The rent is due, doctor’s bills have piled up and there’s nothing to cook for dinner. In the developed world, people deal with these challenges by charging the credit card or dipping into savings. Yet two-and-a-half billion people—55 percent of the world’s adults—do without access to formal financial services. They rely instead on uncertain relationships with family members, moneylenders, savings collectors, employers, even savings clubs. These relationships can be expensive, unreliable, insecure and inflexible. They help families survive, but they do little to create stability. This lack of financial access contributes to household-level stress.
Making responsible financial services available to poor people requires both scale and presence. Traditional banks have the scale to serve thousands of new clients, but have found it difficult to develop a presence in the places where poor people live, work and transact. Microfinance institutions, for their part, have a presence in poor communities, but they lack scale, both in terms of the number of customers they can serve and the range of products they offer.
Recently, new options have emerged for bringing financial services to poor people. The wide proliferation of cheap, functional computing devices (such as cell phones, laptop computers, POS terminals and ATM machines) coupled with low telecommunications costs have lowered the traditional barriers of cost and distance for banks. These trends are making transactions much less expensive for banks and much more accessible for customers. New regulations in many countries are likewise allowing non-banks to provide services or act as “agents” on behalf of banks, creating a network of locations where customers can put money in, take money out, and pay bills. These technological advances are making traditional financial services available outside of bank branches.Data Sources: GSMA (Regulatory Framework for Mobile Banking). GNI per capita from World Development Indicators database, World Bank, 1 July 2006. Mobile penetration from GSMA’s Wireless Intelligence. Population banked from P Honohan “Cross-country variation in household access to financial services” The World Bank, Trinity College Dublin and CEPR, February 2007. Only China and India show higher banking penetration than mobile penetration. Rapidly-growing mobile penetration in both countries means that it is probably only a matter of time before they fit the pattern.
What Focus Note 58 said in response to these questions:On the basis of hypothetical modeling, Focus Note 58 proposed that it should become cheaper over time once infrastructure was built.Based on general patterns of usage by low income households, Focus Note 58 tentatively suggested yes, provided the services fulfilled the recipients’ needs and preferences.Focus Note 58 had no clear evidence but suggested that branchless banking was likely to be an important part of the solution by lowering transaction costs.
Cash. The beneficiary has to appear at a particular payment point, often at a particular time, to receive her payment. In this case there is no store of value created for the individual and hence no way for her to leave some value for later use. Limited-purpose instrument. These instruments transfer the grant to (at least) a notional account earmarked for the recipient. This virtual or actual earmarking enables more choice of times and locations at which the recipient can withdraw the funds. Nonetheless, the functionality of this account is restricted in one or more ways: Accumulation—The funds cannot be stored indefinitely; if not withdrawn in a defined window, the program may reclaim the unused funds Convenience—Cash may be withdrawn only at dedicated infrastructure, i.e., at agents or cash points that are specifically established for this purpose only (and that, therefore, non-recipients cannot use) Additional uses—No additional funds may be deposited into this account from other sourcesMainstream financial account. These accounts have none of limitations of limited-purpose instruments and are usually bank accounts that are available to nontransfer recipients as well. The recipient benefits from the same functionality as any other user of such an account. Note that the restriction of the word “cash” to the first category may seem misleading. The latter two categories still typically result in the recipient withdrawing benefits in cash. But the options and choices provided with the payment instrument widen as one moves from the left of the diagram (“physical cash”) toward the right as the other two categories involve an electronic payment rather than simply the handover of cash.The important point here is not that limited-purpose instruments are necessarily subpar solutions that should be avoided or discouraged. Rather, they should be deployed in such a way that they can more easily be converted into mainstream accounts (as is the case in Colombia) instead of keeping G2P payment recipients closed off from the mainstream financial infrastructure (as is the case of Net1’s closed-loop card system in South Africa).
Brazil: 84% - limited-purpose Social Card from which they must withdraw the benefit within 60 days and onto which they cannot deposit additional funds. 5% - mainstream CaixaFacil bank account, the same account that is used by 10 million non-BolsaFamilia recipients. Colombia: 9% - Cash 91% - BancoAgrario basic bank account accessed via a magnetic-stripe debit card. However, this card can be used only at BancoAgrario ATMs and at merchants specifically recruited by its partner Assenda, so categorized as limited-purpose. If and when Assenda connects its agents to the local card switches to enable Familias en Accion recipients to use mainstream financial infrastructure, then Colombia would immediately have the highest percentage of recipients among the four countries offering mainstream financial accounts to G2P payment recipients. Mexico: 66% still paid in cash 34% are paid into mainstream financial accounts. Breakdown of 34%: 12% - Bansefi account with smart cards - used where there is limited payment and communication infrastructure since it enables offline transactions 16% - Bansefi account with magnetic-stripe cards (Debicuenta) 6% Bansefi passbook account (accessible only at Bansefi branches with no accompanying card); being phased outSouth Africa: 41% - Specific payment providers that offer store of value via smart cards, but no additional fund deposits and use at dedicated pay points (i.e. Net1) 59% - Mainstream bank accounts; Sekulula account (offered by AllPay) with magnetic stripe card as default option in certain provinces
Comparisons of cost are not easy because of different grant sizes, varying frequency of payments, fluctuating currency values.Brazil MDS pays Caixa a fee that is 31% lower ($0.88 compared to $0.60) for a recipient with a mainstream CaixaFacil account than for a limited-purpose Social Card MDS saves 5.8% of cost of payments by having 15% of banked recipients. If all payments shifted to CaixaFacil, MDS would save 31.5%.South Africa SASSA also pays a fee that is 54% lower ($4.46 compared to $2.03) for a recipient with a mainstream financial account Payments made into bank account of recipient’s choice, bulk electronic transfer costs 10c.If SASSA receives reports for reconciliation, benchmark is $2.03.Colombia Electronic payments are not cheaper than cash Fee paid to sole bidder BancoAgrario is $6.24 USD, a substantial increase from previous cash payment fee of $5.20. High price reflected the short term nature of the initial contract (2 years) and bank’s need to upgrade its system, issue millions of debit cards, capture biometric information and build a new merchant network.Mexico Payments into mainstream financial accounts are slightly more expensive than cash payments ($2.84 compared to $2.35). Gov. set norms for distance recipients should have to travel to collect payments, resulting in higher costs across thinly populated areas. In 2010, President directed all G2P disbursements to electronic means by end of 2012Conclusions: Case of Brazil & South Africa: Sufficient evidence that move from cash to electronic payments need not be more expensive for the programs May be cheaper to use mainstream financial accounts from the start, rather than get stuck in limited purpose, closed loop systems. Case of Colombia & Mexico: Costs per payment if new distribution networks need to be built Case of Colombia: Limited purpose instruments should be implemented in a way that makes it possible to easily transition to mainstream financial accounts later Colombia: If and when Assenda connects its agents to the local card switches to enable Familias en Accion recipients to use mainstream financial infrastructure, then Colombia would immediately have the highest percentage of recipients among the four countries offering mainstream financial accounts to G2P payment recipients.
Beneficiaries may not be aware of the functionality (or even existence) of the account as this is often not adequately explained by the program or the bank. Beneficiaries may fear losing their entitlement to the program if they leave a balance in the account.The accounts themselves may be poorly designed or inconvenient for the customer as evidence shows that beneficiaries are saving in informal ways.Emerging evidence from Colombia shows that where the program and the bank communicate clearly to recipients and incentivize savings, behavior may change.
The most demanding level is the first (the individual account), that is, the requirement that each account be sufficiently profitable on its own. If profitability holds at that level, it will hold at higher levels, too.
5 levels of the business case:Account: Is each individual account sufficiently profitable: with government fee and without government feeClient: Is each overall client relationship profitable (i.e. cross sell)?Portfolio: Is the overall product or client segment profitable?Strategic: Does the bank earn direct financial return in other ways, i.e. other business with government?Mandate: Does the bank’s license or existence depend on doing this, regardless of financial return?Conclusions: The business case for providing bank accounts to social transfer recipients depends on receiving a regular fee from government. If this fee is at an adequate level, the business case can be attractive.Without this fee, the business case for offering low balance savings accounts is challenging for banks. Governments need to continue paying fees and not assume that banks can get sufficient revenue from interest on the float or from cross-selling for several years.In time, a combination of increasing balances, more customer-initiated payment transactions and cross-selling of other services may support a stronger business case at the client level.An efficient widespread agent distribution network is a key factor in reducing the cost of opening accounts and servicing client transactions.
G2P - Government to Person Payments 2012
G2P Payments March 2012
What are G2P payments?Worldwide, 170 million low income individuals receivesome form of regular payment from their governments Government-to-Person Social Safety Net (G2P) Payments (SSN) Programs Employee Payments Social Transfers Noncash Support (wages, pensions) To better off Conditional Food employees Transfers To low-income Unconditional Price Subsidies 170 million employees Transfers Workfare Fee Waivers Note: Data is from 2009
Financial access and the 170 million55% of adults worldwide—2.5 billion people—survivewithout formal financialservices. No formalThey rely instead on: access Family members Formal Friends and neighbors access Savings clubs Employers Moneylenders and savings collectors
Financial inclusion requires scale and presenceTraditional banks havescale, but lack presence.Microfinance institutionshave presence, but lackscale.
Branchless models for scale and presence Channel Costs $250k Traditional branch $50k In-store branch $10k ATM $2k Agent with POS terminal $400 Agent with mobile1.7 billion people worldwide have a mobile phone but no bank account. $0k No agent (cashless)
Can G2P be leveraged for financial inclusion? FOR GOVERNMENT: Is building inclusive financial services into social transfer programs affordable for the social program? • COST FOR RECIPIENTS: Will poor recipients use financial services if they are available to them? • USE FOR PROVIDERS: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis? • BUSINESS CASE
Evidence from four middle-income countries • Various unconditional transfers reach 9 million recipients (30% of the South Africa’s Social population) Security Agency • Various payments methods: prepaid smart cards and magnetic stripe cards linked to an account • CCT program started in 1997 reaching 6 million households Mexico’s (20% of population) Oportunidades • Bansefi has various payment mechanisms, including cash, magstripe cards linked to accounts, smart cardsColombia’s Familias en • CCT program reaches 2.4 million families (11% of population) • 1.8 million interest-bearing savings accounts opened by Banco Agrario Accion • CCT program reaches 12.9 million families (30% of population) Brazil’s Bolsa Familia • 2 million recipients receive grants into a simplified current account accessible via magnetic stripe card
Changes over time towards electronic payments 11
Case 1: South Africa Social Security AgencyStrong financial inclusion push under Financial Sector Charter (2003) Old Age GrantsAgency strategy to promote bank South Africa payments to reduce cost and leakageBeneficiaries choose whether to be paid in cash or into a bank account o 37% paid electronically into general or special bank accounts o Payments made by three main payment contractors using special purpose cards at dedicated pay-points with ATM/ POS and biometric authentication
Case 2: Familias en Acción in ColombiaPayment system evolved over time: o 2006: Cash distributed from state bank Banco Agrario branches Familias en Accion, o 2007: Prepaid cards that could be Colombia used at ATMs of private banks o 2008: Mix of options—cash, bank branches, and prepaid cards o 2008: Banco Agrario won tender to pay grants via savings accountsDevelopment of banking correspondents was linked to the roll- out of CCT pay points o Subsidies offered for bank correspondents in some areasStrong roll out: from 8% in 2009 to 86% of recipients in 2010 – 1.8 million savings accounts opened
Case 3: Oportunidades in MexicoCCT program started in 1997 reaches 5 million households (18% of pop) Oportunidades,Payments made primarily through Mexico Bansefi and Telegrafos/TelecommBansefi has experimented with distribution: o Cash through Bansefi branches o Cash through dedicated mobile units o Direct deposit with debit card access and no withdrawal requirement o Diconsa stores as correspondents using POS terminals o Credit unions affiliated with the Bansefi-sponsored L@ Red de la Gente payment network equipped with Bansefi terminals
Building Incentives to Save into G2P Product Design Next generation of savings Example: Jóvenes con Oportunidades in Mexico products specially designed • Jóvenes con Oportunidades was added in 2003 as an additional benefit for participating for use with cash transfer families. programs • Program consists of savings accounts for Personal Capitalization Oportunidades youth to incentivize continued education Accounts (PCAs) e.g. in Peru • Account is opened in a child’s last year of Child and Youth Savings Secondaria (middle school) and ―points‖ are accounts e.g. in Mexico deposited in the account for each year of high school the student completes ―Lotteries‖ being used as an • Points are converted into cash (approx. $336) incentive to promote savings which the youth can withdraw or leave in the Bansefi savings account e.g. in Colombia • Student can use the account as a personal savings account, making and withdrawing deposits; but the cash payout is not available until graduation • More than 330,000 youth have opened these savings accountsSource: Zimmerman & Moury, 2009; http://www.oportunidades.gob.mx/jovenes/preguntas_frecuentes.html
Colombia: Promoting savings behaviorBanco Agrario and the government saw that usage of the savings accounts would not happen automaticallyExperimenting with incentives to promote savings behavior among beneficiaries o Lottery held at the local level o Approx one in every thousand people has a ―zero added‖ to their savings balanceCombined with financial education to measure uptakeControl group created so that effectiveness can be measured
Linking with micro-insuranceStrong theoretical argument in Example: 4Ps program in Philippines favor of insurance: o Could be cheaper and better suited to beneficiary needs Recent pilot links 12,000 – 20,000 o Life, health, disability and beneficiaries of the 4Ps CCT program weather insurance being with micro-insurance association discussed Currently only life and pensionRising on the agenda: products offered o One pilot in the Philippines Plans to scale up over the next year o New strategy for Africa being Other products being considered developed by WB including weather index andIssues still to be resolved: agricultural loans with built in weather o Who pays? insurance cover o What should be covered? o Opt in, opt out, or mandatory enrollment?
Linking G2P with credit Few examples around the world Example: FINO in India Governments may be wary of promoting credit FINO is developing a proposal to One product being designed by test a credit product in India FINO (in conjunction with CGAP) Credit line would be extended to in India FINO agents Linking with transactional savings FINO agents would make decisions on who to lend to and set interest rates Agents would bear credit risk
Mexico: How hard should governments push? “Is Grandma ready for this? Mexico Kills Cash-based pensions and welfare by 2012”• All government agencies required to make all disbursements electronically by December 2012• Initial drivers were efficiency and transparency; but widened to embrace concerns for financial inclusion• Oportunidades CCT: In 2010 85% of 5.8m recipient households received their disbursements in cash; moving to payout from bank accounts via agents• Incentives: fiscal subsidy for rollout of POS country wide (FIMPE) 2005-2008 Source: Fletcher School/BFA case study 2011
Government Costs BRAZIL COLOMBIA MEXICO SOUTH AFRICAAverage grant per recipient $71.0 $55.1 $118.3 $144.7Average cost per payment $0.84 $6.24 $2.52 $3.30As % of average grant 1.2% 11.3% 2.1% 2.3%Cash payment $0.88 $5.20* $2.35 N/ALimited purpose payment $0.88 $6.24 N/A $4.46Mainstream financial account $0.60 N/A $2.84 $2.03 or $0.10Rate used in conversion:1 USD= (15 August 2011) 1.62 BRL 1784.5 COP 12.4 MXN 7.2 ZAR * Under previous contract; included for comparison only since current contract has no cash payment as defined. Sources: Country Reports
Key takeaways on costs per countryEVIDENCE FROM RESEARCH:Brazil: o MDS pays Caixa 31% less ($0.60 vs. $0.88) for a recipient with a mainstream Caixa Facil account than for a limited purpose Social Card. South Africa: o Bulk electronic transfers into an account of the recipient’s choice cost 10c. o If SASSA receives reports for reconciliation, benchmark is $2.03Colombia: o Banco Agrario, in partnership with private logistics company Assenda, was the sole bidder on the government’s electronic G2P tender o Government pays high fees of $8.90 per bi-monthly payment; negotiated down to $6.24 (cash payment fee was $5.20). o High price reflected the short 2 year term of the initial contract and the bank’s need to upgrade its system, issue millions of debit cards, capture biometric information and build a new merchant network through Assenda.KEY LESSONS:Cost of payments is lower in countries with existing infrastructure (i.e. agents, ATMs) The details of the tendering process have a huge bearing on cost
Research on the Recipient Experience BRAZIL COLOMBIA MEXICO SOUTH AFRICAQualitative 7 focus groups 8 focus groups 10 focus groupsData totaling 49 people; totaling 74 people totaling 100 people in(specific to 12 in-depth interviews and 5 in-depth 3 urban and 5 ruralthis project) in 4 different settings interviews in 4 communities in one state (RJ) municipalities which are part of PPCAQualitative IADB: 16 focus South African financialData groups of 10 people diaries and diaries each, plus 18 in- refresh data (2009) depth interviews (2010)Qualitative IADB survey GAFIS (2011):data (other) performed by nationwide survey of CEDE in 6 cities 830 Oportunidades (2010); recipients who BdO (2010): received payment via Baseline for PPCA Diconsa stores
Before and After: The Recipient Experience BRAZIL COLOMBIA MEXICO SOUTH AFRICATime spent < 30 mins walking; Urban: 5-10 mins < 30 mins walking Pick-up at a bank ortraveling to some travel many hrs Rural: 1-2 hours retailer: 5 mins-2hrscollect or overnight Payment provider: 30 mins-2 hrs walkingWaiting time ATM: 0-10 mins No waiting 30 mins to 2 hrs Bank: 5 mins-2 hrs Agent or branch: Cash and agents Hours 5 mins-2 hrs take longest Specific payment providers: Several hrs Supermarket: 5 minsCost to the None Bank: Depends on bank None None chosen by beneficiary.recipient use Supermarket: No fee,service to often required to spendwithdraw gov 20% in storepayment Specific payment providers: NoneOther financial Saving in the house Saving in the house Saving in the house Saving in the house Saving with a trusted Installment credit Savings clubsservices used Installment credit Credit from shops person SACCOs Funeral plans and Informal borrowing Credit from local ROSCAs burial societies Lottery prizes shops Informal borrowing
Customer Usage ConclusionsEVIDENCE FROM RESEARCH: Recipients welcome convenience of electronic payments over cash. Few recipients automatically use new bank account to save or for much else beyond withdrawing benefits. Customers may open accounts just to receive their G2P payments (i.e. 51% of South African recipients opt to receive their payments via accounts). Causes of low customer use beyond withdrawal may be: o Beneficiaries don’t know about account functions o Beneficiaries may fear losing their entitlement if they leave a balance o Beneficiaries perceive that unpredictable fees reduce account balances. Free balance enquiries may be important to build trust. o The accounts may be poorly designed or inconvenientHOW TO ADJUST OUR THINKING: It will take time for entrenched behavior patterns to change; and it will require clear, consistent communication. Early expectations about rapid and automatic take up of financial services, especially savings, need to be recalibrated. Main benefit to recipients from inclusive accounts may come from their function as a gateway to the formal financial sector.
Business Case for ProvidersIllustrative Financial Model: informed from 4 country experiences Average balance needs to be $246 to makeREVENUE account profitable without government fees. Typical balancesAverage balance $246 = $10-$15 are $10-$15.Interest recognized 5%Transaction fees RareFIXED COSTSOpening cost $10Monthly maintenance $0.75Dormancy rate 20-40%VARIABLE COSTSTransaction pattern 1 withdrawal; 2 balance inquiriesUnitary cost of each transaction $0.25-$3
Provider Proposition The business case for providing bank accounts to social transfer recipients depends on receiving a regular fee from government. If this fee is high enough, the business case can be attractive. Without this fee, the business case for offering low balance savings accounts is challenging for banks. Governments need to continue paying fees and not assume that banks can get sufficient revenue from interest on the float or from cross-selling for several years. In time, a combination of increasing balances, more customer-initiated payment transactions and cross-selling of other services may support a stronger business case at the level of the client level. An efficient widespread agent distribution network is a key factor in reducing the cost of opening accounts and servicing client transactions.
Branchless models are key to making electronic G2Pwork for recipients ” – what theExisting Model beneficiary has, what the agent has Target Model SPP SPP Post Office Bank Post Office Post Office Branch Branch Agent Agent ATM? Beneficiaries Beneficiaries (Payments delivered by post office) (Payments collected from agents)
Advancing financial access for the world’s poor www.cgap.org www.microfinancegateway.org