Experts who work on moving government-to-person (G2P) payments to electronic platforms overwhelmingly agreed that opening accounts and delivering funds is straightforward. What is difficult, however, is designing products that increase use of financial services. While G2P payments have high potential, unless individuals use their newfound access in everyday life, they miss a key opportunity. Yet few G2P payment schemes build in incentives for providers to promote stored value in accounts or to couple the accounts with financial services like savings, loans, and insurance. And few G2P payment systems exist in a fully enabled digital financial ecosystem that allows customers to make additional transactions from their wallet rather than cash out.
If the decision was made to shift government transfers and distribute them into bank accounts, convenience and value for customers may increase. However, products must be designed in such a way that they can be used for money management rather than merely serve as another channel to distribute funds.
In our Roadmap on Technology-Enabled Business Models, FI2023 recommended that governments deploy G2P payments to promote technology-enhanced inclusion. There are strong financial incentives for governments to switch to electronic G2P. According to the most recent estimate, governments were the biggest generators of payments in the world, with a predicted annual volume of about U.S. $40 trillion. Using digital rather than cash payments can significantly reduce transaction costs. In conversations with us, some government workers who design and implement G2P projects have highlighted the transparency that G2P payments afford. They jokingly referred to themselves as “plumbers” who patch corruption holes within the social payments infrastructure.
Many conditional cash transfer programs were originally created with the idea that people would – and should – use the funds for immediate consumption. Despite research on financial inclusion which shows that people at all income levels borrow, mitigate risk, and save for the future, some policymakers we talked with said that those receiving G2P payments are too poor to place savings in a formal financial institution, contribute to a pension, or receive a loan. The difference in perspective between the managers of benefit programs and promoters of financial inclusion reveals one of the reasons why the financial inclusion community has found it difficult to incorporate financial inclusion elements into electronic G2P payments.
“There has been progress on the rollout of electronic payments, but the suitability of the product to people is quite low. In most instances, social benefit payments are cashed out in full immediately, or they are delivered in a way that is not necessarily helpful to providing access to other financial services.” – World Bank Payments Group
In Peru, where 1.2 million new accounts were opened through conditional cash transfers, research funded by Proyecto Capital and the Ford Foundation suggests that financial education makes a difference in whether and how people use their G2P accounts. Of those in a control group who did not receive financial education, 3 percent stored value in their account. In contrast, 21 percent of those who received financial education left money in their accounts that amounted to about double the national average of savings.