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By Shashi Verma, Director of Strategy and Chief Technology Officer, Transport for London
Our development of contactless payments didn’t begin with the technology, it began with a question: Why do we have to sell tickets? Why is it that transit agencies sell tickets and Starbucks doesn’t?
The origin of selling tickets for public transportation goes back to the middle of the 19th century. Before then, fares were collected in cash. You would board your coach, pay the conductor, and that was the end of it. The problem with cash collection was not so much fare evasion as that a lot of the money was getting pocketed by the conductor and the driver, which threatened the viability of the transport system.
Selling tickets not only solved this problem but led to all sorts of clever deals: weekly passes, monthly passes, tickets that gave you not just transportation but also access to attractions, such as the zoo. It also created a whole industry around ticketing.
In the modern era, starting in 1965, we went from cardboard tickets to tickets with a magnetic stripe that could open and close the gates automatically. Then in 2003 we introduced the Oyster Card, an electronic smartcard that allowed users to buy and store credit for numerous trips and recharge the card when necessary, eliminating the need to purchase a new ticket for each trip.
The Oyster Card was immensely successful and popular (and technically contactless), But, it still required people to change their money for ours in order to travel. Given how much it cost us to process these payments, could we find a way for people to pay for transport without our having to sell tickets?
In retrospect, the solution was blindingly obvious: If you could allow people to pay for travel with their credit or debit card, we wouldn’t have to sell tickets and our problem would be solved. The problem was the customer experience of using a credit card or debit card to make micropayments. If you buy a bottle of soda or a newspaper or a bus ticket, you want that transaction to be quick. You don’t want there to be a gap in time during which you are fiddling around with your PIN number or a signature. We somehow needed to make the payment experience of using a credit card to pay your fare so seamless that people would compare it to the experience of using an Oyster Card.
So how could we make credit cards fast enough to be used in our setting? And the answer to that, again, was obvious: Add the Oyster Card’s contactless functionality to your credit card.
First, we had to rewrite the whole chip and PIN standards to make them suitable for contactless credit card payments. That was quite a big exercise by itself. Visa and Mastercard, being two different companies, don’t coordinate their standards with each other, so we were intermediaries between them to make sure that the standards remained aligned. A whole set of security standards and a whole commercial set of standards had to be developed, so that cards could be accepted everywhere in the world.
This project took a long time. We first conceived of the idea of contactless payment at the end of 2006. And the system went live at the end of 2012. About 18 months of that time was due to a slowdown in the payments industry following the financial crisis, but even so, it was a complicated project. This was completely new technology for which no standards existed, and to get it to work in London, we had to develop a global standard.
Of course, we did all of this in collaboration with the payments industry. But for our leadership, however, I doubt contactless payments would have taken off so quickly. We were able to help the payment providers coordinate their standards while giving them a tremendous incentive to adopt – that is, a massive market for the service from Day One.
Looking back, a few things I already knew became even clearer to me in the course of this project.
First, I realized that whether the goal is greater efficiency or a new product, you’ve got to be clear about the business problem you are trying to solve, and then find the right technology to solve it, not the other way around.
The other thing I realized even more was that business change is complicated. People focus on technological change, but business change can be just as complicated. You need to keep your eye on both.
Finally, I had a deeper awareness that keeping the users’ perspective in mind end-to-end is really, really, really important. You won’t find a negative news story about contactless because the launch was so smooth that nobody could find anything wrong with it. That took a huge amount of consideration with respect to how the system is designed, and how the launch preparation was handled.
In the last 12 or 13 years since we’ve been on this path, our cost of revenue collection has dropped from 15% of revenue to about 8% of revenue. The total savings for us as a result of contactless and other operational innovations is on the order of nearly £300 million per annum.
Today, TfL collects about £8 million a day through contactless payments. The UK overall probably takes in about 7 billion pounds through contactless payments per month. And worldwide, the numbers are probably $40-$50 billion per month. Driving change on this scale is not easy. But I think we have demonstrated that it’s possible.
Ask fundamental questions about why you do things. Disruptive innovation begins with a disruptive question.
Begin with the business. It’s important to begin not with the technology but the business rationale for any technology project you undertake.
Think about the customer. Many ideas go wrong because people don’t think enough about the customers’ requirements.