Branchless Banking and Financial Inclusion for G2P Recipients

A few weeks ago, CGAP CEO Tilman Ehrbeck SRAHSS about the various roles that governments can play to create financially inclusive ecosystems. One such role was that of a driver of transaction volume, and he specifically mentioned that one of the government’s most powerful tools to drive such volume is through government-to-person payments (G2P). G2P payments include the spectrum of social cash transfers, wages and pension payments paid by governments to its citizens. Because many of these payments, especially social cash transfers, are specifically targeted at the poor, this presents a huge potential to bring financial services to the unbanked by linking these payments to financial accounts.

But this is often easier said than done. The link between financial inclusion and G2P payments must take into account the interests and needs of three main constituencies:

• The governments that are providing these payment funds whose main focus is cost reduction and increased efficiency
   
• The financial providers that are making the payments to recipients whose main focus is the business case for such activity
   
• The recipients whose main focus is the convenience of the payments process and the functionality of the financial products offered to them

The challenge is to align these incentives in a way that brings the poor, unbanked G2P recipient into the mainstream financial system of a country.

There are two main barriers that make this difficult: the prevalence of cash and the lack of proximity to recipients. This is exactly where new business models based on alternative delivery channels such as branchless banking can play a powerful role. What good is it if a payment lands into the bank account of a recipient when the bank is located 100 kilometers from where the recipient lives? How will banks ever seriously take up this business and offer small-balance accounts to a new client segment if their only option is to use expensive channels such as branches to service them? How can governments reduce costs and increase efficiency when they are forced to truck cash around to rural parts of the country? The use of new technologies and new distribution channels such as cash-in and cash-out agent points can provide the enabling infrastructure for greater financial inclusion for G2P recipients.

Recent CGAP research looked at four countries where this linkage is happening at scale (Brazil, Colombia, Mexico and South Africa). The results provide important lessons on implementing financially-inclusive G2P payments. Here are some of the main headlines:

• When the Ministry of Social Development in Brazil started making Bolsa Familia payments directly into the bank accounts of recipients held at the state-owned bank CAIXA, government costs decreased by 31% (compared to payment on a prepaid debit card with no store of value).
   

• The South African Social Security Agency pays a fee that is 54% lower when a recipient receives her payment into a mainstream financial account held at a commercial bank.
   
• The switch to electronic payments in Colombia turned out to be more expensive for the government than previous payments in cash since the agent distribution network had to be built from scratch, as opposed to leveraging existing networks in Brazil and South Africa.
   
• Recipients welcomed the convenience of electronic payments over cash. However, few recipients automatically used the new bank account to save or for much else beyond withdrawing benefits.
   
• The business case for the banks depends on receiving a regular fee from government. If this fee is at an adequate level, the business case can be attractive. But generating revenue on float or from cross-selling additional products is simply not a viable option for banks at this point in time.

What should we take away from this data? When the payment arrangements use existing financial infrastructure, such as agents and ATMs in Brazil and South Africa, the cost of making payments into bank accounts will be lower than the alternatives. However, if dedicated infrastructure need to be set up only for the purposes of paying cash transfers to program recipients (as in the case of Colombia), then the cost will likely be higher. Likewise, an efficient widespread branchless banking agent distribution network is the key factor for banks in reducing cost of opening accounts and servicing G2P client transactions.

The path most likely to reduce cost and improve efficiency is one that builds on and supports the development of a country’s general retail payment system. Social cash transfer programs can function as a stepping stone in the move from cash to electronic and on to fully-inclusive formal financial services.

Read the full research here or a 3-part blog series on the research on the CGAP Technology Blog.