BRIEF Understanding How Consumer Risks in Digital Social Payments Can Erode Their Financial Inclusion Potential Because digital social payments (DSPs) recipients are a fast-growing, yet often overlooked, digital financial services (DFS) segment, acknowledging and addressing the most common and consequential consumer risks they face should be a priority for any program or provider seeking to unlock the potential benefits of DSPs for the poor. Low-income recipients of cash transfers—whether processes; (iv) poor or no recourse mechanism; and (v) fraud government to person (G2P) or donor to person (D2P), and that targets the recipient. Drawing on promising practices by whether conditional or unconditional—increasingly receive governments, development agencies, and providers, it then their payments digitally. This digitization trend is expected to recommends that DSP programs and their payment service continue. The value of electronic transfers that are delivered providers should consider three critical basics—reliability, into store-of-value accounts and accessible via debit cards communication, and monitoring—to better mitigate these or mobile money wallets, referred to here as “digital social risks. While these three elements of “doing digital finance payments,” is estimated to more than triple between 2010 right” are basics that apply to any DFS offering, getting and 2017 to over US$194 billion (Riecke 2014). them right in a DSPs context will provide a solid foundation for ensuring that these programs achieve both their social DSPs offer a variety of potential benefits over traditional protection goals and their financial inclusion potential. cash, voucher, or in-kind methods. Proponents most often cite increased efficiency, reduced leakage, and faster, more convenient and more secure payments to recipients.1 When Five Most Common and linked to bank accounts or mobile wallets that offer store-of- Consequential Consumer Risks value opportunities or access to additional financial services, Faced by DSP Recipients DSPs to the bottom of the pyramid could pave a way to fuller financial inclusion. However, evidence shows that the 1. Inability to transact due to network financial inclusion benefits of DSPs have thus far been limited: downtime or service unreliability most recipients withdraw 100 percent of their payment at Many DSP programs are targeted to populations in poor and once and by and large do not use the account again until mostly remote locations, where mobile network coverage the next transfer takes place, let alone take advantage of is often weak. As a result, recipients experience frequent additional financial services that may be available to them. network connectivity problems for point-of-sale (POS) This lackluster use has led some to question the promise of devices and mobile phones. DSP recipients trying to access DSPs as a financial inclusion gateway.2 their periodic payments suffer acutely from such unreliability. There may be several reasons for recipients’ limited (active) For example, in three digital cash and voucher programs of use of their digital accounts, including limited ubiquity, the World Food Programme (WFP) in Kenya and Lebanon, convenience, value proposition, and trust. 3 CGAP’s pervasive network failures and insufficient connectivity “Doing Digital Finance Right” (McKee, Kaffenberger, and exposed recipients to financial loss and potential harm in Zimmerman 2015), however, suggests that the experiences a variety of ways. Interrupted transactions left payments in and perceptions of several risks among low-income DFS limbo, and when networks were down entirely, it became consumers are, at best, adversely affecting customer trust common for recipients to leave their card and personal and confidence in DFS and, at worst, causing actual loss identification number (PIN) with agents or merchants to or harm. It also revealed that DSP recipients—a unique complete the transaction later on, resulting in risks and segment among low-income DFS clients that tends to be reported experiences of inappropriate, and even fraudulent, more vulnerable, less literate, and less familiar with new agent behavior (WFP 2016; El-Huni 2014). Network or technologies—experience some identified consumer risks infrastructure failure was also a frequent challenge for particularly acutely or in distinct ways. G2P recipients in Nigeria and in the HelpAge Program in Applying the consumer risk lens outlined in McKee, Bangladesh, which uses the bKash network to transfer funds Kaffenberger, and Zimmerman (2015), this Brief focuses on into mobile wallets (Adewole 2015; InterMedia Africa 2015; the particular experiences of low-income and vulnerable Islam and Woodard 2014b). In the Philippines, Pantawid recipients. It reviews existing evidence from DSP programs Pamilya recipients not only had network connectivity in 12 emerging markets to identify the most common and problems but also inconsistent and unreliable service hours of consequential consumer risks and challenges experienced agents, even when those agents were designated specifically in their design and deployment.4 These consumer risks for the DSP disbursement (Zimmerman and Bohling 2015). include (i) inability to transact due to network or service Network outages and finding an agent’s shop unattended unreliability; (ii) insufficient agent or automatic teller machine added to the time recipients had to wait for cashing-out and (ATM) liquidity; (iii) complex user interfaces and payment being able to use their transfers (Islam and Woodard 2014b). 1 For example, the High Level Panel on Humanitarian Cash Transfers identified more than 200 resources and studies that evaluate the effectiveness of cash transfers, and concluded that there is evidence of benefits for both programs and recipients (ODI 2015). 2 See also, Almazan (2013). 3 Limited use and uptake of DSPs may stem from limited and unreliable infrastructure; limited customer-centricity, and therefore, little customer value of the services offered; fear that the social payments will be canceled if recipients are seen saving; lack of awareness of additional services; limited access and acceptance points for digital payments; safety concerns; social norms and personal preferences; among others. See also, Malaguti (2015). March 2016 4 This evidence summary focuses on DSP programs targeted at the poor, including both G2P and D2P transfers, in low-income markets. The study does not assess social payment schemes covering middle- to higher-income recipients, such as pensioners. 2 2. Insufficient agent or ATM liquidity complete their SMS-based voucher redemption and if a timeout occurred before the transaction was finalized, the DSPs are usually transferred in bulk, with most recipients recipient had to start all over again (Murray 2013).5 Moreover, typically withdrawing all of their money on a single day. This the SMS-based system did not allow the use of local script creates heavy pressure on the access point to meet liquidity and language, which was another challenge for recipients demands, which is a particular challenge in remote and less who were unable to read and understand the messages.6 Two secure areas. Consequently, recipients often line up and months after introducing mobile payments to WFP Kenya wait for several hours to collect or access their payments or food-aid recipients, a survey by CGAP and WFP found that are even sent back home to repeat the journey another day. there were still recipients with inactivated SIM cards. This risk appears to perpetuate a vicious cycle: the shortage of liquidity erodes recipients’ trust and confidence in the 4. Poor or no recourse mechanism system, which creates an imperative to withdraw all of a Recourse mechanisms, such as complaints, queries, and payment at once and as soon as it’s deposited, which thereby dispute resolution, are another particularly weak spot in DSP exacerbates liquidity issues at cash-out points. programs (Zimmerman, Bohling, and Rotman Parker 2014). For example, in a mystery shopping exercise carried out in Recipients often don’t know about or are confused about WFP Kenya’s Cash for Assets (CfA) Program, 21 percent of recourse and support options, making it difficult for them the recipients were unable to cash-out the desired amount of to solve problems or get answers to questions they have their transfers due to insufficient agent liquidity (WFP 2016). about their payments. Recipients from several programs also In another mobile cash transfers program by WFP Kenya, worried that if they complained they could lose their transfers, recipients perceived liquidity constraints as a cost factor that a misperception that made them reluctant to report problems. made the digital payments useless given the distances to Even where customer support or grievance hotlines do exist, and limited selection of M-Pesa agents. In the Philippines, recipients are either not aware of them, or have had negative where the payment per recipient can vary from cycle to cycle, experiences, such as being kept for a long time in automated agents often lack sufficient change to pay each recipient the waiting lines or having their call dropped before they could exact amount of his or her withdrawal and, therefore, pay out speak to anyone. This usually results in frustration and, in some the transfers to arbitrarily assigned groups, leaving it up to cases, financial loss incurred from spending their airtime to recipients to find the required change to split the payments make the call. In Bangladesh, for example, recipients of mobile among them, or the agent may offer them inexpensive training allowances complained that when they wanted to talk merchandise, such as little candies, to make up the difference to a bKash support agent they often gave up—thinking that (Zimmerman and Bohling 2015). it was not worth waiting to express a problem that might not even be resolved (Islam and Woodard 2014a). 3. Complex user interfaces Recipients commonly state a preference for face-to-face and payment processes problem solving—which is also rooted in cultural and Complex interfaces and complicated processes—which personal biases—and often turn to agents or merchants increase the likelihood of errors and losses from either for help. However, these parties cannot always adequately incorrect transactions or recurring timeouts due to limited address problems or questions because they lack the transaction times—create risks and a poor user experience respective training, access to a faster-to-reach support for all types of DFS users. DSP recipients are even more hotline, and sufficient business incentives to make time to likely to be negatively affected: besides being among the help customers—especially to help social payment recipients most vulnerable and least literate consumer segments, who may have their own particular questions and needs they are often new to and initially uncomfortable with (McKee, Kaffenberger, and Zimmerman 2015). In WFP the digital payment system, including the technology Kenya’s CfA Program, 69 percent of the recipients who and the numerous steps required to access or use the reported a problem during their mystery shopping visit said payments (WFP 2016). Beyond the inconvenience of the agent did not address the problem to their satisfaction. In frequent transaction failures and repetition, these issues 29 percent of these visits, the agent called the bank’s hotline increase the risk of recipients being charged extra fees by (only half reached a customer service representative), in 50 agents or being victims of fraud as they have to ask others percent the shopper was given contact information so that for assistance. Such issues can significantly reduce trust they could follow-up on their own, and in 21 percent the and make the system seem inconvenient to the recipient, recipient did not get any support at all (WFP 2016). making it less likely that this initial interaction with DFS will 5. Fraud that targets the recipient lead to broader use of formal (digital) financial services. DSP recipients are particularly vulnerable to fraud such as A CGAP study of four newly digitized social payment unauthorized fees, price hikes at merchants, and skimming schemes in Haiti, Kenya, the Philippines, and Uganda found of payments (i.e., illegally retaining a portion). For example, that recipients exhibited an astonishingly low understanding during the introduction of WFP Kenya’s Cash Lite Program, of how the payment schemes, and particularly the digital 72 percent of recipients paying at the shops with their bank payment aspect of it, worked (Zimmerman, Bohling, and cards were charged additional fees or higher prices than Rotman Parker 2014). In a mobile voucher program in Nepal, other customers (WFP 2016).7 Recipients of digital G2P the complicated process and user interface was a major programs in the Philippines, Uganda, and Nigeria reported problem for recipients. Recipients had only five minutes to incurring extra costs—sometimes referred to as “taxes”— 5 Vendors and recipients did not always enter the exact syntax needed to process voucher redemptions. If any messages in the transaction sequence were incorrectly formatted, the user would be forced to try again in a five-minute window, or the entire transaction failed. SMS logs show that 8 percent of users entered their PIN incorrectly and had to restart their transaction (Murray 2013). 6 Only 33 percent of SMS voucher users were able explain how they checked the amount charged for their purchase before entering their PIN (Murray 2013). 7 One year after implementation, another mystery shopping study revealed that 14 percent of the recipients were charged unauthorized fees by merchants. 3 to withdraw their payments at the agents (Zimmerman, are certainly not the only critical elements of well-functioning Bohling, and Rotman Parker 2014).8 In India, 13 percent of DSP schemes. Yet, getting these three basics right will not surveyed G2P recipients report paying a bribe to access only help improve the overall functioning of these schemes, their payments (InterMedia India 2014).9 Recipients are but will also help open a potential pathway toward financial often unaware of the actual charges and fees associated inclusion. The following are important points about these with their payments, nor do they know the exact amount and basics and examples of existing promising solutions that frequency of their benefit, leaving them vulnerable to such programs and providers have implemented: instances of unfair treatment and fraud. CGAP and WFP 1. Ensure reliability of the payments experience first and Kenya assessed recipients’ awareness of transaction fees foremost. DSPs reach recipients through complex and found that 62 percent of CfA Program recipients did systems that can include agents, merchants, mobile not know that there were transaction fees, despite paying a phones, POS devices, and ATMs. Both the value chain of transaction fee of at least KSH 50 for each withdrawal (WFP actors and the payment systems rely on strong network 2016).10 In the Pacific Financial Inclusion Program (PFIP) connectivity to successfully process real-time digital in Fiji, 68 percent of recipients were not aware of agent payments. Up-front risk assessment and contingency charges and half were not sure whether there were charges planning can help to address some of the aforementioned or not (Leonard 2011). And in Ghana’s LEAP Program, 80 risks at the design stage, such as (i) making the customer percent of recipients did not know their payment amount, interface more user friendly; (ii) ensuring agent service and 85 percent were unaware of the frequency of their quality, training, and float and liquidity management; payments (Abbey, Odonkor, and Boateng 2014). and (iii) clearly defining roles and responsibilities for risk PIN protection is another challenge that is particularly mitigation among actors. For example, MTN Uganda prevalent in DSP programs as many recipients share their added 15 new network towers—five specifically for PIN with agents or third parties and do not enter their PIN its SAGE Program—in previously poorly connected into the POS device or mobile phone themselves. It appears catchment areas (Zimmerman and Bohling 2014). that agents and recipients often compromise data protection 2. Improve communication channels between recipients and procedures in this way for the sake of efficiency, especially providers. Even more than for typical DFS consumers, when recipients come in large numbers on paydays and social payment recipients require relevant, and often agents have to serve many clients quickly.11 In Fiji, for substantial, training and communication first when a example, PIN-sharing was reported as common practice, new digital payment system is introduced and then particularly by elderly people whose family members or continuously after rollout. For more self-control and friends picked up their benefits (Leonard 2011). In Nepal, the confidence, recipients need to know their payment majority of mobile voucher recipients relied on registered amount and frequency. Equally as important (and at times “helpers” to carry out transactions.12 These helpers entered overlooked), they need to know how the system and the PIN in 89 percent of observed SMS and in 37 percent of payment mechanism are supposed to work and where to observed smartphone transactions (Murray 2013). Research go if they face problems. This means that responsibilities on the ARCC II Program in the Democratic Republic of for specific problems should be clearly defined among the Congo documented that recipients lacked capacity those involved in the social payment value chain. A and understanding to control the process of entering the well-organized grievance and complaints mechanism purchase amount and PIN themselves (Murray and Hove for recipients can also be very useful for improving the 2014). In WFP Kenya’s Cash Lite Program, 36 percent of program design based on recipient feedback, as identified recipients handed their bank card together with the PIN by USAID in the case of the LEAP Program in Ghana letter over to the merchant to carry out the POS transaction (Abbey, Odonkor, and Boateng 2014). More programs are (WFP 2016). In 73 percent of the test visits in WFP Kenya’s investing in toll-free service hotlines and communication CfA Program, agents did not allow recipients to enter channels specifically for recipients. For example, Digicel their PIN even though 72 percent of these recipients had in Haiti doubled its call center staff on paydays for the memorized their PIN and knew how to enter it (WFP 2016). Ti Maman Cheri Program, and Save the Children and WFP in Malawi gathered representatives from each Three Basics to Mitigate Risks nongovernment organization, the bank, and the mobile and Open up the Financial network operator during disbursements to support Inclusion Gateway of DSPs recipients who had problems or questions (Zimmerman and Bohling 2014; Almazan 2013). Banco Davivienda in While more needs to be done to understand the nature, Colombia trains and employs former G2P recipients to incidence, and consequences of consumer risks for recipients, work for the support hotline to encourage reporting of three basic principles emerge that would build a more complaints and improve resolution (CGAP 2014). solid foundation for effectively mitigating these risks and, 3. Institutionalize monitoring and prepare to adjust as thereby, enabling financial inclusion in DSPs for the poor: needed. Introducing digital payment mechanisms reliability, communication, and monitoring. These are critical influences the behaviors and incentives of recipients for consumer risk mitigation in most DFS deployments, and and payment providers alike. Effective monitoring and 8 In the Feed the Future Nigeria Livelihoods and Nutrition Project by Catholic Relief Services, recipients reported paying “taxes” to access their payments. 9 InterMedia’s Financial Tracker Survey India focused on recipients from three categories of schemes that disburse periodic payments: social security pensions, post-matric scholarships, and National Rural Employment Guarantee Scheme payments. 10 For withdrawals from KSH 100 to KSH 5,000 the transaction fee is KSH 50, for amounts from KSH 5,001 to KSH 10,000 the fee is KSH 70. 11 However, sharing one’s PIN with family members or a regular agent may be less risky than conducting a transaction independently and failing. There have not been sufficient studies on the relative consequences of various risky behaviors to enable an assessment of the risks of such “work arounds.” 12 During registration, MercyCorps offered recipients who did not feel confident using mobile technology, to register a trusted family member or friend as their personal “helper” to carry out the transactions (Murray 2013). March 2016 All CGAP publications evaluation of experiences, preferences, and behaviors El-Huni, Ekram Mustafa. 2014. “WFP e-Voucher Programme are available on the is therefore necessary for successful program delivery.13 in Lebanon.” Field Exchange 48. Oxford: Emergency Nutrition CGAP Web site at Network, November. www.cgap.org. As important, however, is that the DSP systems and partnership structures are flexible enough to make InterMedia Africa. 2015. “Financial Inclusion Insights Africa.” required adjustments, whether they are small tweaks or Presentation at the FII Event, in Nairobi, 28 August. Nairobi: CGAP InterMedia Africa. 1818 H Street, NW larger process changes, to quickly rectify problems. For example, to prevent fraud, WFP in Lebanon collaborated InterMedia India. 2014. “Financial Services Use and Emerging MSN IS7-700 with a partner bank to monitor participating merchants’ Digital Pathways. Highlights from the FII Tracker Survey Washington, DC and the Digitized Government Payments Qualitative Study, transactions in nearly real time and freeze a merchant’s 20433 USA conducted October 2013–January 2014.” Financial Inclusion POS device if transactions exceeded certain threshold (El- Insights. Washington D.C.: InterMedia, June. Huni 2014). After discovering that agents and merchants Tel: 202-473-9594 Islam, Ariful, and Josh Woodard. 2014a. “Mobile Money frequently charge unauthorized fees and treat social Fax: 202-522-3744 Snapshot: English in Action.” Doha/Washington, D.C.: payment recipients unfairly, WFP Kenya designed posters USAID’s Mobile Solutions Technical Assistance and Research with pictures depicting payment procedures and self- (mSTAR) Bangladesh, February. Email: protection rules that will be displayed prominently in ———. 2014b. “Mobile Money Snapshot: HelpAge International.” cgap@worldbank.org agents’ and merchants’ shops (WFP 2016). When Westpac Doha/Washington, D.C.: USAID’s Mobile Solutions Technical in Fiji found that its agents passed their POS transaction Assistance and Research (mSTAR) Bangladesh, February. © CGAP, 2016 fees onto PFIP recipients or requested minimum Leonard, Matt. 2011. “G2P, Expanding Financial Inclusion purchases, it modified its fee structure to reduce the costs in the Pacific: Fiji’s Transfer of Social Welfare to a Savings- agents incur when serving recipients (Leonard 2011). Linked Electronic Payment.” Suava, Fiji: PFIP, United Nations Development Programme Pacific Centre. These emerging examples of solutions show how a variety Malaguti, Maria Chiara. 2015. “Payment System Regulation of DSP programs and providers are working to get the for Improving Financial Inclusion.” Washington, D.C.: Center basics right for successful delivery of DSPs. They address for Global Development. observed shortcomings on the supply side, on the one McKee, Katharine, Michelle Kaffenberger, and Jamie M. hand, and demonstrate the importance of strengthening Zimmerman. 2015. “Doing Digital Finance Right: The Case the demand side—the recipients—to self-protect and for Stronger Mitigation on Customer Risks.” Focus Note 103. become vigilant and empowered customers, on the other. Washington, D.C.: CGAP. Going beyond these basics to achieve meaningful financial Murray, Sara, and Fidelis Hove. 2014. “Cheaper, Faster, inclusion outcomes will require solutions that do more to Better? A Case Study of New Technologies in Cash Transfers build trust and confidence in digital payment services, and from the Democratic Republic of Congo.” Portland, Ore.: ultimately add value to recipients’ lives and create interest Mercy Corps and Oxford Policy Management, November. in other financial services. These issues will go unresolved if Murray, Sara. 2013. “MasterCard Worldwide & Mercy winning a fee-for-payment government contract is the only Corps: ELEVATE Phase I Report. July 2013.” Portland, Ore.: motivating factor for providers, or if the program values MercyCorps, July. the lowest fee service proposal over customer-centric ODI (Overseas Development Institute). 2015. “Doing Cash systems that can add the most value and best service for Differently. How Cash Transfers Can Transform Humanitarian recipients. Social payment programs and providers are Aid. Report of the High Level Panel on Humanitarian Cash responsible for ensuring the reliability, convenience, and Transfers.” London: ODI, September. safety of DSPs. Doing so will imply tradeoffs and require Pickens, Mark, David Porteous, and Sarah Rotman. 2009. investment of both time and resources, but may be the key “Banking the Poor via G2P Payments.” Focus Note 58. to unlocking the elusive win–win–win for all stakeholders. 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Washington, D.C.: Technical Guide. Washington, D.C.: CGAP. CGAP, May. 13 CGAP has identified mystery shopping as an effective and cost-efficient tool to assess financial consumer and provider behavior (CGAP 2015; WFP 2016). AUTHORS: Jamie M. Zimmerman and Silvia Baur