Open-loop payments have become the default for many transit services in many cities across the world. Cards, digital wallets, and smartwatches promise ultimate flexibility.
No doubt, they do bring benefits, but the truth is that focusing only on open-loop payments comes with blind spots.
Things like fare capping, loyalty rewards, user-level insights, and offline functionality—all of these are harder to deliver through purely open-loop infrastructure.
In this blog, you will learn why placing all bets on open-loop payments for transit fares might limit what your system can achieve and why a hybrid strategy that includes a closed-loop auto fare collection option may better serve your riders and your operations.
Why open-loop payments became common in public transportation
Open-loop fare payments gained popularity for a simple reason: they made public transit more accessible to regular and casual riders.
With support for EMV-based bank cards and digital wallets, these systems let passengers tap in with whatever’s already in their pocket. There’s no need to carry a dedicated transit card.
That’s a major convenience for tourists, first-time riders, and anyone who prefers not to deal with physical tickets or cash.
Besides, it also lowers friction at the point of entry. And for transit operators like you, open-loop fare collection reduces the complexity of fare payments.
No doubt, this model works well for certain segments of riders. But it doesn’t account for everything a transit operator needs, especially in the long run.
Four limitations of relying solely on open-loop payments
The flexibility and convenience of open-loop payments are real, but they come with some limitations as well.
And when transit agencies rely exclusively on this model, they may miss out on important levers for growth and operational efficiency.
1. Loss of direct customer relationships
Open-loop payment systems treat every passenger as a transaction.
It’s because payments go through third-party networks. Operators like you don’t have access to the full picture of rider behavior.
And there’s no way to gather meaningful data, personalize the experience, or incentivize loyalty. Every tap is just another anonymous payment.
This makes it difficult to identify high-value riders, offer tailored passes, or build recurring usage through perks and rewards. The relationship remains shallow, and the potential for long-term engagement is left on the table.
2. Higher transaction and processing fees
Every open-loop transaction incurs a fee that flows to third-party providers (banks, card issuers, and payment networks).
It’s a small cut for every transaction, but it adds up. And the amount can be significant because public transit usually has thousands of riders each day.
Operators like you may not feel it on a per-ride basis, but over months or years, these fees become a significant operating cost.
3. Limited flexibility with fare models and discounts
Open-loop payment systems are built for simplicity. But that simplicity comes at a cost. How?
Because it becomes difficult to design fare strategies that go beyond pay-as-you-go. Capped fares, regional passes, loyalty incentives, or bundling services (like transit + parking + food) are much harder to implement.
That means transit operators like you lose the freedom to create pricing models that could drive more consistent usage.
Nowadays, public transport is facing severe competition from ride-share, scooters, and other private services. So when you can’t tailor fares to different user groups, then it’s a missed opportunity.
4. Dependency on external tech infrastructure
With open-loop payments, you are tied to external banking and payment networks.
That means uptime, data rules, and system changes are outside of your control. If a network goes down or changes its policies, you are left scrambling.
And any improvements or innovations have to align with external roadmaps, which means your services’ ability to adapt or evolve is dependent on third-party providers.
What a closed-loop automated fare collection system brings to the table
Closed-loop systems are not a replacement for open-loop. They’re a strategic complement. They fill in the gaps and unlock advantages that a pure open-loop model simply can’t offer.
1. Full control over fare structures and incentives
With closed-loop automatic fare collection, you can have full autonomy over pricing models.
You can set:
- Fare caps
- Zone-based pricing
- Off-peak discounts
- Subscription models without restrictions
- And much more…
Apart from that, you can bundle services—parking, bikes, transit—into one pass. And because you own the platform, you can update or test new incentives on your timeline.
This flexibility is especially valuable for high-frequency riders, commuters, and multi-modal users who want more value from regular transit use.
2. Lower operating costs in the long run
Automated fare collection with a closed-loop payment system reduces reliance on third-party processors.
As opposed to closed-loop fare payments, with these systems, fare payments won’t need to go through card or band networks.
This allows you to save on transaction fees. Plus, backend processes are simplified, and the cost per rider becomes more predictable over time. There may be upfront investment, but the long-term operational savings are substantial.
3. Direct access to ridership data
When the payment system is owned and operated by you, all usage data flows back to you.
That means you can track how, when, and where people travel. This insight is crucial for:
1. Demand forecasting
2. Route optimization
3. Personalized services.
You can even enable account-based loyalty programs or feedback loops to improve customer satisfaction and retention.
It’s a direct channel to understand and improve the rider experience—something you simply don’t get with open-loop payments.
4. Seamless integration with other services
A closed-loop card or app isn’t just for fare collection; it can become a central hub for urban mobility.
Whether it’s public bike rentals, parking garages, or event access, a unified payment solution for all these services creates a better user experience.
It allows people to manage multiple services through a single platform, and operators like you can coordinate offerings to boost usage across the board.
This integration lays the foundation for a smart and connected city.
Open vs closed-loop: Why it’s not an either/or decision
The thing is that both open-loop and closed-loop payments have some really cool benefits. On the contrary, they both have some drawbacks as well.
So, to get the best of both these systems, the best thing for operators like you is to embrace a hybrid model.
Why hybrid payment models are ideal
Major cities like London, Singapore, and Sydney have adopted systems that allow both open-loop and closed-loop payments.
That basically means that everyone, from regular users and tourists to occasional riders, benefits from the ease of tapping a bank card for fare payments.
Meanwhile, most frequent commuters get more value and benefits from using a smart transit card or app.
The hybrid approach increases accessibility without giving up control or insight.
Tailor fare strategies based on rider segments
Every public transit network serves a wide range of users. And these users are based at different locations.
By segmenting based on usage frequency, travel patterns, or multi-modal needs, you can provide different offers or subscriptions for different groups with closed-loop AFC systems.
Open-loop works well for infrequent riders. Closed-loop systems serve as a high-value channel for recurring users. These users generate consistent revenue and benefit most from loyalty programs or bundled services.
So, when you introduce closed-loop fare payments, then it’s likely that the most frequent users will be compelled to use that because of the benefits and value.
Final thoughts: Rethinking fare strategy for the long term
Open-loop fare collection has clear benefits, but it’s not the full answer.
If you rely on it exclusively, then you risk missing out on deeper engagement, cost efficiency, and strategic flexibility.
Closed-loop payment solutions don’t just enable fast and reliable transactions; they create opportunities for long-term growth, stronger rider relationships, and a more resilient payment network.
If you are looking to enhance fare collection without replacing your current system, a closed-loop AFC model might be the missing piece.
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