April 5, 2012
Last month, the Consultative Group to Assist the Poor (CGAP) held an event on government-to-person (G2P) payments and financial inclusion. The event was based on a February report, “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries,” which itself was a follow up to a 2009 paper “Banking the Poor via G2P payments” on the same topic. This continuing work explores the potential to expand financial inclusion through leveraging government payments, a topic which the Global Assets Project has also been extensively involved in. Currently, we are engaged in a Global Savings and Social Protection Initiative aimed at mapping out the potential of social protection payments and the opportunities to encourage asset-building strategies as governments shift to electronic payments.
As CGAPs’ CEO Tilman Ehrbeck put it, the overlap between financial inclusion and social protection should not only help bank the unbanked, but also allow “governments to execute other social policies in a more effective and efficient way.” The challenge is, he said, to simultaneously develop “a financial ecosystem that works for the base of the pyramid.”
In the new report, Chris Bold, David Porteous, and Sarah Rotman looked at four countries—Brazil, Colombia, Mexico, and South Africa—in light of this potential. Specifically, they examined whether banking the poor through social protection payments could be of benefit to recipients, governments, and financial institutions. Each of the four countries selected are pursuing joint financial inclusion and electronic payments agendas, each allow the use of banking agents, and each have tiered “Know-Your-Customer” procedures which allow lower regulatory hurdles to opening low-balance accounts. There four countries, in other words, should provide vital clues as to the challenges and opportunities ahead.
Regarding their key research questions, CGAP found that electronic payments, properly set-up, “need not be more expensive” than cash payments. This was especially obvious by the savings in Brazil and South Africa after their shifts to electronic payments. Second, in all four countries, recipients found electronic payments more convenient than cash payments. And third, these new accounts can be profitable to financial intermediaries if they either reach sufficient scale or if they are accompanied by modest government fees. As to whether beneficiaries are using the accounts to save, Bold, Porteous, and Rotman found that many beneficiaries are not saving formally, suggesting that separate interventions may be necessary to leverage the accounts for asset-building.
While efforts to increase financial inclusion through government payments are still in their infancy, and face numerous contextual hurdles—like recipients’ mistrust of banks, account-types that don’t match recipients’ savings needs, and debit cards that allow for purchases only at certain vendors—there are a number of other benefits to electronic payments that go underemphasized in the report. Those include the savings in increased transparency and reduced corruption, especially in tackling the ghost worker problem prevalent throughout much of the developing world. It's not only social protection payments that are being shifted to electronic delivery, in other words, but government workers and government pensioners, too, a development which will surely speed how quickly payment systems can reach sufficient scale to make accounts profitable to the financial intermediaries. Other likely benefits also go underemphasized because they’re harder to measure, for instance, the economic benefits to governments and societies in moving people out of the informal economy, and the gender equality effects of providing women, who are often the recipient of government social protection payments, with formal accounts.
In all, however, CGAP’s latest report is a deeply-valuable and much-needed resource for the growing movement dedicated to taking advantage of the opportunities in the overlap between government payments and financial inclusion. And in the long term, of course, improvements in infrastructure development should make the challenges exponentially easier.