In 2014, Uruguay launched an ambitious financial inclusion program, joining other countries in the region that have sought to give citizens greater access to banking and financial services and encourage the use of electronic payments instruments that avoid the need for cash. Unbanked people in Uruguay, as in other countries of the region, had traditionally lacked ways to safely and profitably channel their savings. Moreover, the country lagged in the adoption of electronic payment systems, that, among other things, can be used to trace transactions and boost tax collection.
Uruguay’s reform initiated in 2014 had the potential to address these issues. The Financial Inclusion Act required employers, with few exceptions, to pay wages and social security benefits through electronic means, rather than cash. It also gave workers and social security recipients a choice as to the banks where they would receive those payments and forced banks to open accounts for potential clients with generous conditions, including the waiving of fees, the waiving of minimum balances, and the issuing of debit cards without charges for cash withdrawals or electronic payments. The inclusion act also provided financial incentives to encourage citizens and firms to move towards electronic means of conducting business. These included a discount on the value added tax of 2 to 4 percentage points for credit and debit cards respectively and a subsidy to businesses that installed point-of-sale (POS) devices that process debit and credit card transactions.
Uruguay is a high-income country with a GDP per capita above $15,000. But it is also a developing country, where many citizens, as in other countries of Latin America and the Caribbean, suffer from restricted access to financial services. For those reasons, we wanted to study the effectiveness of various aspects of the reform to see which were the most effective in promoting financial inclusion and which sectors of the population benefited the most.
Looking at Household Data
In a recently published study, we used household data from three nationally representative sources to compare public sector workers, who overwhelmingly had bank accounts and access to electronic payment mechanisms before the reform (our control group), with private sector workers, a substantial portion of whom were paid in cash (our treatment group). We wanted to see how the mechanisms of reform in Uruguay affected the use of electronic payment instruments, like debit cards; household savings; and credit.
On one level the Uruguayan reform was a success: the proportion of workers in the formal private sector that received their wages in a bank account increased from 66% to 79% in the months immediately after the payment of wages directly into bank accounts became mandatory (2017). Moreover, between 2013 and 2017, the number of debit cards issued increased dramatically, with many private sector workers having them for the first time, and transactions with them increasing 2,150%, as overall withdrawals of cash from ATMs fell.
The Effect of Paying Wages Directly into Financial Institutions
Yet in examining the effect of the requirement that employers pay wages directly into bank accounts, we were unable to find robust evidence that this reform impacted savings, credit, or the consumers’ choice of payment instruments. As a result, we concluded that the increase in debit card use was caused principally by the tax rebates and that those already holding such cards before the implementation of the reform benefitted the most. We caution that our results come from data collected around five months after the implementation of the reform and that longer-term studies might show different outcomes. Financial inclusion is an essential goal for Latin America and the Caribbean, for its fight against poverty, its efforts to boost tax collection, and its pursuit of greater savings, investment and economic growth. Understanding the mechanisms that further that goal and the particular circumstances which make it achievable is fundamental.