THE FUTURE IS urban and that future has already arrived. Millennia after the first human settlements were established, the UN announced in 2007 that more than 50% of the world’s population lived in cities. The UN’s Global report on human settlements 2011 predicts that 59% of the world’s population will be living in urban areas by 2030; cities’ headcounts are growing by 67 million every year. Fully 91% of this increase is in developing countries.
“It is estimated that it will take just 15 years for the global urban population to cross 4 billion,” says Roland Chalons-Browne, chief executive of Siemens’ financial services division. “About 70% of the world’s population is expected to reside in cities by 2050 – as compared with only 1 billion in 1960. Megacities are growing at a scorching pace, with those in emerging markets growing the fastest.”
Anil Menon, president, globalization and smart connected communities at Cisco, notes that urbanization is occurring because people want to improve their access to jobs, healthcare, education and cultural opportunities. However, rapid urbanization might herald a miserable future for much of the world’s population unless ways of addressing problems are changed.
Infrastructure stress
Migration to cities often presages poor living conditions and increased congestion and exposure to pollution. “As population in cities around the world surges, it puts greater strain on infrastructure already struggling to keep pace with the requirements of its residents, emphasizing the need for higher investments in infrastructure development,” says Chalons-Browne.
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“Many of these technologies pay for themselves by saving energy over their lifetime,” he says. “They are not luxuries for affluent cities; they are good investments for every city” |
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Stresses on infrastructure most obviously occur in the transportation, power and water supply sectors as increased demand requires new capacity – a problem compounded by climate change. “Urban agglomerations account for approximately 75% of the world’s energy consumption and for 80% of greenhouse gas emissions,” says Chalons-Browne. “Cities will have to bear the cost of minimizing their increasing impacts on the environment by enforcing energy-efficiency measures and adopting renewable energy sources.” Although the scale of the challenges associated with urbanization is daunting, it is not insurmountable: politicians worldwide are waking up to the importance of building cities fit for the future. Part of the solution could be the construction of new, purpose-built cities such as New Songdo in South Korea, King Abdullah Economic City in Saudi Arabia, Global Gateway Logistics City in the Philippines, Meixi Lake District in China and PlanIT Valley near Paredes in Portugal.
Almost all developed-country cities also have initiatives to improve the infrastructure and the quality of life for citizens in important existing cities. For example, the City of New York has recognized the challenges posed by its growing population and its ailing infrastructure and adopted PlaNYC 2030, which addresses infrastructure development, including transportation, waterways, housing and solid waste disposal, and aims to reduce greenhouse gas emissions by 30% by 2030.
Opportunities for banks
The shift in the world’s demographics has not gone unnoticed by the world’s largest banks. At a global level, most of those moving to urban areas are poor and by implication unattractive from a retail banking perspective. However, the infrastructure investment associated with urbanization presents a huge opportunity in terms of project finance and capital markets mandates.
Perhaps less obviously – but potentially more lucratively – the financial infrastructure requirements created by this migration to cities could provide a big opportunity for banks’ transaction banking businesses. “McKinsey says that the greatest opportunities for growth in the coming years will be in the world’s 600 top cities,” explains Francesco Vanni d’Archirafi, chief executive of global transaction services at Citi. “These cities are looking for efficiencies and ways to improve the services they deliver to their residents.”
Citi argues that a confluence of factors rather than just urbanization is creating opportunities for banks in cities. “Commerce, which grows faster than GDP, is being globalized,” says Vanni d’Archirafi. “Global solutions are needed as people move across borders and as cross-border capital markets flows increase.” Moreover, the increased ease with which people and capital flow around the world reinforces the importance placed on cities by accelerating urbanization. “There is increased competition between cities to attract businesses,” says Cisco’s Menon. “Therefore there is a need for cities to upgrade their infrastructure and ensure environmental sustainability.”
Digital infrastructure
Another trend that is driving opportunities in cities for banks is digitization. “It is affecting every aspect of daily life,” says Vanni d’Archirafi. “Just 20% of the 1 billion Africans have bank accounts but 50% have mobile phones. Consequently, mobile phones have the potential to replace the banking system. By superimposing stored-value technology with mobile phones it is possible to create mobile wallets that allow citizens to handle daily payments without using cash, for example paying for their parking through smart metering using their mobile device.”
Sascha Haselmayer, general director of living labs global, a non-profit association based in Copenhagen that promotes innovation in services in cities, agrees that there is now a level of digital infrastructure readiness within cities and that they must take “a critical step towards greater integration of data-processing capabilities in real-time, enabling entirely new services”. He adds: “Through the widespread availability of data or voice-enabled mobile devices citizens are able to carry out a large number of transactions – if only they were available.”
Transaction banks: Making life easier
The potential role of transaction banks in helping to transform cities is wide-ranging. “The goal of many public-sector bodies and governments in relation to financial and payment infrastructure is often to make life easier for individuals who are part of urbanization,” says Ray Zabarte, global head, product development, at Standard Chartered. Given banks’ capabilities in payments (and services management in some cases), transaction banks can therefore be a facilitator of city authorities’ visions.
Vanni d’Archirafi at Citi sees banks as having a broad role in transforming cities. “Banks can ensure that urbanization, globalization and digitization are channelled in a transparent and efficient way,” he says. “They need to be able to service the end-to-end supply chain and the ecosystem of a city – it is important to remember that cities are very big buyers of goods and services.”
There are a number of core themes that emerge from banks’ engagement with public-sector entities:
Stored-value cards
One of the most important is the introduction of near-field technology stored-value cards such as Oyster in London, Octopus in Hong Kong and EZ-Link in Singapore. Indeed, increasingly, as in Singapore, London and elsewhere, transit payment capabilities are being embedded directly into debit and credit cards. “Typically, [stored-value card] initiatives are often not a single bank-led initiative – as in the case of Singapore, they may be provided by an independent company run by a consortium of banks such as Network for Electronic Transfers,” explains Zabarte. “In addition, a bank or a group of banks may support the provision of services by managing liquidity associated with stored-value cards.”
Mobile payments
A second key area for solutions for cities is mobile payments. Although not always a government-led initiative, such projects are frequently backed by public administrations because of the increased efficiency they offer in accessing city services and their potential for improving social inclusion by banking the unbanked. “Mobile payments would be a massive enabler to rationalize inefficiencies in micro-payment collection such as parking, public transport, car-sharing, electric vehicle charging, and other small transactions,” explains Haselmayer at living labs global.
Standard Chartered is working on providing solutions where the mobile wallet can be used – even for salaries, according to Zabarte. “Corporate entities have requested assistance from banks to provide solutions in response to the local government’s financial inclusion objectives in providing a more secure way for storing value for those people who are unbanked, to make a greater part of the economy visible in national statistics such as GDP, and to reduce the sizeable costs associated with cash,” he says. Safaricom’s M-Pesa mobile transfer solution in Kenya is widely seen as the role model for mobile remittance payments and stored value. “A critical factor in its success was the creation of distribution points to allow retrieval of cash,” says Zabarte.
Electronic tax and fee collection
A third big theme in city infrastructure projects that involve banks is electronic tax and fee collection, which is becoming increasingly widespread. “In India, Citi provides a bank-agnostic tax payment gateway that is helping to improve the efficiency of taxation and that is important in bringing citizens into the tax system to build prosperity and growth,” says Vanni d’Archirafi at Citi.
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“Citizens will be able to interact with government services and open information via self-service capabilities from any device in any location” |
The PlanIT Valley project, near Paredes in northern Portugal, will offer citizens similar functionality. PlanIT Valley will be Europe’s largest sustainable project and is being developed by Living PlanIT, a sustainable urban technology company, with Cisco as master planner for information and communication technology, design and architecture. “In PlanIT Valley city operations will integrate with financial systems and in turn with government systems via the urban operating system,” says Steve Lewis, chief executive of Living PlanIT. “Taxes and bills for services from governments will be presented and paid electronically, while citizens will be able to interact with government services and open information via self-service capabilities from any device in any location.”
Further treasury and cash management projects
In addition to these central themes, there are a wide variety of other potential projects on which banks can work with city authorities, including more efficient management of supplier relationships that unlock trapped cash for both the public sector and private suppliers and improvements in treasury and cash management to enhance visibility and control and lower costs. There is also increasing use of commercial and prepaid cards to make travel and expenses and other government spending more efficient and transparent and to pay social security benefits more effectively. For example, in the UK less than 2% of social security payments are by cheque but it still costs £30 million a year to process them. In response, the UK’s Department for Work and Pensions has established a money-transmission service to issue cards for social security benefits in advance of the abolition of cheques in 2018.
Unique urban profiles, bespoke payment solutions
Bespoke and tailored – coupled with solutions – are possibly the most overused words in the banking lexicon. In the provision of services to cities, however, such language is justified given the unique profile of each urban centre. “Every city is different, faces different challenges and is at a different stage of development so there are no established first choices in terms of types of solutions to be adopted and no set evolution curve,” says Vanni d’Archirafi at Citi.
Value, volume and purpose are the main determinants in the types of payment solutions that are needed for a particular country, according to Standard Chartered’s Zabarte. “A domestic infrastructure need not be too sophisticated because it’s usually denominated in the same currency and often [produces] high-volume, low-value transactions,” he says. Conversely, for countries such as those in the Middle East with a large migrant worker population the high volume of payments resulting from cross-border remittances is an important consideration in the development of international payments infrastructure. “Such cross-border payments may be initiated from different destinations across different countries and via different modes ranging from accounts, mobile or cash,” says Zabarte. “As regulations and platforms differ across countries, setting up of such payment infrastructures can be more complex.”
Despite widely varying regulatory, political and economic environments, it is possible to apply the lessons of one implementation to another city. “Commonalities will be greater between cities than between cities and the countries they are in,” says Vanni d’Archirafi. “Best practice is therefore possible – there is a broad acceptance worldwide of the need to do more with less; and everyone wants transparency and control. In addition, there is detailed dialogue between cities over the same issues, such as urban transport. The platforms and banking services are also similar – ultimately the biggest difference will be procurement processes.”
Zabarte agrees but says greater overlap in technologies and regulatory structures would be helpful. “It would be advantageous if there was greater commonality between different countries’ approaches to these sorts of issues so that similar solutions could be scalable across borders and cost savings from efficiencies could be reinvested into the ecosystem,” he says.
Lack of framework is a barrier to progress
The multiplicity of political and regulatory environments in cities around the world mean that impediments to improvements in the delivery and accessibility of public sector services vary widely. Nevertheless, some themes recur. “The biggest challenge in creating smart cities is regulation. Often existing policies restrict how technology is used or how buildings are built,” says Cisco’s Menon.
For example, Haselmayer at living labs global says that a “confusing regulatory environment – especially in Europe – and the prohibitive pricing policies of mobile operators mean that service operators are either squeezed for revenue when using mobile billing or desperate to promote credit/debit-card pre-sign-up, which typically shows an 80% lower user uptake”.
Another common roadblock to the introduction of new ideas in cities is a lack of vision or consistency among public authorities when making technology decisions, according to Haselmayer. “Budget pressures are exposing decisions that should have been taken a long time ago,” he says. “Protectionism, bad investments into digital infrastructures and lack of courage to innovate and see through organizational change all become apparent as budget cuts lead to service cuts, rather than smart use of mobile and other digital payment and other tools to deliver better services at lower costs.”
The ideal is for governments to set framework regulations – such as in the UK where many local councils are embracing prepaid cards for benefits payments after the government established a framework. However, many countries have instead decided on a more reactive approach, letting the market drive the set-up of the ecosystem, according to Zabarte at Standard Chartered.
For example, transportation services in Germany are part of the city administration and many cities have started offering web-based applications for consumers to buy tickets online, while others use prepaid cards, according to Jens Michael Otte, head of public sector and institutions, Germany, at Deutsche Bank. “However, the rules and systems used for such applications are all determined locally,” he adds: “There’s no national framework because of Germany’s federalist structure.” Inevitably, the absence of a framework slows the uptake of innovative technologies.
Some governments have seized the opportunity to marshal the resources of private-sector participants by laying out not just a framework but an entire structure for a given technology. “The banking regulator in India is taking a lead role in trying to provide access to financial services with the National Payment Corporate of India establishing what is effectively a clearing house for mobile-initiated payment transactions,” says Zabarte. “By providing a single standard with interoperability, the Indian government will accelerate take-up of mobile payments and ensure that banks invest in added-value services rather than basic infrastructure.”
Are technology projects important?
The rapid growth of urban areas is beyond doubt. However, there are some that argue that the governmental realities have yet to catch up. “In our experience, it is at a country level rather than a city level that issues around urbanization are being addressed as it is country-level government that largely funds and plans infrastructure development,” says Zabarte at Standard Chartered.
Vanni d’Archirafi at Citi agrees that “by definition, there is a division of decision-making at the national, regional and local level in the public sector”. However, he argues that the globalization of commerce, urbanization and digitization means there is an increasing focus on the challenges facing cities and that is leading to enhanced decision-making at a city level. “In the developing markets, many countries are working to keep pace with the speed of urban growth while in the developed world deficit reduction is driving the adoption of private-sector best practices to reduce costs,” he adds.
Regardless of where decisions are made, urban living is a reality for the majority of the world’s population and it is indisputable that ways must be found to make living in cities more pleasant. Chalons-Browne at Siemens is convinced that technologies to transmit electricity more effectively, use energy more economically, and move people more efficiently are crucial to making cities more sustainable. “Many of these technologies pay for themselves by saving energy over their lifetime,” he says. “They are not luxuries for affluent cities; they are good investments for every city – including those in emerging economies. Cities can secure and improve their attractiveness and competitiveness with modern infrastructure. The key to that is efficiency.”
Moreover, quality of life and the efficiency of public services will become increasingly important in determining where companies locate. Reiniera van Pallandt, financial sector adviser at Amsterdam in Business, the foreign investment agency of the Amsterdam Metropolitan Area, says employment markets or the proximity of Schiphol Airport to the city centre are crucial in encouraging businesses to locate in the city. However, she adds: “The provision of an efficient electronic tax payment systems such as that used in the Netherlands or the use of contactless transit payment cards in Amsterdam are important factors because they make it easier for businesses and individuals to live in the city.”
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