Recently, Ignacio Mas and I wrote a CGAP Focus Notes entitled Going Cashless at the Point of Sale: Hits and Misses in Developed Countries. We wanted to analyze the history of electronic money schemes in developed countries, more specifically in Europe and Asia. We thought it would prove a useful exercise as CGAP works towards sustainable branchless banking models in developing countries. As expected, our research shed light on important lessons.

In the paper, we discuss three broad approaches, and in each case we look at two providers who met different degrees of acceptance in the marketplace. Although our primary interest is with payment through mobile phones, we start with two cases that use smartcards, because these share many of the same characteristics and issues as payments through mobile phones. The last blog post looked at Mondex. Now we turn to Octopus.

In 1979, Hong Kong’s Mass Transit Railway (MTR) launched a prepaid card with a magnetic strip as a ticketing system for use with its rail services. In 1994, Creative Star (renamed Octopus Cards Ltd. in 2002) was formed as a joint venture between MTR and four other public transport operators in Hong Kong to make it an intermodal ticketing system (i.e., including buses, ferries, subway, etc.). The Octopus card, a contactless smartcard based on Sony’s FeliCa chip, was introduced in 1997, replacing the old magnetic strip cards. The card does not need to be physically inserted into a device to be read, which makes payment very convenient for users in a hurry: all they have to do to pay the exact fare is to swing their purse or handbag near the card reader.

The value is stored securely in the card itself. The card can be personalized for an extra charge with a photo, and personal data can be kept on record. If a personalized card is lost or stolen, the customer can reclaim the remaining value of the card, and the original card will be blacklisted to prevent its use.

At the time of launch, acquiring an Octopus card required a deposit of HK$50, which created widespread resentment with the new payment mechanism. However, adoption was driven by (i) very rapid conversion of all turnstiles to the new system; (ii) a short phase-out period for the old ticketing system of only 2–3 months; and (iii) a pricing scheme of the only remaining ticketing alternative—a single trip ticket—at a much higher price. This amounted to a compulsory conversion by all transport users, such that within 3 months, three million cards—a number equal to half the residents of Hong Kong—were sold (Siu 2002).

The Octopus system is now a widely used electronic cash system. By mid-2008, there were over 17 million Octopus cards in circulation (which is more than twice the population of Hong Kong), with more than 10 million transactions, worth HK$85 million, processed daily (Citi 2008). The cards are used by 95 percent of the population of Hong Kong aged 16 to 65; the average user stores around HK$63–65 on the card.

Van Hove (2005) notes that Mondex failed to take root in Hong Kong, whereas Octopus has taken root. Octopus had four distinct advantages over Mondex:

• Having signed up all the main public transport companies in the territory, Octopus had a de-facto monopoly with a large user base—mass transit users.

• Octopus focused on replacing cash in unattended POS—ticketing machines. The ability to present exact fares at all times through a smartcard at unattended machines offered a big convenience factor for users. In contrast, at least initially, Mondex attempted to replace cash in stores, where not having the exact change is much less of a bother for customers.

• Octopus’s contactless features made it extremely convenient for users—indeed, faster than using cash. The cards do not have to be inserted and, in fact, generally do not even have to be withdrawn from wallets and handbags, to be read by the card readers.

• The card’s personalization feature means that value can be retrieved by users who lose their card or have a faulty card.

You can read about the other cases we analyzed here.