Transforming the digital payment infrastructure

Implementing a new payment infrastructure will require careful planning, patience and flexibility


Beyond overcoming barriers to financial inclusion, digital payment systems could streamline government-to-person payments and improve public service delivery. Photo: AFP
Beyond overcoming barriers to financial inclusion, digital payment systems could streamline government-to-person payments and improve public service delivery. Photo: AFP

In the aftermath of demonetisation, millions of Indians have switched to digital modes of payment for their daily transactions. To fuel this momentum, the Union government has announced a slew of incentives further encouraging citizens to go cashless. Shifting towards a digital payments ecosystem could generate several potential benefits: for citizens, it could reduce transaction costs and increase access to critical financial services; for governments, it could reduce leakages and improve public service delivery. While there is some evidence to support these theories, capturing these benefits in reality is not straightforward and will require a systematic, evidence-driven approach.

Kenya’s M-Pesa, a mobile money service which allows users with or without bank accounts to transfer and make payments through a basic mobile phone, is often heralded as the exemplary digital financial inclusion success story. Since its launch in 2007, M-Pesa has become an integral part of Kenya’s economy: M-Pesa transactions account for 20% of gross domestic product (GDP) and it is used ubiquitously (by at least one individual in 96% of Kenyan households and by 75% of the unbanked population). Results from a recent, large-scale multi-round panel survey suggests that access to mobile money (defined as proximity to M-Pesa agents) improved per capita consumption and lifted 194,000—or 2% of Kenyan households—out of poverty. These effects were more pronounced for women and driven by increased savings and greater occupational mobility—185,000 women made the shift from agriculture to business.

However, Kenya’s success with large-scale digital payments remains an exception. Of the 271 different mobile money services offered in 93 countries worldwide, very few have achieved similar levels of growth, particularly among the poor and unbanked. A unique set of circumstances allowed M-Pesa to become ubiquitous in Kenya. Crucial among them was high mobile phone penetration (83% of the adult population had access to basic mobile phones), a widespread agent network (approximately one agent for every 1,000 Kenyans) and an enabling regulatory environment. These conditions are largely absent in India. While 61% of Indians own a basic mobile phone, there is significant disparity in access and usage across geography and gender. In addition, only 17% of Indians own a smartphone—a major hurdle since, unlike in Kenya where M-Pesa’s USSD technology is phone-agnostic, most Indian payment wallets are only accessible on smartphones. Finally, India’s business correspondent (BC) model—the equivalent to the agent network in Kenya—remains relatively underdeveloped. Recent research by the Helix Institute of Digital Finance revealed that in the BC model Indian agents earn a median income of $52 per month compared to agents in Kenya who earn $192 per month. For a digital payment system to thrive, all these issues need to be addressed.

Also read: Mobile payments outgrow smartphones

Beyond overcoming barriers to financial inclusion, digital payment systems could streamline government-to-person payments and improve public service delivery. India’s social programmes can be notoriously wasteful: for instance, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), India’s largest social protection programme, has historically been plagued by leakages and delays. In response, transforming government-to-person payments through the Jan Dhan-Aadhaar-Mobile (JAM) platform has emerged as a key policy priority. By linking bank accounts to biometric identity and mobile phones, the government hopes to develop the infrastructure to transfer benefits directly to the poor, circumventing rent-seeking intermediaries and reducing market distortions in the process.

Evidence from Andhra Pradesh suggests that shifting to an electronic-payment infrastructure along these lines can improve programme delivery by reducing leakages. In 2006, the government of Andhra Pradesh launched a smart-card programme for MGNREGS and social security pensions where payments were delivered to bank accounts linked with biometric smart cards. A randomized evaluation of the intervention by affiliates from the Abdul Latif Jameel Poverty Action Lab (J-PAL) revealed that biometrically authenticated transfers resulted in a faster, less corrupt payment process. Similarly, in an unconditional cash transfer programme in Niger, researchers affiliated to J-PAL found that mobile transfers were the most cost-effective delivery mechanism and led to improved household and child-diet diversity. The study attributes these results to the time-saving associated with cashing out mobile transfers and shifts in intra-household bargaining power for women. Digital payment systems for improved public service delivery need not be restricted to government-to-person related transfers. In Bihar, a J-PAL evaluation of a fund-flow reform which allowed panchayats to bypass the district and pull MGNREGS wage payments directly from the state account, found that this reduced programme expenditure without a detectable decline in programme performance.

However, transitioning to a new government-to-person digital payment infrastructure can be challenging. In Niger, the positive impact of mobile transfers was contingent on significant investments in establishing the mobile payments infrastructure, including access to mobile phones and agents responsible for “cashing-out” transfers. In Andhra Pradesh, despite high-level government support and investment, only half of all MGNREGS payments in the intervention districts were smart-card-enabled after two years—a reflection of the significant logistical, technical and political challenges in establishing new payment systems.

Large-scale changes can be disruptive: They upset the status quo, create push-back and risk exclusion. One way to mitigate this is through gradual implementation, incentives and evaluation. In Andhra Pradesh, the programme was rolled out while retaining the status quo system, with banks incentivized for every transaction made on the new system—this allowed programme evaluation, course correction and posed minimal risk of excluding deserving beneficiaries. Implementing any new payments infrastructure—whether it is for government-to-person payments or person-to-person payments—will require similar careful planning, patience and flexibility. The government of India should keep this in mind as it seeks to transform the nation’s economy.

Vishnu Padmanabhan and Miral Kalyani work for the policy team at J-PAL South Asia at IFMR.

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