Smart Cards for Benefits Dispersal Prove Promising in India’s Andhra Pradesh

The state of Andhra Pradesh has been using biometric technology to reach its poorest households since 2006, when it originally began piloting the concept of distributing social security and work program payments through smart cards.

According to a recent article by liveMint, the smart card project today extends to almost 12.7 million throughout the state and allows beneficiaries to more effectively access their social security payments, as well as their entitlements from the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which provides 100 days of work annually to eligible poor households.

The system works by assigning basic savings accounts and smart cards to eligible participants, and using local outposts and customer service providers (CSPs) to run the outposts within individual villages. Beneficiaries bring their smart card to the CSP, who swipes the smart card on a Point of Service (POS) machine, which is described as working similar to an automated teller machine—“the PoS machine, after authentication, generates a printout of the pay receipt and instantaneously updates the payment systems of the bank, MGNREGS and social security pension servers.” Based on the receipt, the CSP distributes the appropriate amount of cash to the recipient.

Despite its current success, caution should be gleaned from its humble beginnings. For example, initial upfront costs and challenges are reported by FINO as quite large, and included the daunting task of administering the program in over 60,000 rural villages, which entailed issues such as high illiteracy levels, inaccessibility, and “improper education of the project to the villagers.”

Nonetheless, this advanced electronic system has significant implications for the landscape of financial inclusion within India. A 2010 McKinsey report estimated that “an electronic platform for government payments to and from individual households could save [India] USD 22.4 billion a year.” The elimination of time waste, leakages to the non-poor, and transaction costs are a few of the advantages of switching to electronic payment systems. According to Additional Commissioner, Rural Development, V. V. Prasad, Andhra Pradesh is a leader among the country in utilizing biometric smart card technology for benefits dispersal, and its success has initiated pilot programs to explore how the technology can be used for other government programs.

The concept also paves the way for linking savings schemes and other asset building initiatives into these welfare programs to accelerate poverty reduction amongst the most vulnerable populations. Although the program as of now disperses cash to beneficiaries, the potential of eventually eliminating this step (thereby further decreasing costs) and incorporating savings mechanisms as an additional product can enhance its impact. The New America Foundation has been tracking such movements towards e-payments for social protection programs through its Global Savings and Social Protection initiative (GSSP) project, and studying the savings opportunities and challenges that they pose. The project will be closely monitoring the potential of this program, and in India as whole, to see what lessons can be applied to social protection programs in other countries.