Ideas & Updates

Picking the Gridlock: Digital Payments in the Transportation Sector

Transportation Series: Blog 1 (Introduction)

In this blog series, the Better Than Cash Alliance examines three key aspects of the transportation sector: Tolling, urban transit, and ride-sharing with a focus on emerging economies. We review key impediments to the flow of goods and people, and dive deep into extraordinary examples of innovation that have leveraged digital payments to overcome barriers, reduce costs and increase productivity. Read blog 2 on tolling, blog 3 on urban transit, and blog 4 on ride-sharing.

By rails and roads, across continents and oceans, our world is in motion. The beating heart of global commerce is constantly pumping: $15.5 trillion dollars of physical merchandise was traded between countries in 2016 alone. The daily rhythm of urban commute is unceasing and ever-expanding, a tide of people swept in at dawn and pulled out at dusk. And roads, don’t forget roads, crisscrossing every country in the world, enough roads to hold the world’s 1.3 billion vehicles, enough cars and buses and trucks to carry every human on earth.

Transportation is one of the cornerstones of our economy. Free and efficient movement enables productivity, by allowing goods and people to be relocated from their point of origin to the place where they can generate the most value. An x-ray machine sitting in a warehouse in Chennai is an expensive paperweight. But when transported to rural Rwanda, it saves lives. The same is true of people: well-connected urban transportation creates stronger and more efficient labor markets by increasing the number of people who can do a given job. And uncongested road networks stitch together the rural with the urban, feeding cities and supplying villages.

Free and unfettered transportation networks have never been more important, or under so much strain. Annual passenger traffic is projected to increase by half between 2015 and 2030, while global freight grows 70% over the same time frame. At the same time, as the world becomes smaller and more integrated, the cost of delays and inefficiencies within transportation systems continues to rise:

  • Congestion in Southeast Asia costs countries 2-5% of their GDP every year (McKinsey, 2018).
  • Every additional day that shipborne cargo spends in transport is equivalent to a 1% tariff (Hummels and Schaur, 2013), and countries that improve their port efficiency by 10 percentage points have seen exports rise by 2% (Herrera Dappe and Suárez-Alemán, 2016)
40% of food waste occurs post-harvest, with degradation and spillage caused by poor transportation infrastructure

Frictionless, efficient transportation can only be achieved using electronic payments. Every voyage has a cost, and every cost requires a transaction. These go by different names: tolls, duties, fares, tariffs. But one thing they have in common: cash leads to delays and leakages. Cars must stop, drivers must find change, ships must wait for customs officials. Multiply those moments wasted by the sheer volume of transportation, and it becomes clear that we are waiting lifetimes to move. It does not have to be this way. By removing payment frictions, electronic payment modalities can facilitate the faster movement of goods, services, and people.

But the benefits of digital payments go beyond speed:

  • Increased transparency ensures that revenue arrives where it is supposed to;
  • Digital payments enable dynamic pricing, which can be used to deliver subsidies and accurately price congestion; and
  • Data, always data; digital transactions allow cities and states to understand what services are being used when and where, so they can make informed judgments on how to allocate resources.

Electronic payments have been endorsed by the World Trade Organization an essential step in improving transportation efficiency. Its Trade Facilitation Agreement commits members to “adopt or maintain procedures allowing …electronic payment for duties, taxes, fees, and charges.” A Visa report on Cashless Cities concluded that digital payments “have the potential to significantly decrease costs associated with transit and toll systems maintained by municipal governments.”

Nor do the benefits flow just one way. We have seen multiple examples of the transportation sector driving adoption and usage of new payment technologies. Octopus cards in Hong Kong that began as simple metro cards are now used at 20,000 locations to pay for over $25 million in goods and services daily. Ride-sharing services owe their existence to payment innovation, changing payments “from a thing that happened rather than a thing that was done.”