INNOVATIVE CREDIT CARD MICROPAYMENTS FOR THE KOREAN METROPOLITAN

UNIFIED FARE SYSTEM

In many Asian countries, daily commuters often use a combination of public trains and buses to travel to
and from work, necessitating the use of a combination of stored-value or regular credit cards for each mode.
This was the situation facing commuters in Seoul, Korea, a few years ago. As the details of this case explain,
the eventual solution was the creation of a unified transportation smart card.

The Problem

Boram, a banker in Seoul, Korea, commutes by MRT and public buses. She uses a credit card that allows her
to pay for both MRT and buses, not only in Seoul but also in other major Korean cities without having to
recharge the card. The accumulated monthly charges are automatically paid by her bank. Boram recalls the
days when she had to carry two different transportation cards in addition to credit cards.

In the past, Boram used to pay for the subway by using a Seoul MRT Card, which is a stored-value card. The
card is issued by the city-owned Seoul MRT Corporation and could be recharged only at MRT stations. To
ride a bus, she had to use a Seoul Bus Card that is another stored-value card issued by the private Seoul Bus
Transport Association (SBTA). The Seoul Bus Card was introduced in 1996 as the first RF-type bus card in
the world. Thus, she had to recharge both cards individually because they could not be used
interchangeably. Other cities have similar governance structures. Therefore, to take the subway in another
city, Boram had to buy one-time subway tickets at the subway station.

Credit cards, as described in this chapter, are not cost-effective enough to be used for the micropayment of
transportation because the card company could not justify its service fee. Therefore, as described earlier,
Boram needed to carry at least one credit card and two transportation cards in her wallet.

Large cities in Asia such as Seoul, Hong Kong, and Singapore have adopted similar types of stored-value
transportation cards. As such, credit cards and stored-value cards coexist as two major card services. The
two types of card issuers compete to expand their application territory. The transportation card company
wants to extend the card’s application so users can pay for parking fees, for various toll fees, and at
restaurants and stores. However, the users have to load the cards for prepayment.

At the same time, for credit card issuers to expand their application to include payments for transportation,
they need to simplify the authorization process and reduce the service fee for the participating transporters.
The question is: which business model will eventually win? In Seoul, it is the credit card issuer that includes
payments for transportation.

The Solution

In order to pay transportation fares quickly, credit card payments for subways and buses must be processed
without the full authorization procedure. This risk is tolerable because the frequency and amount of
micropayment abuse is low in Korea. Therefore, the transportation ticket gate merely automatically checks
whether the card is valid and not on a “blacklist.” The gate displays not only the fare but also the charges
incurred during the current month as shown in Fig. below. The first credit- based MRT card was adopted by
Kookmin Bank in 1998. Today, several issuers support this type of card.
The credit-based transportation card has revolutionized the recharge service process. In the early stage,
both MRT cards and bus cards had to be recharged at manned booths. To reduce the expense of the recharge
service, unmanned booths were installed at MRT stations. However, with the credit card, recharge booths
can be eliminated altogether, and users do not have to spend time recharging their cards. Therefore, both
the users and the city transportation authority benefit.

Another benefit of the smart transportation card is that it can restructure the city’s transportation system
by aligning and coordinating the routes of subways and buses. In the past, bus routes were designed in
consideration of the departure and destination points of citizens’ trips. This approach intended to make it
convenient for citizens to take only one bus to reach their destination. However, too many buses created
bottlenecks in busy streets, causing traffic jams. To avoid such congestion, the MRT and main bus companies
planned to design the transportation system so that bus branch routes are connected to the subway and to
the main bus routes. However, if citizens are required to pay an additional fee for branch routes, they may
resist the new structure. Therefore, the transportation fare card should be interconnected.

To solve this problem, the transportation card, credit or stored-value, is designed to memorize the
departure time from the MRT station so that the connecting buses do not charge passengers again if the
elapsed time is less than 30 min. Taking a branch bus is regarded as a transfer for single trip. This means
that the owners of transport systems need to agree on about how to allocate the collected fees. Therefore,
the city of Seoul adopted the Metropolitan Unified Fare System in 2009.

The Results

Due to the national standardization and integration effort, nationwide transportation cards are now unified
using smart cards. Credit card companies do not really make enough money through transportation
payment services, but this service is essential for them to gain new customers and retain the existing ones.
The city also can collect data about commuters so that additional buses can be dispatched depending upon
the passenger load by route and time. Note that, at midnight, regular bus services stop. For midnight bus
service, the control center analyzes the frequency of mobile phone usage in certain areas to estimate the
number of potential commuters and dynamically determine the routes of midnight buses.

Another lesson that can be learned from Korea’s experience is the C2C payment system use of credit cards.
In C2C auction markets, escrow services that are based on credit cards allow individual buyers to pay eBay
Korea directly. The sellers can receive payment through eBay Korea if delivery is confirmed by the buyer.
Therefore, there is no need for an e-mail payment system such as PayPal that charges high service fees. The
function of a debit card, combined with a credit card, has also virtually replaced the function of electronic
checks, so e-checks are no longer needed. In this manner, payments by credit cards in Korea are
electronically integrated for e-commerce, physical stores, and micropayments for transportation.

Sources: Case written by Jae K. Lee, Seoul, Korea.

Questions for the Case

1. How can credit cards be processed as quickly as stored-value cards at the ticket gate?
2. What is the major benefit of owning a credit-based transportation card for commuters?
3. What is the major benefit of credit-based transportation cards to the city government?
4. How can the Metropolitan Unified Fare System enable the restructuring of public transportation
infrastructure?