Taking the Cash out of Conditional Cash Transfers to Boost Savings

Throughout the developing world, money is heaved onto trucks and transported by governments to delivery points scattered across countries. Citizens come to these drop-offs, where the delivered cash is broken down into smaller sums and distributed. This is essentially the process for more than half of the almost 170 million poor people who receive social welfare cash payments on a regular basis from their governments. The other half receives e-money, which involves no trucks or hard cash, just electronic payments using smartcards, debit cards, and mobile phones.

These government-to-person (G2P) payments are almost twice as common as microcredit loans in the developing world, and have proven to be an extremely effective tool for poverty alleviation. In particular, conditional cash transfers (CCT), which are used to influence positive behaviors like sending children to school or going to the doctor for a check up, are garnering much deserved attention.

One of the largest CCT programs in the world is the Mexican government’s Oportunidades program, which has been in operation for over a decade. Reaching an estimated 5.8 million households, the program has lived up to its name by creating opportunities for the country’s poor through incentivizing involvement with educational, health and nutritional services. Across the implementing areas, program beneficiaries’ high school attendance increased by 23 percent and health visits  increased by 18 percent. As part of the program, recipients are also offered savings accounts, and estimates show that over 1 million households are now using these accounts and saving, on average, 12 percent of their government payments.

This link between savings and CCTs can be an extremely powerful connection in providing a gateway to financial inclusion for the poor. Last week, the Global Colloquium on Savings-Linked CCTs discussed the increasing synergy between the fields of social protection and financial inclusion. Savings and CCTS in their own right have demonstrated their ability to be effective poverty alleviation tools, and their jointure offers potential to increase their impact. One valuable connector and linkage is electronic payments.

Across Mexico, electronic payments are becoming more widespread; from 2001 to 2009, the amount of credit cards in Mexico increased from 6.7 million to 25 million. And in 2009, the National Coordination Board of the Oportunidades program came together to design a pilot to further reach marginal urban households in eight cities. Electronic payments were identified as a platform to reach these beneficiaries and promote bank usage among them. Currently, over half a million beneficiary households are reached by electronic payments.

The vision of an economy dominated by e-money rather than cash is not as farfetched and insubstantial as one might think. As the impact of CCTs and the importance of savings continue to come to light, electronic payments will become an important piece in building the foundation for a mutualistic relationship between the two. This is not to say that difficulties in regulating and operating electronic payments will not arise but rather that the advantages of electronic payments in reducing costs, creating transparency, and promoting formal banking inclusion will outweigh them. In the end, cash payments are becoming a thing of the past, and this trend will prove to be extremely beneficial to the poor.