Leveraging G2P Payments for Financial Inclusion

November 11, 2008    

CGAP estimates that 140 million poor people around the world receive regular payments from their governments. Yet less than 25% of beneficiaries receive their benefit into a bank account through which they can save, withstand financial shocks and build assets. This may represent a missed opportunity to promote financial inclusion and strengthen the safety net beneath the most vulnerable groups of people.

Until very recently, most G2P (government-to-person) payments were carried out in person and in cash. However, because such methods pose security risks and require high transaction costs for payers and beneficiaries, governments are increasingly switching to electronic delivery.

Government payment systems vary widely by country. Plan Familias in Argentina, for example, offers a debit card re-loadable only by the government. Funds must be drawn within 1 month or the beneficiary loses them, and they may not deposit additional funds into the prepaid account. In Brazil, the Ministry of Social Development is in the process of migrating 12 million recipients of Bolsa Familia, the financial program that represents 25% of Brazilian families, away from an electronic benefit card, and toward the option of a simplified account. In South Africa, several million of the country’s more than 9 million grant recipients receive their funds via a debit card from the nation’s largest bank or a smartcard from payment system provider Net1 UEPS Technologies.

However, even when more services are offered, recipients do not always use them. The Moscow Social Card, a smartcard issued by the Bank of Moscow to deliver pension, medical, and other benefits to 4.5 million recipients, can be used as a debit card for cashless purchases in stores. However, just 18% of recipients actually use the debit function. In Argentina, just 12% of Plan Familias recipients make debit purchases with their cards.

More positive news comes from South Africa, where the more than 4 million low-income users of Mzansi basic bank accounts provide strong evidence of demand for financial services among the poor. And in Brazil, Caixa Economica reports a strong response from customers switching to the simplified account.

The main actors in G2P payments, namely banks, beneficiaries, and governments, all have something to gain from payment systems that allow recipients to access financial services. However, there remain issues that, left unaddressed, may hamper the process of bringing the poor into the formal financial sector. 

One concern is that it is suboptimal to have banks participate in G2P programs if they do not see the recipients as a long-term attractive market. Some state-owned banks may readily participate in electronic G2P programs, given their traditional role of handling government payments. Once the government transfers end, after a recipient’s child is grown for example, what happens next is unclear. For instance, will the recipient lose her account? Or, can such a bank guarantee durable access to finance?

Cost is another issue. Increasingly, commercial banks have been willing to bid on the right to deliver payments, such as in Brazil, Kenya and South Africa. However, banks have not yet determined the precise expenses they will incur to open simplified accounts for low-income customers. This uncertainty can result in banks making inaccurate bids to the government.

Governments may also incur unexpected costs. For governments, electronic G2P payments take advantage of what they are already doing, namely delivering payments to employees, pensioners and social beneficiaries, while also achieving a second goal of improving access to finance for the poor. Yet evidence is mixed if costs associated with electronic G2P payments are more or less expensive than the traditional methods, such as driving trucks of cash around to the recipients. Furthermore, the prices paid by governments for such schemes vary widely. Evidence is clearer on the benefits both to governments and beneficiaries from the reduction in fraud.

For beneficiaries, the advantages are clear: electronic G2P payments have the potential to significantly lower the time and travel costs involved in retrieving their money. In addition,electronic G2P payments eliminate the risks of fraud and lax security which may prevent beneficiaries from receiving the full amount of their grants. But it is not yet clear whether customers that are offered more functional bank accounts will in fact use them. 

In most cases, the verdict is still out on whether these schemes are successful both from the government and beneficiary points of view. Banks have not yet determined the cost and revenue associated with grant recipient clients. Governments, for their part, have not established what percentage of the grant amount is appropriate to pay for the electronic delivery mechanism. It is still unclear how costs compare between delivery methods and whether expenses increase if payment is linked to an account.