The idea that linking social protection payments to financial inclusion initiatives can reduce poverty is gaining increasing traction. In February of this year, CGAP published a paper on Social Cash Transfers and Financial Inclusion. In April, the Asia-Pacific Economic Cooperation (APEC) held a workshop examining the potential of financially-inclusive electronic G2P payments. One of the core goals of the Better Than Cash Alliance, launched in September by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, Omidyar Network, UN Capital Development Fund, USAID, and Visa Inc., is to reduce the reliance on cash for G2P and other transfers in order to improve the effectiveness of aid.
To analyze this trend and chart a path forward, the New America Foundation’s Global Assets Project released two papers this past month that highlight how to integrate social protection and financial inclusion in a way that is most effective and efficient for all parties.
Enthusiasm for the idea of combining social protection and financial inclusion has been essential in mobilizing political will and spreading the message; however, an idea is just an idea until data and evidence can be used to support it as well as provide a way forward. This has been the driving force behind our Global Savings and Social Protection (GSSP) Initiative’s research over the past year. In this time, the GSSP Initiative has aggregated and analyzed information on social protection programs specific to cash and electronic transfer mechanisms as well as the extent to which programs enable and encourage asset building policies.
While gathering data for the initiative, we quickly came across a glaring issue: the widely used term “e-payments” does not accurately capture the details of the G2P transfer process, especially when it comes to savings linkages. For example, a government may deliver funds to a local bank via electronic means, but individuals may be required to immediately withdraw their transfer in hard cash making it insufficient to call this an “e-payment”. Rather, we should examine the two distinct channels that are part of this process: delivery of services and how beneficiaries receive their payment.
Our recent publication “From Protection to Investment” identifies the several variations in infrastructure and possible channels through which money can flow, all of which make the differences between delivery of services and how individuals receive their payments nuanced but significant. In order to make this distinction, the report introduces a new way to look at these channels:
- Delivery channels are defined as the way in which funds leave a program source for distribution. Generally, these are either electronic (e.g. via a central bank account that is not attached to an individual) or non-electronic (e.g. via village paypoint).
- Payment method refers to the way in which an individual has access to funds. Payments are made either in cash (physical currency) or they are electronic (e.g. via an individual’s bank account).
For example, a government agency may transfer funds to one bank in each province (electronic delivery), but program staff will withdraw physical currency from these bank accounts (non-electronic delivery), travel to individual villages and distribute cash at village pay points. This would be classified as combination delivery and cash payment (Figure 1).
We collected data on 84 social protection programs and found that 30% of payments are made via electronic delivery and payment methods. As for financial inclusion, our data indicates that over 100 million individuals are part of savings-linked social protection programs.
As discussed in our second paper “From Social Banking to Financial Inclusion”, India has some of the greatest potential benefits from financial inclusion, which may not be surprising given the presence of the largest unbanked population in the world. In 2012, almost USD 40 billion will be delivered in social protection benefits and subsidies across India. However, the evidence thus far indicates that those who receive government payments, even in accounts, typically withdraw all or almost all the amount received, thus rendering the account as a simple pass-through. Furthermore, although nearly 100 million government-mandated bank accounts have been opened, dormancy rates among these accounts are estimated to be as high as 90 percent.
Since 2006, the Business Correspondents (BC) channel has focused on increasing usage of these accounts and reducing leakages from government social welfare schemes. And some successful strategies are coming to light. In addition, in informant interviews with almost 30 leading financial institutions across India, our research found that executives believe that G2P payments were vital to finding sustainability and increasing usage of low-income focused accounts.
As the idea of linking financial inclusion to government-to-person payments gains momentum, there is an increasing need for hard data and clear demonstrations of success. The Global Savings and Social Protection Initiative is beginning to fill this void both on the global level, through identifying opportunities to implement and experiment with financially-inclusive social protection models, and through detailed analyses of particular countries such as India. As this evidence continues to accumulate, enhancing and extending the impact of social protection payments through financial inclusion may gradually change from a promising idea to a tested solution.