This last post wraps up the discussion of the digitization of social security allowances (SSAs) in Nepal. It takes stock of the main insights of the pilot project and sketches a strategy to scale up the alternative payment method, so far tested in three districts on full scale, across the country.

The pilot project, discussed in Part 2, offered a glimpse of what SSA distribution across Nepal using a digital payment method would look like. ‘Going digital’ is hardly an easy task: the country still relies on a manual procedure, which is entrenched in the existing administrative infrastructure, as explained in Part 1. But innovative partnerships, political commitment and strategic vision can catalyse the efforts of all stakeholders.

Several lessons can be learned from the pilot project. A key lesson is that digitizing SSA payments implies a rethinking of public-private partnership—in particular, a redefinition of roles and responsibilities of each stakeholder, as evident when comparing the procedures in the traditional versus the alternative system of payment.

In the former, Village Development Committee (VDC) officials are in charge of disbursing cash to beneficiaries and submitting a report to the Ministry of Federal Affairs and Local Development (MoFALD). In the latter, these tasks are performed by the bank or a payment service provider (PSP), which is responsible for arranging the supply of cash float, disbursing cash at pre-determined ‘pay points’ at, or near, beneficiaries’ residence, and processing the beneficiaries’ data for reconciliation and auditing purposes. Once the branch or agents have released the money to the legitimate recipients upon the swipe of a personalized card or through other payment instruments (viz, mobile), the data are simply uploaded from the agents’ point-of-sale (POS) devices to the bank or PSP database or Core Banking System (CBS), which in turn compiles and submits a report to MoFALD. While activities at the identification and enrolment stage remain a prerogative of District Development Committees and VDCs, the bank takes over the disbursement part of the process. It is therefore not about dismantling the existing administrative arrangements, but about dovetailing the State’s resources and capacities with the ones of the financial sector. This shift has the potential to create a win-win situation for both the State and its private partners.

Outcomes of the pilot project suggest there are clear benefits for the Government of Nepal: re-routing the payment of SSAs through agent banking is very likely to lead to greater efficiency, security and cost-effectiveness. Similar programmes rolled out elsewhere have shown that these benefits are achievable. In Brazil, for instance, the usage of agent banking to transfer social payments to over 12.4 million beneficiaries of the Bolsa Família social welfare programme has reduced administrative costs from 14.7 percent to 2.4 percent of the total grant value. Similarly, in South Africa, administrative costs of delivering social transfers for the South African Social Security Agency fell by 62 percent after shifting to bank account transfers.

However, under current conditions, there is not such an obvious business case for banking and payment service providers in Nepal. The country’s digital financial service landscape is still fledgling, with fifteen banks gingerly venturing into this field along with non-bank PSPs preparing to venture and get license (includes remittance companies). Although sensitive to the prospect that the delivery of SSA payments through agents could increase the financial awareness of beneficiaries, the private sector has so far been reluctant to throw its weight behind an initiative that might prove costly before turning profitable, particularly when considering geographical challenges and uneven population distribution. For instance, in the mountainous district of Taplejung in eastern Nepal, some VDCs have as few as 91 beneficiaries. Moreover, many VDCs are inaccessible by roads; it can take at least an hour to walk from a main road to reach the nearest VDC.

This is where the Government could step in—by offering incentives to banks to set up their agent networks. This approach would assist banks to overcome their current hesitancy and help them to envisage future benefits, deriving from the delivery of a full suite of financial services to a rural population who is increasingly financially aware. Although the responsibility of making fixed cost investments to set up an agent network is typically borne by the bank, in this case the Government could support through a commission pay-out scheme for bulk payments in which large remunerations are gradually scaled down as transactions on the agent channel increase in volume and annual operating expenses decrease. To be noted is that a large portion of beneficiaries live in municipalities, where bank branches are more likely to be, which means lower transaction costs for the Government. Thus, the Government should expect higher costs only for locations that are not covered by branches and where there is a reasonable demand for setting up the infrastructure, notably agent points.

The expectation is that, while in the early years (years 1 and 2) most transactions at the agent level will be SSA transfers, over time user awareness of agent banking will rise and consequently demand for a broader range of financial products will grow. At this point, the business case for banks and PSP will be evident. Therefore, the commission amounts given by MoFALD for SSA payments through the agency channel can be higher in the initial two years (years 1 and 2), can gradually diminish over the next two years (years 3 and 4) and can be stabilized or discontinued thereafter (a decision to be made after a comprehensive review of the prevailing situation after four years). See the figure for a view of commission over time.

It is worth considering that, agent banking will probably struggle to perform timely and efficiently unless it reaches a certain scale with regard to customer demand. This implies that local conditions remain relevant when scaling up the digital method at the national level.

In hard-to-reach regions, continuing with the old way of working is not a bad option. Contrarily, this would allow the government to scale digital channels in a phased wise manner across the country. In hard to reach regions VDC secretaries could be provided with POS devices to record the disbursement of benefits upon biometric authentication of beneficiaries - the receipts of the transactions to be reconciled later. Moreover, the government should cultivate synergies with other financial institutions that provide similar services in rural areas, such as remittance service providers and mobile network operators acting as payment service providers.

Mobile money is already proving to be an effective and increasingly popular solution to transfer SSAs to beneficiaries. Among its strong points, delivering payments through a mobile-based interface is much cheaper than using a POS device.

Learn more from other examples of social protection programmes using mobile money.

ABOUT UNCDF MM4P

MM4P is a programme launched by UNCDF in partnership with the Swedish International Development Agency (Sida), the Australian Department of Foreign Affairs and Trade (DFAT), the Bill & Melinda Gates Foundation and The MasterCard Foundation. MM4P provides support to digital financial services (DFS) in a selected group of least developed countries (LDCs) to demonstrate how the correct mix of financial, technical and policy support can build a robust DFS ecosystem that reaches low income people in LDCs.

For more information, visit mm4p.uncdf.org or follow @UNCDFMM4P and UNCDF MM4P on LInkedIn.