Between 19 and 21 March 2011, Mr. Ajay Banga, President, MasterCard Worldwide, addressed the 2011 China Development Forum in Beijing. Mr. Banga also visited the new MasterCard Center. The Forum, initiated by the State Council Research Center in 2000, is held at the Diaoyutai State Guesthouse in March every year the week after the National People's Congress (NPC) and Chinese People's Political Consultation Conference (CPPCC). Its aims are to gauge views of the international community; to extensively study key issues affecting economic and social development in and outside China; to explain advances made in reforms and development trends in China; and to study the suggestions of the international community on the economic development strategies of the country. Participants of the Forum are mainly top corporate executives from different countries, senior officers of international organizations and well-known academics. This year, participants were addressed by and exchanged views with senior State Council officials and political and economic leaders in China.

　　In his speech, Mr. Banga talked about the way forward for the payment industry and its role in aiding transformation of the payment market in China, conducive to social harmony and transparency in economic activities. He pointed out that the prevailing mode of payment with cash is costly and open payment systems can help lower usage of cash. Open payment systems, which can give transparency to economic activities, allow government departments to pool resources for use on more critical missions, thus encouraging innovation and social harmony. Electronic payment, which is open for diverse applications, will not only encourage personal consumption, but also lower systematic risks.

　　In conclusion, Mr. Banga said the successful experiences of the international payment industry are strong references for China's payment market. He believed an open payment market would help boost domestic demands in the country hence bring benefits in social harmony and more effective monitoring and control, to lower risks and increase efficiency. In other words, a gradual step-by-step transition from cash payment to open payment systems will be in the best interests of China's development and stability.

The speech of Mr. Ajay Banga at the 2011 China Development Forum:
　　Ajay Banga: E-payment Presents the Best Opportunity for Future Development
　　The pace and momentum of growth in China is very palpable and the last three decades are testament to your focus on planning and investment in the economy. The thoughtful steps taken on economic policy have fostered social development and economic growth. In the area of electronic payments, you have set up a strong inter-connected domestic network for banks and merchants that has helped increase electronic payments in China substantially in the past decade.

　　As China moves towards becoming the world's leading economy, you have set some focused goals of rebalancing China's growth model from exports to greater domestic personal consumption and service industry development. I would like to discuss today how the payments systems should evolve and become more open to supporting this objective while also helping to strengthen social harmony and drive transparency in the economy.

　　First, cash is very expensive for the economy and reducing the amount of cash in the system is transforming and beneficial. Let's start with the cost of handling cash; printing, transporting, securing, distributing and changing bills. Multiple studies estimate these costs to be at 0.6% to 1.5% of a country's GDP. You add to this the cost of handling cash for banks to transport, secure and distribute to branches and ATMs. Then comes the cost for the merchant who must accept it, guard it from theft and bank it. And in these numbers, we have still not added the costs of tax evasion supported by cash or the cost of transfer of illegal goods within the country or across borders. Electronic payments reduce or eliminate much of this cost and increase transparency and tax efficiency. The drive by the Korean Government over the last two decades is a very good pointer for cost reduction and tax collection improvements. Based on the statistics from Korean Institute of Public Finance, the informality ratio has dropped from 23.7% in 2000 to 17.1% in 2008. A "win-win" for all.

　　Second, electronic payments tend to correlate with higher Personal Consumption growth. Research shows that physically held cash limits the money supply available for consumption, which limits the "working capital" available for households. Japan and Germany are good examples of relatively closed payment systems and a low level of household spending. In contrast, markets with open electronic payment systems have a better developed retail industry. The developed retail sector attracts consumers and tends to drive a higher proportion of personal expenditure as a percentage of GDP. Australia, Canada and South Korea are good examples in this regard.

　　Third, open payments systems correlate with lower cash. There is a significant correlation between the increase of payment network options and reduction of cash for retail payments. Usually, countries with open payments networks tend to have half the cash usage – the value of cash payments as a share of total consumer payments – when compared with countries with closed payment systems. By example, research shows that the cash usage in South Korea, Canada and the US is much lower than the usage rate in Russia. One of the reasons this happens is greater innovation in payments options – not just credit and debit, but also in prepaid, mobile, ecommerce payments – when there are multiple networks in a market.

　　I hope I have built the case for you that open, electronic systems can benefit the economy in reducing cash and improving consumer spending; a priority within the Five Year Plan.

　　Now, let's review the impact of open payments systems on social harmony and innovation. There is a correlation between cash-rich, closed market models and commerce in the "grey" economy. In fact, a recent study estimates that at least 20% of Europe's GDP appears in the "parallel" economy. Estimates in the former Soviet Union countries and many of the strong growth Asian economies are more than three times that rate. Displacement of cash by electronic payments can reduce this significantly and impact GDP positively. The additional tax revenue for the Government can also be used for further investment in the critical priority areas, thereby benefiting society and reducing potential sources of conflict among citizens.

　　Open market models tend to encourage different players to innovate in smarter and safer cash alternatives. In Canada and Australia, innovations involving chip cards and rewards programs accelerated the adoption of electronic payments by consumers AND improved personal consumption levels. By contrast, countries like Russia and Mexico with relatively closed systems have had low levels of innovation and a lower impact on driving personal consumption.

　　Importantly, innovation broadens access to economic opportunities through financial inclusion; as more rural and low-income residents become connected to commerce in the economy. For example, creation of low-cost transaction systems that use mobile phones as both a payment and acceptance device, and storage of monetary value for low income and rural populations are areas of great opportunity ahead of China. Attracting the best and most creative ideas in this field from around the world will be of benefit — and open systems are the pathway to providing that. Over time, both these effects promote growth and social harmony in the masses.

　　Lastly, let me highlight how open, multiple systems reduce risk of payments system collapse. You may recall that in the aftermath of 9/11, the overlapping payment mechanisms at US Banks allowed consumers and businesses to make payments and access cash even when the national check collection system was crippled. Having multiple networks, clearing houses and payment options ensured reliability and security by preventing single points of system failure. This was despite the fact that the data centers of several banks were darkened for days.

　　In addition, benefits of electronic payments are maximized when you have global scale in some of the payment systems operating. That scale allows the networks to invest billions of dollars in system integrity, fraud detection and operational robustness, while amortizing that cost over all the markets they operate in. This significantly reduces the burden on any one economy while transferring success and best practices across them. All national payment and banking systems can benefit from global scale players involvement in the economy.

　　In summary, let me leave you with the following thoughts:
　　Cash is very expensive for the economy. Electronic payments support higher personal consumption. Open, multiple payments reduce cash significantly. Open systems help to foster innovation and improve social harmony by improving transparency in the economy and raising resources for priority areas by the government. Open, multiple systems reduce "systems" risk of the economy. I believe control of the payment systems' integrity, safety and soundness should continue to be a priority of China's regulatory system. However, other areas with a lower risk profile – such as low value payments and online consumer and consumer-to-business payments – may not require the same level of regulation. Consideration of suitable global best practices and increase of payment network options with necessary adjustment for Chinese national realities and imperatives could help advance these efforts appropriately and efficiently. As you move forward, MasterCard Worldwide pledges to support this transition with its best efforts. I hope you have found my ideas useful in deliberating the evolution of your systems over the next decade. MasterCard looks forward to being a partner in your success.