How governments can lead a payments revolution
Advances in technology, driven by the private sector, have made digital payments one of the most exciting sectors for promoting economic development. Digital payments can advance financial inclusion and reduce the cost of transactions across the economy, unleashing new efficiencies in other areas that promote development, including health, education, infrastructure and women’s empowerment. The 2008 World Bank report,
Payment Systems Worldwide, A Snapshot, Outcomes of the Global Payment Systems Survey
, found financial inclusion spurs “broader and stronger economic growth by deepening financial intermediation and increasing efficiency of and access to payment, savings, insurance and credit services”. For households, businesses, NGOs and governments, doing business in cash is expensive and inefficient. Cash is extremely vulnerable to theft and loss. It is anonymous and difficult to trace. Cash payments also provide little opportunity for broader access to traditional financial services. To capture the benefits of the payments revolution, governments are uniquely positioned to lead the way. This is true not only because governments set policy and regulation, but because they also represent one of the largest generators of payments globally with, according to the World Bank, salaries, benefits and pensions representing an estimated US$40 trillion annually. However, governments cannot undertake the digital shift alone. It will take collaborative action with the private sector, donors and NGOs to realise the development potential of payments. To accelerate this shift, the United Nations Capital Development Fund (UNCDF), the UN capital investment agency for the world’s 48 least developed countries, serves as the secretariat of the Better Than Cash Alliance. The Alliance advocates for digitising payments and provides leadership, resources and technical expertise to facilitate the transition. Launched in 2012 as a collaboration among governments, companies and the development community, the Alliance now has 35 members, is an Implementing Partner of the G20 Global Partnership for Financial Inclusion and is on the World Economic Forum Financial Inclusion Steering Committee.
The benefits of digitising payments
As part of its mission, the Better Than Cash Alliance works with developing countries to agree to strategies for digitising payments, enabling everyone in their economies to share in the benefits. These benefits include:
Economic growth
Integrating digital payments into the economies of emerging and developing nations addresses crucial issues of broad economic growth and individual financial empowerment, according to a new report by the World Bank Development Research Group.
Cost savings
A Better than Cash Alliance study found that the Mexican Government is saving an estimated US$1.27 billion annually or 3.3 percent of its total expenditure on wages, pensions and social transfers after a concerted shift to electronic payment distribution. Other governments have had similar experiences. A study by McKinsey & Co. estimates the government of India could save US$22.4 billion per year by automating government payments.
Financial inclusion
All people make payments. As a result, digitising payments is a fast, cost effective way to expand access to broader financial services. Colombia’s Familias en Accion programme, for example, resulted in 91 percent of the households receiving digital payments on a card-linked bank account. In Mexico, two studies found that poor households that open bank accounts continued to make deposits into them, while also increasing the frequency of remittances they received through formal channels.
Speed and security
Unlike cash, which must be carried and shipped, digital payments are instantaneous and less vulnerable to theft or loss. Aid payments made electronically after the 2010 earthquake in Haiti cut delivery time by seven days. Because those transfers were not made in cash, theft fell by 50 percent.
Evidence also shows that digital payments are less subject to ‘leakage’ than cash. In one survey after Argentina’s Ministry of Social Development shifted to digital payment cards, recipients who admitted to paying bribes to local officials in order to access their money fell from 3.6 percent to 0.3 percent. In India, social security pension (SSP) payments made digitally on smart cards resulted in a 47 percent lower incidence of bribes demanded.
Women’s empowerment
Digital payments can help overcome some of the additional barriers to financial inclusion and economic participation women face. For example, in Niger, digital delivery of a social benefits payment resulted in greater privacy and control of mobile transfers, compared to cash, resulting in intra-household decision-making in favour of women.
Action on digitisation
The benefits of making this shift are clear, but it is challenging to do it effectively. Despite the benefits of a digital payments ecosystem, there are political, policymaking and technical challenges to overcome. Coordinating effectively between government agencies is among the most critical hurdles. The savings realised by Mexico, for example, only became possible because of a sustained, 15-year effort by the Ministry of Finance and the Mexican Central Bank to centralise as well as digitise payments. Changing established regulations and procedures is hard in the face of competing priorities. For example, a locally designed risk-based approach to know- your-customer rules for opening bank accounts still has to comply with international standards. In Colombia, the government set a clear vision for both the electronic payment and financial inclusion agenda, which gave the private sector great incentives to innovate and collaborate. However, a tax on formal financial transactions until recently created a disincentive for digitisation among smaller businesses. There are technical challenges as well. Making digital payments cost-effective for individuals is facilitated by interoperable accounts for mobile phones, ATMs, point-of-sale terminals, and online. It also depends on the ability of people to use the same system to receive government payments and to pay each other, friends and family, schools, merchants and utilities. Compounding these barriers, governments may have to build financial literacy among citizens and trust in the formal financial systems, all while confronting a lack of experience or expertise within implementing agencies. So there are also great benefits in increasing communication between public and private actors to address these challenges.
Leading the path to digitisation
The Better Than Cash Alliance plays a vital role by helping its member countries to develop and implement strategies for a digital payments ecosystem that works for everyone in the economy. In its unique position hosted by UNCDF, the Alliance can convene stakeholders from government, the private sector and the development community. Digitisation strategies begin with diagnostics to assess the infrastructure, policies and progress in each country, and the Alliance continues to support players throughout the journey to ensure progress. The Better Than Cash Alliance provides members with a technical toolkit for designing and implementing a strategy, as well as many opportunities to learn from other members, including case studies from transitions with signs of success, such as Mexico’s, and peer-learning exchanges to better understand the experiences in other regions. The result is a thriving, evolving community of practice that is driving the global transition from cash to electronic payments. The shift may not be easy. But government leadership and public-private collaboration will make it more successful and allow developing nations to more rapidly achieve the reduced costs, increased transparency, financial inclusion and women’s empowerment that can come from digital payments.
By Judith Karl
Photo: UNDP ?Sierra Leone