Does it matter how someone pays the bills as long as the bills get paid? Research suggests that it can, in fact, matter a great deal.
It is no surprise that most of the world’s poor are also unbanked. What is becoming better understood is that the lack of banking is a vicious cycle, and how gaining access to the world of financial products and services – known as financial inclusion – is crucial to the alleviation of poverty. We wanted to know more about the dynamics of inclusion, and we found that the introduction of non-cash methods of bill payment can be a powerful strategy for bringing people into the financial mainstream.
Our focus on bill payment as an entry point is not random. Three qualities of bill payment make it particularly well-suited to the task, no matter how developed the surrounding economy.
High Penetration: Nearly every household in the world has bills to pay in order to maintain critical services like water, electricity, heat and telecommunications.
Recurrence: Because these payments are regular, not one-offs, they help consumers build a payment habit.
Size: The size of the potential market for a solution is large enough to make it worthwhile for the stakeholders to address.
Take the case of Mexico, where close to 70% of the population are unbanked, and over 90% of consumer bills are paid for in cash either at the biller’s office or at a bank or retail outlet, even though most of the people making these cash payments have received their salary on a prepaid or “salary card.” Rather than using the card to make payments, they tend to withdraw its entire sum in cash as soon as they receive it.
This system of payments serves none of the major players well. Consumers need to travel to a particular place to pay their bill, during particular hours and then frequently wait in long lines. The billers themselves have to bear the costs of the staff and office space required, and even banks, for which bill payment is an important revenue stream, have to cope with the high costs of personnel involved in accepting bills as well as the revenue lost to low use of the prepaid cards.
With internet penetration at around 30% of Mexico’s population, online bill payment is not going to be viable. But while few consumers may have internet, most – almost 75% – do have mobile phones. As such, a solution that allows people to pay their bills by phone, with their salary cards as the source of funding, would provide value to all the major players: consumers, who would no longer need to carry cash to the billing office and wait on a long line during business hours; billers, who otherwise must bear the high cost of staffing payment offices and banks, which would see an increase in the use of the salary cards they issue and a decrease in the need for expensive branch services. Further, it would offer the additional benefit of helping the government crackdown on the underground economy.
The progression of Mexico’s population towards financial inclusion is likely to continue. As they regularly pay bills with their salary cards, it is logical to think that they will become increasingly comfortable with them, and gradually migrate more of their spending on to them. In fact, this phenomenon of creating stickiness to the payment method by its regular use is also supported by MasterCard’s research. Further, the use of a non-cash payment form helps companies track and analyze their payments and get useful insights into their creditworthiness, making personal loans, for example, for education and training a possibility.
As economic life becomes increasingly sophisticated and increasingly complex, those without access to the tools of modern economic life will become ever more marginalized and ever more mired in poverty. For a solution to be truly effective and deliver benefits to all involved parties, it must be based on consumer demand, not the desire of a stakeholder to promote a particular product or service. Governments, banks and businesses should be looking at bill payment solutions to help ensure that everyone will have the tools they need to build a safe and secure economic life.
Amit Jain is a principal in the global thought leadership division of MasterCard and can be reached at firstname.lastname@example.org. Gidget Hall is group head of MasterCard bill payments and can be reached at email@example.com.