Financial inclusion via social cash transfers: the case of South Africa

Lena Gronbach

In recent years, two separate but potentially complementary development strategies have emerged in the global South: the rise of digital payment technologies with their enormous potential to boost financial inclusion, and the extension of social cash transfer programmes as a means to address poverty and inequality. Increasingly, these two strategies have converged into a single headline objective: to replace cash-based payments with digital transfers into ‘financially inclusive’ accounts, thus creating the basis for the sale of additional financial services to grant recipients. According to the proponents of this strategy, this will create a ‘triple-win scenario’, benefitting the state, private financial companies, and the poor alike.

South Africa, which boasts the largest social cash transfer system on the continent, has assumed a pioneering role in implementing this ‘G2P approach’. In 2012 the country’s Social Security Agency SASSA appointed a private financial company as the sole paymaster for its extensive social grant programme and introduced a new electronic, biometrically-enabled payment system. While this has contributed significantly to the increase in bank account ownership and access to formal financial services among low-income households, the case has not been without controversy. Instead of realizing the promised ‘triple-win scenario’, the outcomes for all there parties have been mixed, with grant beneficiaries carrying a disproportionate share of the social and financial costs of South Africa’s ‘G2P experiment’.

This paper outlines how South Africa used its rapidly expanding social grant system to ‘bank the unbanked’ at an unprecedented scale, using digital payments and biometric technology, and discusses the main issues that emerged in this process. These include the protection of beneficiary data, the harshly-criticized practice of cross-selling financial services to grant recipients, debit deductions from beneficiaries’ bank accounts, the relationship between the state and its financial contractor, and the financial and logistical implications of SASSA’s decision to replace its private contractor with a state-owned entity in 2017. The paper argues that, despite its potential to act as a catalyst for financial inclusion, the ‘G2P approach’ in its current form, as well as the broader financial inclusion agenda and its strong focus on consumer credit, require a fundamental re-thinking in order to make finance work for the poor instead of the other way round.

In addition, the paper tentatively explores the potential of mobile money as a payment channel for social cash transfers, based on a number of recent pilot studies in Latin America and Africa. The use of mobile money as an alternative to the costly cash disbursements that are still the norm in rural areas is currently under discussion in South Africa and a number of other developing countries, especially in light of the tremendous success of M-PESA in Kenya and East Africa. However, it is debatable whether the use of mobile money for G2P transfers is as cost-effective and technologically feasible in practice as the enthusiastic reports on its success as an alternative to traditional banking suggest.

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