Governments in middle income countries are increasingly making cash transfers to poor citizens as a cost-effective means of poverty alleviation. Conditional and unconditional transfers now reach millions of people each month in countries like Brazil, Mexico and South Africa. There is emerging evidence that these programs can be effective in targeting and alleviating poverty (see for example the link to IDPM study on pensions and poverty here); but in addition, they are also promoting innovation in national banking systems: very often, the eligible recipients are unbanked. However, electronic transfers of small amounts to bank accounts are much safer and cost effective—often for the recipient as much as government. Signing up unbanked grant recipients for new types of appropriate bank accounts is helping to push the bankable frontier in countries such as these today.
As they embark in this course of action, developing countries will find lessons to learn from the recent experience of converting to electronic payment of benefits in some developed countries. In the Nineties, both the US and the UK announced drives to pay all state benefits to recipients electronically. Since many of the welfare-eligible in both countries lacked basic banking services, this was linked to systematic attempts to promote access to these services. However, successes have been relatively limited to date; and tensions between state agencies and private banks have often been high (in the UK at least).
For beneficiaries to receive federal benefits electronically, the US Treasury designed a new category of account called the Electronic Transfer Account (ETA). The ETA has a maximum fee of $3 per month and no minimum balance. Recognizing that the profitability of these accounts was relatively low and affected by the startup cost, the US Treasury offered a small one-off payment ($12.60) to cover the opening costs. By 2004, some 98 000 accounts had been opened, which is progress to be sure, but hardly a massive take-up in the US context. Under federal pressure, US states have also converted check benefits payments into electronic payments. However, Michael Barr in a recent Brookings Institute paper entitled Banking the Poor, points out that in most cases, this is done by a contractor providing a debit card through which the beneficiary accesses funds held in a state float, rather than encouraging them to open a bank account.
In the UK, all payments of social benefits via cash at the Post Office were due to be phased out this year. Instead, beneficiaries would either have to open a basic bank account at a UK bank, or a card account at the Post Office. Basic bank accounts have been offered by UK high street banks from 1999. They have features including: no checks or overdrafts, but access to cash at counter and ATM; the ability to offer credits and debits. The marketing of these accounts was left to individual banks. Because of their lower profitability, some alleged that high street banks did little to promote take up of the accounts. Various investigations were done. Nonetheless, by late 2004, some 1 million basic bank accounts had been opened. In addition to offering their own basic accounts, UK banks contributed some US$380m to support the development of the Post Office Card Account Scheme (POCA) as the other part of Universal Bank Services Scheme. The POCA is similar to the basic bank account, except that it allows no direct debits and standing orders. Despite these moves, rumblings of discontent have continued to come from UK Treasury over the 1.9 million households in the UK still unbanked. At one stage last year, it was rumored that the Treasury would go as far as to set explicit targets for each bank to open basic bank accounts. However, as reported in a December 2004 press report in the Guardian, Gordon Brown backed down to instead agree with the industry an industry-wide goal of reducing the number of unbanked people by half in 2 years.
The experiences to date with grant payment processes in the three developing countries—SA, Mexico and Brazil—are quite similar in some ways.
In South Africa, over 8 million beneficiaries now receive monthly grants—pension, child care, disability, and so on--ranging from $25 to $130 per month. Of the beneficiaries, only 2 million are currently banked. Most are paid by contractors at some 8000 mobile payment points, using biometric identification on smart cards, as shown in the picture below. However, some banks have developed new account offerings to encourage direct deposits: the Sekulula account, developed by ABSA Bank, is an example of this, offered initially in one province (Gauteng). The monthly fee for the VISA Electron card ($2) is paid by state welfare agency, and entitles the holder to 2 free withdrawals via ATM or bank during the month. The Mzansi basic bank accounts, often covered in this blog, have also been designed to cater for welfare recipients among other unbanked segments. However, I have not yet seen any numbers of eligible beneficiaries among the 1m people who have opened Mzansi accounts in the eight months since their launch. The challenge is, of course, having accessible banking facilities at which a basic bank account can be used, in order for it to be attractive to beneficiaries.
Biometrics in action: a pensioner identifies himself by means of fingerprint at a rural mobile paypoint in South Africa
Brazil offers the Bolsa Familia program, in terms of which qualifying (poor) families receive monthly cash transfers of between $17-33 per month. The grants are conditional on all family members complying with human development conditions. The program reported 3.6 million families signed up at end 2003; and projected a rapid ramp up to 11.4 million in 2006. The benefits are paid out on the so-called Citizens Card issued by the Caixa Economico Federal. No doubt the current program to roll out basic bank accounts in Brazil (see previous blog post) will affect this too.
The Oportunidades program is Mexico’s main anti-poverty program, providing cash grants to participating families for each child under 22 who is enrolled in school. There were more than 4 million enrolled families in 2003, of whom 2.5 million lived in rural areas. In a similar role to the Caixa in Brazil, national savings bank BANSEFI is reportedly responsible for payments to 1.5m beneficiaries. Of these, 750 000 were paid through savings accounts opened for the purpose and accessed via BANSEFI’s L@Red de la Gente Internet network, which links over 400 savings and credit cooperatives in Mexico.
While the story in the three developed countries is in some respects quite similar to the developed country experience—increasing usage of bank accounts for direct deposit—the implications are likely to be quite different. In the US and UK, most people (close to 90% of adults) are already banked. In developing countries, the majority are not. There, the push to bank beneficiaries will tip the majority into the banking system. And once a majority has an account into which they can receive or make other payments (from family and friends), network effects should ensure that the momentum to bank a large portion of the unbanked will continue. This is a good news story both for poverty alleviation and financial system development. This should not come as a surprise: the two objectives in fact usually work well together, as at least one previous blog post has pointed out.
