Linking Electronic Payments and Social Cash Transfers in India


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From April to September 2013, CGAP directed a research study to better understand how the electronic payment of social benefits in Andhra Pradesh, outside of the future integration of Aadhaar, impacts the lives of poor beneficiaries, the agents who complete the transactions, and the banks who are disbursing funds. In addition, analysis was done of the potential impact that a full roll-out of the Aadhaar system could have in the already largely electronic payment system of Andhra Pradesh. The research showed that while there are no banking regulations that prevent the electronic payments from being used to promote financial inclusion, there are design elements in the program that act as barriers and prevent electronic payments from linking beneficiaries with additional financial services.

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  • The BC channel can offer flexibility and access to the formal financial system and be convenient at the same time.
  • Delay penalty has been taken according to policy not according to practice. A lot of the penalties are waived off. Float: Penalty, 5:9.
  • if one includes 40% of a BPM’s average salary
  • Stagger roll-out of DBT: Develop district readiness indicators for cash-in, cash-out networksCreate transparent processes to handle offline transactionsDevelop applications that automate the “manual” process
  • Linking Electronic Payments and Social Cash Transfers in India

    1. 1. Direct Benefit Transfer and Financial Inclusion Learning from Andhra Pradesh, India Shweta S Banerjee, Sarah Rotman, Stephen Rasmussen, Suyash Rai December 2013
    2. 2. A Guide to Indian Financial Inclusion Terminology • AP: Andhra Pradesh – a state in southern India • G2P: government-to-person payments • NREGA: National Rural Employment Guarantee Act – a workfare social protection program that guarantees 100 days of work to every Indian household, if desired • SSP: Social Security Pensions • SHG: Self-Help Groups – a women’s-only savings group system • SERP: Society for the Elimination of Rural Poverty - an organization to facilitate poverty reduction through social mobilization and improvement of livelihoods of rural poor in Andhra Pradesh • UIDAI: Unique Identification Authority of India – a project to provide every Indian resident with a Unique ID number known as Aadhaar • EBT: Electronic Benefit Transfer – the electronic payment system to pay social cash transfers • DBT: Direct Benefit Transfer – the electronic payment system build on the Aadhaar system to pay social cash transfers • CSP: customer service point – the equivalent of what other countries refer to as “agents” • BC: Business Correspondent – companies that manage networks of CSPs on behalf of banks 2
    3. 3. Research summary • In partnership with the World Bank and SERP, CGAP carried out a research project from April to September 2013 to understand the EBT system developed in the state of Andhra Pradesh since 2006. • The research analyzed the policy, supply, and demand side aspects of this EBT ecosystem, with a view that lessons from AP are valuable for the DBT rollout across India, as well as global knowledge on G2P and financial inclusion. 3
    4. 4. Key Research Questions 1. What are the various types of technology and payment models being used and which are most efficient? 2. What is the value of a unique ID system? 3. Business Case for Banks: How is the 2% government commission broken up via cost to bank, BC, and last mile agent? 4. What is the experience of recipients? Why are millions of payment bank accounts not being used? 5. Is there a business case to provide financial services through G2Plinked accounts? What are the barriers? 6. Indigenous Peoples and Remote Areas: How can the program better serve hard-to-reach segments? 4
    5. 5. Key Findings • An electronic system of benefit transfers provides more efficiency and less leakages. Most recipients note a high level of trust and satisfaction with the system as a payment disbursement channel. • Most payments are delivered to recipients within a month, 25% of NREGA payments are delivered within two weeks. • The 2% fee paid by the government to banks is not enough, as the cost of delivery is higher. As a result banks are at a loss, and agents make less than minimum wage rate. • Most accounts are not being used by recipients. The potential of using this channel to achieve financial inclusion is unmet, especially since recipients widely use other formal and informal financial products. • Technology is not a barrier to use for recipients, but this is largely because transactions are intermediated by CSPs on behalf of recipients. 5
    6. 6. Research firms and methodology Research Firm Nature of research Supply-side of 4 bankBC models, including an Aadhaar pilot, and India Post Demand-side Quantitative Demand-side Ethnographic Sample 3 banks 4 BC companies India Post 2,460 households 80 interviews Districts Four (4): • Anantpur • Khammam • East Godavari • Chittoor Twelve districts (12) Three (3): • Mahbubnagar • East Godavari • Visakhapatnam 6
    7. 7. Broad coverage of 12 districts in AP 7
    8. 8. Government Reported Data: Key numbers from Andhra Pradesh’s EBT system Scheme Volume of disbursement Number of (2012-13) (USD million) beneficiaries (2012-13) National Rural Employment Guarantee Scheme 600 10,641,105 Social Security Pensions 350 6,518,348 Post-metric Scholarships 340 2,847,999 8
    9. 9. Government Reported Data for NREGA 2012-2013 2013-2014 (through August) Disbursed within 14 days 25.16% 15% Electronic 55.91% 81.39% Manual 33.03% 10.44% Manual overrides on electronic system 11.06% 8.17% 9
    11. 11. Monthly household income data during May-June 2013 • • • • • The main sources of monthly income are wages earned by the household and the payments received from government. Monthly income range is more or less equally distributed between Rs. 2,000-10,000. Average monthly household income is around Rs. 4,600 per month. Average monthly expenditure is Rs. 4,031 The months of May and June is an agricultural lean season therefore the volume of payments through NREGA is higher than average. Participation of sample households in type of government schemes (in %) G2P Scheme Average Income from govt (in Rs.) NREGA NREGA 59 Pension 43 Scholarships Rs. 2017 Pension Rs. 313 Scholarships Rs. 300 32 0 20 40 60 80 100 1 USD = 62 Indian Rupees 11
    12. 12. EBT increases convenience for beneficiaries Distance travelled in kms EBT Average distance travelled (in kms) Manual Payments 0.58 For SSP + NREGA 1.15 Time spent in collecting payment (in %) EBT 47 37 Manual 43 Average time for EBT : 55.49 min 28 19 13 1 less than 30 30 min to 1 hr 1 hr to 2 hrs min 8 0 4 Average time for Manual : 77.14 min 2 hrs to 5 hrs Greater than 5 hrs * The time spent denotes the cumulative time in collecting the payments. This could include travel time, waiting time in the queue etc. Base: Pension or NREGA Recipients EBT – 1482 ; Manual – 551 Figures in percentage except base EBT payments also include DBT payments 12
    13. 13. Trust is high, but suffers in indigenous communities Strongly Agree & Agree Base:All respondents I have trust that money is credited on time from the government and given to me. I have trust that proper amount is transferred from the government to me. I have trust on the mode of payment used by the government to disburses payment to me. I have trust on the agent who hands over the money to me I believe that there is maintenance of proper government accounts I am confident that there is no manipulation of funds by the government. I believe that the system is transparent in disbursing payments to recipients . Overall Karimnagar Adilabad Mahabub Nagar Khammam Warangal Nalgonda 2460 200 216 196 221 198 183 82 80 56 96 61 97 87 77 61 49 98 57 88 78 74 56 51 98 52 83 64 74 58 49 98 65 80 63 74 60 40 98 54 79 72 71 62 34 98 48 77 70 72 68 44 98 51 74 86 13
    14. 14. Recipients are active users of financial tools Recipients widely use both formal and informal financial products but not their EBT accounts 14
    15. 15. Despite their low incomes, recipients do save Number of people saving (in %) Common Saving Methods (in %) Yes, 34 Dwakra group 72 Insurance No, 66 16 Savings account 16 Average MHI : Rs. 4610 Average expenditure : Rs. 4031 0 Base: All Respondents- 2460 20 40 60 80 100 Base: Those who have monthly savings- 833 A third of the households claimed to regularly save. A common method of saving is through dwakra or savings groups (self-help groups for women). 15
    16. 16. Recipients have comfort yet passivity with technology • Technology is rarely a barrier to use • Whether smart card or mobile phone, there is no noticeable different in the user experience • This is due to the fact that the interaction between the user and the technology is always mediated by the CSP and is perceived to be not more than a government payment channel. 16
    17. 17. Recipients are unaware of account functionality Several aspects of the end recipient experience are compromised because of poor information access. These include information on : • Whether these are bank accounts • What services they can avail through the account • Account balances • Whether payments have been credited into their accounts • The reasons for payment delays • An expected date by which payment is likely to be received. 17
    18. 18. Recipients trust community-based agents, but CSPs need more support One of the biggest advantages of the communitybased CSP system is the trust inherent in it and the extent to which it mitigates recipient’s anxieties and frustrations. However, there is a clear need for additional support: • To manage crowds at peak transaction times, she would often seek the assistance of someone familiar and trustworthy. • In addition to an inadequate physical and human resource infrastructure, the CSP also has to negotiate several technical and process glitches without a clear error resolution mechanism for either. • The CSP’s own salary and associated incentives are often delayed and transferred without any explanation about the basis of calculation. 18
    19. 19. There are significant differences in G2P payment delivery in indigenous communities and remote areas The indigenous communities present a completely different set of challenges when evaluating the impact of electronic delivery of government benefits. • Higher workload for the CSP compared to plain areas, forcing the CSP to improvise when it comes to performing her duties comprehensively • Operational barriers due to network unavailability resulting in a much higher incidence of manual over-rides for making payments. • Huge delays in receiving payments specially in the case of NREGA wages leading to lesser trust in the system. • CSPs have to shoulder comparatively higher risk while transporting the money to the village because of the large distances they need to travel. 19
    20. 20. Key Messages from Demand Side Research ● • Focus on clear and consistent communication • Recipients need to understand what the account is and the functionality it offers. • They need to be informed when payments have been credited, how much to expect and any reasons for possible delays. Develop an effective grievance redress system • Develop a system where recipients can communicate directly to express any payment-related issues • Especially in indigenous communities, create payment access points in the full commercial ecosystem, such as leveraging the weekend markets. • Design financial products so that small amounts from payment benefits can help to smoothen income fluctuations and consumption needs. 20
    22. 22. Overview of the 5 Business Models Studied Bank 1 – BC 1 Number of CSP points Number of beneficiaries enrolled to date in district Enrolled / target beneficiaries % Average disbursement size (Rs) Number of disbursements (June 2013) Disbursements per CSP per month Bank 2 – BC 2 Bank 3 – BC 3 900 88 750 434,744 67,500 316,200 51% 90% 48% 248 155 249 760,000 58,000 537,779 844 659 717 Bank 4 – BC 4 Aadhaar pilot 22 27,000 90% 237 18,450 839 India Post 1,333 717,997 91% 256 632,050 474 * Specific bank and BC company names have been taken out for confidentiality purposes 22
    23. 23. Comparison: CSP Network Management Indicator Agent recruitment lead time: Time from the exam /interview of a CSP to appointment. Training support: Depth of training and level of hand holding support provided to CSPs/BPMs during onboarding. Salary and Commissions Bank 1 – BC 1 Bank 2 – BC 2 Bank 3 – BC 3 Bank 4 – BC 4 Aadhaar pilot India Post BPM- 30 to 45 days 60 to 270 days 7 to 15 days 90 days 30 days CSP- 15 to 30 days 3 day classroom training. Field level support by MCs Rs. 500 per month (fixed) and 0.25% of the total disbursements 1-2 day classroom training 2-3 day classroom training 3 days classroom and onsite covering POS handling, cash handling and disbursement processes Rs. 2,000 (fixed) Rs. 500 per month or 0.5% of the disbursements made in a month, whichever is higher Rs. 500 per month (fixed) and 0.25% of the total disbursements 1 day of classroom training by AP. Online staff for both BPMs & CSPs. • BPMsRs.5,000 to Rs.8,000+ 0.15% • CSPs – 1.0% 23
    24. 24. Comparison: BC Management & System Performance Indicator Work load per BPM/CSP (transactions per month) Transaction Processing time : Average time per transaction Transactions per day per BPM/CSP Interconnectivity: Beneficiaries are able to transact at multiple BPMs/CSPs and also at the linked branch Bank 4 – BC 4 Aadhaar pilot India Post Between 5001000 Between 7002,000 (average is 1,700) 2 to 3 minutes 1 to 2 minutes with good connectivity 1 to 2 minutes, with good connectivity is and low load. 10-15 minutes during peak load. During SSP payment days transactions can go up to 100 per day During SSP payment days can go up to 100 per day During SSP disbursements can go up to 70 transactions per day No No Bank 1 – BC 1 Bank 2 – BC 2 Bank 3 – BC 3 Between 5001,000 2 to 3 minutes if connectivity is good During SSP disbursements can go up to 70 transactions per day No Between 5001,000 2 to 3 minutes if connectivity is good During SSP disbursements can go up to 70 transactions per day No Between 4001300 Yes 24
    25. 25. AP The Business Case for Banks is Weak • For every Rs. 100 that the AP Government disburses, the Government pays the bank Rs. 2 • • • 1 Rupee is withheld until proof is submitted that all payments has been disbursed This final payment is usually paid to the bank with significant delay, forcing the bank to front the 1 Rupee For every Rs. 100 that the bank disburses, the total costs of disbursement in locations with full scale are • • Rs. 2.93 in Bank 1 – BC 1 Rs. 2.65 in Bank 3 – BC 3 25
    26. 26. Per Disbursement Cost to EBT Channel Based on normalized assumptions of monthly disbursements 3.50% Additional Cost 3.00% 2.50% 0.93% 0.65% Additional 2.00% 0.52% 0.78% 1.50% 2% CSP BC 1.00% Bank 1.23% 0.97% 0.50% 0.25% 0.25% Bank 1 - BC 1 Bank 3 - BC 3 0.00% Bank 1 – BC 1 Bank 3 – BC 3 Total Cost to EBT Channel 2.93% 2.65% Bank loss -0.93% -0.65% BC profit 0.58% 0.46% 1082 1389 Model CSP commission (Rs) 26
    27. 27. Two EBT models That Have Achieved Scale Bank Viability to Bank 1 (% of disbursement) Bank Viability to Bank 3 (% of disbursement) 2.50% 2.50% 2.00% 2.00% 1.50% 1.00% 1.50% 2.26% 1.00% 3.19% 0.50% 2.26% 2.92% 0.50% 0.00% -0.93% -0.50% 0.00% -1.00% -1.50% -0.65% -0.50% -1.00% Total income Total cost per month Total Profit/Loss Total income Total cost per month Total Profit/Loss Total channel cost per Rs 100 of disbursement: INR 2.93 (2% + loss of 0.93%) Total channel cost per Rs 100 of disbursement: INR 2.65 (2% + loss of 0.65%) Net loss/profit per transaction: INR -2.3 Net loss/profit per transaction: INR -1.6 The bank has a higher cost structure which reflects in its higher management and supervision cost overhead. No Smartcard in the model, leading to lower enrollment costs. It is important to note that there are potential adjacent benefits which have not been accounted for on the revenue side: • Potentially integrating the EBT channel with the broader FI strategy of the Bank (Cross sell revenues). • This is especially relevant as the costing model accounts for broader costs such as the cost of hosting the account – which the bank will certainly aim to offset through cross sell revenues. 27
    28. 28. Department of Post is a Unique Model in Partnership with the Technology Provider AP Online • • • Department of Post relies on Branch Post Masters (BPMs) to distribute 60% of payments, leveraging existing cash management networks. BPMs are spending 40% of their time delivering G2P payments, but not getting adequately compensated. They are even refusing the 0.15% per payment. Through a proposed hub and spoke model, payment costs would decrease by 24.2% from Rs 8.31 per disbursement to Rs. 6.3 (for the average disbursement of Rs. 256) BPM The remaining 40% of payments made through traditional CSP network CSP • During the month of June 2013, 61% of payments were made through Aadhaar authentication. CSP Village 3 Village 1 Village 2 Village 4 28
    29. 29. The India Post Model Has Two Possible Approaches India Post Viability in Current Model (% of disbursement) India Post Viability (% of disbursement) –Proposed hub & spoke model 3.00% 2.50% 3.00% 2.00% 2.50% 1.50% 1.00% 2.00% 2.50% 3.24% 1.50% 0.50% 1.00% 0.00% -0.74% -0.50% -1.00% 2.50% 2.46% 0.50% 0.04% 0.00% Total income Total cost per month Total Profit/Loss Total income Total cost per month Total Profit/Loss Total cost per Rs 100 of disbursement: INR 3.24 (2% + loss of 1.24%) Total cost per Rs 100 of disbursement: INR 2.46 (2% + loss of 0.46%) Net loss/profit per transaction: INR -1.9 Net loss/profit per transaction: INR 0.1 • Under the hub & spoke model – the disbursement role played by higher cost BPMs is carried out by external CSPs hired and managed by the Post. • However, this model does not account for an additional cost of a reasonable return for stakeholders such as AP Online. Note: The hosting charges make a big impact on all the models. For the post, hosting costs are half of bank costs – this works out to be a substantial cost saving. But the Post also loses any adjacent benefits (potential cross sell, etc.), which is not accounted for within this model. 29
    30. 30. Aadhaar pilot revealed many benefits and challenges of the new DBT system Challenges Benefits • • • • After the introduction of DBT, the district administration identified ghost beneficiaries to whom payments were being made. From Dec 2012 to April 2013 the number of payments reduced from 8,884 (EBT) to 8,444 (DBT). A large part of this can be attributed to existence of ghost and duplicate beneficiaries. This accrued savings of Rs. 88,500 for the government, with the total amount of SSP payment reducing from Rs. 2,922,700 in Dec 2012 to 2,834,200 in June 2013 • • • • The process of seeding new banks accounts was inefficient Biometric authentication often fails for the elderly. Online authentication is an issue for areas with low connectivity. CSPs must do manual reconciliation based on the amounts disbursed at the end of the day. 30
    31. 31. A scaled up version of the Aadhaar pilot is the most efficient model of all – but still faces a sustainability challenge Bank Viability to Bank 4 (% of disbursement) – actuals Bank Viability to Bank 4 (% of disbursement) – scaled up scenario 3.00% 2.50% 2.00% 2.00% 1.00% 1.50% 2.26% 1.00% 0.00% 4.40% 2.26% 2.74% 0.50% -1.00% -2.14% 0.00% -2.00% -3.00% -0.48% -0.50% -1.00% Total income Total cost per month Total Profit/Loss Total income Total cost per month Total Profit/Loss Total cost per Rs 100 of disbursement: INR 4.14 (2% + loss of 2.14%) Total cost per Rs 100 of disbursement: INR 2.48 (2% + loss of 0.48%) Net loss/profit per transaction: INR -4.5 Net loss/profit per transaction: INR -1.1 • Scale 22 CSPs (actual) v/s 900 CSPs (Scaled up scenario) – reduces the fixed cost overhead on the model on a per CSP/ disbursement basis. • Aadhaar takes out the smartcard cost and lowers some of the KYC verification costs for the Bank. • At scale the Aadhaar enabled model goes from the least cost efficient model to the most cost efficient model 31
    32. 32. The Business Case for CSPs is Weak On Average Agent Earns Rs 1200 Per Month for Ten Days of Full Time Work. This is lower than the AP minimum wage rate of Rs 149 per day. 32
    33. 33. The Channel is Designed to Only Make G2P Disbursements • • Regulations and technology allow the channel to be used for a range of financial services Current incentives of the channel make it difficult to offer any financial services other than disbursement of G2P benefits • • • • Commission to banks tied to disbursement in cash Penalty of 0.1% per day for banks for every day of delay in disbursement Mandate to disburse the entire benefit in cash within a few days puts pressure on the channel, and makes it unavailable for other purposes The state is setting up a parallel Financial Inclusion channel providing a range of basic financial services 33
    34. 34. Key Messages from Supply Side Research ● Improve Bank Business Case • Increase current commission paid to from 2% to 3%, and 3.5% in tribal areas. A minimum of 1% should be passed down to CSPs • Remove withholding of 1% service charge Enable banks to provide diverse financial services Improve CSP Business Case • • • • Remove the full disbursement mandate so that recipients can leave small value deposits • Merge the G2P and FI payments by allowing CSPs to carry out other kinds of financial transactions such as loan repayments for SHGs members • • Currently CSP does not even make the daily minimum wage rate, so increased incentives need to be prioritized Stagger payments throughout the month to make the CSP’s role less stressful Systemize a process for manual overrides, where necessary • Online payments will not be possible in all areas. A systematic manual process needs to be established in parallel with DBT with effective monitoring and supervision at the village level 34
    35. 35. Government Level: Develop an integrated payment architecture, managed by a payments unit (DBT Cell) at the state level to reduce redundancy Department A Department B Develop standards of service delivery Interface with providers Department C Monitor quality of implementation Develop and maintain a common technology middleware that standardises processes DBT Cell Recipients District Administration Maintain a centralised complaint and feedback centre to track quality and hasten resolutions Providers Be a single point of contact for financial service providers, technology service providers, and agent network management companies. 35
    36. 36. Advancing financial inclusion to improve the lives of the poor