This is the third post in our series on G2P, branchless banking and financial inclusion. Our first post on Pakistan can be found here and our second post on the Philippines can be found here.
In this post, our guest bloggers discuss the Government of Colombia’s efforts to use Conditional Cash Transfer (CCT) programs as a gateway to financial inclusion. Beatriz Marulanda is the CEO of Marulanda Consultores. She headed the team that advised the Colombian Government in the design and implementation of Colombia’s financial inclusion policy, Banca de las Oportunidades. She was also part of the team that helped in the design of the payments strategy for Familias en Acción through deposits into savings accounts. Mariana Paredes is an independent consultant with Marulanda Consultores. She worked on the design and implementation of Banca de las Oportunidades and also worked on the design of the savings pilot with Familias en Acción.
Familias en Acción is a CCT program administered by Acción Social in Colombia providing cash transfers to poor households on the condition that their children attend school and follow preventive health care measures. The program was launched in 2000 focused exclusively in rural areas, and by 2002 it had reached 300,000 families in 627 municipalities with less than 100,000 inhabitants. By 2005 the program had expanded to even smaller rural municipalities that did not have bank branches, making the payment of benefits a real challenge.
After the program’s first impact evaluation, the government decided to aggressively expand Familias en Acción to cover all 1,100 municipalities in the country, thus becoming an integral part of the government’s RED UNIDOS strategy to fight poverty. By 2009, 2.2 million families were being paid an average of USD 90 every two months.
The initial payment system was based on cash transfers paid at the branches of the public bank, Banco Agrario. This meant that many mothers had to walk for hours to reach the closest municipality with a bank branch to claim their payments. In response to this challenge, Banco Agrario began to use a strategy of “extended cashiers” that would transport cash in helicopters to recipients in rural municipalities on payment days. Even in the cities, bank payments were a challenge because the demand for liquidity on payment days surpassed most branches’ capacity.
Familias en Acción knew that it needed a more innovative payment system. In 2007, they introduced prepaid cards. 450,000 beneficiaries in seven cities were able to withdraw their payments at the ATM network of a private bank. Even this proved challenging at first…the bank’s ATM network collapsed the day after the first payments were made available because the network had breached its maximum transaction level. By 2008, Familias en Acción had a mixed payment structure as shown below.
Source: Prepared on the basis of information of Acción Social A new tender process for Familas en Acción payments was launched in 2008. In line with the government’s financial inclusion policy, Banca de las Oportunidades, the tender required interested banks to pay CCT grants through savings accounts opened for each beneficiary. The only bank that responded to the tender was Banco Agrario, which already had an extensive branch network in rural areas (with more than 500 municipalities in which it was the only bank present at the time).
During the first half of 2009 Banco Agrario started the account opening process together with Assenda, a logistics company that also manufactures debit cards. These debit cards were issued to the CCT beneficiaries during the account opening process, which turned out to be a huge undertaking. Beneficiaries were brought to stadiums to sign the bank contracts, provide their fingerprints and receive their debit cards. They also received a brief explanation of how to use the cards. Despite the fact that the Financial Superintendence had just authorized simplified KYC procedures (which no longer required beneficiaries to provide their fingerprints or sign the bank contracts), Banco Agrario still decided to capture all of this information through a lengthy and costly process. The exact reason why they took this decision is unclear.
Over the next few months, 1.8 million savings accounts were opened. But still the problem of paying in municipalities without a bank branch or ATM remained. Regulation had allowed the use of agents (called Corresponsales No Bancarios – CNB) in Colombia since 2006. Banca de las Oportunidades therefore designed an incentive to take agents to 128 of the 132 municipalities with no bank branches. The incentive offered a guaranteed commission to agents based on a minimum level of transactions. This incentive would decrease by 50% in the 2nd year and would be eliminated in the 3rd year, with the expectation of establishing a sustainable agent businesses by this point. Once again, the only bank willing to accept the challenge to expand to remote locations using a new delivery channel was Banco Agrario.
Banco Agrario’s experience using agents to pay CCT payments has revealed many new challenges:
- The biggest challenge is the lack of liquidity on payment days. Since the CCT program has a payment cycle with concentrated payments, there is huge demand for cash-out transactions at agents and ATMs for 1-2 days every two months. It is virtually impossible for a typical agent to use its normal cash supply to meet this demand. Banco Agrario has therefore been forced to provide cash to agents in armoured vehicles. This is the same expensive process they used when beneficiaries were previously paid directly in cash.
- Another challenge is related to questions about the real savings capacity of the beneficiaries and their willingness to use a savings account. Although beneficiaries have been informed about the services and benefits of using their new accounts (to either deposit their own money or save part of their subsidy), most of them withdraw the full amount as soon as it is deposited. '
Preliminary results suggest that there are a number of factors that lead to this behaviour. Many beneficiaries still do not completely understand that they actually have a savings account at their disposal. Both beneficiaries and bank employees tend to think that leaving part of the subsidy in the account may result in losing the grant in the future because they might no longer be considered “poor”. Other anecdotal information suggests that beneficiaries prefer cash to savings because, they often already owe the money to someone else.
A savings pilots launched by Banca de la Oportunidades and Familias en Acción with the support of Fundación Capital has been launched in 12 municipalities. In three municipalities, there are financial rewards to incentivize savings. In another three municipalities, beneficiaries are invited to a financial education course, consisting of six two-hour sessions. In the third group of three municipalities, beneficiaries are offered both the savings incentive and financial education courses. The last group of three municipalities is used as the control group.
- There are some interesting things to watch over the coming months: The payments contract with Banco Agrario will soon be ending, and Familias in Acción will have to decide if it continues with its financial inclusion strategy, if it will open a new tender process, and if the terms of this tender will change.
- There is new interest from private banks to participate as payment providers, although many are asking whether it is necessary to open savings accounts for beneficiaries or whether a prepaid card or mobile wallet would be more appropriate.
- Finally, and most importantly, the results of the savings pilot will hopefully provide insight into the behaviour of beneficiaries when making decisions about where and how to save and spend their money.
Beatriz Marulanda & Mariana Paredes