Hong Kong’s Octopus Surfaces in Middle East; Challenges Continue at Home

- Updated October 11, 2014

The United Arab Emirates hopes to complete a contactless smart card system for its roads and public transportation system by the end of 2009 with the help of Octopus Knowledge Ltd. and the Electronic Documents Centre LLC, a card personalization, billing and fulfillment supplier. According to Octopus, a subsidiary of Hong Kong-based Octopus Holdings Ltd., the UAE system will use a common payment platform for multiple public-transport services in Dubai, including subway, buses and parking. It also will bring the Octopus Clearing House System and a loyalty system to Dubai, the company says. The Roads and Transport Authority of Dubai expects to complete the project’s back-end system by the first quarter of 2009 and finish the entire project by the end of 2009, according to Octopus. The company adds that it expects to handle more than 2 million transactions per day when the system reaches full operation. Nearly 16 million Octopus cards were in circulation as of the end of 2007 in Hong Kong, despite its population of only 7 million. Octopus has combined transit payments and small-sum retailing payments in Hong Kong for 10 years and has decided to offer the card and its experience to other countries. The Dubai project, however, does not mark the first time the Octopus has taken its system abroad. In 2003, Octopus provided technology and expertise to set up a new public transport e-ticketing system in the Netherlands, which also will roll out in 2009. CHALLENGES AND COMPETITORS However, a sour note sounded last year for Octopus, as the company closed one of its card addvalue channels—EPS, an ATM-like system that enables cardholders to reload via their bank accounts—after complaints from users. A year ago, two cardholders reported that EPS deducted funds from their bank accounts without putting the funds on their Octopus cards. After the first phase of an investigation, the company said the problem occurred after an upgrade to the system. Apparently, 571 customers were affected by the system failure between December 2006 and February 2007. However, after a complete re-check, supervised by the Hong Kong Monetary Authority, Octopus announced in July that such cases were tracked to as early as January 2006, and more than 15,000 cases had been discovered. The total default value amounted to around HK$3.7 million ($474,334 U.S.), 0.06% of all card reloads conducted via EPS during the period. The company stopped using the EPS payment system in February 2007 and recently announced it will not resume the service. Explaining the shutdown, Octopus CEO Prudence Chan says the company could not guarantee a 100% success rate in EPS payments, even after investing heavily in the search for a solution. She adds that EPS payments accounted for 1.5% of reloads through all value-added channels. “It’s not worth investing in this not-so-popular channel,” Wenli Yuan, a Beijing-based analyst with research company Celent LLC, says of EPS. “The return on investment will be very low.” However, apart from EPS reloading problems, Octopus did not have issues with services or operations, according to Yuan. “In general, Octopus is a convenient and efficient retail-payment system and runs well,” she says. Octopus’ standing in Hong Kong recently was challenged by Hong Kong-based Hang Seng Bank, which in December issued Hong Kong’s first Visa credit card with the Visa PayWave contactless function. With Visa PayWave, cardholders make small-sum “tap-and-go” payments at selected merchants. “The Hang Seng card may benefit from the comfort Hong Kong residents have with contactless cards because of their long experience with Octopus cards,” says Douglas A. Jaffe, Hong Kong-based research director for Financial Insights Asia. Hang Seng may have another advantage, he adds, because consumers know anyone can use the value loaded onto a lost Octopus card. “A credit card is more secure, and this makes a contactless proposition easier,” Jaffe says. More than 90% of Octopus cards are owned anonymously, Octopus says, but the company has introduced a personal card that stores the cardholder’s information. Octopus maintains the advantage of familiarity because so many people use it, says Jaffe. Use of the card also appears likely to expand into smallvalue payments as readers become more ubiquitous, he adds. “I don’t see this as a zero-sum game,” Jaffe says. “I doubt either will supplant the other, and only time will tell how usage trends emerge.” STILL NO. 1 IN HONG KONG Still despite obstacles, Octopus card has a phenomenal penetration rate in Hong Kong. Around 95% of the population between ages 16 and 65 possesses at least one Octopus card, according to the company. Besides using the Octopus card for transportation and at convenience stores, cardholders may shop at the more than 1,000 merchants with 50,000 card readers that now accept the card, the company says. On average, Hong Kong consumers make more than 10.5 million transactions per day with Octopus cards, amounting to a total of HK$29.7 billion (US$3.8 billion) a year, Octopus says. In the transportation sector, Octopus cards were accepted only on buses and subway trains 10 years ago. Now, acceptance has expanded to include trams, ferries and small buses known as maxicabs. Nearly 200 parking lots accept Octopus for fees, and Octopus parking meters have been placed throughout Hong Kong, according to the company. More than 3,000 stores, including department stores, supermarkets, pharmacies, convenience stores, fastfood shops and household stores accept Octopus cards, the company says. The Octopus card is good at public swimming pools, sports facilities, racecourses, cinemas, parks and even private clubs, Octopus says. Consumers may use Octopus cards at 5,000 self-service photo booths, pay phones and vending machines, says the company. Octopus envisions expanding card acceptance to every possible payment situation. Each Octopus card has a serial number that cardholders can register with an office or apartment building’s administrators, who enter the number into the building security system. After registering, cardholders enter the building by tapping their Octopus cards on a card reader installed at the building entrance, without the need for a separate card or the chore of remembering a personal identification number, Octopus says. More than 100,000 residents and employees have adopted the ID application. Some schools in Hong Kong have begun using Octopus cards to record attendance. Students also use the card to pay tuition and other fees, Octopus says. (Article originally appeared in Prepaid Trends, which has since ceased publication.)

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