Home >> More Reports news >> This Article

Government Payments Through Cell Phones Could Kick-Start Financial Services for the Poor

Published on:

Note -- this news article is more than a year old.

Wider use of mobile phone accounts as mobile banking services could boost financial inclusion amongst people in receipt of government hand outs. More than 170 million poor people worldwide receive regular payments from their governments, but the potential to use these payments to increase financial inclusion is largely untapped, according to a report by CGAP, a microfinance group based at the World Bank, and the U.K.'s Department for International Development (DFID).

Pioneering programs in Brazil, India, Mexico, and South Africa are providing financial services, such as savings accounts and electronic money transfers, to poor recipients of government transfers. But the report finds that worldwide fewer than one-quarter of government-to-person (G2P) payments to the poor land in a financially inclusive account-i.e., one that enables recipients to store funds, make or receive payments from other people in the financial system, and is accessible, in terms of cost and distance.

"Government-to person payments for school tuition, food, even salaries reach over 170 million people in the developing world. Often these transfers are made in cash or with a debit card that can only be used to withdraw funds. By using payments on a card, cell phone or a no frills bank account, governments could empower people with access to financial services well beyond the receipt of a government payment," said CGAP CEO Elizabeth Littlefield.

"Today, tens of millions of poor people have to spend a considerable amount of time and money just travelling to a bank branch to collect a cash payment from the government. Making these payments electronically will not only make it much more convenient for people to access their money, but will also lower administration costs for governments and reduce the risk of fraud and corruption" said UK Minister for Trade and Development Gareth Thomas.

The report says that governments could make significant cost savings by switching from paying a grant in cash over the counter at a bank teller window to delivering the payment electronically into a financially inclusive account accessible via agents equipped with point-of-sale terminals. For a hypothetical social transfer program that pays monthly US$40 grants to 1 million recipients, for example, a government would save USD12.6 million over a period of five years by switching to an electronic payment channel.

Nearly half of all government payment programs launched in the past 10 years use an electronic payment mechanism, which could be the foundation for a financially inclusive account, says the report.

Although financial institutions are often skeptical about the business case for serving poor people, the report outlines how they can increase their chances of success in this market by using cost-effective delivery channels, achieving scale quickly, and developing quality products that serve the needs of poor people. As a result, branchless banking channels-mobile phones or card-based solutions, often with merchants acting as cash-handling agents-are likely to play a prominent role in delivering government payments to recipients in future.

Sign up for our free email news alerts

Sample Copy

Tags: cgap  school  fraud  africa  cell phone