How To Promote Financial Inclusion

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1 Traditional versus Innovative G2P Payment Solutions Hemant Baijal Payment Systems Development Group The World Bank

2 Discussion Points Importance of G2P payments to national economy A framework for G2P payments Key challenges in adoption of G2P payments Innovative payment approaches to overcome challenges Leading examples of innovative approaches: Brazil and India Conclusions

3 The Importance of Government Payments to the National Payment System Large Scale government payments projects encourage coordination and cooperation between financial service providers and government authorities to develop efficient business processes for delivery of payment solutions Government payments can play an important role in promoting financial inclusion by extending non-cash, electronic payment instruments to the unbanked Role of Central Bank as an Overseer and fiscal agent of the Government The use of non-cash, electronic payment instruments for government payments may significantly improve cost savings at all levels of national economy Scale and importance of government payments can play an important role in promoting growth and innovation in a country s retail payment infrastructure 3

4 Key Types of Government Payments Government to Person Payments Payments to Government by Persons and Businesses Government to Business Payments Conditional and non-conditional cash transfers and social benefits including disaster relief assistance Income tax refunds Pension and social security (transfer payments) Employee payroll and incentives Income, sales and VAT tax payments Social security/pension contributions Automotive costs tolls, fines, tickets Fees for government services, e.g. company registration Procurement of goods and services Corporate tax refunds Sales Tax/VAT refunds Disbursement of loans or business assistance Government to Government Payments Intra-governmental payments include payments made by one government agency to another government agency for budgetary or operational purposes 4

5 Adoption of Electronic Payment Instruments for G2P Payments Benefit the Entire Value Chain National public policy goals Safety and cost efficiency in payments Financial inclusion Consumer protection Government agencies want Lower processing costs for G2P payments* Reduced incidence of fraud and leakages Improved access to finance for financially underserved populations G2P recipients want Safety, cost efficiency, and control over funds Convenient access and reliability of payment method Prestige associated with using electronic payments *Globally processing costs for cheques can vary between $0.50 to $5.00

6 G2P Payments Traditional Approaches Cash Transfers and Social Benefits Government Pensions and Payroll Emergency Relief Assistance - One time or recurring - May be conditional - Recipients unbanked or financially underserved - Cash/paper based payments costly, inefficient and susceptible to fraud - Recurring - Recipients may have existing bank accounts - Cash/paper based payments costly, inefficient and susceptible to fraud - One time - Recipients unbanked or lack of access to bank acct - Cash/paper based payments costly, inefficient and susceptible to fraud - Card based products - EFT Credit Transfers - Payroll and pension cards - EFT Credit Transfers - Central treasury account - Single use prepaid cards - Mobile/wireless ATMs to supplement card usage

7 Challenges with Adoption of Traditional Payment Platforms Difficult business case for banks to offer traditional products to unbanked Quality of legal and regulatory framework Lack of integration and manual nature of government processes Large unbanked population but most products available through banks only Choice of payments platform Weak payments Infrastructure to support traditional approaches 7

8 Factors Influencing Choice of Payment Platform for G2P Payments Legal and regulatory environment policies enabling financial inclusion, outreach and adoption of electronic payments Cost efficiency explicit cost (transaction fee) as well as hidden cost (time taken to process transactions) Eligibility verification system for determining entitlements and recipient s identity verification Flexibility and extensibility scalability of operations and effectiveness in rolling out multiple programs Safety and reliability ensuring payment instruments work as expected and prevent unauthorized access and leakages Availability locations or acceptance points where payment instrument can be used (e.g. ATMs, EFTPOS, etc.) Convenience easy to use, time it takes to pay for goods and services, etc. 8

9 Innovations that Overcome Adoption Challenges for G2P Payments Innovative schemes being introduced in certain markets to extend noncash payment instruments Combination of conventional payment instruments and new delivery/access methods Regulatory framework updated to complement delivery of G2P payments through business correspondents (BCs) and agents BCs and agents are catalysts in Promoting technological and institutional innovation Improving accessibility and convenience for previously unbanked populations Reducing cost of financial access for recipients Ensuring a reliable customer interface that promotes faster adoption of noncash payments 9

10 Brazil An Early Adopter of BC Model to Promote Financial Inclusion Since 12 years, Brazilian Central Bank (BCB) has worked with various stakeholders to align incentives in favor of BCs Between Banks allowed to extend services through BCs Account opening, deposits, withdrawals and bill payments among services Agents can be located anywhere Bolsa Familia program launched in 2003 Between Pass new regulations to allow cash handling by non-banks in 2003 All BCB licensed financial institutions are allowed to hire agents Relaxation of foreign transfers regulation allowing international transfers Replace requirements for approval to hire agents by online system 10

11 BC Services Allowed by Brazilian Central Bank Bill Payments Withdrawals BC Services by Share in % Deposits Transfers (domestic and intl.) Consultations 0.19 Bill Pmt Prepaid Mobile and mobile top-up Loans Credit Cards Withdrawals Loans Deposits Cashout Tr. Preliminary Credit Analysis Misc. Loan collections Account opening (for banks) Source: CGAP, Febraban. Figures for period Jan-Jun 2008

12 Distribution of BC Services Vary Across Regions in Brazil Urban Bill Pmt Semi-Urban Deposits Withdrawals Other Rural % 20% 40% 60% 80% 100% Source: CGAP

13 Brazil Remaining Challenges Presence in every municipality is not enough distance to BC remains a challenge Limited financial services offered Bill payments account for 75% of volume ($1.6 billion) and 70% in value ($105 billion) Many CBs do not offer the entire range of services Urban bias Rural areas where G2P payments model is working has too few locations 13

14 India BC Model an Integral Part of Financial Inclusion Policy Reserve Bank of India (RBI) began evaluation of BC model in 2007 closely studied Brazilian and South African models Passed regulation in 2008 allowing set up of BCs; revised regulations in September 2010 Bank led model but require a technology intermediary compared to Brazil where bank s technology platform used for linkages with BCs RBI requirements include No frill bank accounts for unbanked or people who cannot afford regular bank accounts All commercial banks (including smaller rural banks) can appoint BCs Individuals, small businesses, kirana stores NGOs and cooperative societies Post office Companies with widespread retail outlets 14

15 Characteristics of Indian BC Model BC activities typically include Identification of individuals through public campaigns in need of banking services within community Focused on G2P payments and banking activity; no bill payments No frill account opening and application processing on behalf of banks Small value deposits (typically up to Rs 100,000) Collection and processing of loan applications including verification of customer information/data Disbursal of small value credit and recovery of principal/collection of interest Sale of micro insurance/mutual fund products/pension products Domestic money transfers and remittances Financial literacy, money management and debt counseling 15

16 Solution Access Points Financial Services Available No Frills Account - Manned Kiosk Solution Biometric Online Manned Kiosk Kiosks manned by BCs Deposits, withdrawals, domestic remittances India BC Examples No Frills Account -Smart Card Solution Biometric Off Line BC No Frills Account -Mobile Phone Solution On line PIN based BC No Frills Account - Post Office Network Savings Account Manual signature based BCs and Kiosks BCs Post Office Branches Deposits and withdrawals Deposits, withdrawals, domestic remittances Deposits, withdrawals, remittances Time of Delivery Online Instant 2-5 days Online Instant 7-30 days Usability Simple Simple Moderately Complex Cumbersome customer service

17 India BC Examples

18 Relevance to G2P Recipients of Payment Method* Salaried and Banked Marginally banked Poor and unbanked Bank Account No Frill Account- Kiosk No Frill Account Smart Card No Frill Account - Mobile Post Office Savings Account High Medium Low Low Low Medium High High Low Low Low High High Low Low *Based on feedback from survey of G2P recipients

19 Conclusions War on cash and paper based payment instruments must go on!!! Lack of adequate platform should not hinder efforts in rolling out G2P programs Effort required by public authorities as well financial institutions to ensure viability of solution Consumer adoption is key for success 19

20 Annex 1: World Bank Strategy 20

21 PSDG Strategy for Government Payments Conceptual Framework and Guiding Principles Creation of the Task Force on Government Payments Country Assessments and Pilots Self Assessment Methodologies TA Product Line Task Force Composition Chair: PSDG World Bank Representation from: DFIs IMF Central Banks and Ministries of Finance from various regions NBFIs such as UPU, WBSI, etc. Payment Networks MasterCard, Visa, Eurogiro and SWIFT World Bank Group CGAP, IFC, HDN/SSN and ICT The Task Force inaugural meeting is scheduled for December 2-3, 2010