March 2012

G2P Payments

Government-to-Person (G2P) Payments

Social Safety Net (SSN) Programs

Employee Payments(wages, pensions)

Social Transfers Noncash Support

Workfare

UnconditionalTransfers

ConditionalTransfers

Food

Price Subsidies

Fee Waivers

To better off employees

To low-income employees

170

mill

ion

What are G2P payments?

Worldwide, 170 million low income individuals receive some form of regular payment from their governments

Note: Data is from 2009

Financial access and the 170 million

55% of adults worldwide— 2.5 billion people—survive without formal financial services.

They rely instead on: Family members Friends and neighbors Savings clubs Employers Moneylenders and savings collectors

No formalaccess

Formalaccess

The Case for Financial Inclusion

Financial inclusion requires scale and presence

Traditional banks have scale, but lack presence.

Microfinance institutions have presence, but lack scale.

Channel Costs

$250k Traditional branch

$50k In-store branch

$10k ATM

$2k Agent with POS terminal

$400 Agent with mobile

$0k No agent (cashless)

 

1.7 billion people worldwide have a mobile phone but no bank account.

Branchless models for scale and presence

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

Can G2P be leveraged for financial inclusion?

Evolving G2P Delivery Methods

Linking G2P to the Personal Payment Eco-System

Evidence from four middle-income countries

• Various unconditional transfers reach 9 million recipients (30% of the population)

• Various payments methods: prepaid smart cards and magnetic stripe cards linked to an account

South Africa’s Social Security Agency

• CCT program started in 1997 reaching 6 million households (20% of population)

• Bansefi has various payment mechanisms, including cash, magstripe cards linked to accounts, smart cards

• CCT program reaches 2.4 million families (11% of population)• 1.8 million interest-bearing savings accounts opened by Banco Agrario

• CCT program reaches 12.9 million families (30% of population)• 2 million recipients receive grants into a simplified current account

accessible via magnetic stripe card

Mexico’s

Oportunidades

Colombia’s Familias en Accion

Brazil’s Bolsa Familia

Changes over time towards electronic payments

11

Strong financial inclusion push under Financial Sector Charter (2003)

Agency strategy to promote bank payments to reduce cost and leakage

Beneficiaries choose whether to be paid in cash or into a bank account

o 37% paid electronically into general or special bank accounts

oPayments made by three main payment contractors using special purpose cards at dedicated pay-points with ATM/ POS and biometric authentication

Case 1: South Africa Social Security Agency

Old Age GrantsSouth Africa

Payment system evolved over time:o 2006: Cash distributed from state

bank Banco Agrario brancheso 2007: Prepaid cards that could be

used at ATMs of private bankso 2008: Mix of options—cash, bank

branches, and prepaid cardso 2008: Banco Agrario won tender to pay grants via savings

accountsDevelopment of banking

correspondents was linked to the roll-out of CCT pay points

oSubsidies offered for bank correspondents in some areas

Strong roll out: from 8% in 2009 to 86% of recipients in 2010 – 1.8 million

savings accounts opened

Case 2: Familias en Acción in Colombia

Familias en Accion, Colombia

CCT program started in 1997 reaches 5 million households (18% of pop)

Payments made primarily through Bansefi and Telegrafos/Telecomm

Bansefi has experimented with distribution:

oCash through Bansefi branchesoCash through dedicated mobile

unitsoDirect deposit with debit card

access and no withdrawal requirement

oDiconsa stores as correspondents using POS terminals

oCredit unions affiliated with the Bansefi-sponsored L@ Red de la Gente payment network equipped with Bansefi terminals

Case 3: Oportunidades in Mexico

Oportunidades, Mexico

Building Incentives to Save into G2P Product Design

Next generation of savings products specially designed for use with cash transfer programs

Personal Capitalization Accounts (PCAs) e.g. in Peru

Child and Youth Savings accounts e.g. in Mexico

“Lotteries” being used as an incentive to promote savings e.g. in Colombia

Example: Jóvenes con Oportunidades in Mexico

• Jóvenes con Oportunidades was added in 2003 as an additional benefit for participating families.

• Program consists of savings accounts for Oportunidades youth to incentivize continued education

• Account is opened in a child’s last year of Secondaria (middle school) and “points” are deposited in the account for each year of high school the student completes

• Points are converted into cash (approx. $336) which the youth can withdraw or leave in the Bansefi savings account

• 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 accounts

Source: Zimmerman & Moury, 2009; http://www.oportunidades.gob.mx/jovenes/preguntas_frecuentes.html

Colombia: Promoting savings behavior

Banco Agrario and the government saw that usage of the savings accounts would not happen automatically

Experimenting with incentives to promote savings behavior among beneficiaries

o Lottery held at the local leveloApprox one in every thousand

people has a “zero added” to their savings balance

Combined with financial education to measure uptake

Control group created so that effectiveness can be measured

Linking with micro-insurance

Strong theoretical argument in favor of insurance:oCould be cheaper and better

suited to beneficiary needso Life, health, disability and

weather insurance being discussed

Rising on the agenda:oOne pilot in the PhilippinesoNew strategy for Africa being

developed by WBIssues still to be resolved:

oWho pays?oWhat should be covered?oOpt in, opt out, or mandatory

enrollment?

Example: 4Ps program in Philippines

Recent pilot links 12,000 – 20,000 beneficiaries of the 4Ps CCT program with micro-insurance association

Currently only life and pension products offered

Plans to scale up over the next year Other products being considered

including weather index and agricultural loans with built in weather insurance cover

Linking G2P with credit

Few examples around the world Governments may be wary of

promoting credit One product being designed by

FINO (in conjunction with CGAP) in India

Linking with transactional savings

Example: FINO in India

FINO is developing a proposal to test a credit product in India

Credit line would be extended to FINO agents

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

 BRAZIL COLOMBIA MEXICO SOUTH AFRICA

Average grant per recipient

$71.0 $55.1 $118.3 $144.7

Average cost per payment $0.84 $6.24 $2.52 $3.30

As % of average grant 1.2% 11.3% 2.1% 2.3%

Cash payment $0.88 $5.20* $2.35 N/A

Limited purpose payment $0.88 $6.24 N/A $4.46

Mainstream financial account

$0.60 N/A $2.84 $2.03 or $0.10

Rate used in conversion:

1 USD= (15 August 2011)

1.62 BRL 1784.5 COP 12.4 MXN 7.2 ZAR

Government Costs

* Under previous contract; included for comparison only since current contract has no cash payment as defined.

Sources: Country Reports

Key takeaways on costs per country

EVIDENCE 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 $2.03

Colombia:o Banco Agrario, in partnership with private logistics company Assenda, was the

sole bidder on the government’s electronic G2P tenderoGovernment 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

COLOMBIA SOUTH AFRICAMEXICOBRAZIL

QualitativeData(specific to this project)

7 focus groups totaling 49 people;12 in-depth interviews in 4 different settings in one state (RJ)

8 focus groups totaling 74 people and 5 in-depth interviews in 4 municipalities which are part of PPCA

10 focus groups totaling 100 people in 3 urban and 5 rural communities

QualitativeData

IADB survey performed by CEDE in 6 cities (2010);BdO (2010): Baseline for PPCA

IADB: 16 focus groups of 10 people each, plus 18 in-depth interviews (2010)

GAFIS (2011): nationwide survey of 830 Oportunidades recipients who received payment via Diconsa stores

Qualitative data (other)

South African financial diaries and diaries refresh data (2009)

Before and After: The Recipient Experience

COLOMBIA SOUTH AFRICAMEXICOBRAZIL

Time spent traveling to collect

< 30 mins walking; some travel many hrs or overnight

Urban: 5-10 minsRural: 1-2 hours

< 30 mins walking Pick-up at a bank or retailer: 5 mins-2hrsPayment provider:30 mins-2 hrs walking

Waiting time ATM: 0-10 minsAgent or branch: 5 mins-2 hrs

No waiting 30 mins to 2 hrsCash and agents take longest

Bank: 5 mins-2 hrsHoursSpecific paymentproviders: Several hrsSupermarket: 5 mins

Cost to the recipient useservice to withdraw gov payment

Bank: Depends on bank chosen by beneficiary.Supermarket: No fee, often required to spend20% in storeSpecific paymentproviders: None

None None None

Other financial services used

Saving in the houseInstallment creditCredit from shopsInformal borrowingLottery prizes

Saving in the houseSaving with a trustedpersonCredit from localshops

Saving in the houseInstallment creditSACCOsROSCAs

Saving in the houseSavings clubsFuneral plans andburial societiesInformal borrowing

EVIDENCE 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 functionso Beneficiaries may fear losing their entitlement if they leave a balanceo 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 inconvenient

HOW 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.

Customer Usage Conclusions

Business Case for Providers

Illustrative Financial Model: informed from 4 country experiences

REVENUE

Average balance

Interest recognized 5%

Transaction fees Rare

FIXED COSTS

Opening cost $10

Monthly maintenance $0.75

Dormancy rate 20-40%

VARIABLE COSTS

Transaction pattern 1 withdrawal; 2 balance inquiries

Unitary cost of each transaction $0.25-$3

$246 = $10-$15

Business Case for Providers

Average balance needs to be $246 to make account profitable without government fees. Typical balances are $10-$15.

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.

Provider Proposition

Branchless models are key to making electronic G2P work for recipients

” – what the beneficiary has, what the agent has

SPP

Post Office Branch

Existing Model

Post Office Bank

Target Model

(Payments delivered by post office) (Payments collected from agents)

Post Office Branch

Beneficiaries

SPP

Agent Agent ATM?

Beneficiaries

Advancing financial access for the world’s poor

www.cgap.org

www.microfinancegateway.org