GOOD PRACTICE CASE STUDY

The OCTOPUS system – Contactless smart cards in Hong Kong

Demonstration site / Hong Kong
Thematic Area / Integrated Ticketing for PT use and electronic payment
Date of latest update of document / 08.04.03

Table of contents

Key successes

Abstract

Urban profile

Background and objectives

Political and institutional framework

Present stage of implementation

Technical profile of the CSC system

Results and impacts

Lessons learned

Additional information

Bibliography:

1

Key successes

  • The “Octopus system” is a contact-less smart card (CSC) system for the fare payment across all forms of public transport in Hong Kong using one single ticket.
  • With the Octopus contact-less smart card system, Hong Kong has introduced a fast, reliable, cost-effective and convenient method of public transport (PT) fare payment and collection, which brings considerable benefits not only for the PT user but also for the PT operators.
  • The Octopus business has extended from a transport payment system to a general e-payment system for small-value transactions. Octopus is easily the world's most successful experiment to date in stored-value, electronic cash cards.
  • Five competing PT operators created a joint venture company in order to develop and operate a common contact- less smart card system in Hong Kong.

Abstract

The high quality of the PT network of Hong Kong is well known since many years. In order to enhance the attractiveness of PT services a number of PT operators decided to establish a joint venture company (Octopus Cards Limited) in 1994 for the purpose of introducing a fully integrated ticketing system. After a development and trial phase of 3 years, the Octopus smart card system was introduced in 1997, allowing travellers to use six different PT modes with only one single card and eliminating the hassles of finding the exact change for individual journeys. The integrated ticketing system and the contactless smart card have been a big step towards seamless intermodal PT services in Hong Kong.

In 2000 the Octopus system has extended from a transport payment system to a general e-payment system for small-value transactions. Besides its basic function as a means of payment for the use of PT modes, the Octopus card now includes payment applications for parking, vending machines, pay phones, convenience shops, private housing estates, fast food restaurants, leisure facilities. Easy to use and versatile, the Octopus card is rapidly becoming the preferred method of payment for a number of different applications. The fact that the number of Octopus cards as well as transactions that take place each day across the networks of the service providers of the Octopus system has steadily increased over the last years, show the high degree of acceptance of the Octopus system amongst the citizens.

The introduction of the Octopus system in Hong Kong has offered much greater convenience to users and service providers can enjoy its many operational and financial benefits. Some of the major benefits are:

  • Users can easily use the entire PT network and change between modes without thinking of buying new tickets. Cash handling is reduced.
  • Increase in public transport usage and revenue through enhanced user-friendliness of the system. Enhanced corporate image and customer service.
  • Secure, efficient, flexible and reliable means of revenue collection.
  • Provision of a platform for accommodating complex fare collection strategies such as intermodal discounts, loyalty schemes and different fares at different time of the day.
  • More management data on customer profiles and behaviour for service improvement
  • Reduced costs. Reduction of maintenance costs and elimination of card recycling costs. Economies of scale achieved by the sharing of a common system infrastructure by all participating operators

Urban profile

Hong Kong is situated in the southeast coast of China. With around 7 million people living in an area of only 1.100 km² , it houses nearly 7 million people. Being one of the most densely populated cities in the world, Hong Kong is also one of the wealthiest cities. The per capita gross domestic product in 1999 was US$23,000.

As far as transport is concerned, the number of vehicles on roads is about 500.000, representing a very low vehicle ownership for a wealthy city with only 7 vehicles per 100 persons. The total length of road in service is 1.900 km. As a result, the density of vehicle per km road length is extremely high despite a low vehicle ownership. Thus, like all other busy cities, road congestion in peak hours is common. Coupled with strong social and economic activities as well as the provision of an affordable and efficient transport system, a total of 14 million person trips per day are made on various modes of transport. 7% of total person trips rely on cars; 11% on taxis, 15% on minibuses, 30% on railways, 35% on buses, and the remaining 2% on others including ferries. In total, over 80% of all person trips are made by public transport excluding taxis.

Background and objectives

Since 1979, when the Mass Transit Railway Cooperation Limited (MTR) in Hong Kong has been established, magnetic tickets were used as the medium for fare collection. The magnetic plastic cards were principally used for single journey and stored value tickets, operating in an entry/exit controlled (or closed) environment. The

In 1984, the Kowloon-Canton Railway Corporation (KCRC) adopted the same magnetic cards (Common Stored Value Tickets – CSVT) to allow passengers to pay for their journeys. In 1989, the CSVT system was further extended to selected Kowloon Motor Bus (KMB) feeder buses and one Citybus route. In addition, the CSVT was adopted for small scale non-transport applications, such as payments in photobooths and for fast food vouchers. These trials indicated very positive public acceptance and aroused much interest from operators, spanning a diverse range of small value payment applications. However, due to the limited data capacity and unreliability, the magnetic tickets and readers proved to be inadequate for further service improvements. With the increasing complexity of fare tables and discounts, multi-operator use and bonus point schemes, new fare media with enhanced data capacity were required.

In 1993, the MTR took the lead in reviewing its fare collection technology and in devising a future development strategy for the next decade. While the CSVT had been well accepted by the public, it had reached the limits of its development capabilities. Contactless smart card (CSC) technology was subsequently recognised as the most appropriate platform for future systems. The CSC technology incorporates advanced security by virtue of mutual authenticiation processes between cards and readers, employing encrypted security keys, and achieves a typical transaction time of less than 100ms.

In 1994, five major public transport operators namely, the MTR, KCRC, KMB, Citybus and the Hong Kong and Yaumati Ferry (HYF), established a joint venture company, known as "Creative Star Limited" or Octopus Cards Limited (Octopus Cards), to develop and operate a contactless smart card system in order to achieve a fully integrated ticketing system. These five PT operators signed a shareholder agreement with the initial share holding and funding in proportion to current ridership. This kind of agreement was innovative, since traditional competitors were now co-operating with a common interest of better customer service at lower operational costs.

The basic aim of the joint venture company was to introduce the “Octopus system”, which is a use contactless smart card (CSC) system for the fare payment across all forms of public transport. The "contactless" feature means that the user does not need to remove the smart card from his wallet/purse. To use the Octopus, the card holder simply touches the wallet or purse against the fare processor, and in less than 1/3 of a second the transaction is completed. With the CSC technology PT users should be able to travel on buses, trams, ferry, taxis, light rails, metro and commuter trains using one single card eliminating the hassles of finding exact change for individual journeys. However, the integrated ticketing systems was expected not to impose limitations or restrictions on the fare charging methodologies of the Transport Operators, which are not integrated. The Octopus system is designed to provide the individual service providers with comprehensive management information.

At the same time only data relating to the particular service provider is available such that confidential business information of other system users are protected.

The detailed information on passenger usage is retrieved from the individual transaction records. Reports are produced to show the MTR usage for different ticket types by date by time by entry and exit stations. This information is necessary to establish the patronage trends and to optimise revenue through marketing activities and fare changes. Loyalty and repetitive business can be measured by analysing the frequency of use within a given time period based on the transaction history. In the case of the MTR, around 20 daily usage and revenue reports are generated in addition to updating the database from which the long-term trends can be plotted and monitored.

Subject to the data sharing agreement with other participating transport operators, a full history of the whole journey involving various modes of transport can also be traced for planning a direct door-to-door service, a fully co-ordinated transport network and an integrated fare system. The sharing of revenue for an integrated fare system amongst participating operators will also rely on the transaction data.

The travel patterns for the various market segments such as different age groups can be obtained based on the card type and personalised card data. This detailed information is a useful component in formulating the marketing strategies for the various target groups. It is, however, crucial to ensure that the individuals’ privacy would not be violated.

Besides the objective to improve the overall quality of services by establishing a fully integrated ticketing system, the PT operators also had the intention to make their fare collection systems more efficient.

For the Transport Operators, who operated existing automatic fare collection systems (such as the MTR and KCR) the main quantifiable benefits were expected to derive from reduced maintenance of solid state card processing modules over the current magnetic ticket processors, reduced faulty card handling and card recycling costs. In the case of those companies, which previously employed cash based systems such as the bus operators, benefits were identified from reduced cash handling and providing a system platform that could accommodate more complex fare collection strategies such as intermodal through ticketing and distance fares.

In addition to the reasons mentioned above, the following arguments were relevant for opting for an integrated ticketing systems, based on CSC technology:

  • Ability for Operators or Service Providers to reduce the high risk (and cost) of entry into an advanced smart card project without committing high level resources to the design and operation backend card issue and control systems.
  • A high market penetration at least as great as the magnetic Common Stored Value Card (CSVT) which was held by 50% of all adults in Hong Kong. This will also ensure that a critical mass exists from which viable product development, such as personal reader’s etc, can be sustained.
  • The Octopus provides the vehicle for not only collective and individual operators marketing initiatives but also the opportunity for specific alliances between organisations, for example, in establishing intermodal discount between operators, etc.
  • Total flexibility for different revenue charging methodologies to be implemented completely under the control of the respective Operator.
  • It establishes a co-operative framework and focus point in which future developments such as expansion of facilities accepting Octopus on the transport services systems or premises can be discussed and collectively negotiated.
  • Personal preference data carried on the personalised Octopus can be established to enable future systems and equipments to interface more effectively with the needs of people with disabilities.
  • Finally, it provides a technology platform which can in tune with the positive image of continuous improvement of Customer Service to the travelling public of Hong Kong.

Political and institutional framework

“Creative Star Ltd.” (or Octopus Cards Limited), the joint venture company was formed in 1994 to develop and operate a contact- less smart card system in Hong Kong, is jointly owned by five of Hong Kong’s major transport operators including the Mass Transit Railway (MTR), the Kowloon-Canton Railway (KCRC) East and Light Rail Divisions, the Kowloon Motor Bus (KMB), Citybus and the Hongkong and Yaumati Ferry (HYF). The company “Creative Star Ltd.” is responsible for financing the contactless smart card system as well as for its development, management and operation. The role of “Creative Star Ltd.” is to overlook all the existing service providers, as well as the new comers, ensuring the system integrity as a whole. In 1994, “Creative Star Ltd.” awarded a contract with ERG Limited of Australia for the detailed design, supply and installation of the system including 3 Million contactless smart cards which were manufactured by Sony of Japan.

Currently, the Octopus business has extended from a transport payment system to a general e-payment system for small-valve transactions. In year 2000, it successfully transformed into a Deposit Taking Company (DTC) in Hong Kong, attaining a status equivalent to that of a Bank in Hong Kong.

In January 2001, a new shareholders' agreement was signed amongst Octopus Cards' shareholders and the shares of Hong Kong and Yaumati Ferry Company Limited was transferred to New World First Bus Limited and New World First Ferry Services Limited. Under the new shareholder's agreement, Octopus Cards Limited has also been transformed from its previous non-profit making status to a profit making one.

The original implementation strategy called for full rail operator implementation and outlying Island routes of the Ferry Company. The bus operators chose a more incremental approach with the system being installed on cross-harbour routes only, however with the success of the launch this is now actively being reviewed with a view of acceleration. Other Transport Operators, such as Discovery Bay Ferry, Peak Tram and Star Ferry, have also indicated their intent to join the system.

The introduction of such a CSC system into so many organisations requires a high degree of planning and co-ordination. In order not to confuse the customer, it was important that consistent design standards and user interfaces were used. At the same time, flexibility was required to ensure the particular business requirements of the Operator (i.e. fare collection methodology) was not inhibited. The CSC Contract called for the provision of the Central Clearing House System and the Service provider’s own equipment. Creative Star undertook the project management including the co- ordination for design submission approvals. This role was particularly important in ensuring that the common equipment such as the Add Value Machines was suitable for all operators environment yet would be consistent and instantly recognisable as being a CSC related device.

For the individual operator’s system design stage, the co-ordination role of Creative Star was less prominent as the need to establish the detailed requirements of the operators can only be achieved by a close dialogue between the designers and the end user. However, certain “threads” such as data security and overall performance was closely monitored by Creative Star on a total system bases.

Besides such technical issues, all associated operational policies such as card control, data security, settlement, refunds, etc. have been established and supported by the information architecture and ultimate system design.

The introduction of 5000 processing devices distributed through 5 Service Providers and 9 major subsystems was a demanding exercise. As with any new system of such scale and complexity and despite the rigorous testing and commissioning processes, teething and familiarity problems were experienced and in hindsight a more incremental introduction supported by more aggressive educational promotions could have alleviated some of the early problems.

The rapid increase in transaction volume from 0 to over 2.5 million transactions per day in 12 weeks also caused some data processing bottlenecks as windows for software debugging and system tuning restricted transaction processing machine time. Fortunately, backup systems had been put in place to enable accurate revenue settlement to be achieved although not all management information reports could be generated due to the bottleneck problem. Although load testing on individual elements of any system was carried out, such simulations cannot wholly replicate the real world environment and again in hindsight a more steady and controlled increase in transaction volume, achieved by incremental rollout, would have mitigated problems.