Banking the Poor via Government-to-Person (G2P) Payments

Government-to-person payments: Definition

G2P includes cash payments related to social programs as well as wages, pensions and other payments

Potential for financial inclusion

Globally, 170 million poor people receive a regular payment from their government

fewer than 20% receive their payment into an account at a regulated financial institution through which they can

Conveniently Affordably Safely …

BUT

save and make electronic transactions

The move from cash to electronic

Argentina

• Ministry of Social Development switched from cash payments to a prepaid debit card number of participants who said they paid a bribe to access their benefits dropped 12-fold1

• In Brazil the switch to electronic delivery of Bolsa Familia grants resulted in a drop in proportional administrative costs between 2001 and 2006 from 14.7% of the grant value to 2.6%2

Cutting cost and corruption

1 Duryea and Schargrodsky (2007).2 Consolidating several social benefits into one payment also accounts for a portion of the savings seen by Bolsa Familia. See Lindert et al. (2007).

Banking poor G2P recipients: early experiences

South Africa

•¼ of the country’s 12.4 mil G2P recipients have their grant electronically transferred into accounts with either Allpay’s Sekulula card (a debit card-based bank account specifically designed for social transfer recipients) or•Net1 (a payment services company which offers smartcard-based accounts).1

India •National Rural Employment Guarantee Scheme (NREGS) offers its 35 million recipients a choice of 4 ways to receive payment for days worked•Choices include an electronic prepaid account accessed via smartcards issued by two technology firms, Fino and A Little World.2

•Caixa Economica is in the process of migrating 11.1 million Bolsa Familia recipients away from electronic benefit cards to saving accounts which include a Visa-branded debit card usable at more than 20,000 agents, other stores and ATMs. •As of June 2009, the bank has converted 1.66 million recipients to this offering.3

1 Net1 SEC filings (2009), SASSA (2008), BFA (2006).2 Ministry of Rural Development (2009); Johnson (2008).3 Pickens et al (forthcoming).

Growing cohort of G2P programs offer financially inclusive account to recipients

BrazilCaixa Economica migrating 12.1 mil recipients to card-operated bank account accessible via 20,000 agents

South Africa¼ of 9 million people receive payment into accounts at Absa (largest bank) and Net1

India4 million NREGA recipients choose branchless banking over traditional delivery

But globally…Fewer than 1 in 4 G2P recipients get payment into financially inclusive account

Will financial services boost social protection?

A growing body of evidence shows that access to financial services enables the poor to better withstand shocks, build assets, and link into the wider economy as fuller economic citizens.1

“Asset effect” says that assets connect people to a more hopeful future, give cause for long-term planning, support entrepreneurial appetite, and raise owner’s standing in eyes of family and friends2

When youth savings accounts were offered to AIDS-orphaned adolescents in Uganda: 3

Improved expectations about the future Increased plans for education (88% to 96%) Improved their HIV prevention attitude scores (17.2 to 18.5)

1 See inter alia Dupas, Pascaline and Robinson (2008); Ssewamala, Alicea, Bannon and Ismayilova (2008); Littlefield, Morduch and Hashemi (2003); Chen and Snodgrass (2001); Bynner and Paxton (2001); Sherraden (1991).2 Sherraden, M. (1991). Assets and the poor: A new American welfare policy. Armonk, NY: M.E. Sharpe. See also Bynner & Paxton, 2001. 3 Ssewamala, Fred M., Stacey Alicea, William M. Bannon, Jr., and Leyla Ismayilova, “A Novel Economic Intervention to Reduce HIV Risks Among School-Going AIDS Orphans in Rural Uganda.” Journal of Adolescent Health 42 (2008) 102-104.

Financial inclusion can strengthen social protection for poor households

Will poor G2P recipients use financial services if offered?

Brazil

• In 2004 when the cards were issued to Bolsa Familia recipients, 24% said using the card was “easy” or “very easy”

• One year later, the number increased to 96% 1

• Caixa Economica reports strong uptake of “simplified accounts” by 2 million recipients

• Oportunidades recipients are offered a full savings account in Bansefi and over 1.5 million have elected to use it (among 5 million total recipients)

• These households saved an average of 12% of their government grant, with subsequent investments leading to a 35% increase in consumption after 5 years in the program 2

Poor G2P recipients will use financial services…if good quality if offered

1 Polis Institute (2007).2 Gertler, Martinez and Rubio-Codina (2006).

Is building financial services into G2P program expensive?

Note: For a social transfer program which delivers a USD 40 grant monthly to 1 mil recipients, a card-based system with 10,000 agents equipped with card-reading point-of-sale (POS) terminals would be 10.8 percent cheaper after five years than a traditional set up paying grants over the counter in cash at a government office or branch of a state-owned bank

Financially inclusive options may be cheaper than traditional payment arrangements

Can financial institutions offer services profitably?

Figure: G2P Flows Suitable for Pairing with Basic Banking

Feature Rationale

Large number of recipients Scale needed to attract and retain interest of banks

Large payments, relative to recipient income Greater potential for sizeable float revenue

Frequent schedule of payments, not scheduled to end in short term

Recurring stream of payments generates dependable fee income for banksPromise of future payments encourages recipients to utilize and become familiar with operating the account.

The business case may be attractive for financial institutions

Conclusion

Conditions need to be enabling:

1. Appropriate nature of G2P flows to make business case for banks

2. Regulatory openness to enable branchless approaches

3. Presence of entity with standing and appetite to spark the change, such as Ministry of Social Development in Brazil

4. Donors can help design experiments which include measurement of usage of financial services, impact on welfare, and understanding business case for providers

Advancing financial access for the world’s poor

www.cgap.org

www.microfinancegateway.org