Transportation Deployment Casebook/2014/Octopus Card System in Hong Kong

Introduction
Hong Kong’s Octopus Card is a contactless smart card originally developed as a replacement magnetic plastic card for the city’s various public transportation systems. Since its launch in 1997, Octopus card has being widely used in Hong Kong. At present, there are more than 26 million Octopus cards are in circulation where the population in Hong Kong is only 7 million in 2014. Over 99% of Hong Kong people (age 15-64) possess an Octopus card. In addition, the Octopus card system is one of the world’s most used smart card system, there are over 13 million transactions a day, valued at over HK$150 million. Octopus card has the following features:
 * Convenient and fast: Octopus card eliminates the need of carrying cash or coins. It also eliminates the needs of swiping or punching the cards. Additionally, each transaction only takes as little as 0.3 seconds.
 * Contactless: Octopus card uses Radio Frequency Identification (RFID) technology. It allows the card reader to process without physical contact. It means the transaction can happen without withdrawing the Octopus card from wallets or purses.
 * Secure: Octopus card is anonymous which means there is no personal information, bank accounts or credit cards attached with the card. If the Octopus card is lost, only the cash stored in it is lost.
 * Purchase/reloading locations: Octopus card can be purchased at every transportation service center including every Mass Transit Railway(MTR) station, five light rail customer service centers, four First Ferry customer and Octopus service centers as well as KMB ticketing office.
 * Multi-usage: Octopus card can be used not only at Hong Kong public transportation system, but also can be used at retail, parking, leisure facilities, school and etc. Public transportation use includes buses, ferries, light rails, taxis and railways. Retail use includes, most notably, 7-Eleven convenience stores, McDonald’s restaurants, Starbucks coffee shops and etc. In addition, leisure facility use includes cinemas, theme parks and etc.

Birth
Prior to the implementation of Octopus Card technology, Hong Kong’s Mass Transit Railway (MTR) used recirculate magnetic plastic card system. The magnetic plastic card system was already a more convenient system compared to many other cities where still using manual sales ticket system from 1984 to 1997. With all the disadvantages above, on September 1, 1997, the Octopus system has been introduced in the public transportation system in Hong Kong.
 * Magnetic plastic card system: The Magnetic card system replaced the manual sales system in 1984. However, the Magnetic card likes many other magnetic media in the world; this technology had many issues with the magnetic strip from the back of the card. For example, the magnetic strip was easy to peel off and lost the information stored inside. In addition, the Magnetic card system only provided 31 day passes and stored value cards.

Invention of the Technology

 * Radio Frequency Identification (RFID): The Octopus card uses the Sony 13.56 MHz FeliCa RFID built-in chip. The chip communicates with the reader or writer to finish each transaction, and it can auto process with different fare or payment. Furthermore, the RFID technology allows users to take the Octopus card close to the reader without physical contact. The reader will deduct the fee on the card and will display the balance on the screen. Proximately, the whole process takes only 0.3 seconds at the fastest . Hong Kong is first city in the world to use this technology into public transportation system.
 * The Octopus Clearing House System: This system uses a complex set of business rules to validate each transaction prior to authorizing settlement amounts . It also sent back each transaction report to the service provider on a daily basis. Then the system will automatically deposit the relative settlement amounts into the service provider’s account on the following day7.
 * The Octopus card reader and writer: It uses inductive Radio Frequency with a range between 30mm to 100mm to transmit signals to the Octopus card. In addition, the reader and writer are connected with the service provider’s point of sale (POS) terminal in order to receive commands by the service provider. Each transaction will be both sent to the service provider and the Octopus Central Computer each day for clearing and settlement purposes.

Early Market Development
The Hong Kong public transportation network was already widely regarded worldwide in the 1990s. The first rapid transit railway opened in 1979 with the initial length of 7.9 miles. At present, the system has 135.6 miles of railway and 152 stations in total. Before Octopus Card system was introduced, MTR Corporation operated recirculated magnetic plastic cards since its inception in 1979. As the increased use of the transit system, the transport operators intended to find a faster, and more convenient ticketing system. In 1992, The MTR Corporation started to research different automatic fare collection technology and tried to find a better replacement for the future development. After a year, the MTR Corporation recognized the contactless smartcard technology as the most appropriate platform for its future fare collection system8. In 1994, in order to promote the new technology, the MTR Corporation had companied with four other public transport operators, Kowloon-Canton Railway Corporation (KCRC), Kowloon Motor Bus (KMB), Citybus, and Hongkong and Yaumati Ferry (HYF). Five operators had established a joint venture named Creative Star Limited (renamed as Octopus Cards Limited in 2002). In September 1997, the Creative Star Limited had introduced the Octopus card. During the first three month of introducing the Octopus Card system, there were three million cards purchased. Until 2000, the Octopus cards were only used in the transportation system. In 2001, the Octopus Card Limited has gained authorization from the Hong Kong Monetary Authority in order to expand business outside the transportation system. Since then, the Octopus Card Limited became a for-profit company.

Role of Policies
The Octopus Card system started to consider the use in the field of retail industry in 2000. During that year, some retail stores signed a contract with MTR Corporation in order to hold the use of Octopus technology. Since at that time MTR Corporation was still a non-profit organization, so all the non-transportation system use must be authorized by the government. In 2001, the MTR Corporation gained the permission of the government. This policy encouraged the growth of Octopus card system in Hong Kong. In addition, in 2003, the Hong Kong government decided to replace the parking meters with the Octopus system. By late 2004, the entire parking machines in Hong Kong were replaced by the Octopus system10. This policy kept the growth rate of Octopus card system stay constantly at a higher percentage. Furthermore, in 2007, the government mandated all schools to use the Octopus Card system to enhance children’s security. The students needed to swipe the cards when they arrived at the school, and needed to swipe again when they were leaving the school.

Growth
As can be seen from the milestone table below, the growth period of Octopus Card system started in 1997 and continued in 2014. The huge expansion into retails, parking, and more started in 2000 when the Hong Kong authorized non-transport use of the system. In 2001, a new agreement was signed among shareholders in order to extend Octopus system into trams, and some public facility access. From 2002 to 2005, the expansion of Octopus system includes supermarkets, cinema ticketing, mobile phone payment, apparel chain stores and etc. Till then, the Octopus system was serving people in Hong Kong. At the end of 2005, Octopus services were available for all Hong Kong’s public transport modes. With the success of Octopus system in Hong Kong, the company started to establish business opportunities worldwide especially in mainland China. Shortly in 2006, the Octopus system extended its business into mainland China. Shen Zhen is first city in China accepted the use of Octopus cards. Notably, in 2009, the Octopus system was commissioned to take part in developing a new transport ticketing system for Auckland, New Zealand. Moreover, in 2010 Octopus started to provide smart cards services and development in mainland China. After the successful adoption the Octopus system in Wuhan in 2011, there were more and more capital cities in China considering adopt the system. Besides the domestic export, the Octopus began to export its technology and experience to The Netherlands in 2003 as well as Dubai in 2007. In addition, the Dutch e-ticketing system was developed and supported by the Octopus system.



Moving Forward
With further economic integration and bonding between the mainland China and Hong Kong, Octopus focus on providing experience and expertise with other cities in China. Currently, there are many cities in China constructing new transportation system; the business opportunities for the Octopus are everywhere. In addition, the Octopus focuses on stepping up to bring convenience of contactless payment to cross-border travelers10. In terms of international business, Octopus is exporting a full service as both smart card issuer and operator. With the successful technology export to the Netherlands as well as Dubai, the Octopus has confidence to provide service to anywhere in the world.

Quantitative Analysis
A life cycle analysis is used to identify the periods of birth, growth, and maturity of the Octopus Cards usage in Hong Kong. The lifecycle of the Octopus Card system in Hong Kong follows the S-curve similar to many modes of transportation. The annual card in circulation is provided by the Octopus Card official website. The number accumulated Octopus card is likely to overstate the actual population of Hong Kong because most people in Hong Kong own more than one Octopus cards. The predicted card in circulation is calculated by the following three parameter logistic functions.

Results
The life cycle of the Octopus Cards in Hong Kong is shown in Figure 1. The S-curve fits the real data pretty well. Before 1997, there was no Octopus card in operation. Between 1997 and 2007, the Octopus Cards in circulation were growing at an increasing speed. According to the figure below, the year 2007 is the year when ½ K is achieved, which means that the system is still growing but with a slower rate. Around 2040 the Octopus Cards in circulation will start to level off at around 33 million.



Equations
S(t) = K/[1+exp(-b(t-t0)]

Where:

S(t) is the status measure (millions of the Octopus Cards)

t is time (years)

t0 is the inflection time (year in which 1/2 K is achieved)

K is saturation status level

b is a coefficient

In order to determine the coefficient (b) and inflection point (t0), the S(t) formula can be transformed to get a the following linear relationship:

LN((S(t))/(K-S(t)) = bt+c

Where:

Y= LN(Number of Octopus Cards/(K-Number of Octopus Cards)

X = time (as in years)

K = the maximum extent of the technology

Once b is found, it can then be used to determine the inflection points as:

-b(t-t0) = -bt + bt0

Determine the value of K
The regression analysis is being used to determine the K value. In order to pick the best K value, the table below is created. When K equals 33 million, R-square shows the highest value as well as the t-statistics value (which indicates the variable is statistically significant at the 95% confidence level.)

Determine the coefficient
The regression analysis result is used with K equals to 33 million. From the table below, the coefficient b is estimated to be 0.1946115.