A few years ago I visited some coffee farmers in a mountainous section of Uganda. When they were due to be paid for their coffee they spent most of a day traveling down the mountain to the provincial capital. At the office of the coffee marketing company each farmer received an envelope with his payment in cash. On the long journey home the farmers often fell prey to attackers who knew their pockets would be full. A few attacks had been fatal.
For people like those Ugandan farmers, yesterday's launch of the Better than Cash Alliance by seven major public and private organizations is potentially very good news. The seven founders of the Alliance - Citi, the Ford and Gates Foundations, the Omidyar Network, Visa, UNCDF and USAID - have joined to promote the transition of the economic lives of the world's poor from cash to electronic.
Projects to pay government benefits and humanitarian aid in electronic form are a boon. They increase security and accountability while decreasing cost. Until now, however, such projects have been isolated, with no worldwide, deliberate, coordinated push. The Alliance also adds an important new dimension by including in its ambit private sector companies that buy from or sell to the poor (like coffee purchasers).
The Alliance's theory of change is laid out in a white paper by Bankable Frontier Associates, "The Journey toward 'Cash Lite,'" which argues that the shift will involve several steps. The paper has the important insight that the early steps may not be as life-changing as one might hope.
Consider the Ugandan coffee farmers. Sometime after my visit, the coffee marketing company arranged to pay into a cooperative bank, which distributed the payments (electronically) into bank accounts in each farmer's name. At this point the farmers still traveled to town. Rather than standing in line at the coffee company, they stood in line at the cooperative bank. They still went home with cash, because they could not use the money in the village if it was in the bank in town, although they might leave some money on deposit as savings to use on their next trip. They were still prey to robbers, and their lives did not change much. However, they would now show up in national statistics as at least partly "financially included". The white paper calls this stage "Few to Many", a situation in which major payers like government sent payments to recipients through electronic means. Because the few payers are usually big, sophisticated organizations, it is relatively easy to convince them to make the electronic switch, and that is why "Few to Many" is step one.
Huge numbers of people in the developing world are in a "Few to Many" stage. The Global Findex, a powerful resource of data on financial inclusion, was released earlier this year with the headline that 41 percent of adults in the developing world have a bank account. In fact, the picture is much less positive than these numbers suggest.
Many bank accounts in the developing world are relatively inactive. In high income countries, most people use their bank accounts as their money management hub, which can be seen by the fact that 72 percent of people with accounts use them actively (e.g. withdraw more than twice per month). Not so in low and middle income countries, where only 17 percent of people with accounts use them actively. Like the Ugandan farmers, many people use accounts simply as a way to get paid or receive government benefits, a classic "Few to Many" situation. If we measured financial inclusion by the number of people who both have and actively use bank accounts, we would have to admit that only 7 percent of the developing world's adults are "included". A shockingly small number, indeed.
There is a profound difference in the way people in the developed and developing worlds manage their money. Research such as reported in the landmark book, Portfolios of the Poor, shows that even very poor people conduct complex financial lives to cope with their low and uneven incomes. Money management is conducted through cash in the hand and a balance sheet in the head. Portfolios of the Poor states, "They keep savings at home; join savings clubs and savings-and-loan clubs; transact with family, friends and neighbors, and employers; and, where doing so is feasible and attractive, sign on with formal licensed providers." When a formal financial service is offered, like government benefits paid to a bank account, the client is unlikely to change how she handles the rest of her portfolio. While putting such payments into electronic form sets people on a path toward financial inclusion, it is not at all certain that they will proceed down the path.
How does one move from a largely informal to a formal financial life? The transition is unlikely to be swift or easy, and won't be completed in one leap. For the Ugandan farmers, if the cooperative bank puts a branch, an ATM, or a banking agent in the home village, or connects to mobile payments, the "Few to Many" stage would be complete, and the stage would be set for the next stages ("Many to Few" and "Many to Many") in which the farmers would use electronic means for transactions they initiate. However, these remaining shifts cannot be brought about by a decision at a corporate or ministerial headquarters. They only occur when millions of cash-comfortable individuals are able to pay others electronically and decide to do so. The money management habits of the Ugandan farmers will change significantly only if they are persuaded by low transaction fees and convenience, and even more by whether the friends and corner grocers they transact with accept electronic payments. Confidence that this can and will happen is growing, thanks to the M-Pesa mobile payments revolution in next-door Kenya.
While payments by governments and aid agencies may contribute to financial inclusion, they are only a first step toward a cashless or cash-light world. Policy makers must pay close attention to usage and the factors that influence it, which requires understanding the money management habits and economic networks of low income people. Look to the Better than Cash Alliance to help make this happen.