4% drop in revenue? $25m. By going all digital whether you pay with your phone, a credit card, or an MBTA issued fare card, your device is the record of your payment. Simple.
  3. The future. Putting themselves in the mainstream of payments, and using the card network “rails” and standards may mean delaying or preventing these massive investments every decade or two in fare systems.
  4. Or maybe just because they started using the system themself and saw how much easier it could be. (I can vouch for this one)

I am looking forward to never using a vending machine to purchase a transit fare again. And I’m glad agencies understand that part of their mission is to make the payment systems disappear in order to improve the overall experience of riding public transit. Even if it might reduce revenue. That’s not what they should optimize for. Here’s to doing the right thing in the public interest.

*Why hasn’t that happened in Chicago yet? “Luck ” — no adoption of contactless cards and a cumbersome fingerprint process with Apple Pay — but there are signs those are changing fast.