Regulators in India recently defined a framework for a FinTech regulatory sandbox designed to test products and services in a live environment, similar to established players (BigTech) and startups in the banking & insurance sectors and capital markets. The new sandbox will operate in a FinTech hub at an Indian smart city in Gandhi Nagar, Gujarat. It is run by the International Financial Services Centres Authority (IFSCA), a statutory body set up by the Indian government this year.
Innovative ecosystems, such as the above-mentioned smart city hubs, lead to partnerships between local research universities and businesses, giving local talents access to intellectual resources and opportunities to practice their skills on smart city projects. A regulatory sandbox provides an opportunity to test innovative products in a fail-safe environment. This article explores why we should care about smart cities and use financial technologies to create such cities.
Rapid urbanization in developing countries is a concern for governments worldwide. Currently, cities are incapable of bearing the increasing load on resources. Cities collapse when they become unlivable, and the evidence for such failing cities can be seen explicitly. The only way out is to create more and smarter cities that are inclusive and sustainable. Fortunately, though mostly feeble, some efforts are being made to create such cities worldwide.
The number of smart cities worldwide and initiated development projects are growing. Globally, 27 cities have been identified as ‘smart cities’ based on specific parameters by various monitoring and governing organizations. Interestingly, the top 25 cities of the world account for half of the world’s wealth. Hence, advanced innovations in financial services focus on legacy tier 1 cities for quick wins. However, there is a high concentration of economic power and sustainability burden on a handful of cities. This makes a strong proposition for developing new cities and ensuring that we are mindful of financial inclusion and convenience through innovations.
According to The Smart City Journal, over 40 global cities will emerge as smart cities by 2020 (might get delayed by a couple of years due to COVID-19). Nearly 300 smart city pilots are currently planned in China and India alone.
What to Expect From Smart Cities
Smart cities have emerged as an urban ecosystem that integrates digital technology, knowledge, and assets to become more responsive to users, improve city services, and make cities more livable.
Ensuring environmental, social, and economic sustainability is necessary to keep pace with this rapid expansion. An intelligent network of connected objects, machines, and platforms helps execute the combined approach to improve the running of a city. A smart city uses new technologies and data to address its economic, social, and environmental challenges.
A smart city is a framework predominantly composed of Information and Communication Technology (ICT), which develops, deploys, and promotes sustainable development practices to address the growing urbanization challenges. Countries and city governments worldwide take different approaches and focus on various elements for designing a smart city and implementing technologies. A smart city framework has four dimensions—governance, communication, environment, and public services (transport, health, and education). These trickle down to two key objectives—a sustainable and improved standard of living for citizens and buzzing economic activities. Innovative financial services are often less discussed but are a crucial aspect.
Connected FinTech, banks, and BigTech are creating an ecosystem to work together to give the best experience possible to their customers. Let’s look at some evidence for this ecosystem in our smart cities.
FinTech Innovation in Smart Cities
Visualize this scenario of a well-integrated smart city (most of it already exists as siloed or integrated solutions in some smart cities). A person walks from his office premises to a local bus station. An integrated health and pedometer app on his smartwatch indicate a high cholesterol level, and AI advises him to walk slowly. He connects to the bus station's display board using a Low Power Wide Area Network (LPWAN) wireless technology. He checks the number of minutes left for the bus to arrive and slows down his pace. On the go, he wants to reload his integrated transport card with a certain amount and pay from his mobile wallet. He intends to use this card for his bus and metro/inter-city bullet train travel. While reloading, he is offered a discount on his upcoming health check-up if he reloads for a stack amount. As his checking account does not have the required balance, he immediately opts for an interest-free overdraft or a buy-now-pay-later checkout option in his money management mobile app. His travel card is now charged with the desired value that he used to purchase a cup of on-the-go coffee from an automated tuck shop at the bus station. He used these services and got a deal and instant credit—all in 15 minutes!
Machine learning or AI, IoT, and robotic automation are predicted to be some of the most critical technologies of the decade. The Internet of Things (IoT) is fast moving from smartphones to smart cars and now to smart cities in a short period. These technologies will support embedded finance through which non-financial service businesses can give their customers access to financial services and payments, often in an invisible, seamless way.
According to an in-depth survey conducted by Tribe Payments, including research by more than the top 100 executives in FinTech, over 40% of professionals believe more investments in the future will be made in FinTechs that innovatively address environmental, social, and governance challenges by 2030. These three elements are essential to smart cities.
This observation is clear from the successful launch of some innovative FinTech products amid the COVID-19 pandemic. These products have offered the desired relief and support to citizens and businesses. For example, the bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme (CBILS) announced in the UK support numerous struggling SME businesses.
MAS introduced a care package worth S$129 million for the financial and FinTech sectors to support workers, accelerate digitalization, and improve operational readiness and resilience. Singapore provides a co-innovation hub for FinTechs and Bigtechs, wherein new solutions can be quickly built and tested, cutting bureaucracy with simplified procedures.
Communities can improve energy distribution, decrease traffic congestion, and provide access to secure open data with help from IoT and ICT. In addition, these technologies can lead to innovations in many smart cities.
Digital payments are the foundation of smart cities. From real-time contextual insurance to mobile-integrated payment services such as WeChat Pay, Apple Pay, and buy-now-pay-later checkout options such as Klarna and Afterpay, seamless integrations and customizable payment products are increasingly becoming commonplace for smart cities. At the ecosystem level, there are unified payment instruments, mobile- and web-based POS terminals, and value-added services such as tax collection and automated utility bill payments offering benefits to all stakeholders.
Here are some of the significant transport-related developments ideal for smart cities:
- Mobility-as-a service (India’s FASTag in smart cities)
- City-wide ride-hailing app (Uber in Denver)
- Apple Pay’s ticketing payment support (London, Moscow, and Shanghai)
- Transit system’s contactless payment feature with integrated services (New York)
In India, the National Highways Authority launched two mobile apps—MyFASTag and FASTag Partner—to facilitate the availability of FASTags for Electronic Toll Collection. MyFASTag is an app that helps a consumer purchase and recharges FASTags. FASTag Partner is a merchant app. Agencies such as Common Service Centres, as well as banking partners and vehicle dealers, can sell and enroll FASTag through this app. This transit pay system has been launched across multiple smart cities in India.
On the insurance front, new types of cities bring a new set of risks in lifestyle, public safety, and property and casualty insurance, which means insurers should be assessing risks differently. Pay-per-use is a much-talked-about insurance solution for such scenarios. Here are some examples of smart cities integrated with insurance:
- In Paris, AXA, a leading insurance company, has invested in a startup that enables finance and insurance options for new vehicles if owners are willing to put the vehicles on a carsharing platform. AXA is working on trip insurance and smart living insurance solutions.
- Allianz has an innovation lab to develop solutions for smart city living, mobility, and connected healthcare in Singapore.
- Swiss Re, a leading reinsurance player, focuses on emerging risks that affect cities, for example, new forms of mobility, cyber risk, and prolonged power outages.
Well-connected cities open doors for a secure and broader collection of their citizens’ data, helping in unlocking opportunities to create solutions for the masses and some premium experience services that help affluent customers differentiate themselves from the ordinary. Lifestyle-based customized insurance, payment, and lending solutions in such data-rich smart cities can lead to innovation opportunities.
FinTech and BigTech Players Focusing on Smart Cities
Here are the predictable BigTechs, long-playing FinTechs, and some promising startups that are contributing to the development of technology infrastructure and framework for smart cities:
Many BigTech and FinTech players in various segments actively support developing a smart city ecosystem. Here are some of these players:
- Payment solutions with embedded finance features, such as Visa and Mastercard; Klarna and Afterpay; Apple Pay, Google Pay, and Uber Pay; UPI; and the proposed Facebook Libra (a blockchain-based payment system)
- Shopify is an e-marketplace service provider that markets itself as a service for merchants but earns 59% of its revenue from its embedded payment products.
- Wisetack enables software companies, mostly in the home vertical, to become lending companies.
- Social media/single-service platforms are becoming marketplaces, such as Facebook, Paytm, and WeChat.
FinTechs have, so far, surpassed banks and BigTechs by refocusing on simple, practical, and consumer-centric services that resonate with real customer needs. The future belongs to finance embedded in invisible, everyday technology. BigTechs are keen on shaping the smart cities they are in. Along with investments, they offer specialized expertise, thorough knowledge of consumer segments, and networked resources. Businesses capable of investing in customer experience will be able to build, scale, and survive—regardless of market conditions or the location of smart cities.
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