Digital processing of payments is spreading rapidly and governments are increasingly harnessing the benefits of digital payments across their economies. However, their full benefits are only just starting to be realised and offers many opportunities for low- and middle-income countries.
One area of largely untapped potential in many countries is the integration of digital payments into governments’ public financial management (PFM) systems. In a recent paper, Ruth Goodwin-Groen, Managing Director of the Better Than Cash Alliance, Alan Gelb, Senior Fellow at the Center for Global Development, and I reviewed examples of such reforms in Estonia, Ghana, India and Mexico.
Though limited in number, these cases show there can be both direct and indirect benefits of digitising payments.
Cutting costs and reducing wastage
In one modest application in Ghana to the scandal-plagued National Service System, the e-Zwich digital payment system uncovered 35,000 ghost employees – almost half of the entire agency payroll. It is estimated that Ghana’s government saved $35 million a year as a result. However, India has reported $7 billion in savings linked to its digital programs over two-and-a-half years. These were found by shifting from price subsidies to digital payments, reforming in-kind delivery systems for food, and changing the delivery of pensions, often from post office to banks. Even if this figure is based on optimistic assumptions, a modest fraction of such savings would represent a considerable rate of return on the investments made in digital technology.
Supporting financial inclusion, particularly for women
A survey in Rajasthan, India, showed the major impact digitising had on public payments for pensions, Liquefied Petroleum Gas (LPG) and subsidised rations, particularly for women. All respondents had bank accounts after the reforms, compared to only a third before. These gains are greater, of course, if payments are made into general-purpose accounts rather than through programme-specific mechanisms.
Increasing transparency and accountability
By providing more reliable, comprehensive, complete, and timely information, digital payments can also drastically improve transparency. They develop a much-needed audit trail that can enhance accountability by way of statutory bodies such as supreme audit institutions, as well as by citizens and civil society. In some cases, it may also improve the experience of the people who receive social transfers. In Rajasthan, 63% of pensioners preferred the new digital payment system to the old one, while only 2% thought it was worse.
While these potential benefits are vast, they are not necessarily easy to realise. Much like public financial management systems, digital payments arrangements should not be seen as IT-driven and they do not provide a ‘silver bullet’ for a more effective PFM system.
Three important lessons for realising the benefits of digital payments
To help navigate this terrain, there are three lessons that can be drawn from the cases we reviewed:
1. Ongoing, high-level leadership is essential
Continuous, high-level political and technical leadership is essential for successful digitalisation reforms, ideally with central fiscal authorities in a leading role. In India, sustained leadership has been vital in overcoming the implementation problems that will inevitably arise, including opposition from those who have benefited from the previous systems. Consistent leadership was also critical for digitalisation reforms in Mexico and Estonia.
2. An integrated approach is needed
An integrated approach is needed, with robust digital and regulatory infrastructure that allows for an inclusive approach to PFM. Top regulatory priorities include:
- A telecommunications regime that encourages universal connectivity, noting that high-capacity broadband is still very limited in some countries.
- A level playing field for financial providers that encourages entry and competition, facilitates choice, and caters for low-income users.
- Encouraging interoperability so that payments can be made across different payments providers at low cost.
- Common payments arrangements for government agencies that eliminate unnecessary fragmentation across different programmes. This is another benefit of a treasury single account.
3. Take actions to ensure security
Governments need to be aware of risks and take actions to ensure the security of the payments and associated data. They also need to ensure the growing digital cloud does not compromise citizens’ privacy or classified government information. The Better Than Cash Alliance’s Responsible Digital Payment Guidelines include best practices that significantly reduce risks to citizens.
While the challenges of digitising payments are many, the potential benefits for PFM vastly outweigh the costs. In the paper, we encourage policy-makers everywhere to approach reform collaboratively, using lessons learned in other countries, tailored carefully to their own national conditions. By doing so, they can deliver genuine benefits for those most in need of government support and assistance.
Marco Cangiano is a Senior Research Associate in the Public Finance and Institutions (PFI) programme at ODI and serves as a Senior Advisor for the UN-based Better Than Cash Alliance. He is a former Assistant Director at the International Monetary Fund (IMF) where he held a number of positions since 1991.