Replacement for Coins, or More?
By John Regan
For years, the parking industry has offered smart cards as an alternative to feeding meters. But these programs haven’t done very well, because of the premise that smart cards are nothing more than a replacement for coins.
For smart cards to have wide adoption, they must be truly smart: They need to be a credit mechanism, not just debit, and need to include a high level of security, effective distribution channels and marketing strategies to entice customers. The technology to achieve all that is ready for prime time and should be activated.
Most municipal governments haven’t been in the business of operating large consumer product initiatives. But in today’s recession, governments are responsible for stimulating the economy. Leveraging card payment solutions is an extremely cost-effective way to build revenue and encourage consumer spending. It is good local economic development without a price tag.
The act of consumer spending starts with parking the car. That’s the trigger point of sale: If a shopping district is easy to park in, consumers will be enticed. So this point of sale is where the strategy and technological feature-set must come into play.
To deploy a robust consumer spending initiative, municipalities need to understand the features and potential of existing card technologies, including memory, e-Purse, bank-issued credit and debit, and contactless card solutions – all in the context of parking technology.
Memory cards provide rudimentary, challenge-based security features. In a parking application, this typically means an amount of “parking time value” remaining on the card. Memory cards are technologically limited in terms of utility and weak cryptography, which doesn’t meet the increasingly rigorous banking standards for payment. There also are distribution and marketing problems. Even if the card can be used in different proprietary meters, it can’t be used in a parking garage or in neighboring towns, and there’s no convenient way for consumers to obtain and reload a card. The whole system discourages user adoption.
E-Purses, designed to meet banking standards for payment, are far more secure and flexible than memory cards. The catch is that they require purchasing more expensive multiprocessor-based-cards, and a secure access module (SAM) to be installed in the payment device. The SAM contains security keys to ensure the authenticity, integrity and security of every transaction in an e-Purse payment system.
Despite some initial investment, e-Purses have limitless use potential. The return on investment occurs quickly, because there’s very low operating overhead. Also, e-Purses are designed for general payments regardless of location or items being purchased.
Additionally, 3DES e-Purse systems have not been hacked. Symantec research documents millions of accounts being compromised in 2008 in a continuously shifting threat landscape; however, not one e-Purse using 3DES security has been compromised. The trade-off is that municipalities must be prepared to incorporate a check-and-balance system with e-Purses, which requires a trusted third-party administrator.
An estimated 75% percent of the U.S. population carries a credit or debit card, according to www.creditcards.com.
Without question, credit and debit cards have increased the value of a transaction at parking meters and are clearly convenient to consumers. Many cities cite increases of 30% to 35% in their card-based transactions. Although similar increases have been documented with prepaid stored-value programs, there is no additional cost to the operator to market or distribute credit or debit cards. And as on-street parking costs increase, these cards are ideally suited to purchases over $5.
Many cities adopting credit/debit are surprised to discover that most of their meters capture only about 50% of their transactions on cards. Payment research suggests that it’s the identity theft issue. Consumers are increasingly concerned about using cards at unattended devices. Despite Payment Card Industry (PCI) success, both credit and debit cards are still prone to having their data skimmed at unattended devices. The crooks simply use a secondary card reader that the consumer is unaware of to gain access. The PCI does not address this issue.
When accepting credit and debit, the operator also must dedicate resources to the management of the program. Accounting, rate structure and dispute issues must be managed. The required communications infrastructure can be costly. Interchange fees must be paid to the card-issuing bank, plus a margin to the merchant acquirer or originating processor of the transactions. These costs can be relatively high for small-dollar transactions, although they become more and more marginal as the average ticket rises above $5.
Payment disputes, or charge-backs, also must be managed, which can cost the operator as much as $25 per dispute. And finally, Visa and MasterCard place liability squarely on the merchant, which in this case is the municipal government.
Despite these new costs to a city for adopting credit and debit, the technology does, and will continue to, play an important role in on-street parking revenue generation.
Contactless cards were originally designed for rapid-transit systems; their “tap-and-go” capability serves the quick throughput requirement of this market. The most well-known examples are the Hong Kong Octopus and London Oyster cards. Fare-payment transactions are required to work in one to three milliseconds. Both the Hong Kong and London cards have been compromised by hackers, despite their success in meeting their primary mission – rapid transit.
About 45,000 merchants accept contactless cards out of a U.S. pool of three million plus. The jury is still out on this product, because the push-and-pull marketing game between the card issuers promoting the technology and the merchant acquirers has barely begun. Why should merchants pay for this new technology when, from their perspective, there is no real benefit?
The challenge for the on-street parking industry is similar. Do contactless cards provide any more value to the parking operator, the cardholder or the municipal government? Since parkers still must get out of their cars and tell the meter how much time they need, tap-and-go convenience and speed do not seem to apply. Furthermore, why should meter vendors and parking operators invest in a technology when the bank issuers and their brands are still not ready to replace their current plastic in the U.S. market?
Given the pros and cons, there certainly is a market for both bank-issued cards as well as regional e-Purse solutions. Notwithstanding the emergence of other wireless payment products, it is clear that these technologies will continue to be significant players in this market.
The memory card never established the foothold its early promise suggested, and it’s a product clearly being overtaken by more capable technology. It also is unclear whether the U.S. will leapfrog contact-based card solutions in favor of contactless, and will likely remain unclear for many years to come.
John Regan is President and CEO of Parcxmart Technologies. He can be reached at firstname.lastname@example.org.
Article Abstract from February, 2009