April 5, 2022
Many in developed countries have taken to digital platforms for making and receiving payments. We sign up for direct deposit of our paycheques and tax refunds. And, we use services like Vimeo, Interac, or Paypal to transfer funds for our marketplace buy, babysitter, or lawn service.
The benefits of such digital financial services go beyond simple convenience. They can also increase financial inclusion among individuals and households who otherwise lack access to bank accounts or traditional financial services. For example, people without credit or accounts at brick-and-mortar banks can still enjoy the benefits of their Vimeo accounts.
According to the FDIC, approximately 7.1 million US households were “unbanked” in 2019, meaning that no one in the household had a chequing or savings account. These households, in particular, may benefit from access to digital payment services, which may serve as their only means of financial inclusion, providing a platform for savings and payments. Globally, digital service platforms have the potential to bring financial inclusion to the world’s 1.7 billion unbanked adults.
With such benefits in mind, organizations such as the Bill and Melinda Gates Foundation have been supporting programs that promote access to digital financial services and payment systems. Many of these efforts have focused on digitizing the systems through which governments provide assistance payments or other transfers to their people.
Digitizing Government-to-Person (G2P) payment programs is seen as an essential step in promoting use of digital financial inclusion among poor, rural, and financially excluded households. Some digitalized G2P systems give people the choice about whether to receive electronic payments or cash, others switch everyone over to electronic payments. Regardless of the model, it is hoped that such systems will encourage the use of digital savings and payment accounts among households who receive government assistance, and will encourage financial service providers to increase their services (such as cash-in cash-out points) in rural areas and poor communities.
The Gates Foundation recently asked Limestone Analytics to assess the current state of digitized G2P and the successes such programs have had in improving financial inclusion. The assessment included the detailed review of hundreds of past G2P projects including dozens of key informant interviews with G2P thought leaders, staff, and partners.
The findings of the evaluation suggest that G2P digitalization has succeessfully increased digital financial inclusion among the unbanked. But, there is no evidence that the G2P digitalization has encouraged private sector organizations to increase service offerings within rural and poor communities.
Unsplash: Eduardo Soares/Brazil
G2P digitalization has successfully expanded access to digital financial services, reaching unbanked people. This includes decreasing the financial inclusion gender gap, as women who receive payments from the government may now receive payments directly into their own accounts, over which they presumably have greater control.
These are important benefits of G2P digitization. However, the Limestone Analytics assessment also shows that we still have a long way to go, particularly when it comes to providing financial access in rural areas and the poorest communities. One potential benefit regarding G2P digitization is that an increase in demand for digital financial services in rural areas and the poorest communities may encourage greater investments by financial service providers to support these communities by things like establishing cash-in cash-out points. With G2P digitization, these rural areas now can receive government payments digitally, increasing the number of people in these communities that may want to use such services, increasing potential service volumes in these areas, and potentially encouraging firms to start operating there and eventually encouraging even more people to enroll in such services.
The assessment, however, found no evidence that G2P digitization effectively encouraged the expansion of private-sector financial services to a broader range of communities. The main reason for this is that digital financial services in such environments remain risky and generally unprofitable for the firms. This means that widespread use of the digital financial services may still remain low in these communities, if the lack of local service provision means that people find it difficult to get money into or take money out of their digital accounts.
While G2P digitization may be a necessary step in encouraging digital financial inclusion among some groups, it is not on its own sufficient for ensuring the widespread use of digital accounts. More effort is needed to ensure that the service providers have the right incentives to provide access to a broader range of potential users.
The summary was written by Christopher Cotton based on the Limestone Analytics report by Lindsay Wallace, Olga Morawczynski, and Nudrat Shreya.
Picture credit: The banner picture is Nyani Quarmyne, IFC 2018