Financial Services

From government to people

June 01, 2010

Global

June 01, 2010

Global
Anonymous Writer

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Pensions, health benefits and child support are just a few examples of the long list of payments that governments make to their citizens, and yet many of the recipients have no bank account into which to deposit them, particularly in less developed countries. “The numbers are huge,” says Elizabeth Littlefield of CGaP. She estimates that only 25 per cent of the recipients of these G2P (government-to-people) payments have a bank account into which to deposit them.

Most payments are made in person with the recipient travelling to the bank to collect cash from a teller. This creates very high transaction costs for both parties and leaves room for human error and theft. Making these payments electronically would serve both to reduce these losses and to create a mechanism for providing poor people with basic banking services, particularly where branch networks do not exist. “There’s a huge potential out there to leverage the payment flows from government to people and create a financial infrastructure with those payments,” says Ms Littlefield.

Electronic G2P payments are emerging in a number of developing countries. In a G2P programme in Argentina, payments are transferred every month to a debit card, which has led to a significant reduction in fraud. Deposits on to the debit card can only be made by the government and expire after one month if unused.

Ms Littlefield believes there is potential to make such systems even more effective. “Imagine if you used it to put those government payments into a no-frills bank account or a debit card that could be reloaded with cash elsewhere or used for other purposes,” she says. Such a structure would not only connect payees to the financial system, but reduce problems caused by fraud and human error while laying the groundwork for financial planning.

This is already starting to happen. In Brazil, for example, the Ministry of Social Development is working to move family payments currently made to 12 million recipients through electronic benefit cards, to another system that uses a simplified bank account. Ms Littlefield sees this type of initiative as one with “massive potential” for expanding financial inclusion. “You can leverage the vast networks of G2P safety net payments and transfer them into financial assets for those people,” she says.

A similar system has been launched by Absa Bank in South Africa. Working with the South African government, Absa launched a payments system to distribute pension, disability and child benefit payments electronically rather than via traditional cash-based methods. The Sekulula card is automatically credited with payments, and customers can then add funds to the card using cash or via electronic transfers.

The principle does not apply only to developing countries. In the UK, for example, the government has successfully migrated benefit recipients from post offices to basic bank accounts.

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