The Opportunities and Challenges of Digitizing Government-to-Person Payments

The Opportunities and Challenges of Digitizing Government-toPerson Payments This paper reviews evidence on the benefits and challenges faced by governments migrating from cash to digital (electronic) government-to-person (G2P) payments. When supported by an appropriate consumer financial protection framework, digital payments enable confidential and convenient financial services, which can be especially important for women. By shifting government wages and social transfers into accounts, governments can lead by example. Digitizing G2P payments has the potential to dramatically reduce costs, increase efficiency and transparency, and help recipients build familiarity with digital payments. Digital wage and social transfer payments can also provide the onramp to financial inclusion and in many cases the first account that the recipient has in her own name and under her control. However, digitizing G2P payments is not without its challenges. Most importantly, digitization may require significant up-front investments in building an adequate physical payment infrastructure that is able to process such payments, as well as a financial identification system and a consumer protection and education framework to ensure that recipients have safe, reliable, and affordable access to the digital payment system. JEL codes: D14, G28, O16 More than 100 million poor people worldwide receive a government-to-person (G2P) payment (Demirgüç-Kunt et al. 2015). This includes, for example, government wages, government transfer payments (such as pensions, social benefits, and unemployment benefits), and tax refunds. While it is estimated that 90 percent of high-income countries make their G2P payments “mostly electronically”, over half of developing countries make their G2P payment in the form of cash or The World Bank Research Observer C The Author 2017. Published by Oxford University Press on behalf of the International Bank for Reconstruction and V Development / THE WORLD BANK. All rights reserved. For Permissions, please e-mail: doi:10.1093/wbro/lkx003 Advance Access publication August 3, 2017 32:211–226 Leora Klapper and Dorothe Singer 212 The World Bank Research Observer, vol. 32, no. 2 (August 2017) paper-based payments such as checks (World Bank 2012a). Furthermore, 19 percent of adults report receiving a wage or social transfer payment from their government and 28 percent of recipients report receiving such payments in cash, including 39 percent of recipients in developing countries (Demirgüç-Kunt et al. 2015). As a result, governments, businesses, and individuals are bearing the often high cost of cash payments—costs associated with disbursing and receiving cash, the greater probability of “leakage” (fraud and corruption), and the higher incidence of associated crime. Digital or electronic G2P payments can take different forms. Examples include direct deposits into bank accounts, transfers to pre-paid or stored-value cards that work as a virtual account, or mobile money transfers which may or may not be linked to a mobile money account.1 Depending on the type of digital payments, recipients can access the funds through an automated teller machine (ATM), at point-of-sale (POS) terminals, banking or mobile money agents, or other means. One reason many governments still make their G2P payments mostly in cash or paper-based forms is that their digital payments infrastructure might be underdeveloped or have limited coverage in non-urban areas. However, innovations in technology and financial business models, such as mobile money service accounts and agent banking (which use mobile and/or Internet connections to provide realtime financial services), are expanding the reach of the electronic payments infrastructure in many countries. This in turn makes it increasingly feasible to digitize payments. Governments play a pivotal role when it comes to digitizing payments in an economy. By shifting government wages and social transfers into accounts, governments can lead by example and play a catalytic role in building a digital payments infrastructure and ecosystem where all kinds of payments—including private-sector wages, payments for the sale of agricultural goods, utility bills, school fees, remittances, and everyday purchases—are done digitally. Governments also have an essential role to play in creating an enabling regulatory environment and promoting consumer protection and education to facilitate the shift to digital payments beyond government payments. In this paper, we review the body of research that has emerged on digital G2P payments and suggest steps that governments can take to hasten the use of digital payments. The second section reviews the benefits for governments and recipients when government wages and social transfer payments are shifted from cash into accounts. Shifting to digital payments has many potential benefits, including lower costs, improved delivery speed, increased transparency, enhanced security, higher financial inclusion, and increased levels of women’s economic empowerment. The third section explores the challenges that countries around the world face as they look to shift their payments from cash into accounts—and the role governments can play in promoting a digital payments ecosystem. Putting in place a robust system of digital payments requires significant physical infrastructure. The literature also shows that one cannot ignore the human element: new users of digital payments need to be educated on how to withdraw and send payments safely and cost-effectively, as well as on the benefits and risk of other financial services they might be offered (such as credit and insurance). Unless users can use the services comfortably and have confidence that financial service providers can be trusted, recipients of electronic payments will withdraw their payments and save the money and transact in cash—thereby losing the potential benefits of financial inclusion.2 The last section concludes. Shifting to digital G2P payments has many potential benefits, for both senders (governments) and receivers (persons): it can improve the efficiency of making payments by lowering the cost of disbursing and receiving them, and by increasing the speed of payments. Digitalization can increase the transparency of payments, and thus reduce the likelihood of leakage between the sender and receiver. Further, digitalization can enhance the security of payments and thus lower the incidence of associated crime. Shifting to digital payments can also provide an important first entry point into the formal financial system. Furthermore, by increasing the privacy of payments and increasing control over the funds received, shifting to digital payments can contribute to women’s economic empowerment. Lower Costs for Governments Shifting from cash to digital payments can lead to significant cost savings in the long term. The potential cost savings are especially striking when co (...truncated)