This is the third blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Read the first two posts here.
We are also releasing today the four accompanying Country Notes which were distilled into the Focus Note. For much more detail on the link between social cash transfers and financial services in each of these countries, read the full reports on Brazil, Colombia, Mexico and South Africa.
In our last post, Chris Bold discussed the second of three questions that our new paper on G2P tried to tackle, namely:
- For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
- For recipients: Will poor recipients use financial services if these are offered to them?
- For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?
Today, I will finish off the discussion by focusing on the final question regarding the business case for providers to offer financial services to social cash transfer recipients.
The biggest challenge when it comes to the business case for banks is that the amount per grant payment is small, and as client research has shown, very little of each payment is left behind in the form of savings. However, compared with other small value accounts, G2P recipient accounts have a regular dependable cash inflow ensuring that they stay active. And there is usually a government agency that is willing to pay for the service. But these anecdotal observations alone do not make or break the business case: it all depends on how the financial institution defines a business case.
To introduce greater precision to this discussion, we identify five different levels of the business case, as the figure below shows. The first level is each individual account. Small balance bank accounts are notoriously difficult to make profitable at the individual account level. But a business case may be sustained at this basic level for G2P payments if governments are willing to pay a regular fee to the banks, as they do in the four countries from our research. Without this fee, the account-level business case would be much harder to sustain. This is rather like the case for basic bank accounts which are considered loss leaders at this level by many banks, but which are nonetheless offered for strategic reasons (other profitable government business may be sold as a result of a good record) or to satisfy regulatory requirements (without regulatory support and forbearance, the bank may struggle to obtain approval for what it considers core business).
The real question for banks interested in the G2P business is whether there is a robust business case in between these two extremes—at the level of the client (i.e. cross-selling other products) or at the level of the portfolio of clients as a whole. The banks which we interviewed for the Focus Note believe that there is a business case at the portfolio level. This belief comes from experience in at least the case of Brazil’s CAIXA: with 12 million basic bank accounts including 2 million for Bolsa Familia recipients, CAIXA finds that the basic portfolio segment as a whole is marginally profitable, even without taking into account government fees. This outcome results from the combination of large scale, which reduces fixed costs per account, as well as having an appropriate distribution system so that most transactions take place in low cost channels like agents. Although CAIXA is a state-owned bank with a mandate to pay welfare recipients, even private banks involved in G2P echoed the view that the segment could be profitable provided branchless banking channels were used.
Most of the banks also expressed the view that a business case could be sustained at the level of the client (i.e. across multiple products) over time, although few have yet undertaken widespread cross selling initiatives. Again, CAIXA may have gone furthest in this respect. Each basic account holder used on average 1.5 CAIXA products; and microcredit and microinsurance offerings have been launched targeted at Bolsa Familia recipients. Take up has been low to date however. In Mexico, microinsurance is offered to Oportunidades recipients together with a matched savings product, but only 15% of Bansefi-paid recipients use another product at present. Colombia offers targeted programs to encourage savings among recipients, but these are funded by a separate government agency, not by the bank.
So what can we conclude about the business case for providers? It is clear that the business case at present depends on receiving a regular fee from the government. Without this fee, the business case is challenging. Governments cannot and should not assume that banks with get sufficient revenue from interest on the float (since the float doesn’t last in the accounts long enough) or from cross-selling at this early stage. Over time, a combination of increasing balances, more customer-initiated payment transactions and cross-selling may support a strong business case. But even then, an efficient widespread agent distribution network is a key factor in reducing the cost of opening accounts and servicing client transactions.
- David Porteous
Although retaining money is a challenge in the receipient account however another way for the business to make it a profitable apart from transaction fee could be the Float Income model.