Government Payments and Financial Inclusion

March 13, 2010

Governments around the world make regular payments to at least 170 million poor people, far more than the 99 million or so who have microloans. Yet, in most countries only about one-quarter of G2P payments land in anything resembling a bank account. That's the upshot of a Focus Note published in December by CGAP and DFID, Banking the Poor via G2P Payments.

"So far, the potential for G2P payments to increase poor people's access to and use of financial services is largely untapped. However, pioneering programs in Brazil, India, Mexico and South Africa are providing financial services to poor G2P recipients," the authors explain.

One interesting statistic presented in the CGAP note is that 45% of G2P programs launched in the past 10 years use an electronic payment mechanism that could form the foundation for financial inclusiveness programs.

The U.S. government, as well as most states and many municipal governments have been moving benefits payments to electronic mechanisms, like the automated clearing house and prepaid debit cards. Last August, the U.S. Treasury Department that it had signed up 3 million federal benefits recipients for Direct Deposit, the ACH application for converting paychecks to EFT that it calls Go Direct.

Government initiatives could also extend easily to public-sector wages and pensions, the authors suggested, noting that rosters of public sector employees worldwide are apt to contain "tens of millions" of lower-income citizens who are now unbanked.

"However," the authors caution, "financial inclusion is far from an automatic outcome of electronic delivery alone." There are many changes that need to take place, especially in the design and pricing of financial products, they insist.

In fact, the report notes, fewer than one in four G2P payment recipients are receiving payments in what the authors describe as "a financially inclusive account."

The research note further challenges assumptions that banks can't cost-effectively serve the poor, pointing to numerous successful programs using branchless banking models, like mobile telephones.

"Financial service providers should look for ways to take advantage of branchless banking channels, move quickly to scale, and craft products that fit the needs of G2P recipients," the Focus Note concludes.

The document was authored by Mark Pickens, David Porteous and Sarah Rotman, and is available at the CGAP Web site.

2.5 billion adults, just over half the world's adult population, do not use financial services to save or borrow

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