Making Cities Better and Making Better Cities

In remarks yesterday at the China Development Forum in Beijing, MasterCard President and CEO Ajay Banga outlined how public-private partnerships will be crucial to building the smart cities of the future and furthering the government’s social and economic development initiatives.

March 22, 2016

Below are his remarks on building the smart cities of the future, as prepared:

Thank you for this opportunity.

Rapid urbanization has defined the world for more than 100 years, and the pace is ever increasing. Already, more than half of the world’s population lives in cities and that number is set to increase to 70 percent by 2050. China is leading this trend with an urban population of 56 percent that is projected to reach 70 percent in just five to seven years.

People leave rural areas for the promise of cities – better jobs, education and a better life. Good things come from increasing urbanization – access to key services, social and information networks and a higher quality of life – but can also lead to new challenges – congestion, pollution and growing disparity of wealth. Major cities in both the developed and developing world are struggling with how best to address these challenges while, at the same time, unlocking the power of increased urbanization. Hence, the attention on cities becoming smart cities.

Cities are core centers of human interaction and commerce. Smart cities will be efficient and more sustainable, better enabling their citizens to live inclusive and rewarding lives. Building these smart cities is a challenge bigger than any one person or organization – it will require a collaborative effort. We believe we at MasterCard can contribute and are committed to working closely with the Chinese government and other stakeholders to create smart cities that advance China’s new Five-Year plan. We can help with our data insights, our knowledge, and our technology, in a way that drives efficiencies and increases financial inclusion.

In particular, we see immediate opportunities to create efficiencies in three areas: make transit payments digital, leverage data to create incentives to modify commuter behavior and streamline municipal payment systems.

First, the challenge in many cities is that mobility models were designed for cars and lack the necessary integration across different modes of transport. This makes it hard for residents on a daily basis to execute on the necessities – getting to their jobs and getting their kids to school. For example, a commuter in Beijing today must buy three different paper tickets to get from West Beijing to Hebei by subway, train and bus. Think of each of these steps and the extra time and expense they add to the daily lives of each commuter, as compared to a time when these three paper tickets could become one digital ticket. Think of the international tourist that comes to China. Rather than being able to take the MasterCard issued from their home bank from their wallet and tap to enter the subway station, they have to add an extra layer of buying a paper ticket – or three as in my previous example – when they are already navigating an unfamiliar city.

There is tremendous opportunity to bring a seamless experience to the everyday experience of commuting thereby encouraging drivers to become public transit users, a more urgent need as urbanization levels increase. The need extends beyond the ease of moving around a city – vehicles account for 75 percent of carbon monoxide emissions in the US, with traffic congestion significantly exasperating the problem. As Enrique Penalosa, former Mayor of Bogota said, “An advanced city is not one where ‘even the poor use cars’, but rather one where ‘even the rich use public transport.’

London is creating efficiencies by embracing the power of digital ticketing and in the process is addressing the annual cost of fare collection, which is equivalent to 15 to 20 percent of fares paid. Original costs come from printing and distributing fare cards and tickets, from the administration of the tickets to complaint management and commissions paid to ticket vendors. London found these efficiencies by abandoning its closed loop system which in essence, had the transit authority owning the end-to-end solution and from the consumer point of view, having to purchase and maintain one additional card or account.

London has now embraced an open loop system which provides full interoperability and from a consumer point of view, allows the use of the existing card in wallet. By moving to open loop, London has saved an estimated 120 million pounds a year and near one million trips a day are taken in London via a digital ticket. Those savings are ones the city of London can reinvest in other areas to the benefit of its citizens.

There is a second opportunity for efficiency when it comes to urban transit. Most transportation systems are designed for the peak of peaks, which requires a higher investment of public funds and thereby absorbs scarce public resources. Through active demand management, cities can delay their next large-scale infrastructure investment by two to three years delivering significant savings.
MasterCard partners with Cubic Transportation Systems to provide the data analytics that enable transit authorities to nudge their users into off-peak routes using a mixture of information and incentives. By diverting five-10 percent of passengers to less busy routes at peak times, large urban transit systems could save $150-$200 million. To put this in perspective, when Singapore offered free rides to those traveling before the morning rush-hour, seven percent of customers shifted out of the peak commute. These solutions can be applied in some of the largest cities like Beijing and Shanghai but also cities like Chongqing, Wuhan and Xi’an.

Third, efficiencies can also be found beyond transit. As large buyers of services, city governments have an opportunity to use electronic payments themselves leading to less administrative burden and increased speed, as well as transparency through traceable electronic payments. In the Colombian city of Barranquilla, MasterCard helped streamline the city’s payment process and as a result, the use of electronic payments grew from zero to 76 percent, driving costs down by 28 percent.

I’ve identified three key opportunities for city governments to deliver efficiencies – adopting digital ticketing of transit, leveraging data for transit planning and to shift demand away from peak times and third, city governments themselves embracing electronic payments.

We can’t talk about smart cities without discussing the importance of financial inclusion thereby equalizing citizen access to the benefits of a smart city.

First, the burden of cash usage on economies is substantial, representing as much as 1.5 percent of a country’s GDP. Multi-function cards are powerful way to combine receiving and making payments for citizens with and without bank accounts with an ID for access to transit, libraries, museums…the necessary and enriching attributes of a city. Paying social benefits electronically provides efficiency, savings, accuracy and accountability. Salaries, bonuses and stipends are paid quickly. Digital payments provide unbanked employees a reliable way to receive funds. More importantly, electronic payments – whether they are social benefits or salaries to the unbanked – equalize. They offer the same key to every resident of a city allowing them the benefits of a financial identity.

According to the World Bank, two billion adults do not have access to a bank account. Despite advances made in the last five years, 36 percent of Chinese adults still have no bank account. Trapped in a cash economy, they lack the financial services to guard against risk, invest in their future and build better lives. Access to basic financial tools creates economic opportunity and growth, individual empowerment and dignity, and can help reduce poverty and gender inequality.

In South Africa, the public-private-partnership with the South African Social Security Agency (SASSA) delivers government funds on 10 million debit cards with biometric security features. One in three adults in the country now carries a SASSA MasterCard, resulting in $375 million savings for the government in five years on administration of funds due to the shift from paper to electronic. Since the launch of the program, 850,000 fraudulent grants have been eliminated, saving another $300 million.

Secondly, financial inclusion is not just about microfinancing or opening a bank account or access to financial services and products, but also about regular usage. Usage is a challenge in many countries and China is no exception – today only 48 percent of those 64 percent adults with a formal financial account use the account to receive and hold funds. On the one hand, increasing usage requires governments to use the account to deliver social benefits on a regular basis. On the other hand, it requires ease and convenience for consumers, for example on their daily commute. An acceptance infrastructure for electronic payments is key.

Where cities have a tremendous opportunity is to embrace electronic payments for their citizens knowing that in doing so, they are not only creating efficiencies but are also bringing excluded individuals into the system, giving them access and equalizing the playing field. By doing this, cities are fostering a digital ecosystem – the backbone of a smart city.

While smart cities offer great potential, no one can get there alone. Realizing the promise of cities will require collaboration across industries, sectors and geographies and the leadership of global organizations such as C40 and the Smart Cities Council, and Chinese organizations including CDRF, NDRC, and the Ministry of Industry and Information Technology and Ministry of Housing & Construction.

We at MasterCard can bring the use of data, enable digital payments, save money and create greater inclusion. The promise of urban life is the promise of greater community and a higher standard of living. City governments are the caretakers of this promise. By embedding digital payments and harnessing the data that payments and usage generate, cities can become smarter – more efficient and more inclusive – and deliver on their mandate to their citizens. As China’s leadership noted in a statement earlier this year, “China’s greatest development potential lies in urbanization.” Let MasterCard be your partner.

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