CGAP Releases Paper on G2P Payments and Financial Inclusion

This is the first blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries”.

While I was in West Africa a few weeks ago, there was a recurring theme running through all our meetings. Whether we were meeting with MFIs, commercial banks, mobile network operators or third-party e-money issuers, they all came back saying about the same thing: their branchless banking business viability depended on capturing more flows of money to turn into consistent, revenue-generating transactions.

Branchless banking is, fundamentally, a business built on high-volume, low-value transactions. Over two years ago, colleagues and I published a Focus Note on the potential for government-to-person (G2P) payments to bring banking to the poor by leveraging the consistent flow of money that goes from governments to its citizens. In particular, social cash transfer programs were just beginning to make innovative changes to the way payments were made, mostly by transitioning from cash to electronic delivery. We wondered about the extent to which electronic payments could go even further by landing directly into the newly opened bank accounts of the beneficiaries.

But the evidence base at the time was sparse because these transitions were just getting started. Our paper was largely forward-looking by presenting the potential of this space, while posing still unanswered questions around three main topics:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?

A lot has changed over the past two years. Our new Focus Note “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries” attempts to answer these questions by building off of the evidence base from four large social cash transfer programs: Bolsa Familia in Brazil, Familias en Accion in Colombia, Oportunidades in Mexico, and Child Care Grants and Old Age Pensions in South Africa. We selected these countries because they are the few that have pursued the twin objectives of electronic government payments and financial inclusion at scale. Admittedly, these countries are all large, middle-income countries with relatively well-developed financial infrastructure. But unfortunately, and quite telling I think, the evidence base does not yet allow us to speak to the situation of low-income countries because G2P-linked financial inclusion is only happening at a pilot level in these countries, if at all.

Over the coming weeks on this blog, my two co-authors, Chris Bold (DFID), David Porteous (Bankable Frontier Associates) and I will provide an overview of the answers to the three questions posed above. Today, I tackle the first question regarding the cost to governments. I have found this question in particular to be asked quite often by social protection practitioners, for good reason. But before I get to that, I first need to frame the discussion with an updated categorization of payment approaches that our paper presents.

CGAP Research

With this in mind, we can now return to the question at hand: what does the evidence say about the cost to governments to not only transition from cash to electronic (or now specifically limited-purpose instruments), but to mainstream financial accounts? Not surprisingly, the answer is that it depends, as the table below indicates.

CGAP Research

In Brazil and South Africa, evidence clearly shows that it is cheaper to deliver payments into mainstream financial accounts. The Ministry of Social Development (MDS) in Brazil pays the state bank CAIXA a fee that is 31% cheaper ($0.88 compared to $0.60) for a recipient with a mainstream CAIXA Facil account than for a limited-purpose debit card. One of the main reasons why these costs are lower is that CAIXA has over 36,000 distribution points (i.e. agents) in all municipalities of the country. The fixed cost of these points of service has been spread across the entire CAIXA customer base beyond just Bolsa Familia recipients.

However, in the case of Colombia and Mexico, the evidence shows that the cost per payment increases when linked to a bank account if new distribution networks need to be developed. The fee paid to the Colombian state bank Banco Agrario is $6.24, a substantial increase from the previous cash payment fee of $5.20. The high price reflects the short-term nature of the contract (only 2 years) and the bank’s need to upgrade its system, issue millions of debit cards and most importantly, build a new agent network for cash-out locations.

So what conclusions should we draw from this data? It is clear that when the payment arrangements use existing financial infrastructure, such as agents and ATMs in Brazil and South Africa, the cost of making payments into bank accounts will be lower than payments by cash or even limited-purpose instruments. However, if dedicated infrastructure (i.e. agents) need to be set up only for the purposes of paying cash transfers to program recipients, then the cost will likely be higher.

Put another way, the payment mechanism that is likely to be cheaper and more sustainable in the long-term is one that is able to integrate into the mainstream payment infrastructure of the country so that recipients benefit from investments made by the bank for its customer segment overall, instead of isolating recipients into a restricted “dead end” payment solution. After all, the goal of financial inclusion is to include, not isolate.

We get into much more detail on this question in our Focus Note. We will also be releasing individual Country Reports on each scheme. In the meantime, remember that government cost is just one piece of the puzzle. In our next blog, we’ll look at what the evidence says about whether recipients actually use bank accounts if offered to them.

- Sarah Rotman