Does digitization of government payments increase access to and use of financial services?

The COVID-19 pandemic has caused the largest global economic crisis in more than a century. Many families who faced sudden losses in income and health expenditures were unprepared for shocks of this magnitude and duration. Women, in particular, were affected because they were more likely to work in sectors with lockdowns and social distancing measures, and they often needed to increase their family caregiving responsibilities. Digital government payments — in accounts, cards and phones — have provided critical financial support to such people in need while at the same time following public health safety advice.

When the economic crisis caused by COVID-19 caused many to seek help from the government, countries with public digital infrastructure such as broadband connectivity, identification, and payment systems, along with data sharing infrastructure, were able to reach more populations. the poorest. in a meaningful and transparent manner. A recent paper on the role of digital systems during the first year of the COVID-19 pandemic showed that among 85 countries, those that were able to benefit from digital databases and share trusted data reached, on average, about half of their populations. Digital government payments have provided a lifeline to millions, some of whom have also benefited from a path to financial inclusion.

Leveraging digital infrastructure provides a range of benefits to governments and recipients. For governments, sending payments directly to financial institutions’ accounts (including mobile money accounts) not only enables them to reach more people quickly and securely, it also reduces leakage and corruption that can result from distributing cash. For recipients, government payments can create a path to financial inclusion and economic empowerment, especially for disadvantaged groups such as women and youth. Global Findex data found that 865 million account holders in developing countries (18 percent of adults), including 423 million women, opened their first financial institution account for the purpose of receiving money from the government.

People receive money from the government for a variety of reasons: remittance payments for educational or medical expenses, unemployment benefits or support payments, as well as pensions and public sector wages. Of those who received government transfers (excluding pensions and wages) in developing economies, 64 percent received digital payments and 15 percent received them in cash. The remaining 20 percent of government remittance recipients received their payment neither digitally nor in cash, most likely through a voucher or one-time passcode; In-kind payments are also possible.

Increased use of digital payments among recipients of government remittances

Account access and receiving payments are necessary steps towards financial inclusion. Of great importance is the constant use of financial services. Here, too, the data shows that among recipients of government transfers, about seven in 10 of those who received their payment into an account made a digital payment — an increase from only about half of recipients in 2017. Those payments included using the internet to pay bills or buy something (49 percent) or using an account to make in-store purchases (54 percent). In addition to digital payments, 34 percent of these digital government transfer recipients also have a deposit in a formal financial institution or mobile money account. The increased use of accounts by recipients of government transfers indicates strong progress towards closing the gap between access to and use of formal financial services.

Figure 1. Adults in developing countries who receive a government-to-account transfer payment

While we’ve come a long way in recent years, there’s still a huge opportunity to further digitize government payments to help bring a share of the 1.4 billion unbanked adults into the formal financial system. The G2Px initiative is one of many efforts by the World Bank Group, in partnership with the Bill & Melinda Gates Foundation and NORAD, to support governments in fundamentally improving government payments. Closing the gap will require that governments complement the digitization of payments with programs to embrace digital and financial literacy. The goal will be to adopt policy and design choices that place the recipients of these payments at the center along with creating a robust consumer protection framework. A multi-pronged approach will be necessary to ensure that everyone, including women, people with disabilities and other marginalized groups, can access and use their accounts or make digital payments with confidence.

Among the unbanked, we know that at least 61 million adults in developing economies receive government transfer payments in cash, including 35 million women. The digitization of government transfers can play an important role in these people’s journey towards financial inclusion.

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