Open Bank Card Payments for Transitd3nrwezfchbhhm.cloudfront.net/media/open_payments_transit_2011/07.pdf · for Open Bank Card Payments Jerry Kane Senior Project Planner SEPTA Open

Property of the Smart Card Alliance © 2011

Building a Business Model and Business Case for Open Bank Card Payments

  Jerry Kane   Senior Project Planner   SEPTA

Open Bank Card Payments for Transit A Smart Card Alliance Educational Institute Workshop

2011 Mobile and Transit Payments Summit Marriott City Center Hotel, Salt Lake City, UT ― February 15-18, 2011

  Willy Dommen   Senior Associate   Booz Allen Hamilton


Agenda

  Introduction

 Business Case Framework

 Business Model

 Case Studies

 Conclusion


Motivation for Fare Payment Project

 Current system nearing the end of its useful life

 Current system is costly to maintain

 Current system subject to fraud and leakage


Motivation, continued…

 Regional Fare Coordination

 Desire to explore new fare payment alternatives:  Reduce payment complexity   Improve customer service  Attract new customers


Business Model  Provides a tool to assess

operating and capital costs of alternative systems

 Quantifies specific characteristics, selected options for different scenarios

 Develops forecasts for various scenarios

Business Case  Provides justification for

why a project should be under taken

 Verifies how a project will further one of more of an agency’s underlying goals

Versus

Understanding the difference between…


Return on Investment

Business Case

Improved Customer Service

$ ROI

Political Agenda

Fare Equity

Regulatory Compliance

Business Case may consider more factors than ROI


Agenda

  Introduction


 Business Model

 Case Studies

 Conclusion


Objectives for Developing the Business Case

 Organize thoughts and knowledge about a potential project

 Consider potential drawbacks and flesh out missing information with further research

 Pinpoint the key pluses and minuses of a project, and develop a stronger ability to communicate


Objectives for Business Case, continued…

 Develop a financial/non-financial justification for a project

 Build teams familiarity with a project’s main points even before it is approved


Building the Business Case

 Focuses on the whole process instead of individual activities

 Takes a “clean sheet approach”

 Strives for improvements across all functions

 Avoids defending old internal and external organizational relationships

 Continuously evaluates the impact of open payment media on the fare payment process


Characteristics of a business case

 Thorough and complete following a proven framework

 Clearly delineated options and scenarios

 Structured and methodical analysis

 Conclusions independently verified


Business Case Framework

Approach to New Business Case©

Identify Internal

Capabilities

Develop Baseline

Set A Goal

Identify Fare Payment

Processes


Framework Continued...

Profile each Fare Payment

Process

Set Priorities For

Implementation

Formalize And Initiate

Implementation Plan

Monitor Implementation

Process

Develop “To be” Process

Identify Gaps between” as is” and “to

be”


Document Existing Conditions

Identify Fare Payment Processes Develop Baseline Identify Internal

Capabilities

 Core Resources

 Infrastructure

 IT Systems

 Stakeholders

 Degree of impact on overall fare payment of each process

 Stakeholder impact on fare payment process  Internal  External

 Starting point  Time  Cost  Quality

 Size of issues

 Stakeholder vision

 Implementation barriers


Developing Baseline, example Current System

AFC Equipment Configuration •  3724 validator/turnstiles •  5711 fare boxes

POS Equipment Volume •  1628 Vending Machines •  596 Express Machines

Media Breakdown • Mag stripe Card: 170 million (90% of fares paid

using mag stripe card) • Single Ride:48 million

Payment Method • Mag Stripe Card: 55% by credit/debit • Single Ride: cash only • Bus cash sales

Transaction Fee Structure •  1.9% + $.10 per transaction • Average Transaction $25

Merchant Sales Baseline


Baseline, example

Distribution Channel Operating Cost Percentage

Sales Agents $2.7 M 60%

Vending Machines $1.22M 27%

Retail $0.45M 10%

Mail/Web $0.13M 3%

Total $4.5M 100%


Baseline, example


Establish future state of fare payment

Identify Gaps between “as is” and “to be” Develop “to be” Profile each

Process

 Actives for each

process

 Impact of activities on

cost and service levels

 Resource

requirements

 Organizational changes

 Operational changes

 Stakeholder impacts

 Tangible improvements

 Consistent with goals

of stakeholders

 Industry benchmarks


Sample process profile tool


Program implementation

Monitor Implementation Process

Initiate Implementation Process

Develop Implementation Plan

 Detailed requirements

gathering

 Acquisition process

 Design Development

 Deployment

 Organizational support

 Customer response

 System Performance

 Adjustments to system

 Communication strategy

 Assign responsibilities

 Schedule Budget

 Performance measures


Agenda

  Introduction


 Business Model

 Case Studies

 Conclusion


Key Components of Cost Model

Value proposi-

tion Open Payment

Distribution costs

Operation costs

80-85%

Optimisation of sales process

Reduction of points of sale

Reduction of Ticket vending

machines

Reduction of forged tickets

Revenue increase

Operating Cost reduction

Optimisation of Resource

employment

15-20%

~30%

~50%

~50%

 Customer Service/sales via internet

 Paperless ticketing  Reduction of cash-handling

 Consulting/sales via internet  Call center/customer support

(Banking Model)  Reduction of maintenance and

field service  Costs of investment

 Analysis of utilisation data  Assessing/planning train

utilisation

Stored Value Float

 Return of credit balance on card

~50%

Potential


Sample Fare Payment Model

 Developed with Smart Card Alliance White Paper

  Allows you to build out fare payment options and compare costs over project lifecycle

 Measures project cost performance based on:  Net Present Value  Cost Per Dollar of Collected Revenue


Staffing Work Sheet Alternative Title Head

Count Year Year Year Year

1 2 3 4

Present Administration 10 551,718 568,270 585,318 602,877

System Revenue Transportation 35 1,403,149 1,445,243 1,488,601 1,533,259

Revenue Services 55 1,681,134 1,731,568 1,783,515 1,837,021

Revenue Audit 10 297,804 306,738 315,940 325,418

Revenue Equipment 62 2,704,909 2,786,056 2,869,638 2,955,727


Year Year Year

Alternative Capital/ Operating Type of Fare Media 1 2 3

Baseline 1 Operating Magnetic Passes 1,000,000 1,122,267 1,122,267 RR Paper Tickets 150,000 158,900 158,900 Paper Transfers 35,000 33,369 33,369 Paper day passes 6,000 6,356 6,356 Bank Fees-Expenses 750,000 750,000 750,000

Total 1,941,000 2,070,892 1,320,892

Total future cost 1,941,000 2,197,009 1,443,374

Total present cost 1,941,000 1,955,330 1,211,885

Fare Media Work Sheet


Agenda

  Introduction


 Business Model

 Case Studies

 Conclusion


Case Study 1, Conversion to Contactless Bank Card

 Current system: Magnetic stripe plastic media

 Equipment status: Nearing end of useful life

 Business requirement: Equal to or lower operating cost

 Transit System type: Multi-modal, multi-operator regional operations


The business model assumes the following features

Magnetic Stripe Contactless Card

Fare Media Cost $0.004 (Single Ride - paper) $0.08 (MagCard - plastic)

$0 ($3 incurred by card issuer)

Average re-use single use (paper) 100 uses (plastic)

5,000 uses

Reliability Low High

Read-writer Cost $2,300 - $3,100 $1,500

Speed per transaction 2-4 s >300 ms

Ease of customer use Need to insert or swipe Read through wallet

Maintenance Requirements Readers require daily cleaning Minimal mechanical wear

Sales Payment in advance Payment on open system


Investment for contactless open payment infrastructure

 Equipment Investment – An investment of approximately $140 million in AFC equipment is required in order to achieve the operational savings  Agency’s budget for upgrading AFC equipment may be applied

toward purchasing smart-card enabled equipment  Agency’s budget for replacing High Production Encoding

Machines would be reduced in proportion to the reduction in MagCard sales


Scenario MagCard Credit/Debit to

Contact-less MagCard Cash to

Contact-less Single Ride Paper

to Contact-less Bus Cash to Contact-less

Total Operating Costs ($1,000)

1 Current System $166,190

2 10% 10% 5% 10% $156,556

3 20% 20% 10% 20% $150,100

4 30% 20% 15% 30% $145,135

5 40% 20% 20% 30% $140,416

6 50% 20% 20% 30% $136,942

7 60% 20% 20% 30% $133,467

Annual operational cost savings may be realized


Initial projections indicate a business case for open payment cards

 Annualized Cost Savings – Annual savings of approximately $16 million may be realized at a 20% market penetration rate of contactless open payment cards  The largest savings result from reduced card management  Savings are distributed in small amounts across several

components, but accumulate to offset increased transaction fees and reduced float revenue


Case Study 2, Gating Rail System

 Proof of payment environment

 Fare Inspection by Sheriffs Department

 Multi-modal regional systems continues to add and extend lines

 Smart card fare media operational


The following gating scenarios were analyzed in detail

Implementation Scenario Physical Gating Strategy

Number of Gates

Passengers Checked at Gates

During Their Journey

Option 1 Red Line only 154 gates 59%

Option 2 Red and Green Line, and strategic light rail stations

275 gates 84%

Option 3 All Metro Stations, not architecturally constrained 394 gates 98%

  All fare media will be based on contactless smart card technology   For those stations where a physical barrier is not installed, a single tap-on validator or

a series of tap-on validators will be strategically placed so that passengers can validate their fare media


Business case is based on reducing fare inspectors and improving fare evasion rates

Option 1 Red line only

Option 2 Red & Green Lines

Option 3 All Metro Stations

Direct capital cost – ONE TIME

Equipment Civil Station Modifications*

$9 million $12.4 million

$15.3 million

$30.9 million

$18.4 million $46.4 million

Net Change in Annual Operating Costs

Maintenance Police patrolling, fare inspection Customer Service

$0.5 million $1.4 million $0.5

million

$1.0 million $2.4 million $0.7

million

$1.2 million $2.8 million $1.1 million

Annual Benefits Contracted civilian inspectors Reduced fare evasion

($7.06) million ($2.7)

million

($7.06) million ($3.8) million

($7.06) million ($4.5) million

Net Decrease Annual Cost ($7.30) million ($6.77) million ($6.47) million * includes 30% contingency


Agenda

  Introduction


 Business Model

 Case Studies

 Conclusion


Characteristics of a business case

 Thorough and complete following a proven framework

 Clearly delineated options and scenarios

 Structured and methodical analysis

 Conclusions independently verified


Building the Business Case

 Focuses on the whole process instead of individual activities

 Takes a “clean sheet approach”

 Strives for improvements across all functions

 Avoids defending old internal and external organizational relationships

 Continuously evaluates the impact of open payment media on the fare payment process


 Smart Card Alliance  191 Clarksville Rd. · Princeton Junction, NJ 08550 · (800) 556-6828  www.smartcardalliance.org

Speaker Contact Information

Willy Dommen

Booz | Allen | Hamilton

Tel (415) 281-4927 [email protected]

Jerry Kane

Tel. 215-580-7151

[email protected]

Documents

Open Bank Card Payments for Transitd3nrwezfchbhhm.cloudfront.net/media/open_payments_transit_2011/07.pdf · for Open Bank Card Payments Jerry Kane Senior Project Planner SEPTA Open