Making Cities Better and Making Better Cities

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1 Making Cities Better and Making Better Cities 2016

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3 Rapid urbanization has defined the world for more than 100 years, and the pace of this urbanization is ever increasing. Already, more than half the world s population live in cities, a number that is set to increase to 70% by China is leading this trend; its urban population may reach 70% in just 5-7 years from its current level of 56% 2, given the reform of the household registration system. With relaxation of the household registration system, migrant workers and their families will be allowed to settle in cities and be entitled to the full benefits of city residents. By some estimates, about half the migrant worker population in China will settle in cities in the coming years adding as many as 150 million new urban residents. The social and economic implications of this policy shift will be profound. As people increasingly leave rural areas in search of better jobs, education and a better life, addressing the needs of cities becomes urgent. Urban planners in China and all over the world recognize both the challenges and opportunities that rapid urbanization presents just as governments recognize the opportunity to make productive and efficient urban centers for their citizens. Good things come with increasing urbanization but oftentimes it also leads to new challenges. Congestion, pollution and growing disparity of wealth and poverty are features of many of the world s major cities. These latter aspects of urban life have the potential to deprive citizens of access to key services, networks and the promise of a higher quality of life. Successful cities will be smart cities that harness the power of transaction and usage data to become more efficient and more sustainable, better enabling their citizens to live inclusive, rewarding lives. Driving macroeconomic change is a challenge for any nation but it s especially true for a country and economy as large as China. China s cities are poised to become more intelligent, creative and efficient in order to deliver. Building Smart Cities will take a collaborative effort by the public and private sector. MasterCard can contribute and is committed to working closely with the Chinese government and other stakeholders in partnership to drive smart cities in a way that advances China s new Five-Year Plan. The efficiencies and savings forecast to flow from smart programs can be reinvested in additional programs to the benefit of citizens. 1 United Nations projections ( 2 Projection of current World Bank urbanization trends in China MasterCard 1

4 MasterCard s Perspective on Smart Cities Cities are core centers of human interaction and commerce and MasterCard connects millions of consumers and merchants all over the world. MasterCard can collaborate with cities to deliver three specific elements of a smart cities solution: Making cities more efficient and more welcoming by embedding digital payments into a city s DNA Making cities safer and more inclusive by reducing the reliance on cash Making cities more sustainable and setting them up for future growth by unlocking the power of data 1. Making cities more efficient and more welcoming by embedding digital payments into a city s DNA Digital payments create more seamless urban mobility In many cities, mobility models are designed for cars and lack integration across different modes of transport, making it hard for residents to get to jobs and schools, making it hard for visitors to get around a city and making it less attractive for international talents to move there. In China as in many countries around the world there are costly inefficiencies that technology can help fix. Today, a commuter must buy three different paper tickets to get from West Beijing to Hebei by subway, train and bus. Those three physical tickets can be combined into one digital ticket. London is doing just that and in the process is addressing the annual cost of fare collection, which is equivalent to 15%-20% of fares paid. Those costs come from printing and distributing fare cards and other tickets. They come from the time and workforce attention required for complaint management. They come from paying commissions to ticket vendors. By moving away from a proprietary, closed loop system, to an open loop system, London has saved an estimated 120 million pounds a year with nearly 1 million trips a day being taken in London via a contactless card or mobile service. 2 MasterCard

5 There is tremendous opportunity to bring a seamless experience to the everyday experience of commuting, thereby encouraging drivers to become public transit users. As Enrique Peñalosa, former Mayor of Bogotá, said, An advanced city is not one where even the poor use cars, but rather one where even the rich use public transport. In addition to optimizing the consumer experience, increased use of public transportation also addresses car based pollution in cities. Vehicles account for 75% of carbon monoxide emissions in the US, with traffic congestion significantly exasperating the problem. Digital payment solutions would allow China to improve public transit and also build greener cities, to align with the aspiration of China s 13th Five-Year goal to reduce carbon emission. Digital payments make government spending more efficient As large buyers of services, city governments have an opportunity to use electronic payments themselves, leading to better business management, accountability and budget planning. Consolidating purchases through traceable electronic payments ensures compliance with spending policies and provides detailed records for pricing negotiations. In the Colombian city of Barranquilla, MasterCard helped streamline the city s payment processes. As a consequence, the use of electronic payments by the local government grew from zero to 76%, driving costs down by 28%. Paying social benefits electronically provides efficiency, savings, accuracy and accountability. Salaries, bonuses and stipends are paid quickly, even at times of natural disasters like flood or earthquake. Digital payments provide unbanked employees with a reliable way to receive funds. Teachers, doctors and village officers in China s remote areas would also benefit from prompt electronic payment. During the unrest in Egypt, public sector employees who received the prepaid card were the only government workers who were able to receive their pay on time and use their cards at ATMs and retail locations throughout Cairo and Alexandria. Making it easier for people to make payments to government is also the mark of a smart city approach. The London Borough of Hammersmith and Fulham has developed a customer self-service portal for city services like paying taxes, purchasing permits and environmental reporting. The portal has achieved 1.15 million of savings a year. Also in the UK, the 5.5 billion Liverpool Waters docklands project application was submitted, managed and paid for entirely via that city's online planning portal, saving an estimated 2.9 tonnes of carbon MasterCard 3

6 versus the old paper-based process. A local economy that runs on electronic payments can also enhance the efficiency of government tax collection and reduce the likelihood of corruption. 2. Making cities safer and more inclusive by reducing the reliance on cash Digital payments eliminate the hidden costs of cash The burden of cash usage on economies is substantial, representing as much as 1.5% of a country s GDP. Merchants alone lose hundreds of millions of dollars every year to leakage and theft. Smart cities are coming to understand the localized benefits of reduced cash usage. In cities with a high circulation of cash, residents and visitors are more vulnerable to theft and mugging. In Sweden, lower crime rates have been linked to the reduction of cash that s being stored at banks, on buses and other public places. A recent study in the US state of Missouri examined the impact on crime of switching from cash to electronic benefits transfers and found a negative effect on overall crime rates. Burglary, assault and larceny in the pilot areas dropped by nearly 10%. Reducing reliance on cash can even be a life and death issue. In the recent Ebola crisis in West Africa, it proved difficult to get cash payments to Ebola response workers, risking the withdrawal of their services and exacerbation of a major humanitarian crisis. The solution in Sierra Leone was to quickly establish mobile money agents, to enable quick and efficient disbursement of funds. Thirteen thousand recipients registered in just three days. Electronic disbursement of funds via mobile phones eliminated a costly and ongoing need for agencies to disburse cash and likely saved lives in the process. Turning to China, research indicates that cash today still accounts for 86% of retail payments 3. Reducing dependency on cash can help China maintain social stability while it continues to pursue economic growth. 3 MasterCard Advisors' Cashless Journey Study using data from the Bank for International Settlements, and local statistics bureau data 4 MasterCard

7 Providing wages and benefits by electronic payments advances financial inclusion By enabling wages and social benefits to be paid electronically, governments allow their citizens to build a financial identity. Multi-function cards are a powerful way to combine receiving and making payments for citizens with and without bank accounts with an ID for accessing transit, libraries and museums. Despite advances made in the last five years, only 64% of adults have a bank account in China 4. 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. Financial inclusion is not just 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% of those 64% adults with a formal financial account use the account to receive and hold funds 5. 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. An acceptance infrastructure for electronic payments is key. In South Africa, 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. Similar programs can help China on its journey to a more inclusive society. Examples include social benefit payments to children and seniors living in rural areas, the timely payment of wages to city migrant workers and the consumption of healthcare and education services outside one s registration city. 4 The World Bank Findex Study ( 5 The World Bank Findex Study ( MasterCard 5

8 3. Making cities more sustainable and setting them up for future growth by unlocking the power of data Using payment data to better manage transit capacity Most transport systems are designed for the peak of peaks, requiring a higher investment of public funds and thereby absorbing scarce public resources. Through active demand management cities can delay their next large scale infrastructure investment by 2-3 years (assuming 2% system growth per year) allowing them to defer interest payments on capital borrowings into the future and thereby realizing 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 5%-7% of passengers to less busy routes at peak times, large urban transit systems could save $150 million - $200 million. When Singapore offered free rides to those traveling before the morning rush-hour, 7% of customers shifted out of the peak commute. These solutions can not only be applied to the largest cities like Beijing and Shanghai, but also cities around the central inland of China like Chongqing, Wuhan and Xi An. Similarly, MasterCard partners with Parkeon, the leading provider of parking solutions, so that as drivers progress along their routes they receive customized incentives that lead them to modify their behaviour and thereby contribute to better traffic flows, reduced congestion and a stimulus for local businesses. In London, Big Data has gone beyond being used to understand and anticipate traffic patterns to shaping these patterns before they happen. During the 2012 Olympics, demand at stations serving Olympic venues surged 83.9 per cent on average 6, and the London Underground carried record-breaking numbers of customers. The transport network was able to accommodate this spike through a combination of increased capacity and targeted messaging about hot-spots. Regular commuters were later shown to have either re-routed or traveled at different times based on the information they received. This was all made possible by the use of payments data to create predictive models of traveler volumes. 6 Smart Cities Council's "Smart Cities Readiness Guide" ( 6 MasterCard

9 Transport for London (TfL) used these models to anticipate demand on high volume routes and communicate predicted surges and delays. Using payment data to improve urban planning Managing a global payment network allows MasterCard to identify and predict patterns of commercial activity that can help inform more inclusive and more sustainable urban planning around the critical areas of housing, transportation and energy management. Combining commerce insights with transit insights helps urban planners and commercial developers better understand the relationship between how people travel, buy, and consume services. These insights can ultimately guide investment decisions for transport links and commercial areas that benefit both cities and citizens. MasterCard s Retail Location Insights is an equally powerful tool for urban planners in understanding the business development in particular area resulting from such actions as opening a museum or adding a transit stop. Using aggregated and anonymous transaction-based scoring and analytics can also help the commercial real estate market evaluate the performance of specific geographies to inform site selection, revenue optimization and growth opportunities. To realize the true potential of any smart cities initiative, data in particular, Big Data will play a critical role. The Economist has described the second electrification that might transform cities due to the data generated by social interactions. Good use of this data, it argued, could have a transformative impact on 21st century cities akin to the impact of electrification on 20th century cities. A Collaborative Approach 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 and Construction. Partnering with governments Moving social benefits programs from cash to electronic based ID systems at the national level (e.g. South Africa, Nigeria, USA, Italy) and municipal level (e.g. Toronto and Barranquilla, Colombia) involves multiple stakeholders (government authorities, NGOs, MasterCard 7

10 development banks, businesses, technology companies) working together. A public-private partnership program can be set up to act as a change agent and catalyst to drive such transformation. This happened in Amsterdam, which partnered with Oracle to deliver citywide broadband. It also occurred in South Africa, mentioned earlier, where public-private partnership allowed the movement of 10 million people from nearly all cash to all electronic social disbursement delivery in little over a year. Public-private partnerships offer an efficient model for building smart cities. Changing consumer tastes and disruptive technologies that are inherent in smart cities initiatives put municipal governments at risk of investing in obsolete solutions. Public-private partnerships may be a great way for governments to mitigate these risks sharing both potential risks and potential gains with a motivated private sector partner that has a specialist's vision for the future of the industry in question. Partnering with other technology companies To create a better, more efficient urban living experiences requires enterprise partnerships across companies in the mobile space (e.g. Syniverse connecting more than 1,500 mobile service providers), the mass-transit space (e.g. Cubic managing transit operations in 40 cities), and the mobility space (e.g. Parkeon). Such partnership builds an integrated ecosystem to enable a more efficient city operating system of the future. Final Thoughts China is a leading actor in a rapidly urbanizing world. Migration to cities is set to increase dramatically in the very near term, while China s economy pivots toward consumption led growth and away from the export led model of the past. Another way to describe this transition is that future growth in China will be both driven, and supported, by urban services. The dynamism of the urban service sector will depend critically on data driven solutions, streamlining service delivery for greater efficiency and broad inclusion to serve the expanding urban middle class while delivering a better quality of life in terms of environment, health, education, transportation and recreation. The promise of urban life is the promise of greater community and a higher standard of living. City governments may be seen as the caretakers of this promise. By embedding digital payments and harnessing the data that payments and usage generate, cities can become smarter and deliver on their mandate to their citizens. 8 MasterCard

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