We must do better than cash

Cash can stifle economic development.  That might seem counterintuitive.  Aid is critical to ameliorating the plight of poor people living on far less a day than we spend on a latte.  But physical cash can undercut many development objectives the U.S. government works to achieve.  From improving aid effectiveness to shining a light on corruption to unleashing the private sector, cash gets in the way.   If you care about reducing poverty, then you must also care about reducing the reliance on physical cash.

USAID is helping Haiti increase financial inclusion through the advance of mobile money. Photo Credit: USAID

We begin a movement to do just that.  USAID Administrator Rajiv Shah is announcing a broad set of reforms to use USAID’s $22 billion financial footprint as a force for good—as a way to reduce the development industry’s dependence on cash.  This includes integrating new language into USAID contracts and grants to encourage the use of electronic and mobile payments and launching new programs in 10 countries designed to catalyze the scale of innovative payments platforms.  Based on examples in Kenya, Haiti, Mexico and Brazil, we believe that our implementing partners will generate at least 15% efficiency gains in their operations by 2016.

This movement would not have been possible 5 or 10 years ago.  The infrastructure did not exist.  But the rapid rise of the mobile phone—there are now nearly 4.5 billion mobile phones in the developing world—in tandem with electronic cards makes it possible today.   We cannot afford to let this opportunity pass—this movement cannot be a movement of one.  Indeed, USAID’s assistance is a big drop but still a drop in the development bucket.   This must be a movement that crosses sectors and borders—private companies with extensive supply chains and governments with large disbursements must join together to leverage electronic payments platforms.  Here’s why we must do better than cash.

First, cash costs money.  It is ironic, but paying teacher salaries or issuing social transfers is expensive.  You need money to hire couriers to lug big bags of cash around—and leakages are inevitable.  Think of electronic or mobile payments as the functional equivalent of epoxy paste—they seal the cracks in the payment edifice and prevent leakages.

For example, in Brazil, when the Bolsa Familia social transfer program switched to issuing grants via electronic benefit cards, the program’s administrative costs dropped from 14.7 percent to 2.6 percent of the grant value dispersed. [1]  More, a recent McKinsey report found that the Indian government could save $22.4 billion annually if it used electronic payments. [2]   This movement should matter to anyone that cares about the efficiency and effectiveness of delivering payments and services.

Second, cash is dangerous.  Those who carry large sums of cash—from merchants to couriers to mom’s paying school fees—are targets of violence. Take for example a large multi-national extractives company that uses couriers to pay employees every two weeks in the conflict prone Niger Delta.  These couriers risk their lives each trip, as they take large bags of cash to pay the company’s employees.   This is not specific to the Niger Delta.  One Haitian woman said, “For me the best thing about being paid by phone is that team leaders can’t take your money.  Sometimes when you work under someone, you don’t have the chance to speak out.  This time, everyone receives their balance on the phone, in their pocket, there’s no way of someone squeezing you or taking some money off the top.”  This movement should matter to anyone who cares about the safety and security of others.

Third, cash doesn’t help anti-corruption efforts.  You cannot track cash.  You cannot see the hands cash moves through.  You cannot document its disappearance into pockets or political coffers.  With mobile or electronic payments, you can.   In Afghanistan, the U.S. Military’s pilot program to pay Afghan National Police through mobile money revealed that government employees had been losing 30 percent of their salaries to ‘sticky fingers.’  This program also demonstrated that government salaries can be on time, complete and improve governance.  Today, USAID is working to convert more of the 400,000 Afghan civil servants and security personnel salaries currently being paid in cash onto the mobile phone and facilitate bill payment for the 750,000 electricity customers.  To be clear, electronic payments are not a silver bullet for corruption—but with proper oversight, they make possible what cash cannot.  And a recent CGAP survey of mobile network operators showed that MNOs are taking oversight seriously—each had dedicated staff to monitoring and investigating suspicious or unusual transactions.  This movement should matter to anyone that cares about accountability and tracking of financial flows.

Fourth, cash curbs innovation.  Moving cash from place to place is expensive and time consuming.  It makes transaction costs prohibitively high for private business to carve out a profit margin and grow.  But mobile money and electronic payments significantly lower transaction costs and enable the private sector to create sustainable fee-for-service models.  Already, in Kenya, 700 innovative businesses exist because they integrated with M-PESA, Safaricom’s mMoney product, to lower transaction costs enough to profitably extend critical services to people in remote areas.  In agriculture, UAP Insurance and the Syngenta Foundation partnered to offer farmers index-based insurance using M-PESA to collect small premiums and issue payouts.  In health, Changamka Microhealth Ltd is using M-PESA’s bill pay function to help expectant mothers save for maternity health care.  In water, Grundfos LIFELINK levered M-PESA to create a fee-for-service model whereby rural communities access safe water and pay for it using M-PESA. [3]  It’s happening all across Kenya without our assistance.  This movement should matter to anyone who cares about innovation in development.

This movement should matter to all of us.  It should matter to any multinational company or international NGO trying to save money or protect their employees.  It should matter to any donor organization or government trying to improve the efficiency and effectiveness of development programs.  And we should act now—surely, we can do better than cash.