November 10, 2016
While payments have been one of the hottest segments of FinTech for some time now, a particular type of a payment service has been widely overlooked as an opportunity for innovation – person-to-government (P2G). CGAP states that today, global P2G payment flows are estimated to be at $7.7 trillion and represent a significant feature of the global payments landscape. For the low- and lower-middle-income countries alone, the number hits $375 billion (~50% of annual government expenditure).
P2G payments include mandatory payments like taxes and fines, payments for government services like utility payments or passport fees, and copayments for social benefits such as insurance. While any other type of payments service will always have to fight for a market share, payments from citizens to the government are here to stay and will always be the most stable flow of funds in any country. Nonetheless, P2G payments have been largely ignored by startup ecosystems around the world and have never been considered to be the sexiest industry to apply innovation (the number of startups helping the business of government is very limited).
Being mostly unattractive for the tech world, P2G payments remained in the shade of governmental structures which are not famous for rapid innovation adoption anyway. In January 2016, however, CGAP, Karandaaz Pakistan and Dalberg Global Development Advisors conducted the first-ever study to comprehensively examine the opportunities and challenges associated with digitizing P2G payments. The study chalks out the role of P2G payments in the global payments landscape with interesting case studies illustrating the importance of the appropriate development of P2G payments.
As mentioned before, P2G payments are a significant feature of the global payments landscape. They are large in absolute value and largely relative to other payment flows: for example, the P2G market in low- and lower-middle-income economies alone is comparable to the entire global remittance market ($528 billion in 2014), the study suggests.
P2G payments are also unique in their vast reach as they involve every citizen of a given country, including the financially excluded. There is hardly any financial service that has such a reach and volume as P2G payments, which touch every single person. Hence, digitizing these payments has a strong – and compelling – value proposition for governments, businesses and individuals alike.
Overall, the study revealed that the digitization of P2G payments in emerging economies is in its infancy: existing initiatives face challenges on both the demand and supply side, and are not yet fully supportive of financially excluded populations. Moreover, after a scan of 61 digital initiatives – 41 of which were in emerging markets – the study found that nearly all solutions offered were for a standalone service or fee and were rarely linked to a national information and communications technology (ICT) or payments strategy. In addition, the research also revealed a need for products that consciously consider usability by the poor during product design (e.g., that do not presuppose digital or financial literacy, do not require a bank account, etc.).
However, examples of solutions working in high-income countries show a shift towards an integrated approach and can serve as a model for where P2G payments in emerging markets might ultimately lead. For example, the UK government’s website has grown over the past six years and now includes all 24 ministerial departments and 300+ other public agencies. Similarly, the Singaporean government portal and accompanying mobile platform offers citizens, businesses and visitors a wide range of information and payment options both to and from the government.
When you automate the system, it brings many benefits such as plugging leakages, introducing integrity, making control easier, making it easy to track payments and user history… The entire payment history of the taxpayer is central and easily accessible, – Government official, Philippines.
Image source: Global Landscape Study on Digitizing P2G Payments
Not only digital do P2G payments benefit above-mentioned participants of the ecosystem, they also can be the strongest force in facilitating financial inclusion. As fairly noted by the study, P2G payments encourage more users to consider opening up digital money accounts, particularly because some forms of payments (taxes, fines) are mandatory.
P2G payments also encourage regular and greater use of digital financial services. Given the recurring and critical nature of some of the payments, once consumers begin using digital money for P2G payments, they may gain familiarity with digital accounts, start using them to receive payments, and, over time, even develop the habit of transacting digitally and/or leaving balances in their accounts to make subsequent payments.
The study also notes that governments that offer integrated solutions allowing digital payments have a particular advantage in that they can offer one convenient platform to pay for a broad array of services/fees with a likely one-time effort on customer education, followed by a limited outlay for subsequent additions to the platform.
Digital P2G payments can also significantly enhance financial health for regular users. As with other digital payments, digital P2G payments can help consumers improve their resilience to financial shocks by providing them an opportunity to manage the budget for service payments. In addition to transparency, digital P2G payments can also result in greater flexibility for the consumer since they take shorter processing time and can be delayed and restored faster.
Efforts to encourage digital P2G payments are part of a larger movement to encourage consumers to use digital channels and move away from cash-based behavior. When a customer visits a store to make a payment and the store employee makes the digital transaction on her behalf (without the customer ever establishing a digital account), the transaction is doing little to help consumers move down the path to a digital economy. Put another way, our view is that fully digital payments are those that are likely to have the greatest operational/system-wide benefits while also having the greatest impact from a financial inclusion perspective, authors of the report suggest.