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Conditional cash transfers digital payments bank accounts Latin America Caribbean

Can Digital Payments Boost the Impact of Social Programs?

April 18, 2024 by Karla Hernández - Bridget Hoffmann - Camilo Pecha - Diego Vera-Cossio Leave a Comment


With tens of millions of citizens receiving cash transfers from social programs each month, Latin America and Caribbean governments have long sought ways to improve payment delivery and boost financial inclusion to improve savings, access to credit, and overall welfare.

One attempted solution is encouraging recipients to open bank accounts to receive digital cash transfer payments. In contrast to traditional methods in which payments are sent by wire transfer to a bank branch and depend on recipients promptly collecting them in person, such digital payments aim to be more efficient: people can use their phones to directly receive, access, and use them.

By incentivizing recipients to open bank accounts, such a system of digital transfers could also provide a path for low-income citizens to save, establish a credit record, and obtain loans for their long-term benefit.

An Experiment in Colombia

Colombia is one country in the region that has tried that approach. Before April 2021, delivering transfers in cash required multiple attempts: a sample comprised of difficult-to-reach households in a recent IDB study revealed that 43% of payment attempts in cash in one of the country’s largest social programs failed. This was because, among other reasons, designated recipients didn’t know which bank to use to collect their payments, sought to collect them too early, or could not pick them up before the specified three-month cut-off. Indeed, within months of being added to the program, nearly a quarter of people didn’t get their transfers.

Hoping to improve the reception of payments and reduce congestion at bank branches, the Colombian government in April 2021 piloted a phone campaign to encourage beneficiaries to open a simplified digital bank account and enroll in direct deposit in one of the commercial banks affiliated with the program. If the beneficiaries agreed to switch, the program guided them through the process.

For us at the IDB, it was an excellent opportunity to study whether direct deposit of cash transfers into bank accounts could simultaneously achieve the goals of greater efficiency, financial inclusion, and social welfare. As described in our study, we took a sample of nearly 30,000 people from the larger universe of unbanked beneficiaries and randomly assigned about half to a treatment group that received the phone calls and a control group that did not.

Greater Efficiency with Digital Payments

The program did increase the efficiency of delivering transfers. We found significant improvements in the reception of program payments. Moreover, those effects were especially large for those who switched to a bank account. While the probability of successfully receiving at least one transfer increased by a percentage point in the treatment group overall, it increased by 13.9 percentage points among those who switched to direct deposits into a newly opened account.

Similarly, while the average time for collecting transfers remained the same, the possibility of spending more than two hours doing so fell by 2.8 percentage points overall and among the switchers by 26.4 percentage points. Because digital payments have lower transaction costs and require fewer attempts than cash payments, the government was also able to save money.

A deeper analysis, with help from a survey, revealed some important subtleties, however. Younger, urban, and more educated beneficiaries, who were more likely to have a previous financial history and better digital skills, also missed fewer transfers in the absence of the intervention. And they were easier to persuade to open accounts in the affiliated banks. By contrast, those with the most to gain from the switch to digital payments, those with no financial history and more missed transfers, were the least likely to make that leap. Light touch, low-cost interventions to encourage such shifts may be insufficient for certain population segments even if such interventions are more successful and cost-effective in getting more people into the banking system.

Problems to Overcome

The goals of achieving financial inclusion and improvements in welfare were somewhat elusive in our study. Although many people may have opened bank accounts for the first time, they tended to withdraw their money from an ATM rather than using their digital accounts to save, pay bills, or otherwise use bank products. We found no evidence of substantial effects on savings, trust in financial institutions, or other measures of financial well-being, even when focusing on people without a pre-existing financial history. People did establish a credit history for the first time, and among those who switched to direct deposit, there was a modest increase in loan inquiries. Even so, only one-third of those credit inquiries resulted in approved loans from commercial banks, indicating deeper frictions in credit markets.

Integrating people into the formal banking system is essential for overall growth and anti-poverty efforts. As our study shows, it can increase efficiency in transfer payments for the benefit of both government and beneficiary households. However, more research is needed to understand how to translate that formal inclusion into its myriad possibilities, including greater savings, access to loans, and improved welfare.

[Editorial note: The authors would like to thank Patricia Moreno, Andrés Bocanegra, Luis Esteban Alvarez, Prosperidad Social and the National Planning Department in Colombia].


Filed Under: Microeconomics and Competitiveness, Social Issues

Karla Hernández

Karla Hernández is a PhD candidate in economics at the University of Wisconsin-Madison. Her research interests focus on the intersection of public, labor, and development economics. She holds a master’s degree in economics of public policy from Barcelona School of Economics and a bachelor’s degree in economics from University of Costa Rica. Before her doctoral studies, she was a Research Fellow at the Inter-American Development Bank and a Research Associate at Innovations for Poverty Action.

Bridget Hoffmann

Bridget Hoffmann is an economist in the Research Department of the Inter-American Development Bank. Her research interests are applied microeconomics, development economics, and environmental economics. She received her Ph.D. in Economics from Northwestern University in 2015. She holds a bachelor’s degree in Financial Economics and Mathematics from the University of Rochester.

Camilo Pecha

Camilo Pecha is a Colombian economist who works as a consultant in the Office of Strategic Planning and Development Effectiveness of the Inter-American Development Bank (IDB), in the area of operational monitoring. He has worked with other areas of the IDB such as Caribbean countries and the Office of Evaluation and Oversight on evaluation issues and the effects of climate change on social welfare. He also has solid experience in the Colombian public sector with the direction of public policy evaluations of the National Planning Department and in the research sector as director of the Center for Regional Coffee Studies CRECE. Camilo holds a degree in economics from the Universidad de Los Andes. He also holds a master's degree in economic analysis and a doctorate in applied economics from the Universidad Autónoma de Barcelona.

Diego Vera-Cossio

Diego Vera-Cossio is an economist in the Research Department of the Inter-American Development Bank. His area of interest is development economics. In particular, his research analyzes how different policies help or prevent family businesses from growing in contexts in which access to finance is limited. He is also interested in understanding how different methods of targeting and delivering resources from public programs affect policy effectiveness. Diego, a citizen of Bolivia, received his Ph.D. in Economics from the University of California, San Diego in 2018. He holds a Master’s Degree in Economics from Universidad de Chile and a Bachelor’s Degree in Economics from Universidad Católica Boliviana.

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