Gov. to Person Payments
Governments make regular payments to at least 170 million poor people worldwide. These government-to-person (G2P) payments include social transfers as well as wage and pension payments. The broad reach of these payments makes them an obvious candidate for technological solutions to help increase efficiency as well as expand access to financial services. However, the push to use electronic systems to link G2P payments with financial accounts carries its own risks. The attractions of fancy technologies can lead recipients astray with high-cost, dead-end solutions. But a well-designed social transfer payment strategy will build on and support the development of a country’s general retail payment system. In this way, social transfer programs can function as a stepping stone in the move from cash to electronic, and on to fully-inclusive formal financial services.
Over the past few years, a number of countries have seen the emergence of two separate but complementary policy agendas as governments seek to increase the use of electronic G2P payments as they aim to promote greater financial inclusion. However, with growing interest and efforts in leveraging G2P payments for financial inclusion, the operational challenges of reaching this goal are becoming more evident.
In the latest research from CGAP, evidence from four middle-income countries (Brazil, Colombia, Mexico, and South Africa) reveals interesting insights into the cost to governments, recipients’ usage of accounts, and the business case for financial providers.
By leveraging existing payments infrastructure for G2P payments when it exists, governments are able to reduce the cost of offering the payments. The government of Brazil saves 5.8% of the cost of payments to Bolsa Familia recipients by having 15% of payments land in bank accounts. But in countries where the infrastructure needs to be built up in order to link payments to accounts, the cost to governments may increase. In Colombia, the government paid US$6.24 for account-based payments through agents, a substantial increase from the previous cash payment fee of US$5.20. Clearly there are differences between countries where G2P payments help build up the branchless banking infrastructure and countries where G2P payments are facilitated by the branchless banking infrastructure already in place.
Research among G2P recipients continues to show that while they may welcome the convenience of electronic payments over cash, few recipients use their new bank account to save, simply using it to withdraw benefits. Early expectations about rapid and automatic take-up of financial services, especially savings, need to be recalibrated. It will take time for entrenched behavior patterns to change and it will require clear, consistent communication to recipients. Nonetheless, the main benefit of inclusive accounts may come from simply serving as a gateway to the formal financial sector for unbanked recipients.
For providers, the business case of paying social transfers can only be profitable if government fees are paid to the providers for making these payments. Without fees, the business case for providing small balance accounts rests on economies of scale, low-cost channels like agents, and, over time, additional services. All of these things will take time to develop and roll out.
So where are we in the link between G2P and financial services? Still at the very beginning. There are a few large-scale programs that have made the link, and these are now struggling to increase usage among beneficiaries and make the business case work for the banks and the payment providers. There are also several pilots begun over the last couple years that are still working out the kinks in their basic implementation. In very few schemes are payments being delivered directly to the mobile phones of recipients. The link to financial inclusion is one that can often get forgotten in the quest for payment efficiency. But the potential is still huge, and more research and new experiences around the world are needed to shed more light on this complex space.
- Designing and Implementing Financially Inclusive Payment Arrangements for Social Transfer Programmes (DFID)
- G2P: Expanding Financial Inclusion in the Pacific - Fiji’s Transfer of Social Welfare Recipients to a Savings-linked Electronic Payment System (UNCDF)
- Promoting Financial Inclusion Through Social Transfer Schemes (Bankable Frontier Associates)
- Savings-Linked Conditional Cash Transfers: A New Policy Approach to Global Poverty Reduction (New America Foundation)
- Savings-Linked Conditional Cash Transfers: Lessons, Challenges & Directions (New America Foundation)
- Scoping Report on the Payment of Social Transfers Through the Financial System (Bankable Frontier Associates)