Mastercard’s Open Loop Payments Make Cities Smarter

Making a city “smarter” is an ambiguous goal. It means installing traffic signals that can identify when a road is being used, but it also means building an entire smart neighborhood plagued with data privacy and ownership issues. Somewhere in between those is the right balance for using technology to improve how a city operates.

What we’re starting to see more of now is a city partnering with an enterprise company such as Mastercard—an organization that already has multiple solutions working fluidly in the private world—and seeing how those applications can then be adopted within the existing infrastructure. This is the often more simple and results-oriented approach, as technology is already so ingrained in the daily city lifestyle that working with large business partners to deploy a project is just more practical than having a city launch their own version of a smart city upgrade.

For Mastercard, their approach to making cities smarter relied on simplifying the daily commute for citizens in over 150 cities. The payments company has begun using its massive network to address shortcomings in city infrastructure without changing how a resident or tourist lives and spends their money.

“Innovation looks like simplicity. It looks seamless,” says Matt Blanks, Mastercard’s VP of enterprise partnerships.

Around the world, 170 million people use metro systems every day. But not every metro system is the same. Closed loop systems ask riders to load a specific card or buy a certain pass that can only be used within that system, creating confusion for tourists and lengthy delays for residents when they have to refill that card or when the system is not working.

Mastercard recently rolled out their own Transit Solutions initiative, piloting it in London, Vancouver and Sydney, then rolling it out to hundreds of more cities. The idea is simple: Use a payment solution a resident already has, like EMV and tap-enabled credit cards, to pay for transit. This kind of open loop system—meaning paying for a service with a card that can be used anywhere payments are accepted—is a key cog to understanding the true outcome many smart city initiatives are trying to embrace.

There are other ways to approach this problem as well. Smart ticketing, which Mastercard rolled out in New York, Boston, and other cities, allows a rider to buy and display a transit ticket on their phone. Dual application is currently active in Bogota and allows riders to make trips and settle the charges later, skipping the often slow process of pre-loading a transit card every week.

“Cities are becoming challenged by how you interact with a customer, resident, and visitor, and transit is very much the lifeblood of the city,” says Blanks. “That’s why we started to interact with cities in this way, to say how is it easier to interact with a citizen.”

Right now, just over 50 per cent of the world population lives in cities. By 2025, that number will climb to two-thirds of the world population, meaning an extra six million people around the world are moving to cities every month. As an enterprise payments company with close to one billion credit cards in circulation, MasterCard knew they were in a unique position to solve infrastructure problems at a city-specific level.

“We look at places where there are big inefficiencies and we can have a big impact,” says Blanks. “It’s fairly easy to say most transit is typically inefficient, You shouldn’t have to stand somewhere for five minutes trying to figure out how to get from point A to point B.”

“It’s all about the options that provide convenience, control, and security,” says Sukhmani Dev, a VP of digital payments at Mastercard. “We believe open-loop payments are better for consumers because it gives them the flexibility to spend the way they want, however they want, and in whatever quantity they want.”

“Innovation looks like simplicity. It looks seamless.” – Matt Blanks, Mastercard VP of Enterprise Partnerships

For tangible smart city technology adoption, transportation is a great starting point as it is often outdated so any improvement will have an impact right away. There are thousands of examples of other smart city initiatives, with dozens in individual cities alone. But Mastercard knows the smart city experience begins and ends with residents, so the first step is to address their concerns. Embracing open-loop payments in transit is the first step towards eventually removing barriers for how and when any person wants to pay.

“From a consumer perspective, adopting open-loop payments is a very simple proposition: You don’t have to ever think about it again,” says Blanks. “From a city’s perspective, it is key fiscal savings.”

Blanks points to the city of London, which is now saving over £100 million ($130 million USD) annually by embracing open-loop payments solutions. That money can go back into core infrastructure projects or updating legacy solutions.

Municipal governments, however, have their own bureaucratic challenges with any systematic changes. As Blanks explains, that was the case with London, and New York, among others. Interestingly, that was not the case with some Eastern European countries, which did not have robust transit payments systems in place, so open loop was the easy fix to the decades-old system of using cash and buying tokens. Essentially, when a city does not have an electronic transit system in place, it is easy for Mastercard to come in and completely revolutionize the way the city moves around, like what they did in Kiev.

Even bringing the open loop system to Vancouver was a bit easier, considering the city planned ahead for disruption and installed EMV readers on their transit payment terminals. This allowed the city to hit the million contactless payment riders mark in only two months.

“Generally what you see in cities are these huge multi-million/billion infrastructure projects, but the pace of change is so quick that often there’s often a moment of paralysis when the cities think about ‘What should we adopt?’ says Blanks. “There’s a clear message of working with Mastercard. It’s something everyone has in their hands, and we evolve that technology just from our side of things. We in essence future proof those massive decisions.”

The bigger ripple

Open loop payments are just the first enabler to creating a true smart city approach to solving infrastructure problems. When a massive company such as Mastercard is implementing their forms of payment, it means they can then innovate using the data they collect and the ongoing problems a city has.

A large amount of current smart city solutions are based on addressing how a city is expanding, and dealing with how people move around the city. By using open loop solutions to address transit problems, congestion can be reduced as well.

In late 2017, Mastercard ran a pilot project with the city of Chicago to see what impact open loop adoption could have. During weekdays when the Chicago Cubs (a popular baseball team) played games, traveling on transit would be a nightmare. On top of the normal rush hour, tens of thousands of people are all using one line to get to one place.

Mastercard rolled out incentives to travel earlier or later than the peak hours. If a commuter hopped on transit one hour before or after the peak 5-6PM time slot, they would receive a fare rebate or contribute $5 to a charity, all funded by MasterCard. After the pilot concluded, MasterCard found that their incentivization resulted in 17.5 per cent lower ridership during peak hours, if the results were applied to everyone using transit.

When it comes to incentivization, Blanks even looks further to the future once all the potential integrations of open-loop payments are put together and operate seamlessly within one city. He imagines being prompted to take a later train than he usually does after a long work week, in return for points towards a free pizza, because the rewards system knows he has a family with two young kids and they like to eat out on Fridays.

This approach has wide-ranging prospects. Right now, infrastructure is always built to handle the absolute peak periods. Subways are made to be as big as possible to fit the most commuters they can during rush hour. Other than those few hours each day, they sit mostly empty. The same goes for highways, sidewalks, public parks, and more.

“There is only so much infrastructure you can build, and you build it for the peaks of the peaks, and they’re getting bigger and bigger, so we’re working with cities to spread that demand,” says Blanks.

When open-loop payments and companies like Mastercard are able to limit those peaks and spread the demand, it takes the strain off the entire system, even if it requires a bit of incentivization.

The way enterprise companies can embrace infrastructure innovation is limitless, and it’s not only Mastercard pushing the envelope. Open loop payments are one step on a journey towards understanding and reinventing how residents interact with their city. Microsoft is addressing transit concerns as well, but they’re focusing on the areas they excel in: Cloud computing, digital hosting, and AI. These all come together to create meaningful pilot projects in cities like Auckland that look to “to build one of the most advanced transportation systems in the world.”

The real takeaway on enterprise-municipal partnerships lies in the simplest interactions that everyday citizens have. When they hop on the subway, and they may not carrying change, or they forgot to load up a prepaid transit card or worrying if they’ll be at risk of a ticket or fine when the system is down. These problems can be solved with widespread solutions that enable a better understanding of what it means to become a smart city.