March 1, 2024

Prepaid and Postpaid in Transportation: Analysis and Risks

Prepaid and Postpaid Systems are the two main modalities in managing payments for services offered in transportation. Two distinct methods that similarly influence financial dynamics and determine who assumes the risk of non-payment in the transportation sector.

Prepaid system

In the prepaid system, the user pays for the service in advance before its utilization. This modality is commonly seen in public transportation, where different schemes are employed, such as:

  • Temporary Passes: Users can purchase a pass valid for a specific period, like a day, a week, or a month, allowing them unlimited travel during that time.
  • Travel Subscriptions or Multiple Tickets: These enable the pre-purchase of access to multiple trips, for example, a package of 10 trips that can be used within a specified period.

The pre-purchase may be partially or entirely funded by the national and/or regional government with a specific duration, ensuring the right to travel under the conditions of that pass or subscription.

Postpaid System

On the other hand, the postpaid system involves payment after completing the journey. It is common in private transportation, such as in VTCs (Uber, Cabify, and Bolt), taxis, and operators of shared micromobility (scooters, motorcycles, bicycles, and cars).

Analysis of Non-Payment Risk

Although the postpaid system offers an advantage in terms of user convenience compared to the prepaid system, preventing fraud becomes more complicated as funds are not loaded in advance.

But who assumes the risk of non-payment? Despite the user paying after the service, the financial risk primarily falls on the transportation operator. This is because at the time of service usage, payment is not made immediately, creating an outstanding debt that the transport company assumes.

The risk of non-payment in the postpaid system can pose a financial challenge for transportation companies since they must maintain service provision even before receiving the corresponding payment. Effective management of this risk becomes a critical aspect to ensure financial sustainability and business viability in postpaid transportation.

Account-Based Ticketing, Prepaid or Postpaid?

Account-Based Ticketing (ABT), or ticket issuance based on an account, is a system where proof of the travel entitlement and any travel records are kept in a back office (i.e., on servers) and not necessarily on a physical medium owned by the passenger.

To use an ABT system, passengers simply need to have a balance in their account and scan a secure device, which will be linked to a tokenized account in the back office. At the time of validation, the validator device typically indicates whether that account is enabled for the journey, leaving the final fare application and balance update process to the back office, asynchronously.

Within a transportation card operating with ABT, it is possible to have:

  • An account where users load a balance, and the system records the loaded amount as credit in favor of the user. This functions similarly to a postpaid system, as the transportation operator owes the user the corresponding value until it is used to pay for trips.
  • A system in which, by loading a monthly subscription, the user acquires advance access for a specific period, usually a month. The debt generated by this subscription is amortized upon the first use or on the first day of the month (depending on the subscription terms), making it behave more like a prepaid system, as payment is made in advance for a future service.

Prepaid and postpaid systems in transportation share similarities and significant differences in terms of financial management and non-payment risk. Although postpaid offers convenience to the user, the transportation operator assumes financial risk due to the pending nature of payment, which can pose financial challenges. Effective management of this risk becomes vital for the sustainability and viability of postpaid transportation in a dynamic and competitive environment.

Diego Ochoa
Marketing Manager