At the end of last year, CGAP published a Focus Note entitled Banking the Poor via G2P Payments.[1] The basic premise of the note was the idea that government transfers, in the form of conditional and unconditional cash transfers, wages, pensions and other payments made to sections of the broader population, could be built upon to make the financial system more inclusive.  The note argued that 'with appropriate experimentation, the payments (G2P transfers) have the potential to become a vehicle for extending financial inclusion and improving the welfare of poor people.'

The note largely focused on why governments, financial institutions and donors would be interested in adopting electronic methods of transfers, looking at the cost effectiveness of electronic delivery of government payments, the opportunities that current transfer programs offer for extending banking services, including the role that branchless banking can play, and the policy decisions behind payments schemes.  

However, the note also highlighted ways in which the poor could make use of inclusive financial instruments linked to their government payments, building on arguments made elsewhere such as in Portfolios of the Poor, that, despite low incomes, the poor are in fact sophisticated money managers who would make use of appropriate formal financial tools when available and affordable.   G2P payments, at least in part due to their wide breadth and regularity are put forth as a choice vehicle for extending formal financial tools and financial inclusion.

In this light, there are similarities between electronic G2P payments and remittances that can contribute to broadening access to the financial system.  Just as an account into which G2P payments are made could help the poor cope with unexpected shocks and build assets, having an account where remittances can be deposited could serve the same purpose, providing greater security and potential for savings and other benefits.

The paper argues that from the perspective of financial institutions, three factors specifically make G2P payments suitable to be linked with basic banking when compared with other types of payments: that G2P schemes have large numbers of recipients, with enough volume for financial institutions to find distributing payments a profitable business; that flows may be high in relation to regular income where extra money may remain in the account, leading to other potential fee-generating transactions; and, that the regular flow of payments generates a dependable income stream for the financial institution.

Remittances share these same characteristics and offer potential for asset building when linked with other financial products.  If a remittance recipient could maintain an account, geared specifically to those typically under the banking radar, into which remittances were regularly deposited, and demonstrated the ability to manage that account, they are beginning to form the basis of a financial history.  Other financial products, such as micro-loans, community investment projects, or other vehicles could potentially be tied to this type of account.  Some of the logic for using government payments as a source of enough "credit-worthiness" for gaining access to a bank account may be faith in the regularity in government payments, and yet in some cases, remittances could be considered equally reliable.

Regarding G2P transfers, the note argues, 'if funds are delivered into an account electronically, outbound electronic transactions can also be enabled.' Again the same can be said of remittance payments, which also offer a tremendous opportunity for expanding financial services and bringing more people into the formal financial fold.

Literature on how poor households manage money highlights that a large part of the difficulty that poor people face is not the absolute amount of money they make, but the lack of regularity with which they receive it.  Seasonal workers, such as agriculture workers, may have an income of $2 or $10 day, but often make the majority of their income over one or two specific periods during the year, and then have to manage that income and make it last during times when they won't be earning income as regularly.

In many cases, however, remittances received by the poor from abroad are somewhat regular, compared to less stable or irregular incomes.  Most remittances, however, are received and kept in cash.  Safe storage for the smaller amounts that banks are traditionally uninterested in managing could help recipients with budgeting and the risks associated with carrying cash.

In fact, one of the main issues that some Kenyan banks brought up in their early opposition to M-Pesa was that customers were leaving credit, i.e. money, in their M-Pesa accounts and almost treating them as a bank account.  Demand for 'stores of value' is increasing as more and more MTOs offer rechargeable cards, which people receiving funds can use at ATMs, POS terminals and banks, while storing extra value electronically. However, these options don't offer additional financial services like investments or loans, even at the micro-level.

Taking it further, if one looks at remittances as a regular payment, almost like a salary, there is the potential to use these flows for developing credit histories and maybe even as collateral for larger loans.  With new regulation on tracking remittances and who they are flowing to as well as with the growing use of rechargeable and other electronic cards, a personal financial history emerges.  And, just as with G2P payments, there is tremendous potential to build on these flows and offer people additional financial services linked to their remittance flows.  Of course, most traditional financial institutions are not currently interested in this target audience and therefore the notion of using alternative means to establish credit-worthiness would need to be embraced via grants from development-oriented funders or new, non-conventional sources.

Meanwhile, while a few researchers are looking at how remittances can play a role in developing sovereign credit at a country level, or how remittance agent institutions can use remittances flows as the basis for accessing international credit markets, there has been much less research done thus far looking into how remittances can be used to develop a credit history for remittance recipients or how these flows could be used to enable access to additional financial products.  If however, remittances can be used at these more macro levels, where a typical remittance securitization transaction is in the investment grade (BBB- or higher[2]) making them a safe bet for even conservative investors such as pension funds and institutional investors,[3] or in developing shadow credit ratings for countries,[4] it may be worth looking more deeply at them for operationalizing access to finance at a micro- or customer-specific level as well.

There have been some examples of companies seeking to leverage the use of remittances to offer additional financial products or services, such as the work done by Microfinance International Corporation, IntEnt, where remittances are linked to loans, or by banks such as Banamex Tricolor Card that issues matching credit cards in the US and Mexico with the US card holder handling the balance, however there is potential to build on remittances in offering innovative products with creative and willing participants.

One interesting, related idea to end on, though likely to be controversial, was brought up by Hannes Van Rensburg in a recent blog piece on "fairness" and financial reasoning for eliminating fees on e-transfers within a single financial service provider.[5] The notion is that if a financial institution keeps as many small e-payments, whether P2P, B2B, P2B or otherwise, within its own system, it might free that provider to see the utility of smaller accounts, smaller payments and aggregated capital. The logic there goes that $1 million, whether from 1 depositor or 100,000 depositors is still $1 million.  With tight and agile technologies, is there necessarily going to be a difference in what that means for available capital, revenue and profits?