Linking Electronic Payments and Social Cash Transfers in India
To Link Electronic Payments and Social Cash Transfers in India, Improving the Business Case for Banks and Agents is Critical
The Indian state of Andhra Pradesh – home to 90 million people, making it roughly equivalent to the population of Vietnam – has been using electronic channels to disburse social welfare payments since 2006. In fiscal year 2012-2013 alone, the Government of Andhra channeled $1.2 billion worth of social welfare payments through electronic channels, and this figure is expected to increase. Andhra Pradesh was the first state in India to implement this electronic payment channel at scale. Many other regions in India have not yet even begun to disburse social benefit payments through electronic channels, which speaks to the progressive approach Andhra Pradesh has taken to serving its residents living below the poverty line.
More and more, technology platforms like electronic bank transfers, smart and debit cards and mobile terminals are becoming the medium of choice for transferring social benefits such as pensions and cash transfers directly to individuals. CGAP has hypothesized that digitally disbursing these payments to beneficiaries may help increase financial inclusion for the poor.
Now, Andhra Pradesh is taking things one step further by linking its electronic benefit payments with Aadhaar, the Unique ID program. The progress and lessons learned in Andhra Pradesh are important as the rest of India begins to roll out a new system – the Direct Benefit Transfer (DBT) system – which promises to link beneficiaries’ Unique IDs and social benefit payments. The DBT system is specifically meant to transfer payments to individuals living below the poverty line, so Andhra Pradesh’s experience thus far in making electronic payments to poor beneficiaries and moving to link the payments with the Unique ID program is extremely valuable to the rest of the country.
From April to September 2013, CGAP directed a research study to better understand how the electronic payment of social benefits in Andhra Pradesh, outside of the future integration with Aadhaar, impacts the lives of poor beneficiaries, the agents who complete the transactions, and the banks who are disbursing funds. In addition, researchers analyzed the potential impact that a full roll-out of the Aadhaar system could have in the already largely electronic payment system of Andhra Pradesh. The research showed that while there are no banking regulations that prevent the electronic payments from being used to promote financial inclusion, there are design elements in the program that act as barriers and prevent electronic payments from linking beneficiaries with additional financial services.
- Direct, electronic payment of benefits increase convenience for beneficiaries. When payments are disbursed through electronic means, the distance beneficiaries must travel to collect payments decreases by nearly half compared to in-person collection of funds.
- Electronic benefit transfers run on technological platforms that could easily be applied to other services, but so far these G2P transactions are siloed from other financial services.
- Even though beneficiaries use a variety of formal and informal financial tools, they use the electronic channel only to collect payments from the government. Since agents act as intermediaries, beneficiaries remain only passive users of the technology used to make payments. While this removes any potential technological barriers from the equation, it leaves customers unaware of potential linkages with other financial services that could make their lives easier. It also prevents them from knowing account-specific information, such as whether payments have been credited to their accounts or the reasons why a payment might be delayed.
- Agents, who help execute the disbursements, are neither trained nor incentivized to treat the electronic payments as a banking channel. Additionally, since all of the disbursements occur within a 10-day window each month, an agent must do over 100 transactions per day, so their time with each beneficiary is extremely limited.
- After studying five business models for electronic benefit payments, CGAP found that the business case for both banks and agents is weak. Banks are paid a fee by the government to deliver payments, but it does not cover the bank’s costs. Agents working to administer the program make less than the minimum wage.
In order to overcome these challenges, the CGAP team makes several recommendations:
- Improve the business case for banks by increasing their commission from 2% to 3% (up to 3.5% in tribal areas).
- Improve the business case for agents by giving them a 1% commission on transactions, allow them to carry out other kinds of transactions, and stagger payments throughout the month to make the agent’s role less stressful.
- Improve the user experience by removing the full disbursement mandate so that recipients can leave small value deposits in their accounts and by allowing customers to access diverse financial services at agent transaction points.
- Focus on clear and consistent communication with recipients so that they better understand what the account is and the functionality it offers.
Despite the challenges that exist in making electronic government payments in Andhra Pradesh, the state has made impressive progress over the years and is an important leader in improving the payment delivery mechanism for the very poor and opening the possibility for financial inclusion.