Camilo Tellez and Dan Waldron contributed to this post. A version was also published by the Better Than Cash Alliance.

Over the next decade, cities in developing markets will drive global economic expansion. McKinsey predicts that 440 cities in emerging markets will generate half of all growth through 2025.

To realize the potential of urbanization, developing cities need to become denser, easier to navigate, and more adept at using data to deliver public services. Inefficient public transit has posed a significant challenge to urban areas around the world. 1.2 billion trips are made using public transit every day, but the share of trips via public transit has declined in developing cities from 35.5 percent in 1995 to 23.7 percent in 2012.

Here are four ways digital payments can increase the efficiency and scale of public transit systems.

1. Eliminate problems with cash transactions

Buses are the workhorses of mass transit in developing countries, but cash collection presents barriers to efficiency and widespread access because it

• provides few or no transaction data,
• exposes users and staff to crime,
• offers easy opportunities for petty fraud, and
• interferes with bus operations.

In Kigali, Rwanda, city buses were losing up to 40 percent of revenue to cash handling issues and fraud, and operators had few data that would help them efficiently deploy their fleets. The city government had had enough.

Local company AC Group worked with Kigali Bus Service (one of three major co-operatives) to install a “Tap & Go” payment system. Riders now use preloaded smart cards to pay without pause and are transported without trouble. The cards can be topped up via mobile wallets, and customers were offered discounted fares to help spur adoption.  

Results were immediate: revenues increased 140 percent in the first several months. Service is faster and more reliable, which has led to an increase in commuters. Bus operators have been able to handle the increase by increasing their fleets and deploying more buses to crowded routes.

“Tap & Go is ensuring commuter safety by providing secure public bus fare payments, ensuring respect of the bus seating capacity, and helping bus operators plan and monitor their fleet,” said Christa Munezero, data analyst and head of government relations for AC Group.

2. Boost economic mobility

In Bogota, Colombia, poor residents faced affordability constraints to mobility, spending up to 17 percent of income on transportation. The switch to an electronic transit card, Tu Llave, allowed the city to offer targeted transit fare subsidies to its poorest residents.

Subsidy recipients increased their monthly trips by 56 percent, compared with normal fare card users, and evidence showed that the subsidies correlated to 20 percent higher hourly wages for informal workers. (Other major cities in Latin America like Rio de Janeiro, Brazil; Lima, Peru; Buenos Aires, Argentina; and Santiago, Chile, have embraced electronic payments for mass transit.)

3. Make data-driven decisions

Kigali’s Tap & Go helps the government make data-driven decisions that influence infrastructural development, hence reducing traffic congestion.

One data-driven decision involves the rollout of a new Bus Rapid Transit in Kigali, with city officials using ridership and transaction data from Tap & Go to design a system that will further reduce congestion.

4. Promote digital adoption

Visa estimates that 100 major cities could realize $470 billion in annual net benefits by going cashless, while generating $12 trillion in increased economic activity over the next 15 years.

But some have raised valid concerns regarding how low-income communities access and embrace new technology. If the value of new systems must be properly communicated and sufficient incentives are offered, users will adopt a new payment technology, resulting in a more bottom-up embrace of digital payments.

But this can happen only if regional governments take a strategic view of digitization, ensuring that any payment technologies are interoperable and implemented as part of a wider vision.

Cities around the world have seen digital payments for transportation as a potential avenue for driving digital payment adoption. In 2017, Mexico City rolled out a new transit debit card that can be used to make utility payments and purchases at participating vendors.

The future of smart cities

Digital payments in mass transit save time, reduce costs and revenue leakages, provide real-time insights on service delivery, and lay the foundation for transforming city governance, planning, and organization.

In the near future, cities can become frictionless, integrated places. City managers will be able to analyze data to allocate their resources and anticipate problems, while businesses can build sustainable solutions that integrate with existing platforms.

Developing cities fight a daily battle to ensure that the benefits of urban life are not lost to congestion. This is how they will win.