Who Should Pay for Banking Infrastructure in G2P Programs?

The transition from cash to electronic G2P payments has been getting a lot of attention lately, and rightly so. Conventional wisdom tells us that cash is more costly, less reliable, and more susceptible to fraud. The evidence base to support these claims is slowly growing, but that hasn’t stopped governments and donors alike to push for this switch.


Cocadas Vendor in Colombia Cocadas Vendor in Colombia

Photo Credit: Ingrid Bonilla Rodriguez

From the recipient standpoint, though, an electronic payment is only as good as the location where the electronic value can be converted back into cash. Most developing countries are operating in an ecosystem that is far from cash-lite, especially in the communities where G2P recipients tend to live. While research shows that recipients value the convenience of receiving an electronic payment, by and large they still want to feel the cash in their hands at some point along the way. This is largely because they are unable to conduct their day-to-day transactions in anything other than cash due to the lack of infrastructure necessary for electronic transactions.

In those countries where distribution networks to convert electronic value to cash already exist (as in Brazil before Bolsa Familia began its large transition to electronic payments), this is all well and good. But what about countries that have no existing agent distribution network or lack a strong banking infrastructure of ATMs and point of sale devices?

The question then arises, who is responsible for building up this infrastructure? Is it the government? If so, then which ministry in the government? The Ministry of Social Development, the Ministry of Finance, the central bank? Or should the provider be responsible? What incentives will push the provider to make the necessary up-front investments of this kind?

To begin to answer these questions, CGAP along with Marulanda Consultores carried out a study of the experience in Colombia of promoting an agent network through a government incentive program of subsidies. In August 2006, over 300 of Colombia’s 1,100 municipalities had no bank presence. At the same time, the government was expanding its conditional cash transfer program Familias en Acción to all municipalities. The dilemma was clear: how should these payments be delivered to rural and hard to reach municipalities that lacked any banking infrastructure?

To begin to meet this need, the policy body Banca de las Oportunidades (BdO) designed three subsidy schemes to incentivize payment providers to build out their agent networks in these challenging locations. The target of the first tender was the 128 municipalities with fewer than 50,000 inhabitants. Banca de las Oportunidades guaranteed a minimum number of transactions at each agent location over a period of 3 years to give the agent time to build up transaction volume on the path to sustainability. The subsidy was provided on a decreasing basis whereby in the first year BdO paid the difference between the transactions made at the agent and those guaranteed at 100% of the price, at 50% the second year, and at 0% the third year. A simple auction system was used and the incentive was awarded to the bank that requested the least number of guaranteed transactions. In the case of the first tender, only the state bank Banco Agrario presented a bid and therefore won.

The second tender targeted the remaining 67 municipalities that were even smaller and more remote than those covered in the first. The same system was used of guaranteeing transactions, although the guaranteed number covered by BdO was increased due to the more challenging locations. The subsidy also spanned 4 years instead of 3 since more time was assumed to be needed by agents to reach break-even on their own.

Finally a third tender was launched to cover marginal neighborhoods in 5 of the major cities in Colombia. A different subsidy model was used this time based on co-financing between BdO and the bank to cover the costs of installing an agent, instead of using the guaranteed transaction model. Co-financing was also set on a decreasing basis over 3 years.

So were all of these incentive schemes successful? Well in one sense, yes. Today 99% of all municipalities in Colombia have access to financial services. The investment of public resources totaled $2.5 million and increased coverage to 187 rural municipalities and to 25 marginal neighborhoods in the country’s largest cities. Familias en Acción payments were able to be made more efficiently and closer to where the beneficiaries lived and today account for almost 40% of the transactions over the agent channel.

But the research also shows that incentives alone were not enough to stimulate private financial institutions to develop business models to reach remote rural communities. The lack of participation in the tenders by private banks indicated that even with the offer of subsidies, many banks were still not ready to make this investment in building an agent network. It is possible that the incentive scheme came too early in the development of the branchless banking market in Colombia. Over time as the subsidy programs were implemented, banks became increasingly interested in building their own agent networks, and now multiple banks have increasing networks of agents throughout the country.

But the Colombian case does provide an informative example of how G2P programs can be leveraged to build the banking infrastructure of the country, and how the government might think about supporting such a roll-out.  You can read a lot more detail about this incentive scheme in the report in Spanish here and in English here.

Beatriz Marulanda heads Marulanda Consultores in Colombia and Sarah Rotman leads CGAP’s work on G2P.



Sub-topics: Payments


21 February 2013 Submitted by Randolph Kantorowicz (not verified)

Great but incomplete. Please Mrs Marulanda could you tell us how much is the operational cost of the solution that you mentioned, How much is the REAL bimonthly cost of payment of Familas en Accion.?

That is NOT a sustained solution for the unbanked in Colombia and the examples all around the World proved that are not the Banks the ones to deal with the unbanked.

The government has the solution in his hand and is not money is to create the regulation to do some real work for the unbanked in Colombia.

04 March 2013 Submitted by BEATRIZ MARULANDA (not verified)


As you can see in the special report commissioned by CGAP for 4 countries (…) the cost for paying FA in Colombia came up to be for 2 years aprox. 1o% of the average bimonthly transfer, clearly a high commission, but also a reflection of the special characteristics of the 2 year tender which was won by Banco Agrario, the only bank to present an offer in 2oo8.
But that does not lead, in my opinion, to the conclusion that banks are not the best channels for paying CCTs. On the contrary, as was explained in Focus Note 77/2013, based on the 4 case studies mentioned, the best results in terms of financial inclusion and acceptance by the beneficiaries were observed by Programs where banks offer an account integrated to the payment system so that beneficiaries can get the best value for the card which normally comes with the account.
In any case what is crucial is to create an infrastructure which comes closest to the beneficiaries not only so they can receive their subsidy but also so they can deposit their small savings with the least transactional costs possible, That is why regulation ( as you mention) allowing for banks to use this type of networks is crucial, and the case we analyzed is an effort made by a government to make this happen more quickly, without affecting the budget of the CCT program but instead the resources set aside to promote financial inclusion in Colombia.

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