Open-Loop Systems Help Modernize Transit Payments

Instead, they’re moving toward modernized payments tied to bank-issued contactless cards and digital payments that let riders tap and pay with what they already carry.

Bank-issued contactless cards and digital form factors such as smartphones and wearables are becoming the gateway to buses, subways and trains, reducing friction at the fare gates/turnstiles while modernizing fare collection. Riders already use these same payment methods for everyday purchases, from coffee to groceries, making contactless transit a natural extension of familiar behavior.

Contactless payment adoption has redefined what payments infrastructure means for transit. It’s no longer just about the back-office function to collect fares. The new emphasis is on speed, reliability and risk management in environments where throughput matters as much as security.

Open-loop and closed-loop cards are not competing models in fare collection. They are complementary. Discover® Network delivers a white-labeled contactless closed-loop solution that lets transit agencies and merchants issue proprietary payment cards built on the same EMV technology used for open-loop transactions, bringing bank-level protections to fare programs.

By licensing its cEMV payment application, Discover Network gives operators access to EMV infrastructure for their own closed-loop cards, eliminating the need to build bespoke systems while preserving full control of the customer relationship.

The result is a standardized, secure foundation that streamlines operations, lowers long-term costs and enables closed-loop programs to scale with the reliability and performance of global payment networks.

How Open-Loop Transit Payments Work

Most modern contactless systems are rolling out open-loop payments, meaning they accept the same bank-issued cards and digital wallets that run on global payment networks.

The process is simple. A rider taps their card or phone, the system authenticates the payment method in real time, and the fare is calculated based on the transit agency’s fare rules. Unlike traditional retail, transit environments often rely on deferred authorization.

Network connectivity can be inconsistent in underground stations or moving vehicles, and fare gates must process riders in a fraction of a second to avoid bottlenecks.

In practice, the system has less than 300 milliseconds to respond to a tap, so riders can keep moving. That requirement makes real-time, online authorization impractical at the gate, even though the transaction is ultimately routed through the payment’s ecosystem.

This differs from closed-loop systems, which use agency-issued cards or credentials tied to prepaid balances or proprietary accounts. In those models, the transit authority controls issuance, funding and transaction logic entirely within its own ecosystem.

Open-loop systems shift much of the transaction processing, authorization and risk management to the payment network and issuing banks, while still allowing agencies to define fare policies and rider experiences.

When a rider taps, the card is authenticated offline and checked against deny lists to confirm it remains in good standing. The transaction is then routed through the merchant’s back office to the issuer, where it is evaluated for available funds, account status or potential fraud.

If an issuer later determines that a card is not valid or flags the transaction as fraudulent, the response flows back to the transit operator, who must then immediately add the card to a deny list to prevent further taps. The process allows agencies to identify and stop misuse after the first denial, even in a deferred authorization environment built for speed.

Open-loop models also support first-ride risk management. Transit operators can attempt merchant-initiated recovery for unpaid fares over a defined period, and if those efforts fail, network-supported risk-sharing mechanisms can help cover limited losses. Importantly, not every declined transaction reflects fraud.

Insufficient funds or exceeded limits can trigger the same controls, allowing systems to respond quickly without disrupting legitimate riders, against a backdrop where contactless payments have not led to an increase in fraud, but have helped defend against vulnerabilities tied to transit payments.

Fraud Concerns Follow Every Payment Modality

As with any payment channel, transit payments raise legitimate concerns about fraud. High transaction volumes, low ticket values and rapid throughput create a unique risk environment. Lost or stolen cards, account misuse and attempted fare evasion are realities agencies must address.

Concerns over fraud have hampered procurement decisions in some markets, slowing adoption despite operational benefits.

Why Open Loop Makes Fraud Easier to See and Manage

Open-loop transit payments operate within global payment networks designed to detect anomalies, flag misuse and block compromised credentials quickly. Deny lists, issuer feedback and standardized transaction flows allow unusual patterns to be identified early, often before losses escalate.

The transit solution from Discover Network supports contactless payments, first-ride risk-sharing, which helps protect merchants from losses, and network controls built to support transit fare policies while managing exposure. Because transactions ultimately flow through systems designed for large-scale, real-time monitoring, agencies gain clearer visibility into when and why loss occurs.

Open Loop Helps Control Risk

Open-loop payments do not completely remove fraud risk from transit systems; they give agencies better tools to control it. Deferred authorization supports the speed riders expect, while network rules, deny lists and issuer feedback ensure that invalid or compromised cards are identified quickly.

For transit agencies balancing rider convenience with financial stewardship, that distinction matters. Open-loop systems bring risk into the open, where it can be managed in near real time, rather than hidden inside delayed reconciliation cycles. In terms of supporting this move toward payments modernization, EMV offers a secure infrastructure.

Most agencies are now adopting hybrid models that support both closed-loop and open-loop systems. The same infrastructure can be used for closed-loop systems as well. Ultimately, open-loop and closed-loop are not an either-or choice; they work best together. The result is a blended fare ecosystem that combines the reach of global networks, helping drive the future of fare collection.