In recent years, the idea has gained traction in different corners of the development community that if we digitize cash transfers, we can connect financially excluded populations to formal financial services. This is an exciting theory, and practitioners have now tested it in various contexts: low-income countries, high-income OECD countries, stable environments, and post-conflict and post-disaster environments.
If you look across all the deployments, however, a fairly consistent narrative emerges: Regardless of the channel used, recipients of digital transfers withdraw the entire amounts of their transfers immediately, do not add their own funds to their accounts, and do not avail themselves of additional services offered through their accounts (such as person-to-person transfers or merchant payments). In other words, despite their potential for increased efficiency, decreased leakage, and better targeting, digitized cash transfers are not leading to financial inclusion.
It is safe to say that these patterns are even more acute in humanitarian transfer programs that target displaced people and those affected by conflicts and disasters. Transfer programs in these contexts are often shorter term, and the transfer amounts are less than the recipients’ total household needs. Because of these factors, there is less “hands-on” time for participants to become familiar with the transfer mechanism, and they are more likely to withdraw the entire amount of the transfer without building up any savings.
Today, in light of these observations, no one would make the argument that simply using a digital channel to deliver transfers is sufficient to lead to sustained uptake and use of financial services. Still, cash transfers could have a complementary role to play in advancing financial inclusion if humanitarian actors can unlock their potential. Below are five suggestions on how development and humanitarian actors can forge a stronger link between humanitarian cash transfers and financial inclusion.
Specify financial inclusion as a programmatic objective. Not all transfer programs that aim for financial inclusion will achieve it, but their chances increase greatly if inclusion is a stated goal. Mercy Corps recently published three case studies of humanitarian programs that used digital channels to deliver cash transfers. Among them, only a program in Ethiopia explicitly used e-transfers to help reach financial inclusion goals. This program was more successful in achieving these goals than the other programs. By the time the program ended, 100 percent of participants were using their new mobile money accounts to save. If funders and implementers wish to see participants using financial services beyond the life of a program, they need to articulate that objective and make the necessary investments. Of course, not all programs will aim for financial inclusion. Depending on the context, other objectives may take priority.
Take measurement seriously and grow the evidence base. We can’t see what we don’t measure. Since financial inclusion is rarely included as an objective in humanitarian cash transfer projects, it is hardly ever tracked or evaluated. This means there is a dearth of information about how and under what circumstances the digital delivery of humanitarian transfers can lead to sustained uptake and use of financial services. If donors begin to integrate financial inclusion objectives into their transfer programs, we can start to build a body of evidence showing the most effective ways to ensure that transfer recipients are empowered to continue using financial services.
Partner with the right providers or help partners improve. Donors should partner with providers that have robust acceptance rates and strong liquidity management or be prepared to make investments in these areas. If transfers are made to debit cards or mobile money accounts that local merchants do not accept, then recipients’ “failure” to use these services is completely rational. Similarly, if mobile money agents cannot manage their own liquidity, customers’ trust in the service will erode, and they will revert to cash-based money management since cash stashed away at home is free and easy to access.
Address misperceptions about poor customers. Financial services providers and mobile network operators often assume that poor people do not need financial services simply because they have so little money. When donors partner with providers to offer humanitarian transfer services, this misperception can lead providers to focus on serving donors as their main clients rather than end-users.
The reality, confirmed by dozens of studies, is that even the poorest people lead complex financial lives and have demand for a wide variety of financial services. More often than not, however, providers do not meet their needs, and they turn to informal services. In humanitarian contexts, these services might include borrowing from friends; saving under the mattress; and sending or receiving money across distances using friends, relatives or bus drivers, or even transporting it themselves.
Providers should recognize the business potential in serving poor populations and realize that a smoothly executed humanitarian transfer service could be the on-ramp for a new segment of customers. Ultimately, it will be up to providers themselves to come up with affordable and reliable alternatives to the popular informal services; however, donors can help them to see this opportunity by sharing examples from other markets or by using smart, targeted subsidies to increase uptake and enable innovation.
Remove policy constraints. Donors must also recognize that even if providers see potential to serve these communities, they may face policy constraints that prevent them from seizing the opportunity. In the absence of tiered know-your-customer (KYC) rules or simplified customer due diligence processes, providers may not be authorized to offer their services to the recipients of emergency cash transfers, particularly if recipients have crossed international borders and lack IDs issued by their host countries. Donors and humanitarian actors can work with governments to address these challenges. A recent example comes from Jordan, where the Central Bank authorized payment institutions to accept UNHCR-issued identification for KYC screenings or refugee clients.
We know that people in crisis environments share the same financial needs as the rest of us: a safe place to store money, the ability to send and receive cash, and protection from shocks. So far, using cash transfers to link recipients to formal financial services has not lived up to many people’s expectations. But with the right adjustments and investments, cash transfers have great potential.