David Porteous is Managing Director at Bankable Frontier Associates. This is the third blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Read the first two posts here. 

We are also releasing today the four accompanying Country Notes which were distilled into the Focus Note. For much more detail on the link between social cash transfers and financial services in each of these countries, read the full reports on Brazil, Colombia, Mexico and South Africa. 

In our last post, Chris Bold discussed the second of three questions that our new paper on G2P tried to tackle, namely:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?

Today, I will finish off the discussion by focusing on the final question regarding the business case for providers to offer financial services to social cash transfer recipients.

The biggest challenge when it comes to the business case for banks is that the amount per grant payment is small, and as client research has shown, very little of each payment is left behind in the form of savings. However, compared with other small value accounts, G2P recipient accounts have a regular dependable cash inflow ensuring that they stay active. And there is usually a government agency that is willing to pay for the service. But these anecdotal observations alone do not make or break the business case: it all depends on how the financial institution defines a business case.

To introduce greater precision to this discussion, we identify five different levels of the business case, as the figure below shows. The first level is each individual account. Small balance bank accounts are notoriously difficult to make profitable at the individual account level. But a business case may be sustained at this basic level for G2P payments if governments are willing to pay a regular fee to the banks, as they do in the four countries from our research. Without this fee, the account-level business case would be much harder to sustain. This is rather like the case for basic bank accounts which are considered loss leaders at this level by many banks, but which are nonetheless offered for strategic reasons (other profitable government business may be sold as a result of a good record) or to satisfy regulatory requirements (without regulatory support and forbearance, the bank may struggle to obtain approval for what it considers core business).

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Today we post a guest blog by Ignacio Mas and David Porteous, both of whom need no introduction. But just in case…Ignacio is an independent consultant, associated with Bankable Frontier Associates. He is former Senior Advisor with the Financial Services for the Poor team at the Bill & Melinda Gates Foundation and at the Technology and Business Model Innovation Program at CGAP. David is Managing Director of Bankable Frontier Associates.

Sarah Rotman blogged recently about yet another breathless announcement about the imminent arrival of the cashless society. She said and we agree that “cashless seems a bit naïve; cash lite seems more realistic although still a big challenge.” The very first part of the challenge is actually to visualize what a “cash lite” world looks like. Is it simply an ill-defined way station on the road to cashlessness, or is there a meaningful state or goal that goes with it?

We think the latter, and for us the defining characteristic is not the amount of cash (let cash do what it will!), but the availability of alternatives for the bulk of the population. It’s freedom from cash, not absence of cash. We have coined a word which encapsulates key elements of a cash lite society: LiFi (see baptismal paper here). Like WiFi, which provides retail connectivity at the edge of the internet cloud, LiFi is about connecting people to an electronic payments grid which provides Liquidity with Fidelity. WiFi is open, general-purpose broadband; LiFi is secure, special-purpose narrowband.

A LiFi world is therefore one in which every person has an electronic store of value which they can easily use to make and receive payments in real time. Just like in places with reliable on-grid electricity, we can turn on a light on-demand, knowing that it will work and that the cost of flicking the switch will be small in relation to the benefits.

Because there is no precedent for cashlessness by fiat and cash can be counted on to still be an option for a long time to come, the key challenge of LiFi is getting people to trust and want to use the LiFi payment mechanism…because it is robust, because it is safe and because it is useful. All these attributes take time to demonstrate to the satisfaction of risk- (and change-) averse users. A LiFi approach recognizes that in two ways.

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