Financial Inclusion: Using Existing Payment Programs to Reach Scale

Feb 2010
Washington D.C., United States, February, 02 2010 - Existing government payment programs could be a powerful mechanism to bring more poor people into the formal financial services system, enabling them to save money, make electronic person-to-person payments, and obtain microcredit according to Banking the Poor via G2P Payments, a new report from CGAP and the U.K.’s Department for International Development (DFID).

Governments worldwide currently make regular payments, including social transfers and wage payments, to at least 170 million poor people. The potential to use these payments to help more people access financial services is largely untapped. In most countries, less than one-quarter of government-to-person (G2P) payments to the poor land in a financially inclusive account—i.e., one which enables recipients to store funds, make or receive payments from others in the financial system, or is accessible in terms of cost and distance.

“Many more developing countries need to emulate the pioneering programs found in Brazil, India, Mexico, and South Africa, which are providing financial services to poor recipients of government payments,” says Mark Pickens, who co-authored the report. “A growing body of evidence shows that the usage of financial services enables poor people to better withstand shocks, build assets, and link into the wider economy.”

However, in most countries, poor recipients of government payments still have to travel long distances to collect cash from a bank teller, incurring considerable costs and inconvenience. A recent CGAP survey of 139 central banks shows the average developing country has just two rural bank branches per 100,000 rural inhabitants.

“Most recipients of government payments have to store the funds as cash, so they have no option but to conduct transactions face-to-face, limiting commerce geographically and the number of people with whom it is feasible to transact,” says co-author David Porteous. “Dealing solely in cash also means poor people often have to run major security risks.”

Even the poorest people don’t necessarily want to spend the cash they receive from the government immediately. Previous studies have found that after meeting nutritional needs, people living on less than US$1 per day still have 22 to 44% of household income for other purposes. They invest in housing, health, education, self-employment, and social and religious events that often require planning to build up sizeable sums of money. They look for financial instruments that can help them manage their funds to meet these ends.

Saving money from the government

It is not just the recipients that would benefit from a switch to new payment mechanisms for government programs. Governments could save considerable sums by switching from paying a grant in cash over the counter at a bank teller window to delivering the payment electronically into a financially inclusive account accessible via agents equipped with point-of-sale terminals. In the case of a hypothetical social transfer program paying monthly US$40 grants to 1 million recipients, the report finds that such a switch would save a government US$12.6 million over five years.

The potential for cost savings is prompting more governments to use electronic payment mechanisms, which could be the foundation for the launch of more financially inclusive accounts. The report found that 45% of G2P programs launched in the past 10 years use an electronic payment mechanism.

When payments are made directly to instruments controlled by recipients, such as debit cards or mobile phones, the opportunities for corruption are also reduced. In Argentina, one study found the percentage of Jefes participants who said they paid a bribe to local officials to access their benefit dropped from 3.6% to 0.3% percent after the Ministry of Social Development moved to an electronic benefits card.

Overcoming bank scepticism

However, one potential obstacle to the launch of more financially inclusive accounts is the reluctance of many financial institutions, which are often sceptical about the business case for serving poor people. The report explores how these institutions can increase their chances of success in this market by achieving scale quickly—in a low-margin business like payments processing, achieving large volumes is critical to profitability. Moreover, the use of branchless banking channels—mobile phones or card-based solutions, often with merchants acting as cash-handling agents—can reduce the cost of delivery substantially.

“Although it won’t be appropriate for all government payment programs to incorporate access to financial services, in many countries there is a good case for governments to experiment with this concept,” says co-author Sarah Rotman. “Rigorous evaluation is needed to add to the growing body of knowledge and to inform future investment decisions.”

Source : CGAP

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