Government-to-person (G2P) transfers for social security benefits are a cornerstone of helping poor people build resilience and weather shocks. The potential impact of G2P payments is more important than ever as governments scramble to deliver much-needed cash payments to their poorest citizens in the wake of the COVID-19 crisis. Thankfully, many governments have made tremendous progress in recent years developing G2P ecosystems and improving the customer experience, which will help provide a lifeline to the poorest and most vulnerable over the coming months. However, action may be needed to ensure G2P payments are available to rural populations, which often fall outside the reach of agent networks. Kenya has found an effective way to reach people in rural areas that may be instructive for other countries: a tiered fee structure that pays providers more to facilitate G2P payments in rural areas.
Governments have several levers when it comes to incentivizing providers. One of the most important is pricing: the amount and ways in which they pay private providers to deliver G2P payments. Governments can use pricing to incentivize good customer service and expand access points in places providers may not otherwise be inclined to prioritize. In recent years, the Kenyan government has developed an innovative tiered pricing structure that offers higher fees to providers that establish access points in the more remote, underserved areas of the country. (CGAP and FSD Kenya recently co-authored a case study on Kenya’s journey in innovating for customer choice in G2P payments, including its pricing innovations.)
Kenya adopted this approach after several frustrated attempts to expand rural coverage. With the assistance of FSD Kenya and other development partners, Kenya has been administering cash programs for its most vulnerable populations since 2004. Now called Inua Jamii (Swahili for “uplift the family”), these programs have expanded over time to cover orphans and vulnerable children, the elderly, people with severe disabilities and people living in the arid northern counties. Prior to 2018, Kenya had sought to bring these programs to remote areas by covering providers’ expansion costs directly, but this approach did not deliver the desired results. It encouraged expansion only up to a certain point and risked rewarding providers for their inefficiencies.
In 2018, when the government launched its most recent phase of payments, it made several key design choices. The first was to allow recipients to choose their payment delivery provider, empowering recipients to expect better customer service as banks competed for their business. The second was to offer fair, well-structured compensation for payment delivery that would incentivize providers to serve more rural parts of the country. The government decided to start compensating providers on a tiered scale, offering the highest fees for the most remote areas.
To develop this compensation approach, the government divided the country into three zones based on a detailed analysis of population density, economic activity and distance from bank branches. Each zone — urban, semi-urban and remote — was assigned a progressive fee rate for cash withdrawals. In total, the fees paid amount to 3.5 percent of the amount delivered to recipients — a healthy incentive compared to most other countries.
Kenya’s Tiered Fee System for Incentivizing G2P Payments
Providers are paid only after recipients access their cash benefit. This means that the compensation scheme has a built-in incentive to ensure payments arrive on time and uses recipient cash-out as a verification mechanism. Proper identification is ensured by reverifying recipients’ biometrics twice a year. The government does not have to spend resources checking whether providers have expanded access to their cash-out points because recipients’ withdrawals serve as confirmation. Remuneration agreements are left up to banks and agents. In most cases, banks themselves rather than agents bear the increased costs of managing liquidity in remote areas and retain the higher remuneration amounts to cover this cost.
Kenya is not unique in using pricing to achieve a program goal. Zambia has also adopted an interesting pricing mechanism, but its motivation has been to ensure that no beneficiary loses a percentage of their benefit to withdrawal fees. The Zambian government empowered recipients to choose their preferred access points by providing a top-up to cover the cost of withdrawing cash benefits. To achieve this, all cash-out top-ups were pegged to the highest provider fee in the market. This has meant that beneficiaries are free to choose their preferred provider without worrying about the withdrawal fee. The hypothesis is that without being able to differentiate themselves based on price, providers will compete for recipients by bringing access points closer and providing them with high-quality service.
Kenya has grown its Inua Jamii program from just 500 beneficiaries in 2004 to 1.1 million as of the end of 2019, including 200,000 beneficiaries who live in remote areas. The four participating providers (Co-operative Bank, Equity Bank, Kenya Commercial Bank and Post Bank) have a network of nearly 70,000 agents around the country. Among these, over 4,100 biometrically enabled agents can be used for Inua Jamii withdrawals today, and more are being added each payment cycle. The program covers all 47 counties in Kenya and is supported by field officers at the county and subcounty levels.
There are still challenges for the hardest-to-reach locations, and some Inua Jamii stakeholders are considering developing a fourth zone for such areas. Discussion is ongoing as to whether a higher remuneration would be sufficient in this zone or if the government would need to deliver cash payments directly. It may be the case that some fraction of recipients are unreachable with digital payments. The unit economics of delivering payments to isolated areas start to fail at the extremes. The government can choose to pay very high fees, mandate delivery or step in to fill in the gap.
Still, the investment Kenya has made in its G2P payment infrastructure is already proving critical to mitigating the impact of the COVID-19 crisis on Kenya’s most vulnerable people. In April, the Ministry of Labour and Social Protection released four months’ worth of payments to current recipients, plus KES 500 million ($4.7 million) in arrears to people with severe disabilities. The government is now considering expanding the number of recipients and possibly linking benefits to the national health insurance scheme.
However, many poor Kenyan households are not recipients of Inua Jamii. They also are experiencing a crisis, particularly in urban areas where many livelihoods have vanished. The government’s COVID-19 Emergency Fund has raised more than KES 1 billion ($9 million), some of which will be sent as weekly stipends to low-income households in urban areas. These recipients have not previously registered with Inua Jamii payment service providers, and launching a new registration process would be too time-consuming and pose health risks. Therefore, these transfers will most likely be channeled via the M-PESA mobile money platform, which is widely used in cities.
Recent developments show how competitive, choice-based G2P systems developed in times of stability can be leveraged during crises, but to reach large numbers of new recipients quickly, alternative delivery systems may be the faster, safer option.