Friday, January 2, 2015

Hurry Up and Wait: “G2P or G&P”: Governments, Payments, and Publics

In this panel about how state policies shape financial inclusion, IMTFI alumni participant Jing Gusto of Mercy Corps suggested that coordination with government agencies required a "Gangnam Style" spirit and an understanding that it was "more fun to not dance alone."  He argued that the innovations of government could serve as a significant vehicle for financial inclusion, although many researchers on the panel complained that it was difficult to make much progress on understanding the synergies between government and the private sector when policies and practices were being changed by new administrations struggling to keep up.

"The Physical and Electronic Payment Interface and its Influence on Consumer Payment Choices and Informal/Fraudulent Practices: A Case Study of the National Water and Sewerage Corporation (NWSC) Uganda" by Tugume Howard of Benda Associates Ltd also reflected the work of Nanteza Justine and Kobusinge Justine, although the Justines were unable to attend the conference.  By focusing on the physical and electronic payment interface and its influence on consumer, Howard argued that a case study involving a national water and sewage could provide understanding of the influence of consumer choices, payment choices, and informal practices.  Howard argued that Benda Associates benefited from its knowledge of business start-ups and agribusiness as an agency capable of comprehensive research.  He began by noting that the Bank of Uganda had an ambitious Financial Inclusion Project and that the BOU's recent financial inclusion report indicated that there had been significant growth of bank branches and ATMs, although the distribution of banks and ATMs failed to serve large sectors of the population, because 41 percent of districts in Uganda lack access to any bank branch.  He also described dramatic growth in mobile money technology with 17 million people have registered.  Additionally, the distribution of mobile money agents in Uganda was more likely to follow the distribution of population than offices of the traditional financial sector.  For those who want to learn more about the financial landscape of Uganda, you can check out the maps and information graphics produced by the Finclusion Lab.

The National Water and Sewer Corporation already offered a range of payment options including mobile money, direct debit, and  ePayment, and researchers were interested in seeing if these options might ameliorate systemic problems of corruption and reduce fraudulent informal practices.  They explained that they wanted to examine the factors that drive people’s payment choices and examine the impact that the interface between physical and material might have as well.  Researchers chose to focus on a diverse set of survey areas, comprising four districts – Kampala (the capital city), Mukono (urban), Mpigi (semi-urban), and Luweero (rural).  The methodology included user interviews, expert interviews and document review.  They discovered that users reported relatively good knowledge of payment methods: 89% were aware of mobile money, 37.06% were aware of bank transfers, 85% knew about cash deposits, and  58% knew about cash.  Because the NWSC stopped accepting cash payments in its offices, users had incentives to learn about alternative methods.  Now 40% used mobile money, 23% persisted in using cash, 79% used the cash deposit method, and 8% tried bank transfers.  Although the work of the last six moths indicated that electronic payments could reduce corruption, users were also exposed to modern malpractices, such as hacking now that water bills could be paid thanks to mobile money and access to ATMs.  The Ugandan researchers also noted a number of limitations to a study largely done in urban centers that depended on a consumable (water) that presupposed development and the fact that informal practices were not yet documented, as were aspects of behavior related to gender.  Although they described it as "too early to draw conclusions," they sketched out the rest of their research plan including data entry and analysis and dissemination of results.

The IMTFI has funded a number of researchers to study practices in Mexico around digital money, and cross-border collaborations have been a particularly important aspect of the institute's scholarly work.  "Delivering Conditional Cash Transfers via Savings Accounts: Default and Mental Accounting Mechanisms" by Carlos Chiapa and Silva Prina also focused on a specific area -- conditional cash transfers that reward poor families for school attendance, preventative health visits to clinics, or participation in nutritional and other forms of education --  that IMTFI field researchers have done work on in other countries, including Gusto's own work in the Philippines (described in blogging from previous IMTFI conferences here) and work on CCTs in Brazil (as detailed here.)

Prina noted that their study was situated in the context of a large body of existing scholarship that showed that inclusion into the financial system helps the poor escape poverty (Aghion and Bolton 1997; Banerjee and Newman 1993; Banerjee 2004).  Those new to this work might start with the work of MIT Professor Abhijit Banerjee and the university's Poverty Action Lab.  Unfortunately, the poor are usually excluded from the financial system, and thus they end up using imperfect substitutes (Collins et al. 2009; Rutherford 2000).  Fortunately, it seems possible to find alternatives to this Catch 22, because there is untapped demand for formal savings devices and access to and use of a savings account increases savings and investment and promotes the welfare of small entrepreneurs and households (Dupas and Robinson 2013; Prina 2014).

The research team focused on Oportunidades, which is now rebranded Prospera, a series of social protection programs that include depositing transfers of cash to accounts of participants in BANSEFI, the social bank of Mexico.  Although most of poorest Mexican households have been granted access to the formal financial system, researchers argued that having an account (being banked) is a necessary but not sufficient condition for financial inclusion, which is defined not only by access to formal financial services, but also by use of those financial services, appropriate regulation, and financial education.

In understanding the "supply vs. demand" problem of the CCT program in Mexico, researchers found that users made little use of their accounts and that most withdrew their funds at once.  Grim results from a 2009 pilot changed little in a 2012 study that showed that 81% still withdraw at once.  Now that researchers have begun a more granular study in May 2014, they have discovered that 58% of beneficiaries do actually save: 38% save in the formal formal (although only 30% of this group does so with BANSEFI) and 79% save in informal institutions.  To understand problems on the demand side, researchers surveyed users and found out that 42% felt that they did not have enough income to save, and 43% had been told to withdraw all at once, which pointed to a "hint of misinformation and disinformation."  Indeed, 11% feared being kicked out of program if they saved, and 11% worried that the government would keep their money if they tried to keep some in reserve.   Only 51% of recipients knew they could save in their BANSEFI accounts, and basics of procedures seemed mysterious to participants, since 83% didn't know how to make a deposit, and 88% didn’t know the money was protected by federal government, although 62% did consider that keeping money in a formal back account did have advantages.

To tackle the problem of low financial literacy, they began with assessment.  They discovered that a simple question about calculating 10% of 1,250 pesos – roughly the amount of a typical conditional cash transfer – could only be answered by 31% of participants.  43% could answer questions about interest correctly, and most knew about inflation.  Drawing on a literature that showed that mental accounting could affect savings and financial accounting decisions (Feldman 2010; Sahm, Shapiro, and Slemrod 2010; Thaler 1990, 1999) and that defaults have also been shown to be very effective in increasing savings in developed countries with low-income population (Thaler and Bernatzi 2004; Madrian and Shea 2001), the researchers looking at CCT programs in Mexico wanted to design a study that emphasized these features. Unfortunately automatic savings programs are often not available in poor households in developing countries, although the concept of an account denominated for emergencies was something salient to people.  Researchers argued that it should be more salient, and that such accounts could be facilitated by a default feature, so that participants don’t have to remember to save.  Speaking on a personal note, I know that the automatic deductions from my paycheck for my retirement have certainly spurred my own default savings behavior, so this assertion certainly seems logical.

Researchers designed a randomized controlled trial in which those in Control 0 all receive a special educational workshop on how to use their accounts and booklets to track savings, those in Treatment 1 are also given an account for emergencies with sticker, and those in Treatment 2 have an automatic designation in which 10% of their income is deposited into emergency savings.  With three treatments it becomes possible to separate out the effects of mental accounting from those of a system default.  Unfortunately researchers described delays caused by political changes in Mexico, particularly now that the entire CCT system was being redesigned.  Although they said that "we know very little," they were confident that "replication should not be particularly difficult."  In the question-and-answer session afterwards participants proposed using better graphic design to promote financial literacy and considering the gender dynamics of banking behavior uncovered by IMTFI researchers working in Chiapas.  One participant also argued that it may be wrong to assume that "people are misinformed," given that banks may have incentives to push customers toward investments in risky ventures and that even a middle-class Mexican research center pension might be tied to speculation with Goldman Sachs.

'The New Financial Architecture in Ecuador: Public Regulatory and Sociopolitical Contexts for Payment Systems" by Javier Felix of Renafipse and Monica Pozo of SENPLADES began by providing the context before the financial crisis of Ecuador in 1999, which resulted in the dollarization of Ecuadorian Economy and a big currency devaluation with very high levels of inflation.  The economy had already been dollarized informally, so the government's pragmatic policy was intended only to acknowledge the existing reality.  Soon it payed off and the economy stabilized, so that the country moved from 95% inflation to rates at a more manageable 3 to 4%.  This period was also marked by extreme political instability in an era in which there were eight presidents in a short period of time.  The government has since embraced policies based on a new constitution oriented around the well-being of citizens, harmony between humans and nature, and new economic systems of a "popular and solidarity economy" that was a response to neoliberalism and deregulation, typical of what Felix described as "21st century socialism in Latin America."

By placing a priority on public policies that addressed the fact that 70.5% of Ecuadorians didn't have a bank account, the government decided to analyze new forms of payment, particularly in response to huge movement in the mobile payments sector in a country with 17.9 million mobile phone subscribers.  Policy makers envisioned a "Public Electronic Monetary System in which the electronic money system, as defined by the Central Bank of Ecuador, is a "set of operations, mechanisms, procedures, and regulations that facilitate the flow, storage, and real-time transfer of monetary value between the different economic agents."  To further this vision, the use of electronic means would include "mobile devices," "Internet," "Smart cards," and other digital monetary instruments.  Although the Central Bank of Ecuador would serve as the Distributor and Administrator, there were other regulatory institutions and technological channels to consider.  For example, there were three mobile companies in Ecuador, and the central bank has signed agreements with all of them.

Like other IMTFI researchers, Felix described flux in the process, including a "pilot phase ending tomorrow," which examined macro agents, transactional centers, users, and delays and changes.  By imagining a financial structure of inclusion that was not based on any private institution, mobile money could become a legal tender and a state liability, as a currency that all must accept.  In this particular theory of money, money should be a public good.  The Ecuadorian team warned that private companies might want to influence users and exploit market share.  Because electronic money in circulation must be backed one hundred percent with the liquid assets of the BCE, there were established limits on the system.  For example, users were limited to three accounts and $2000 per month.  Nonetheless the researchers were eager to acknowledge different perspectives on the strategy of monetary policy to speed up the recirculation of money, especially in rural areas, and they even granted that speculative markets might be necessary.  Although nationalization is often seen as a bane to private industry, the researchers asserted that mobile companies saw a new line of business and technological adaptation and that macro agents saw business opportunities and cost reduction for collections.  In closing, the presentation raised the question of how it could have a greater impact than a private system, particularly in the wake of "trauma about owning national currency."  For these researchers, money serves "as a social agreement" that "needs people’s trust and approval to be part of their lives."   Therefore, "rules should be constructed transparently and with democratic accountability."

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