DISTRIBUTION MECHANISM SCOPING STUDY

November 2008 Report focus areas

Social Cash Transfer distribution mechanism scoping study for a

regular national government disbursement to the chronically

poor and vulnerable in Zambia

Authors: Sarah Langhan (Quindiem Consulting) Gordon Mackay (Quindiem Consulting) Craig Kilfoil (ExactConsult)

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PREFACE AND ACKNOWLEDGEMENTS This scoping study was co-funded by FinMark Trust and Irish Aid who engaged Quindiem Consulting to provide recommendations to the Government of Zambia on feasible mechanisms for the payment of a proposed national social grant scheme. We embarked on the research and analysis contained in this report with the vision that our advice has the potential to improve the lives of the poorest 10% of the population numbering some 200,000. It is these people for whom some form of regular and predictable cash transfer is a vital means of ensuring a minimum level of wellbeing and basic survival.1

The authors wish to thank all those who contributed their time and energy to the research, writing and compilation of this report. We would particularly like to acknowledge the research and project support contributions made by Carolijn Gommans (Just Good Business, Zambia), SCT pilot scheme information, support and data provided by Most Mwamba (Ministry of Community Development and Social Services), statistical and modelling support provided two Quindiem staff members, Kavishin Pather and Yusuf Nanabhay and the work undertaken by Edward Kasali (Central Statistical Office) on the Zambian maps. We acknowledge the guidance, technical oversight provided by Mark Napier, Juliet Munro and Jenny Hoffman (FinMark Trust) and thank all those including Sheila Nkunika (MCDSS), ………..(CARE) and Julie Lawson McDowall (Irish Aid Zambia) and the FinMark Trust team for providing insightful comments on the first draft.

Finally, we wish to express our appreciation to the following stakeholders for giving of their time and valuable information during our in country visit: Sheila Toconkunika (MCDSS); Julie Lawson McDowall (Irish Aid Zambia); Kelly Toole (DFID); Charlotte Harland (UNICEF); Humphrey Chinyama, Michael Adams and Robbie Mwiinga (CARE International; Dailes Judge and Ann Witteveen (Oxfam); Bijoy Sarker (Concern); Ben Musuku, Willie Chisimba, Morris Mulomba, Linda Mazokera and Victoria Chirua (Bank of Zambia, Payment Systems Division); Norbert Mumba (Bank of Zambia, Supervision); Director Edna Mudenda and Lameck Zimba (Bank of Zambia, Non- bank Financial Institutions Division); Arjan Molenkamp and Pious Musaballa (ZANACO); Dick King and Kahula Michael (Finance Bank); Anu Banerjee (Barclays, Retail); Keith Sandbloom (FINCA); Christine Hougaard (Independent Consultant); Martha Akapelwa (Bayport); Grace Nukua (Micro Bankers Trust); Elizabeth Nkumbula, John Richardson (Pan-African Building Society); Brad Magrath (Mobile Transactions); Stephan Doran and Kelly Lefevre (Calltrol); Derek Munsele, Douglas Kakoma, Lucy Sichoni, Progress Chisenga (Cash4Africa); Pieter Swanepoel (Shoprite); Mr Tembo and Mr Chanda (Mint Master) and Morgan Chishala and Chris Mwanza (Zambia Electronic Clearing House.)

1 The social cash transfer pilot schemes currently reach approximately 8200 households. The recently tabled MCDSS framework document for scaling-up a national system of cash transfers suggests that an estimated total of ZKM 165 582 400 (including cost of transfer, administration at district, provincial and national level) will be budgeted for SCT programmes by 2012. By 2012, it is envisaged that fifty (50) districts will be covered with an additional twenty two (22) being added during this year (MCDSS, 2007.)

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TABLE OF CONTENTS

PREFACE AND ACKNOWLEDGEMENTS ............................................................................... II 

TABLE OF CONTENTS ......................................................................................................... III 

LIST OF FIGURES ................................................................................................................. VI 

LIST OF TABLES ................................................................................................................... VI 

LIST OF ACRONYMS .......................................................................................................... VII 

EXECUTIVE SUMMARY ....................................................................................................... IX 

1.  INTRODUCTION ........................................................................................................... 1 

2.  OBJECTIVE AND STRUCTURE OF THE REPORT ............................................................ 5 

3.  THE DELINEATION OF TARGETING, IDENTIFICATION, AUTHENTICATION AND PAYMENT ............................................................................................................ 7 

3.1.  Targeting ........................................................................................................................................ 7 3.2.  Identification and authentication ................................................................................................ 8 3.3.  Payment mechanism ................................................................................................................... 10 3.4  Conclusions ................................................................................................................................... 12 

4.  CHOICE, ACCESSIBILITY, AFFORDABILITY AND TRUST ............................................. 13 4.1  Choice ........................................................................................................................................... 13 4.2.  Accessibility – multiple channels (cash-out points) and interoperability .......................... 16 4.3.  Affordability (cost-efficiency) .................................................................................................. 22 4.4.  Trust ............................................................................................................................................... 22 4.5  Conclusions ................................................................................................................................... 24 

5.  GROWING AND COMPLEX DISTRIBUTION AND PAYMENT MECHANSISMS USED IN G2P AND P2P TRANSFERS ........................................................................... 25 

5.1  Overview of the Zambian SCT pilot manual budgetary and distribution system ......... 26 5.1.1  Technical findings ............................................................................................................... 29 5.1.2  Fiduciary risk ....................................................................................................................... 30 5.2  Learning from other SCT programmes ................................................................................... 31 5.2.1  Use of the post office in India ......................................................................................... 31 5.2.2  Informal banking and money transfer services in Somalia ........................................ 32 5.2.3  Direct delivery by the formal banking sector: Bensefi Bank in Mexico

and ABSA (Allpay) in South Africa ................................................................................. 33 5.2.4  Banking vans – branches on wheels: Equity Building Society in Kenya ................... 36 5.2.5  The use of cash payment services deploying proprietary Smart Cards:

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Social Pensions in Namibia and the DECT project in Malawi .................................... 37 5.3  Lessons learnt from the innovative use of payment technologies in

non-social protection contexts .................................................................................................. 39 5.3.1  The good (cost, speed of transfer and availability) and the bad

(proprietary and potential “tipping” – learning from M-PESA ................................ 39 5.3.2  User friendly and effective registration process - learning from

MTN Mobilemoney ............................................................................................................ 42 5.3.3  Effective customer targeting – learning from WIZZIT ................................................ 43 5.3.4  User friendly technology, disassociated cash in and cash-out points:

learning from SmartPay and G-Cash (Philippines) ..................................................... 43 5.4  Conclusions ................................................................................................................................... 44 

6.  CHOICE OF AN ELECTRONIC PAYMENTS SYSTEM (EPS) OR A MANUAL PAYMENTS SYSTEM .................................................................................................... 46 

6.1  Assumptions underpinning the model ...................................................................................... 46 6.2  Scaling the manual payments model ...................................................................................... 48 6.3  Scaling and electronic payments model (EPM) ..................................................................... 51 6.4  Smart Card payments model ................................................................................................... 53 6.5  Conclusions ................................................................................................................................... 54 

7.  EVALUATING ALTERNATIVE PAYMENT MECHANISMS WITHIN THE ZAMBIAN CONTEXT ................................................................................................... 55 

7.1  Geographic location (physical environment) of SCT beneficiaries ................................... 55 7.2  The enabling environment ......................................................................................................... 59 7.2.1  Overview of reforms in the Zambian payments system ............................................. 60 7.2.2  Regulation and policy ....................................................................................................... 61 7.3  Is a purely bank driven payments solution viable within the Zambian context? ............ 65 7.3.1  Financial services coverage ............................................................................................. 65 7.3.2  Bank product meeting the needs of SCT beneficiaries ............................................... 68 7.4  Is a bank-led, retail driven branchless banking solution viable within

the Zambian context? ................................................................................................................ 72 7.5  Is a non-bank led independent m-payments solution a viable solution within

the Zambian context? ................................................................................................................ 77 7.5.1 Potential for a non-bank led, independent m-banking solution to disburse

SCT’s in Zambia .................................................................................................................. 81 7.5.1.1  Costing the non-bank led, independent m-payments solution ................................... 82 7.6  Conclusions ................................................................................................................................... 82 

8.  DEPPLOYING ALREADY EXSISTING INFRASTRUCTURE – AN APPROPRIATE DESTRIBUTION/PAYMENT SOLUTION FOR THE ZAMBIAN SCT ................................. 83 

8.1  Evaluating payment options against set criteria .................................................................. 83 8.2  Optimal SCT payments system within the Zambian context .............................................. 86 

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8.2.1.  Phase 1: Building a “centralised database” ............................................................... 87 8.2.2.  Phase 1a: “automated pull system” .............................................................................. 91 8.2.3.  Phase 2: “customised pull system” .................................................................................. 93 8.2.4.  Phase 3: “push strategy” ................................................................................................. 94 

9.  CONCLUSION ............................................................................................................. 95 

REFERENCES ...................................................................................................................... 98 

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LIST OF FIGURES Figure 1: Number of households suffering from different levels of poverty in Zambia .............. 2 Figure 2: Forward and rearward compatibility in payments systems .......................................... 19 Figure 3: Budgetary process flow ........................................................................................................ 27 Figure 4: Existing SCT disbursement process ..................................................................................... 29 Figure 5: Multiple channels provided by banks ................................................................................ 34 Figure 6: Diseconomies of scale seen at scale (manual payment system) .................................... 50 Figure 7: Economies of scale (electronic payments solution) ........................................................... 53 Figure 8: Non-viability of a Smart Card solution ............................................................................. 54 Figure 9: Poverty levels by district ...................................................................................................... 56 Figure 10: Zambian population density by district .......................................................................... 57 Figure 11: Road condition and traffic levels in Zambia .................................................................. 59 Figure 12: Overlapping policy and regulatory domains ................................................................ 61 Figure 13: Combined bank branch distribution map: Barclays, Zanaco and Finance Bank ...... 67 Figure 14: Existing retail chain-store (Shoprite) coverage ............................................................. 75 Figure 15: Zain mobile network coverage map ............................................................................. 79 Figure 16: Probable spatial distribution of ‘talk-talk’ agents ...................................................... 80 Figure 17: Evolution of the proposed system through three phases ............................................ 87 Figure 18: Combined reach: banks, retail and “talk-talk” agents ................................................ 89 Figure 19: Sample beneficiary booklet ............................................................................................... 91 Figure 20: Self adhesive barcodes ..................................................................................................... 91 Figure 21: Barcode scanner ................................................................................................................... 92 

LIST OF TABLES Table 1: How interoperable is branchless banking today? ............................................................. 21 Table 2: Overview of the actual costs of the SCT pilot scheme for a bimonthly period 48 Table 3: Cost assumptions of horizontally scaling a typical cash transfer scenario .................. 49 Table 4: Cost assumptions of the electronic payments model ......................................................... 51 Table 4: Cost assumptions of scaling the SCT through an EPS ........................................................ 52 Table 6: Banking supply in selected countries .................................................................................... 66  

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LIST OF ACRONYMS AFI Accessible Finance Institution AML Anti-money laundering ATM Automated Teller Machine BIS Bank for International Settlements CfR Cash Relief Programme CDD Customer due diligence COMESA Common Market for Eastern & Southern Africa CPS Cash Payment Services CSO Central Statistical Office (Zambia) CWAC Community Welfare Assistance Committee DDACC Direct debit and credit clearing DECT Dowa Emergency Cash Transfer (Malawi) DFID Department for International Development (United Kingdom) DSWO District Social Welfare Officer EPM Electronic Payment Model EPS Electronic Payment System EFT Electronic Funds Transfer EMV EuroPay, MasterCard, VISA FATF Financial Action Task on money laundering FDCF Financial Deeping Challenge Fund FICA Financial Intelligence Centre Act FNDP Zambian Fifth National Development Plan FSDP Financial Sector Development Plan G2P Government to person transfers GPRS General Packet Radio Service GSM Global System for Mobile Communications GSMA GSM (Groupe Spéciale Mobile) Association GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH

(German society for technical cooperation) HQ Headquarters ICT’s Information and communications technologies ILO International Labour Organisation KYC Know your customer KVCTP Kerio Valley Cash Transfer Pilot

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MCDSS Ministry of Community Development and Social Services MFI Microfinance Institution MICR Magnetic Ink Character Recognition MMT Mobile Money Transfer NRC National Registration Card NRFA National Road Fund Agency (Zambia) OECD Organisation for Economic Co-operation and Development OIBM Opportunity International Bank Malawi OPM Oxford Policy Management PC Personal computer P2P Person to person transfers PIN Personal Identification Number PoS Point-of-sale PPM Pay-point manager PSWO Provincial Social Welfare Office PWAS Public Welfare Assistance Scheme RTGS Real time gross settlement SADC Southern African Development Community SCT Social cash transfer SCTS Social Cash Transfer Scheme SHS Solar Home Systems SMS Short message service UEPS Universal Electronic Payments System VSAT Very Small Aperture Terminal V-NNSS VISA-National Net Settlement Service WAP Wireless Access Protocol ZECHL Zambian Electronic Clearing House Limited ZIPSS Zambian Inter-bank Payment and Settlement System ZMK Zambian Kwacha

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EXECUTIVE SUMMARY

Introduction The Government of the Republic of Zambia formalised its commitment to regular welfare support for chronically poor and vulnerable households in 2003 when the first social cash transfer pilot scheme was launched in the Kalomo District of the Southern Province. Five pilot social cash transfer (SCT) schemes are currently being run by the Ministry of Community Development and Social Services (MCDSS) with technical input and financial support from a variety of international donors. The pilot schemes are to be scaled-up nationally in 2009. In support of this national scale-up, the Government has committed ZMK 165 582 400 of direct funding over the period 2009-2012. The scaled up scheme will assist the most vulnerable and incapacitated households in local communities. These households were estimated to number 200,000 in 2006.

Critical to the success of a national rollout will be the development and deployment of a reliable and cost effective disbursement and payment system able to deliver regular cash transfers. Whilst it is recognised that regional and global moves towards the adoption of electronic and mobile payment mechanisms including Smart Cards, GSM-enabled cards, Magstripe, ATM, mini ATM offerings and m-banking solutions are increasingly being used to increase the efficiency, reliability and efficacy of person to person (P2P) payments and government to person (G2P) social grant transfers, it is equally important to note the short-comings and failures of a number of inappropriately proposed technological solutions. As such, this report aims to provide a balanced analysis of payment solutions that have worked, those which have not and those which are likely to be appropriate within the Zambian context.

Principles informing the analysis In order to propose an appropriate transfer/payments system that is able to deliver reliable, predictable and cost effective cash transfers to the proposed 200,000 recipient households under the scaled-up SCT scheme, we have approached the preparation of this report with the following principles informing our analysis:

Client-based approach Payments processes must serve the poor. A client-based approach by payments service providers can protect the dignity of participants and potentially provide access to developmental financial services.

Targeting, payment & authentication

Targeting, payment and authentication are separate but inter-related elements and must be dealt with separately.

Repeated targeting is wasteful

Repeated targeting is wasteful and should be coordinated.

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One database One automated and coordinated social benefits database, controlled by a single ministry is key.

Poor is not synonymous with incompetent

Beneficiaries are financially literate in the most basic sense, i.e. comprehend the store value including but not limited to cash.

Choice Beneficiaries should be given choice.

Payment mechanism must be appropriate

Technology should not be deployed for the sake of technology.

Non-proprietary, interoperable and mutable

The payments mechanism must be non-proprietary, interoperable and mutable and designed with the beneficiary in mind.

Leverage existing infrastructure

Within the developing country context the proposed payments system should leverage existing infrastructure. Maximising the use of existing government and private physical points-of-presence nationally is key.

Scalability The payment solution must be scalable and cater for the inclusion of non cash benefits.

Private sector participation Private sector participation is vital.

Delineating targeting, identification, authentication and payment The first step when designing an appropriate distribution/payment mechanism for the SCT programme is to recognise that targeting, identification authentication and payment are separate but interrelated elements. These elements must be separately addressed.

Targeting: The current SCT pilot schemes target destitute and incapacitated households rather than individuals. A recent report found that while targeting specific population groups (the elderly, the disabled, women-headed households) is marginally cheaper than using multiple proxy approaches, age, gender of head, disability status and orphan status are not reliable proxy’s for poverty. As such it is recommended that the SCT programme use different targeting approaches (universal targeting, community based targeting and the means test approach) under differing circumstances.

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Identification and authentication:

Identification is defined as the “process whereby data is associated with a particular real world identity. It is performed through the acquisition of data that constitutes an identifier for that entity”. Authentication on the other hand refers to “the process designed to cross-check against additional evidence the identity signified by the identifier acquired during the identification process.” In Zambia, the officially recognised token (form of identity) is the National Registration Card (NRC). This is a simple paper based card which includes the individual’s name, place and date of birth and photograph. This remains the most cost effective manner in which to authenticate an individual as the photograph has a 100% match success.

Payment: Payment is defined as “a financial system supporting the transfer of funds from suppliers (savers) to users (borrowers), and from payers to payees, usually through the exchange of debits and credits among financial institutions.” This simple definition hides a myriad of modern day complexities which must be considered. New “plastic strategies” require multiple authentication choices and even more choices the characteristics of the payment token. Technological advances including inter alia the advent of electronic payment systems (EPS), m-banking and mobile phones as alternative payment solutions must also be considered.

Choice, accessibility, affordability and trust Proposing a mechanism for the distribution and payment of a social cash grant is not as simple as selecting a technological payment arrangement over a manual based cash distribution mechanism. Multiple and inter related factors must be considered in tandem. If a technological solution is chosen, deciding on the technological parameters of the payments instrument (token) is perhaps the easiest element of the decision making and design process. More importantly, at the low end of the market, and particularly within the social cash transfer context are the consideration of four underlying principles namely choice, accessibility, affordability and trust.

Choice: A key element in the provision of cash grants rather than in-kind transfers has been the recognition by donors that the poor are sufficiently able to identify their own survival needs and allocate resources accordingly. Whilst some SCT today offer beneficiaries the choice of whether to receive their cash grants through a “pull” or “push” approach, the majority impose a particular approach from the top down, allowing beneficiaries very little choice in how they access their cash.

“Pull” approach “Pull” approaches require the beneficiary to physically come to a designated pay-point at a specified time to receive their cash. Pay-points are either fixed points such as bank branches, school halls, post offices etc. or mobile points established through the deployment of humans who physically deliver cash to these points on foot, by bicycle or in

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armed convoys of vehicles and establish a temporary presence in a remote area.

“Push” approach “Push” approaches on the other hand involve electronically “pushing” the grant into a bank account in the name of the beneficiary. Beneficiaries are thereby able to access their funds through various channels (bank branch, post office, postbank, automated teller machines (ATM’s) and point of sale (PoS) devices located at merchants who offer “cash back” facilities (Bankable Frontier Associates, 2006).

Poor does not equate to being financially or technologically inept.

This report advocates that wherever possible beneficiaries should be recognised as capable of making financially sound choices, including the choice of whether to receive their cash grant through a basic bank account (“push” mechanism) or at a designated pay-point (“pull” mechanism). All beneficiaries of social cash grants are poor, which does not automatically equate to being financially or technologically inept. Whilst the introduction of a “push” mechanism would require “technology reorientation”, i.e. basic training on how to use an ATM for instance and the costs associated with maintaining a basic bank account should such apply, we maintain that it is the beneficiary who should be given the right to make an informed choice. The ability of each beneficiary to make an informed choice of which payment approach is to their overall advantage is represented by the successful uptake of the Sekulula Debit Card in South Africa.

Phased migration from manual “pull” approach to electronic “push” based approach.

It is in recognition that the poor, just like the rich, deserve financial choice, that this report ultimately recommends designing a payments solution which provides for a gradual shift from the current “pull” approach to a “push” approach, and as such will allow beneficiaries choice as to how, where and when they access their social cash transfers. By deploying an appropriately phased payment solution from the start and allowing for the voluntary migration by beneficiaries from delivery and receipt of their social cash transfer through “pull” cash based approach to an electronic “push” based approach; we maintain that the Zambian Social cash Transfer Scheme would serve as a model working example for other countries.

Accessibility: For the beneficiary of a social cash transfer programme, being able to easily access his/her cash, at minimal cost, is probably the most vital consideration and the definitive measure of the success or failure of any proposed payment solution. Both “pull” and “push” approaches have advantages and disadvantages and it must be emphasised that both require the beneficiary to “get somewhere” to receive their cash. In the case of a “pull” approach, this will be to a designated pay-point at a fixed time. In the case of a “push” approach, no such collection regime is imposed as distribution/cash-out points may be numerous.

Inappropriately designed “push”

Inappropriately designed “push” approaches are those that deploy expensive technology for technologies sake, require substantial investment in new infrastructure and limit

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strategies beneficiary accessibility through the deployment of proprietary technology including proprietary payment instruments and channels.

Proprietary Smart Cards may limit not enhance beneficiary accessibility and access to the formal financial sector.

An example of such is the Malswitch Net1 Smart Card solution deployed by Concern Worldwide and DFID in the Malawi Dowa Emergency Cash Transfer (DECT) project. Whilst Universal Electronic Payments System (UEPS) technology is arguably the most advanced off-line Smart Card payments technology worldwide and provides the most sophisticated biometric authentication system, the deployment of this technology in Malawi has proven to be somewhat of a white elephant given the “chip only” nature of the Net1 technology, its proprietary ownership, hardware intensity, and the erratic nature of GSM coverage in remote villages. Further disadvantages of the technology:

• The Net1 technology deployed by Malswitch is a “chip only” technology meaning that once funds are loaded to the Smart Card, beneficiaries are only able to access these funds through contact with a custom designed Smart Card chip reader.

• Beneficiaries are only able to receive or spend funds via banks that are members of Malswitch and have deployed Net1 ATM’s and PoS devices.

• Four of the largest banks in Malawi (National Bank, FMB, Stanbic and NBS) are not members of Malswitch and have not deployed Net 1 terminals. Beneficiaries are excluded from making use of these banks branch, ATM and PoS channels to access their cash.

• The cost of a national upgrade to accept these Smart Cards is also prohibitive and the use of one supplier (Net1) to supply cards and terminals causes serious commercial and operational risk which may lead to monopoly pricing.

Smart Cards often do little to bank the “un-banked”

Perhaps the greatest failure of the technology deployed is that it did little to improve beneficiary accessibility, provided no add-on or add-in financial services and limited the use of multiple distribution channels and did not leverage existing infrastructure.

Payment systems must be interoperable

Payment systems must be designed to be forward and rearward compatible. Open technology such as VISA ensures that the payments instrument (VISA Card) works in the manual branch environment, at an ATM, at retail outlets with a PoS and funds are accessible via the mobile phone and the internet. This ensures the greatest degree of accessibility possible.

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An appropriately designed payments solution will from the start allow beneficiaries to access their grants:

• through their closest branch network of any formal financial institution (bank, MFI);

• through multiple channels ATM’s, PoS devices, mini ATM’s (cash back) and other secure devices which are able to read a card and accept a PIN; or;

• to choose to access their cash through a mobile banking platform supported by a cash conversion point.

Channels are most powerful when used in combination

Channels are most powerful when used in combination to reach new customer bases both geographically and by socio-economic stratum. The system implemented in the Philippines by Smart Communications offers a phone SIM card and MasterCard combo and outsources specialised functions to various players. In these relationships, one party, be it a mobile operator or a bank will serve as the “leader” and ultimately hold legal and financial responsibility for the actions of outsourced partners.

Within a social cash transfer programme one would see the Government act as a co-branding partner to the banks when issuing a VISA or MasterCard branded SCT payment card. Alternatively, SCT beneficiaries could opt to bank with any bank in the country and receive “push” payments into their chosen account for whatever reason. The only potential reason why a Government would want to issue its own card is to control costs on behalf of the beneficiary.

Affordability: ‘Affordability’ in the hands of an SCT beneficiary is somewhat of a misnomer because it is largely the responsibility of Governments and/or donors funding such grants to distribute funds at no cost to the beneficiary. One would typically associate affordability criteria with payment mechanisms provided by commercial entities.

Indirect costs must be considered when one suggests that payment streams should move away from “pull” systems or when offering the choice of “push” payments options. When offering SCT beneficiaries the choice of receiving their money from a Shoprite store one needs to consider the transportation costs that would be incurred by the beneficiary to get there. Assuming that poor people are not stupid, they would very quickly establish if it made financial sense to travel into town to get their money rather than waiting for the money to be delivered to them. Hence, in order to accommodate potential travel costs and to incentivise the behaviour, “push” payments incentives should be given to beneficiaries as reward for such behaviour.

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Trust: The Western Union money transfer service offered through a number of agent locations including banks, travel agencies, post offices, airports, currency exchange offices, supermarkets, grocery stores, have succeeded in the past largely due to consumer trust and belief in the reliability of the Western Union brand together with the company’s leverage off a continuously expanding distribution network. The success of Western Union would not have been possible without having built its reputation as the provider of a reliable, trusted and relatively quick money transfer service.

Within the SCT context, beneficiaries must be able to trust that their cash will always arrive and will be available to them at a certain time. It will be of no benefit to the beneficiary if the overall strategy deployed is to “bank the unbanked” through the use of a “push” strategy and the beneficiary finds that his cash transfer is not in his/her bank account when he/she inserts his/her debit card into the ATM. Should this event occur on a regular basis, trust in the financial system will be eroded, and the opportunity for financial inclusion lost. It is more than likely, given the choice that this beneficiary will revert to the face-to-face manual system where an individual (the Pay-point Manager in the case of Zambia) can be held accountable for non-delivery.

Review of the Zambian SCT pilot manual budgetary and distribution system 5 pilot SCT schemes are already in place. All 5 schemes use an entirely manual disbursement and payments system that requires;

Key process findings

• A district office to target beneficiaries in consultation with local authorities;

• the creation of a pay-point often a school or clinic in the rural area;

• the recruiting and training of a pay-point manager (PPM);

• the dissemination of beneficiary lists from HQ to district offices followed by a bank transfer to district bank account for funds plus administration costs;

• cash is disbursed manually;

• reconciliation is manual.

Technical findings

The system is characterised by low levels of technology usage, limited use of existing financial infrastructure and no deployment of potential alternative distribution channels.

The budgeting process is almost completely paper based. The use of electronic funds

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transfer (EFT) and physical bank branch infrastructure is only deployed up to the district level, where funds are withdrawn and transported in person to various pay-points where they are manually distributed to beneficiaries.

Identification and authentication of beneficiaries is manual and relies on the presentation of a NRC and signature.

Where technology has been utilised (in the case of electronic databases) the deployment of such technology has been inefficient. Inefficiency is caused by duplication as each of the 5 pilot schemes has its own stand alone non-interoperable database. Although these 5 individual databases might currently operate within the defined costs and management parameters of the 5 pilot schemes it is unlikely that this will be the case when the scheme is scaled up to cover 72 districts.

Risk

The overall assessment of the fiduciary risk of the SCT scheme in Zambia has been judged to be substantial. This must however be contextualised as a rating of “substantial” is considerably low for a programme of this kind. Two risks namely, corruption risk and key fiduciary risk are however classified as significant.

Potential corruption risk

Potential corruption risk has been assessed to exist as a result of the decentralised nature of the payment delivery mechanism which requires the PPM to carry relatively large sums of money significant distances. It has been suggested that as a result of limited monitoring opportunities PPMs could potentially misappropriate the cash transfers in their possession by claiming that the transfers were lost or stolen in an attack en route to the pay-point.

Key fiduciary risk Points of concern have arisen around the failure of prompt and accurate financial reporting. Indications are that the necessary bank reconciliation processes at four of the five pilot districts have not been regularly undertaken. Considerable delays in financial and other reporting processes are also noted. The potential for fiduciary risk is high as a result of the largely manual system of financial management controls.

Where technology is utilised it tends to be outdated and limited. This makes the tracking, monitoring and accounting for the flow of funds difficult and labour intensive. Expenditure tracking failure inevitably results in delays in transfer delivery, as budgetary requests from districts with unaccounted for expenditures are withheld. These failures in basic financial management practices present a substantial fiduciary risk and undermine the sustainability and future scalability of the SCT scheme.

The key developments observed from various G2P and P2P contexts:

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Before the advent of electronically enhanced payment systems (EPS); the design and delivery of banking products specifically aimed at “banking the unbanked;” the expansion of traditional banking channels to include mobile banking units, ATM’s, cash advance PoS devices, and mobile banking; and independent non-bank m-banking mobile operator led solutions, manual based systems where the only option available to SCT schemes.

Over the last few years governments and donors have begun to experiment with alternative distribution channels and payment mechanisms. Key lessons can be learnt and implementation failures averted if MCDSS carefully observes the successes and failures discussed above. Drawing from international experience, the following key lessons have emerged:

• Key lesson learnt from use of the post office in India. Wherever possible, existing infrastructure should be leveraged to ensure maximum reach and accessibility for the beneficiary.

• Key lesson learnt from the use of the informal banking and money transfer service “hawala system” in Somalia. Lack of communication, coordination and specialisation of money transfer providers if they are asked to distribute SCT payments may lead to poor results.

• Key lessons learnt for direct delivery by the formal banking sector: Mexico and South Africa. Banking

infrastructure must be sufficient and products specifically designed for the segment; banks are often willing to open accounts specifically designed and priced for the low income segment; and; the greatest transformational aspect of Mobile phone technology has not occurred in the “hands of the consumer” but rather at the till of the merchant.

• Key lesson learnt from the use of branches on wheels: Equity Building Society Kenya. Although expensive,

mobile banking units can be used to reach customers in rural and remote areas, bringing financial services to areas which may have been previously un-served.

• Key lessons learnt from the use of cash payment services deploying proprietary Smart Cards: Namibia and

Malawi. Custom designed Smart Card chip readers or customised ATM’s are expensive and require a reliable power supply; potential for a manual override exposes the payments system to the risk of fraud; and; deploying technology for technologies sake may impinge upon beneficiary dignity and cause unnecessary delays.

A number of lessons can also be learnt from the use of payment technologies in non-social protection contexts including:

• Key lessons learnt from M-PESA in Kenya. M-PESA’s 3000 agents makes the national banking infrastructure pale into insignificance, leading to greater consumer accessibility and convenience; M-PESA SCT pilot failed due to fall back to single cash-out point; agents may exploit loopholes in the system; monopolisation of domestic money transfer market may have been built on the back of FDCF funding, a

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point which must be considered; and deliberate under-regulation by the Bank of Kenya allowed for massive growth of a scheme in the face of systemic and fiduciary risk.

• Key lesson learnt from MTN Mobilemoney. Costs can be driven out of the reach of the poor if AML/CFT rules are not adjusted to permit remote account opening with CDD/KYC checks performed by agents.

• Key lessons learnt from WIZZIT (South Africa.) Not being tied to a particular service provider potentially leads to greater coverage; and; the use of a commission driven sales force of WIZZKIDS is probably one of the most effective customer targeting strategies seen to date.

• Key lessons learnt from SmartPay and G-Cash (Philippines.) Partnerships between Telco’s and banks and non-bank mobile lead initiatives provide convenience to customers and extended reach and Mobile driven payments technology can be easy to use if designed with the beneficiary in mind.

Choice of an electronic payments system (EPS) or a manual payments system for the Zambian SCT The current distribution and payments mechanism deployed by the SCT pilot schemes is manual. Manual payments systems have been introduced in many countries in the past and favoured over electronic systems. This is almost certainly owing to the large up-front expenses and the specialist skills required in developing and maintaining electronic payments systems. However, in many cases the designers of manual systems have failed to recognise the problems in expanding these systems on a large scale. Dis-economies of scale generally typify these systems making them increasingly more expensive to run as they grow. Electronic systems on the other hand typically become more efficient with scale as more and more beneficiaries share the significant development costs. Economies of scale in such systems are also achieved by keeping the system operational over longer periods of time as the largest development costs are incurred only at the initial setup of the system.

Determining which payment system to deploy must be determined on a case-by-case basis. International experience has shown that payments systems that are the most successful in the social cash transfer context are those which deploy technology appropriately to address identified needs whilst ensuring a suitable fit with the environmental circumstances in which it is deployed. This can best be achieved through deploying already existing infrastructure and augmenting and improving upon the systems that are already in place. Whilst it might be tempting to follow the trend and deploy technology for technologies sake by spending vast amounts of money on the introduction of finger-print authenticated, off-line capable smart cards, we maintain that this is not the most appropriate solution for Zambia.

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The electronic Payments Scalability Escarpment Model is a model of a hypothetical social cash transfer scenario. The model aims to shows that:

• By scaling the manual cash based system by the required parameters of adding additional human resources, marginal costs increase and as a result, dis-economies of scale result.

• Conversely, in an electronic payments system (EPS), due to a lower marginal cost and a fixed up-front cost, the average cost per transaction declines as one scales outward, thus delivering economies of scale;

• Whilst the argument for an electronic payments system remains valid for standard interoperable technology such as EMV chip or Magstripe, the fixed up-front system cost of Smart Card technology and the proprietary channel needed to support this technology, and the significantly higher marginal cost per payment instrument may mean that the benefits of scale would only be justified far later than compared to a more traditional EPS. As such, the use of Smart Card technology is not recommended.

Geographical location (physical environment) of SCT beneficiaries Physical access to traditional pay-points may be a prohibiting factor

The geographic location of Zambia’s critically poor, incapacitated and destitute households poses a particular challenge when designing an appropriate payments mechanism for a regular social cash transfer. For a critically poor household, characterised by high levels of disability and age-related infirmity, physical access to traditional payment points - whether they be under a tree or at school or health centre in a rural area, or at a bank branch or post office in a district capital - may be a prohibiting factor in receiving social grants and must be taken into account when providing recommendations on appropriate “push” and “pull” payment mechanisms.

Poverty in peri-urban and rural areas is higher

Although poverty is a widespread across all of Zambia, certain spatial poverty patterns are discernable. Poverty has a clear urban-rural split. Critically poor households are primarily located in sparsely populated rural settings, largely beyond the reach of banking, state or retail infrastructure.

Non-electrification and poor road coverage

SCT beneficiaries generally reside in areas which have no electrical coverage and limited road coverage, making access difficult for road going vehicles. Only 19% of Zambian households have access to electricity. Electrical access has a particularly urban bias. 49.3% of urban households (up from 48% in 2005) and 3.2 % of rural households (up from 2% in 2005) have access. All province capitals and most district administrative capitals are accessible by road throughout the year. Moving deeper into the districts it is necessary to use feeder roads which tend to only be accessible by 4 wheel drive and

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often become completely impassable during Zambia’s rainy season.

Weak physical environments limit the potential for businesses to achieve profit and decrease the scope of social service budgets such that investment is discouraged and the value of potential social services benefits are diminished. With specific reference to payment mechanisms, an inadequate physical environment and poor investment in rural infrastructure limits the potential for a single-provider solution as the associated risk of investment in infrastructure for such a provider cannot be adequately mitigated.

The enabling environment What is an enabling environment?

An enabling environment is defined here as the set of conditions which promote a sustainable trajectory of market development. With respect to the payments system, this requires sufficient openness of the legal and regulatory environment combined with legal and regulatory certainly. When proposing a payments system for the electronic transfer of cash to beneficiaries it is important to examine the current state of a country’s payments system and infrastructure. Any transformational strategy proposed must be supported by the institutional and infrastructure arrangements of the financial system.

Reform in the Zambian payments system

The Zambian payments system has been considerably modernised, allowing for greater interoperability and providing the infrastructural foundation for the potential payment options presented in the report. The Zambian payment system project began in 1995. Over the last seven years, the Bank of Zambia has led several fundamental reforms to modernise the national payment system. Reforms have included inter alia: approval of the Financial Sector Development Plan (FSDP) covering the period 2004-2009 in June 2004; implementation of the Zambian Inter-bank Payment and Settlement System (ZIPSS)/Real Time Gross Settlement (RTGS) in 2004 to facilitate inter-bank payments; launching of (eSwitch) ZAMLINK for subscribing banks in 2005; introduction of VISA Electron and non-VISA debit cards for use at ATM’s and POS facilities; establishment of the Payments Division of the Bank of Zambia; and; enactment of the National Payment Systems Act, 2007 (Act No. 1 of 2007).

National Payment System Vision and Strategy frameworks

Two National Payment System Vision and Strategy frameworks have been published. These cover the periods 2002 – 2006 and 2007 – 2011. It is important to note that the focus and objective of the National Payment System Vision & Strategy 2007-2011 is to offer the Zambian populace affordable banking services and to reach the unbanked.

Investment in the Zambian National Switch

In line with its overall commitment to reforming the payment system and investing in core transaction, clearing and settlement infrastructure, the Zambia Electronic Clearing House Limited (ZECHL) has decided to purchase a national switch which complies with existing international standards and optimises interoperability. The national switch will connect

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transaction acquiring points such as ATM’s, PoS devices and mobile phones to different end points including banks and international card processing organisations (Kilfoil and Langhan, 2008). The Zambian National Switch project is potential key to the SCT strategy as it will allow the use of PoS and ATM devices nationally (hopefully at consistent reasonable fees) thereby maximising the use of existing infrastructure deployed by the banks. This makes the option of issuing an interoperable payment card a feasible one. Furthermore it is the intention of the National Switch operated by the ZECHL to offer third party card issuing services. The proposed SCT card could very well be issued by the National Switch at a significantly lower cost than issuing via the typically expensive exiting banking infrastructure.

National Payment Systems Act, 2007 (Act No. 1 of 2007)

The recently enacted National Payment Systems Act, 2007 (Act No. 1 of 2007) has gone a long way to bringing both openness and certainly to the Zambian payments environment. The regulatory framework for the Zambian National Payment System is based on the Bank for International Settlements (BIS) Core Principles for Systematically Important Payment Systems. These principals underpin both the Bank of Zambia’s National Payment System Vision & Strategy 2007-2011 and the Act.

Role of the Bank of Zambia

The Bank of Zambia is responsible for the implementation of the National Payment Systems Act, 2007 and is tasked with the regulation and oversight of the operations of payment systems so as to ensure the integrity, effectiveness, efficiency, competitiveness and security of the system and to promote the stability and safety of the Zambian financial system.

Regulatory response to e-money

Regulatory responses are relevant to technology focused money transmission and payments models because they are deemed to create e-money. Despite the fact that the Bank of Zambia regulations do not define e-money, discussions with the bank revealed that the bank is open to considering applications from payment systems providers in terms of the recently enacted, National Payment Systems Act, 2007. In Zambia, licenses are only granted to deposit taking institutions (banks and licensed financial institutions) and as such, this provision is likely to curtail the development of a mobile operator lead initiative such as that of Safaricom’s M-PESA in Kenya, unless such a model is directly backed and led by a deposit taking institution. A preliminary review of relevant regulations and discussions with various stakeholders indicate that bank based models are acceptable due to the fact that a fully prudentially licensed and supervised financial institution stands behind them.

CDD/KYC Both the Anti-money Laundering Directives, 2004 and the Prohibition and Prevention of Money Laundering Bill, 2001 seem not to have taken advantage of the flexibility allowed for by the FAFT recommendations and seem not to allow for CDD/KYC to be performed beyond bank branches by entrusted staff of nonbank retail agents. It is recommended

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that if the recommendations proposed in the report are adopted by the MCDSS that the Bank of Zambia consider exemptions which would allow for remote account opening and CDD/KYC to be performed by trusted individuals in the field or associated retail agents.

Is a purely bank driven payments solution viable within the Zambian context? Where banking infrastructure and presence is well developed (usually in urban settings), banks have proved to be appropriate vehicles through which SCT benefits can be paid.” The success of such a distribution / payments strategy through the formal financial sector depends greatly upon current reach of formal financial service providers and their willingness to customise their product offering to cater for the specific needs of SCT beneficiaries.

Defining a purely bank driven payments solution & criteria for success

In a purely bank driven solution, a bank would typically be the direct provider of social cash payments to beneficiaries. The bank would develop a new product or modify and existing product (e.g. ABSA-AllPay Sekulula Debit Card in South Africa) specifically for the low income segment and distribute cash payments through its existing channels (branches, ATM’s, PoS). The success of such a distribution/payments strategy through the formal financial sector depends greatly upon current reach of formal financial service providers and their willingness to customise their product offering to cater for the specific needs of SCT beneficiaries.

Current reach of formal financial service providers

14.6% of Zambians are currently banked. 78% have never been banked. With a total of only 405 888 deposit accounts at all commercial banks out of population of 11 million, 6 million of whom are over the age of 18, Zambia has one of the lowest bank accounts to population ratios in Sub-Saharan Africa.

Poor traditional channel deployment (financial infrastructure)

Use of modern card-based transactional infrastructure to service clients is still in its infancy in Zambia. Banks have made the transition to card-based transactional solutions, “plastic strategies” although most banks have not deployed significant numbers of ATMs or PoS devices. Zambia has only 1.5 branches per 100 000 people. At present there are still fewer total ATMs than bank branches in Zambia, with only 0.7 ATMs (less than half the number of branches) per 100 000 population. Placing Zambia’s branch and ATM infrastructure in context, developed markets generally enjoy between 2.5 (Australia) and 4 (UK) ATMs per branch (FSD Kenya 2007). Within Africa, only South Africa boasts a ratio of more than 2.5 ATMS per branch with a ratio of approximately of 3:1.

Normal bank accounts may not be entirely

Normal bank accounts may not be entirely suitable for SCT beneficiaries as:

1) The charges on a normal account may be too high relative to the value of the grant

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suitable for SCT beneficiaries

and there may be minimum balance requirements which might rule out beneficiaries of a social cash transfer.

2) The financial infrastructure may be inadequate.

Willingness of banks to customise product offering to cater for the specific needs of SCT beneficiaries

Whilst a number of Zambian banks currently offer financial products targeted at the low income segment (notably, Barclays Tonse account, Zanaco Seba account and Finance Bank savings account), in order for any one of these products to be attractive and suitable for social cash transfer recipients, the following would have to apply: no minimum balance required to open or keep the account active and no monthly charges. The minimum balance requirements, monthly maintenance fees and limited cash-out points disqualify current products (as they stand) as suitable stand alone solutions for the payment of the social cash transfer.

In addition to Zanaco’s Seba account, the bank has recently launched XAPIT, a VISA Electron prepaid card and integrated account as a total payment solution added to a proven mobile banking system which provides full transactional facilities, payments to utility companies and mobile phone top up. During an interview with Zanaco we established that the bank would be interested in providing similar accounts to beneficiaries. These accounts would facilitate regular payments and withdrawals through existing Zanaco infrastructure. At the time of writing this report, no financial information was available on the cost of this new product. International experience with similar comprehensive banking solutions including WIZZIT and MTN Banking does however suggest that the cost of such a solution may be prohibitive in the social cash transfer space.

A purely bank driven solution is not recommended

Given the poor physical coverage of banks in Zambia and low deployment of alternative distribution channels, we do not recommend that a purely bank driven solution be considered without the possible development of a bank-led model of branchless banking where Zambian banks would deliver basic financial services to beneficiaries of the social cash transfer though retail and other agents to increase reach.

In the bank lead model allowance could be made for withdrawal at Retail outlets instead of ATM withdrawal but this would likely require the bank to supply a POS device that communicates to the bank in order to authorise the disbursement. It may however be possible that the ZECHL could provide PoS devices to disbursing merchants as an alternative to requiring a commercial bank to do so.

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Is a bank-led, retail driven branchless banking solution viable within the Zambian context? Basic bank-led, retail driven model

The bank-led model consists of a licensed financial institution (bank or MFI) delivering financial services through retail agents. Retail agents handle customer interactions (face-to-face service/cash-in and cash-out) and the financial institution maintains the customer’s account. Retail agents have a vital role to play in improving beneficiary accessibility as retail coverage and presence is often far greater than physical bank branch and ATM coverage.

Shoprite chain as cash-out points for SCT disbursements

Discussions with Shoprite Zambia, confirmed that it is plausible for the Shoprite group to act as cash-out points for the disbursement of SCT’s at no cost to the scheme or to the beneficiary. This would be contemplated by Shoprite for three reasons: firstly, the majority of payments made by customers are cash based payments and thus they have far too much cash on their premises. The opportunity to hand out this cash is a potential cost saving in cash handling albeit a small percentage; secondly, SCT disbursement arrangements will secure the custom of beneficiaries for the purchase of maize meal and other basic products with SCT, thus increasing sales; thirdly, Shoprite would consider the service to be part of their corporate responsibilities to Zambians on the whole.

While requiring beneficiaries to travel some distance to receive their cash transfers may attract some criticism, it is not entirely unreasonable to see SCT beneficiaries travelling to town to receive their benefit. This has been proven over some years by ABSA Bank with the Sekulula Card offered to South African pensioners. It is merely an option to the SCT beneficiary. Considering that Shoprite may perform this function for free and that the current manual based system cost is budgeted by the Ministry at 15% it may become feasible to offer SCT beneficiaries a ‘channel incentive’ equivalent to the saving to the MCDSS of say 10% to 15% or ZMK 4,750 to ZMK 7,150. Noting also that existing money transfer behaviour in Zambia often results in beneficiaries travelling into town to collect funds, for an extra ZMK 7,150 the proposed Shoprite ‘“push”’ channel may become the norm and not the exception.

Potential Shoprite payment methods

1) Integration into Shoprite’s Money Market payment solution (beneficiary presents NRC and is paid cash in store);

2) Piggy back on Money Market (create a separate bank/service account);

3) SCT card (fully functional bank account). The account would be provided by or on behalf of a Zambian bank in accordance with Zambian law. The card itself could be proprietary to that Bank, or a more widely accepted VISA card which is recommend elsewhere in this report. Shoprite’s role in this scenario would be that

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of a merchant offering 'cash back'.

Is a nonbank led, independent m-payments solution a viable solution within the Zambian context? Defining a nonbank led, independent m-payments solution

In the nonbank-led model of branchless banking, customers (SCT beneficiaries) do not deal with a bank, nor do they need to maintain a bank account. In this model, customers (beneficiaries) typically deal directly with a mobile network operator or pre-paid card issuer and retail agents/ airtime dealers serve as cash-out points for customers (beneficiaries). Settlement takes place with e-money, not through funds in bank accounts.

Infrastructure required

The nonbank led, independent m-banking solution requires extensive network coverage, distribution of phones, access to electricity, and an extensive network of “agents” prepared to provide cash-in and cash-out services.

Mobile ownership is low

Mobile ownership is low with only 21% of the adult population being in possession of a mobile phone at the end of 2007. Growth in mobile penetration for 2006-2007 was approximately 7% with further strong growth expected.

Coverage is good

Zain, the country’s largest mobile operator has coverage in all 72 of Zambia’s municipal districts, effectively covering 71% of Zambia’s total population with 74% of its 1.9 million users to be found in rural and peri urban areas.

Extensive network of “talk-talk” agents

Zain distributes talk-time through 70 distributors and 200 000 dealers, making it Zambia’s biggest retailer with 171 dealers per 100 000 of the population, completely eclipsing any other form of formal or informal distribution in Zambia.

Solution provides by Zambia’s mobile operators

Mobile operators MTN, Zain and Cell Z may consider formally extending their business models – drawing from and adapting the hugely successful P2P Safaricom M-PESA model in Kenya to a G2P model. Service providers would however have to improve their technology offerings, such as USSD2 and GPRS, to tap into the Government and corporate sectors. Offering a provider linked social cash transfer solution is a sound business decision for any mobile operator operating in Zambia as e-money solutions (such as G-Cash and M-PESA) tend to lock customers into a particular service provider thereby adding traffic (and reducing churn) on an installed communications network and adding incremental revenue per subscriber.

As was previously raised in our analysis of the M-PESA model, the potential lack of interoperability in this non-bank, m-banking scenario and the fact that the potential dominance of one early mover could have negative effects on market. This should be

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avoided in the Zambian context. Although the Bank of Zambia currently adopts an accommodative stance, having one mobile operator dominate the branchless banking arena, partly on the back of a government led social cash transfer scheme, may not be a palatable solution for the Bank of Zambia in the future.2 However, current mobile oeprator coverage may present interesting opportunities for the development of alternative payment delivery mechanisms which operate using mobile phone technology and operator coverage.

Solution provided by payments solution provider

M-payment and m-banking solutions are starting to emerge in Zambia. For example, Mobile Transactions Zambia Ltd, a payment system provider jointly owned by Dunavant Cotton Company and CAD International Ltd has been piloting a payment system in the Zambian cotton industry since July 2007. The solution is currently targeted at companies making payments to the unbanked. Payments are made on any network and customers then transact via their mobile phones or collect cash from an authorised dealer.3 Float accounts are maintained at registered deposit taking banks. A mass-market retail outlet is currently used as a branch network. Mobile Transact will be formally registered through the Bank of Zambia as a designated payment system by BoZ within 2 months. Whilst the cost of each transaction is relatively high, at ZMK 4,000, Mobile Transactions have expressed an interest in distributing the social cash transfer.

Deploying already existing infrastructure – an appropriate destribution/payment solution for the zambian sct When selecting an appropriate payment mechanism for the disbursement and payment of a national SCT benefit, a number of criteria need to be examined and weighted against each other. Whilst it would be ideal to propose a solution that met all of these criteria equally, many of them are competing and must be assessed against the overall objective of the MCDSS, namely to deliver predictable, regular cash transfers to the chronically poor at scale commencing in 2009.

Evaluating payment options against set criteria RANKING 1:

Timely and full distribution of transfers

We maintain that the most important criteria of the disbursement / payment mechanism should be timely and full distribution of transfers. It is vital to focus on the key objective of a social cash transfer, namely distribution of a small sum of money to beneficiaries, providing a vital means of ensuring a minimum level of wellbeing and basic survival. We caution against losing sight of the objective of the SCT programme by primarily focusing on a payments system designed with the sole purpose of financial inclusion or

2 See CGAP focus note 46 where is it noted that “only WIZZIT among the major mobile-enabled branchless banking initiatives works across all networks in the country.” 3 Mobile Transactions Zambia Ltd currently works through an estimated 400 agents which include “talk-talk” agents and agricultural input suppliers.

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"banking the un-banked".

RANKING 2:

Reducing the time to implement

As beneficiaries rely on the SCT for survival, reducing the time to implement the payment mechanisms deployed by the SCT programme is the second most important criteria against which the proposed payment mechanism should be measured. By building the core data base with various additive payments modules and adopting the phased approach set out below, the time to implement the national scale up is substantially reduced and the MCDSS would be likely to meet their objectives of a national scale up by early 2009.

RANKING 3:

Cost minimisation for the grant provider

Grant providers, like beneficiaries have the objective of providing cash transfers to the critically poor and destitute. Both inexpensive solutions and expensive options are available to grant providers. While it might be tempting to issue thousands of finger-print-biometric authenticated, off-line capable smart cards using fancy laptop computers, advanced finger print readers run off portable power generators that are transported by a fleet of brightly coloured expensive 4x4’s this is probably not necessary within the Zambian context. We propose that the investment in a single and coordinated benefits database to which payment modules can be added over time (depending on need and circumstances) would be the most cost effective long term solution for grant providers.

RANKING 4:

Risk minimisation

Risk minimisation is ranked fourth. Within the current manual based system we maintain that risk can be substantially reduced by deploying a single centralised core database and automating the current manual receipting system. This will ensure that tracking, monitoring and accounting for the flow of funds is automatic and does not rely on vast numbers of people to administer the system. Auditability in payment systems is a key criterion to ensure that funds are traceable from source to payee. While no payment system is entirely fraud proof, primarily as a result of internal compromises, payment instructions and thereafter the final disbursement can be tracked to system operators and system participants in an effort to manage risk.

RANKING 5:

Enhanced ability to scale up

The main driver of converting manual payment systems into EPS is due to the potential for enhanced economies of scale. A key premise in showing efficient economies of scale is proven by being able to extend the reach and capacity of a scheme at a marginal cost lower than the average cost per transaction. Good economies of scale emanate through maximising the return on a single, albeit a high fixed cost typically centrally focused. Further, a good system design, not relying too heavily on complex periphery infrastructure is a key component to quick and extensive scale. For example, a simpler system that only needs personal computers (PC) and a printer to extend it and not expensive and sometimes proprietary devices such as Smart Card readers.

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RANKING 6:

Cost minimisation to the beneficiary

From the beneficiary perspective, being able to access his/her grant in a cost effective manner is ranked higher than beneficiary dignity. Cost minimisation for the beneficiary can be achieved through designing a payment system which allows for multiple cash-out points instead of a single designated pay-point. Beneficiaries would then be able to access their SCT at the closest and most cost effective point, be it a bank branch, ATM, PoS or retail outlet. It will however be vital to incentivise a channel shift from "pull" to "push" approaches should an EPS eventually be adopted. A long term strategy which deploys a single cash-out point and does not provide beneficiary choice, often forcing the beneficiary to walk long distances designated pay-points should be avoided. At the same time, forcing the beneficiary into an inappropriately designed "push" strategy which offers little benefit and reduces the transfer amount available for direct consumption by the beneficiary.

RANKING 7:

Maximising the dignity of the recipient

The payments process must serve the poor. As such, as far as possible the poor must be given choice and recognised as capable of exercising choice in their own best interest. i.e. provided with the choice of whether to receive their grant through a basic bank account “push” mechanism or at a designated pay-point through a “pull” mechanism. Those involved in the SCT scheme must recognise and acknowledge that poor is not synonymous with incompetent and invest in providing proper financial and technological reorientation by explaining the costs and benefits of alternative payment options available to beneficiaries.

RANKING 8:

Providing additional financial services to beneficiaries and the surrounding community

While not necessarily proven at this time, there is a general belief that financial inclusion by way of being banked can have a positive social impact on the financially destitute. Evidence gathered from various G2P payment initiatives such as that in the Dowa region of Malawi showed through research that a fraction of the targeted beneficiaries continued to bank with the Opportunity International Bank of Malawi post the conclusion of the emergency cash transfer. The more basic account targeted at the low income segment appears to be appropriate. These accounts should offer the account holder the ability to save, transact and possibly borrow based on a regular savings history.

RANKING 9:

Providing opportunities for non-beneficiaries to improve access to financial services

Lastly, built on the opportunity to bank beneficiaries is the opportunity to bank those around them. The benefits to non-beneficiaries would be the same as those to beneficiaries. The benefit to the scheme would be enhanced economies of scale by bringing down the average cost per account holder by serving more account holders in general.

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Optimal SCT payments system within the Zambian context As represented by the Payments Scalability Escarpment Model it is the human element and not the cost of drawing cash that will make the current manual based payments system inefficient at scale. Additional issues raised in the analysis of the current payments system include the fact that payments are only made every two months due to system inefficiencies and the risk and inefficiencies of the labour intensive manual reconciliation procedures. Based on the assessment of the existing payment solutions available in Zambia and the overall ranking of the criteria above, the following payments mechanism for the national scale up of the SCT programme is proposed. The payments mechanism is based on the following six key principles: 1. KISS or Keep It Simple, Silly; 2. The solution must address the problem; 3. Do not deploy technology for the sake of technology; 4. The proposed solution must scale-up and scale-out; 5. The solution must cater for extending to multiple channels of service delivery; 6. The solution must make use of existing infrastructure to allow for immediate, cheap (or free) and

nationally pervasive reach. We recommend a phased approach which allows for choice and incorporates both pull and push options.4 The proposed mechanism slowly graduates the beneficiary from one option to the other with little stress as he/she will be using the same (token) – the proposed benefits booklet and simply changing his or her “mode of transacting” over time. The proposed payments mechanism will evolve over three distinct phases.

Phase 1: Building a “centralised database”

Phase 1a: “automated pull system”

Phase 2: “customized pull system”

Phase 3: “push strategy”

PHASE 1

Building a “centralised database”

Enrolment and targeting systems benefit from a single registry of all potential and actual programme participants. This helps to reduce fraud and promotes greater coverage and take-up. Management systems must be as simple as possible given the programme requirements, and appropriately tailored to the country’s existing capacity constraints. Particularly when non-governmental organisations are serving as implementing partners, a single registry can minimise coverage gaps and duplication. A single registry works best when government takes primary responsibility for implementation – a national public institution can maintain the database. When programmes follow a decentralised model – and particularly when non-governmental

4 In situations where cards are unfamiliar to start with, however, rather than adding features to the card, designers must start with familiar ideas and concepts – like the transfer of airtime credit for mobile phones, for example – and then add financial services functionality. This is how M-PESA developed (Maurer, undated.) This is also the key to systems that are retailer-based: start with the familiar retail exchange relationship in a small shop and add additional services at the point of sale (Jacob, 2005.)

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organisations are involved – co-ordination among the implementing partners plays a more critical role. MCDSS would need to build a core system (central electronic database) with various additive payments modules forms the nucleus/ central element of the payments system.

The central database should be managed and maintained by the MCDSS. The hosting of the database should be in a securely managed environment to ensure data protection policies are employed.

General system design criteria:

• Open and published API (application program interface) interfaces for Government and Donor organizations whilst ensuring data protection at the highest levels;

• Data interfaces need to cater for the remote capture (registration) of data including on-line ‘mobile’ devices and off line devices;

• A payments module should be incorporated into the system design to cater for the redemption of SCT’s via multiple payment channels.

This database would be able to cater for the initial electronic receipting and reconciliation method proposed, but would also allow for migration to a payments system over time where disbursements could be made via a card issued by a bank, disbursements via Shoprite stores, disbursements via Celpay and disbursements through the payments solution provider Mobile Transaction Zambia to name a few.

PHASE 1A

Automated “pull” system

The first phase of the payments modality is based on a printed beneficiary booklet. This booklet will include beneficiary details, a photograph and payment receipt pages. The booklet also includes a page of self adhesive barcodes which act as receipts when removed from the beneficiary’s booklet and pasted into a PPM’s book or against a pre-printed payments schedule barcodes – electronically readable receipts of payment. The bar code system is merely a method of making the existing MCDSS driven payment scheme more efficient. This is in line with our ranking of criteria and the ranking of “reducing the time to implement” as the second most important criteria. It simply replaces the manual nature of payment schedules, hand written reports and manual reconciliation with low cost electronic receipting technology. The bar code system relies on the central database to produce payment schedules and to identify beneficiaries with a manual token or bar-coded token unique to each individual. The benefit of the printed book with self-adhesive bar coded decals (stickers) is that it is entirely un-reliant on technology being present in the field and thus cannot fail. That is, it is largely a permanent record of transactional activity unlike electronic systems that lose their data when lost, stolen, damaged etc.

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If witnessing of payments is required by way of a third party another type of book with many pre-printed barcodes can be manufactured and given to CWACs. A CWAC barcode would also be placed into the PPM’s booklet or pre-printed payments schedule acting as an electronically readable token (proof of payment.) Again, depending on the initial scoping of the system a more resilient token by way of a PVC ISO 7816 ‘credit card like’ plastic card could be issued to beneficiaries which too would have a unique barcode assigned to it and linked to a beneficiary in the SBT database. The PVC card could be used in on-line environments where a barcode reader could be attached to a PC with on-line capacity or alternatively portable battery operated barcode readers could be issued to PPM’s to be used in field. Of course both could be issued at the inception of phase 1 with a PVC holder (envelope) attached to the back cover of the book providing for safe keeping of the card.

The incremental cost of issue a booklet to each beneficiary has been estimated as: US$ 2.00 per book. Each book would cater for 60 months (five years) of payment history before being replaced. An off-line capable bar code reader that has memory functions and could be loaded with payment schedules would cost approximately US$350 per unit. District offices are apparently already PC and internet enabled and thus no incremental cost is expected per district although it would be recommended that new equipment, that is proven to be compatible with a barcode reader and the associated software is highly recommended. One would budget approximately US$1,500 per new computer including modem and software per district.

The benefit of using barcode receipts potentially include: significant efficiency gains as the process of submitting proof of payment is potentially reduced to minutes rather than days; reduction in the number of mistakes that are likely to be made due to the automated nature of the system; once submitted online to the central database, the payment information is immediately available and more importantly reconcilable to funds disbursed to district offices; lower provincial administrative costs, HQ administrative costs; reduced chance of fraud if only due to quick and timely reporting of payment activity.

PHASE 2

Customised “pull” strategy

In phase 2 of the proposed system beneficiary choice is introduced by offering channels such as Shoprite to payout cash transfers. The SBT booklet can be used in the Shoprite environment. There would be no change to the technology. Information would be submitted via Shoprite stores nationally in real-time to the database for verification that the beneficiary has in fact not been paid using the off-line PPM method. If required an exchange of self adhesive barcode receipts would be used in this environment. After a success early in phase 2 with the payment of benefits via Shoprite, it is recommended that other payment service providers are invited to provide cash out services.

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PHASE 3

“Push” strategy

This phase of the project sees the introduction of a fully functional pre-paid debit card that should preferably be open-standards based, such as Visa electron debit card, so as to make use of as much existing infrastructure as possible. Two interoperable options exist in this phase.

Firstly, MCDSS could issue a social benefits transfer (SBT) or social cash transfer (SCT) branded pre-paid debit card which would work at all existing ATM’s in the country (assuming the successful deployment of the Zambian National Switch by the Bank of Zambia) or certainly at all VISA ATM’s if a VISA branded card.

Secondly, it would be possible to allow beneficiaries to nominate a bank account into which funds would regularly be deposited. Potential providers of such a bank account include Zanaco Bank and Finance Bank. Where MCDSS does wish to offer beneficiaries the ability to select a traditional bank account payment it is recommended that MCDSS secure preferential pricing arrangements from such service providers as it would for other cash out service channels.

For the payment card to be able to be accepted in the phase 1 manual PPM payments system it should be encoded with a barcode that links the card to the beneficiary in the database

The solution proposed in this report is a phased approach which will eventually allow the beneficiary to chose whether he/she receives his/her cash payout at any number of different cash out points including bank branches/ATM’s/POS/retail agents or through cash out points provided by payment solution providers.

We maintain that the value in the design of the solution proposed core database and payments modules solution cannot be understated. The value of being able to disburse funds through hundreds of ATM’s and PoS devices or via thousands of CelPay and Mobile Transactions Zambia partners in a matter of a few weeks and at the single nominal cost of $70,000 is significant.

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1. INTRODUCTION An appropriately designed payments and distribution mechanism capable of facilitating the cost effective, reliable and practical delivery of cash to the chronically poor in Zambia is of paramount importance. Fifty thousand Zambian Kwacha ZMK50, 000 or US$12, 34 roughly equivalent to 5.5 Big Mac hamburgers purchased in South Africa is insignificant to those with affluence, employment and social status.5 For the typical beneficiary of the Zambian Social Cash Transfer Scheme (SCTS) however, this ZMK50, 000 cash transfer is a vital means of ensuring a minimum level of well being and basic survival. This small grant often provides a life line to households who are unable to afford basic needs, live in rural isolation and face numerous risk factors including the lack of sustainable livelihoods, inadequate access to social security, limited access to education and training; inadequate health services, HIV & AIDS and violence against women and children. 6 The importance of social protection mechanisms to promote pro-poor growth and grant households with little or no self-help potential the opportunity to invest in the future of their children is recognised in the Zambian Fifth National Development Plan (FNDP.)7 In recognition of the need for external intervention, Chapter 22, objective 2 of the FNDP explicitly commits the Government of Zambia to “reduce poverty in incapacitated households through welfare support.”

The Government of the Republic of Zambia formalised its commitment to regular welfare support for chronically poor and vulnerable households in 2003 when the first social cash transfer pilot scheme was launched in the Kalomo District of the Southern Province.8 Following the initial success of the Kalomo pilot the scheme was expanded between 2005 and 2007 to include a further four districts in central and southern province.9

5 See The Economist The Big Mac Index Sandwiched July 24th 2008 (Online.) URL: http://www.economist.com/finance/displaystory.cfm?story_id=11793125 where it is noted that a Big Mac burger in South Africa costs $2.24. On 16/11/2008, ZMK50, 000 would buy you US$12, 34 or ZAR125, 00. See URL: http://coinmill.com/ZMK_calculator.html 6 Destitute and incapacitated households in Zambia are characterised by individuals who are critically poor, physically weak, immune compromised, have little or no formal education and lack any real productive assets. Poverty is structural as individual members are labour-constrained and, without direct external intervention households have limited prospects. 7 Extreme levels of poverty are evident in Zambia with approximately 50% of all Zambians said to be living below the food poverty line (FAO, 2006.) 5.3 million Zambians or approximately 1 million households constitute the food-poor. Individuals consuming less than 1 400Kcal per day are defined as the critically poor or non-viable poor and constitute approximately 2 million people or 400 000 households. 8 The concept of the pilot scheme was based on applied research undertaken by GTZ at national, district, village and household levels. Research demonstrated the urgent need for social welfare interventions amongst 10% of all households. See ILO (2008) where it is noted that “the Kalomo scheme initially began as a pilot to investigate the feasibility, costs, benefits and impact of social cash transfers to very poor families. Ten per cent of the most destitute or incapacitated households were targeted, with priority given to single-parent households, those headed by the elderly and orphans afflicted by extreme poverty, hunger and work incapacitation.” 9 Over the past five years a number of other schemes have been introduced including a scheme run since January 2005 by MCDSS with technical input from CARE International and funding from DFID in the Kazungula District of the Southern Province; an OXFAM Zambia run, DFID funded time-bound emergency cash transfer scheme between November 2005 and March 2006 in the Mongu and Kaoma Districts of the Western Province; the Chipata pilot run since February 2006 by MCDSS with support

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Zambia’s experience with cash transfers has been largely positive, however, the expansion of social cash transfers to new districts has met with some significant challenges (ILO 2008.) The ILO note that significant design flaws in these subsequent programmes have resulted in recurrent delays in the payment of benefits, errors in the selection of beneficiaries, capacity constraints in overseeing cash transfers from provincial and district level and poor monitoring and evaluation efforts limiting the extent to which the design and implementation of programmes could be scaled to include a greater number of beneficiaries (ILO, 2008.)

The pilot schemes are to be scaled-up nationally in 2009. In support of this national scale-up, the Government of the Republic of Zambia has committed ZMK 165 582 400 of direct funding over the period 2009-2012 (ILO 2008.)10 The scaled up scheme will assist the most vulnerable and incapacitated households in local communities. These households were estimated to number 200,000 in 2006 and fall into category D in Figure 1. below.

Figure 1: Number of households suffering from different levels of poverty in Zambia

Source: GTZ (2006) Social Cash Transfer in Development Cooperation: Kalomo District Zambia

Eligible households are identified through a community based targeting system which relies on existing Public Welfare Assistance Scheme (PWAS) community structures11. Two over riding criteria are considered in the identification of potential beneficiary households: destitution and incapacitation. Households are considered destitute when they are assessed to be in extreme need with a low certainty of survival and are considered incapacitated when no household members are fit for work in the working age. In 2003, 10% of all Zambian

from CARE International and funding from DFID; the Monze pilot run by MCDSS since January 2007 and the Katete District universal pension scheme run by MCDSS with support by DFID (ILO, 2008.) 10 The ILO note that once a decision has been taken on the appropriate design of the national cash transfer system, that these figures will need to be revised. 11 The PWAS structures operating at community, area and district level are: the Community Welfare Assistance Committee (CWAC), the Area Coordinating Committee (AAC) and the District Welfare Assistance Committee (DWAC)

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households were identified as fulfilling these criteria (PWAS National Household Survey 2003.)12 A comparison of beneficiary households against the national average demonstrates the unique social needs and considerations of this highly vulnerable group.

Looking at the composition of beneficiary households, three types of households emerge: elderly one-person households (17.5%); generation-gap households where the middle (productive) generation is missing mainly as result of HIV/AIDS (32.7%); and incapacitated households with a great proportion of unfit members (50%) (GTZ, 2007.) Overall, beneficiary households are smaller, with an average of 4 household members against 5.2 members for the national average. Beneficiary households display the following characteristics:

• Proportionally more female, young and elderly members than the national average13;

• 50% fewer household members of productive age (20-54);

• 8 times as many elderly members than regular households;

• few young-headed households and an extremely large proportion of elderly-headed households14;

• 68% of children members of beneficiary households are either maternal, paternal or double orphans15;

• high levels of disability with 15.6% of beneficiary members sighting some form of disability against the 2.4% nationally.16

This assessment suggests that the average SCT beneficiary household is most likely to be headed by a single elderly woman over the age of 65 who is partially disabled and is responsible for the care of at least 3 orphaned children.

A recent review of the progress of cash transfer schemes in Kazungula and Chipata by CARE International supports the ILO’s assessment revealing a mixed picture of the success and failure (CARE, 2007.) Beneficiaries are reported to make good use of their cash transfers for the purposes for which they were intended, however, the schemes are reported to face significant challenges with respect to targeting and delivery, accuracy timelines and cash security. Specifically, the Social Cash Transfer Semi-Annual Report, October 2006 to March 2007 notes that interviews with stakeholders suggest that District Social Welfare Officers (DSWO) are over-stretched by cash transfers (or see themselves as such.) This results in supervision failures of Community Welfare Assistance Committee (CWAC) members and pay-point managers (PPM’s) increasing the incidence of loss of funds. In Kazungula for example, a PPM is said to have awarded himself two cash transfers of a deceased beneficiary. Further, a report by the acting DSWO in Chipata purportedly raised the

12 PWAS National Household Survey 2003 13 56% of household members are female (GTZ, 2007.) 14 While the majority of household heads at a national level are of productive age, more than half of household heads receiving SCTs are over the age of 65. 62% of household heads are women (as opposed to 22% for the national average), of which only 44% have any formal education and 1.6% are married (GTZ, 2007.) 15 The prevalence of orphanhood is almost 4 times higher than the national average of 16.9%. The majority (83%) reside with their grandparents (GTZ, 2007.) 16 Levels of disability increase appreciably with age, with roughly a third of individuals between the age 45-64 experiencing a form of disability. This figure rises to almost half for beneficiaries 65 years and older (GTZ, 2007.)

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important questions of the objectivity and reliability of CWAC’s who are said to have a tendency to register relatives and friends, to impose school children on listed beneficiaries or to be swayed by the politics of section chairpersons resulting in the registration of party members only (RHVP, 2007.)

Critical to the success of a national rollout will be the development and deployment of a reliable and cost effective disbursement and payment system able to deliver regular cash transfers to Zambia’s critically poor and vulnerable households. Whilst it is recognised that regional and global moves towards the adoption of electronic and mobile payment mechanisms including Smart Cards, GSM-enabled cards, Magnetic Stripe, ATM, mini ATM offerings and m-banking solutions are increasingly being used to increase the efficiency, reliability and efficacy of person to person (P2P) payments and government to person (G2P) social grant transfers , it is equally important to note the short-comings and failures of a number of inappropriately proposed technological solutions within the developing country context. As witnessed in Zambia and other developing countries, multiple targeting exercises by donors, poor data capture and the inappropriateness of a number of proprietary technological solutions may in fact hinder rather than facilitate the realisation of economies of scale which may be gained through the deployment of more appropriate technology. Therefore, in order to propose an appropriate transfer/payments system that is able to deliver reliable, predictable and cost effective cash transfers to the proposed 200,000 recipient households under the scaled-up SCT scheme, we have approached the preparation of this report with the following principles informing our analysis:

• Payments processes must serve the poor. A client-based approach by payments service providers can protect the dignity of participants and potentially provide access to developmental financial services.

• Targeting, payment and authentication are separate but inter-related elements.

• Repeated targeting is wasteful and should be coordinated.

• One automated and coordinated social benefits database, controlled by a single ministry is key.

• Technology should not be deployed for the sake of technology.

• The payments mechanism must be non-proprietary, interoperable and mutable and designed with the beneficiary in mind.

• Within the developing country context the proposed payments system should leverage existing infrastructure.

• The payment solution must be scalable and cater for the inclusion of non cash benefits.

• Beneficiaries are financially literate in the most basic sense, i.e. comprehend the store value including but not limited to cash.

• Beneficiaries should be given choice.

• Private sector participation is vital.

• Maximising the use of existing government and private physical points-of-presence nationally is key.

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2. OBJECTIVE AND STRUCTURE OF THE REPORT Against the backdrop of extreme poverty, mixed results from the pilot social cash transfer programmes, poorly developed payments and telecommunications infrastructure, limited beneficiary access to formal and informal financial services, low retail reach in rural areas, poor distribution networks, low cell phone ownership and the extreme rural isolation of most SCT beneficiaries the Quindiem team were tasked with the challenge of advising the Government of Zambia on feasible mechanisms for the delivery and payment of the proposed national social cash grant.

The report is structured as follows:

Section 3 establishes the need for the delineation of targeting, identification authentication and payment. Although some have attempted to examine all four elements collectively and design an “all in one solution” this approach is cumbersome, inefficient and ultimately unsustainable. Current SCT pilot scheme household targeting approaches are discussed together with the need to use different targeting approaches under different circumstances. For the purpose of clarification the difference between identification and authentication are clearly indicated. The section discusses the need for a flexible documentation process and the suitability of the current Zambian National Registration Card (NRC) for the purposes of authenticating beneficiaries of the SCT scheme is presented. The section concludes by highlighting the shift from manual based payment mechanisms to electronic payments systems (EPS) and the introduction of the mobile phone as an alternative payment solution.

Section 4 examines choice, accessibility, affordability and trust as four factors that must be considered when designing a payment mechanism for a SCT programme. The success of the Sekulula account introduced by Allpay in South Africa is discussed together with the recommendation that SCT beneficiaries be given choice with respect to the manner in which they receive and access their cash transfers. The section highlights the fact that for the beneficiary of a social cash transfer programme, being able to easily access his/her cash, at minimal cost, is probably the most vital consideration and the definitive measure of the success or failure of any proposed payment solution. As such, the need for an appropriately designed interoperable, non-proprietary and mutable technological solution is discussed together with the need to ensure that beneficiaries are incentivised to move from a “pull” to a “push” approach. The need for building trust in the proposed payment mechanism and the provider of such is briefly covered.

Section 5 details the current manual (non-electronic and human resource intensive) rudimentary distribution mechanism currently deployed by the Zambian SCT pilot schemes. Technical findings and fiduciary risk concerns are highlighted. The section outlines the growing and complex distribution and payment mechanisms currently being used in various G2P and P2P contexts and draws a number of key lessons from both the successes and failures of these experiences.

Section 6 models a hypothetical social cash transfer scenario. The model shows that by scaling the manual cash based system by the required parameters of adding additional human resources, marginal costs increase

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and as a result, dis-economies of scale result. Conversely, in an electronic payments system (EPS), due to a lower marginal cost and a fixed up-front cost, the average cost per transaction declines as one scales outward, thus delivering economies of scale. The model is further extended to show that whilst the argument for an electronic payments system remains valid for standard interoperable technology such as EMV chip or Magstripe, the fixed up-front system cost of Smart Card technology and the proprietary channel needed to support this technology, and the significantly higher marginal cost per payment instrument may mean that the benefits of scale would only be justified far later than compared to a more traditional EPS.

Section 7 examines the beneficiary reality (geographic location, poverty levels, low usage of formal financial services, limited electricity supply, poor road infrastructure, mobile phone penetration and network coverage) with the view to highlighting some of the challenges involved in the migration of the current manual payments system to an EPS. The Zambian government’s commitment to building an enabling payments environment through policy, legislation, regulation and investment in core infrastructure is discussed. Working within the bounds of the extreme nature of the rural environment and building upon our core finding in previous sections, a number of potential payments solutions are examined. These include a purely bank driven solution and a number of transformational m-banking solutions including a bank-led retail driven solution; a purely mobile operator – independent non-bank m-banking solution and a payments solution provider driven solution.

Section 8 examines and weights a number of payment mechanism criteria. These criteria include inter alia: timely and full distribution of transfers; cost minimisation for the grant provider; cost minimisation to the beneficiary; risk minimisation; maximising the dignity of the recipient; reducing time to implement; enhanced ability to scale up; providing additional financial services to beneficiaries and the surrounding community; and; providing opportunities for non-beneficiaries to improve access to financial services. Based on the assessment of existing payment solutions in Zambia and these the overall ranking of criteria, a phased approach which allows for beneficiary choice and incorporates both pull and push options is proposed, scoped and costed.

Section 9 presents our conclusions.

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3. THE DELINEATION OF TARGETING, IDENTIFICATION, AUTHENTICATION AND PAYMENT

When designing an appropriate distribution/payment mechanism for the Zambian cash transfer programme, it is essential to recognise that targeting, identification, authentication and payment are separate but inter-related elements that must be separately defined, investigated, developed and weighted. Each of these elements is in turn influenced by existing infrastructural, environmental, social and regulatory constraints and barriers. Whilst it may be tempting to examine all four elements collectively and attempt to design an “all in one” solution, lessons learnt from international best practice indicate that such an approach is cumbersome, inefficient and ultimately unsustainable (Pearson and Kilfoil, 2007.)17 This section therefore delineates targeting, identification, authentication and payment and discusses the parameters of each in turn.

3.1. Targeting Within the military, targeting is defined as the process of selecting targets and matching an appropriate response to them on the basis of operational requirements, capabilities and requirements (Prokop, 1999.) The choice of an appropriate targeting mechanism within the social welfare context depends on a range of factors including the availability of relevant information, capacity of government institutions and cost (DFID, 2005.) A wide-range of options are available including means testing, geographical targeting, community based targeting, benefits to those belonging to a particular vulnerable segment of the population and self targeting where individuals have the choice to opt in.

The current targeting system deployed by the Zambian SCT pilot schemes targets households rather than individuals. In order to qualify a household must be:

1) Destitute. These households are critically poor, experience chronic hunger and undernourishment, are subject to begging or are in danger of starvation, and

2) Incapacitated. Incapacitated households are those in which the bread-winners are sick or have died. The household has no able-bodied persons of a working age and is composed solely of old, very young or sick individuals with a high dependency ratio (GTZ, 2005.)18

In-depth research which examines the effectiveness of the current community-based targeting system and compares it with alternative methods suited to the Zambian context has recently been conducted by Kimetrica. Although the choice of an appropriate targeting mechanism for the Zambian social cash transfer scheme falls beyond the scope of this report it is worth noting that the study found that while targeting specific population groups (the elderly, the disabled, women-headed households) is marginally cheaper than using multiple proxy approaches, age, gender of head, disability status and orphan status are not reliable proxy’s for poverty. As

17 Pearson and Kilfoil. 2007. Dowa Emergency Transfer (DECT) Wider Opportunities Evaluation and recommendations – Solid Lessons and a Promising Vision. Report submitted to Concern Worldwide and DFID, Malawi. 18 An exception to this is evident in Katete where social pensions are targeted at the elderly.

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Box 1: Human Identifiers

Physical appearance: familiar passport descriptions of height, weight, colour of skin, hair, eyes and visible physical markings: gender, race and wearing of glasses. They are supported by photographs.

Social behavior: habituated body-signals; general voice characteristics, style of speech, visible idiosyncrasies, and speed of action. They are supported by video-film.

Bio-dynamics: these include the manner in which ones signature is written, statistically analysed voice characteristics, keystroke dynamics, particularity in relation to login-id and password.

Natural physiology: these include skull measurements, dental repairs, skeletal injuries, thumbprints, fingerprint sets and handprints, retinal scans, iris-scans, earlobe capillary patterns, hand geometry, skull shape and DNA patterns.

Imposed physical characteristics: practical examples of these include dog-tags intended to be worn permanently by members of the armed forces. Collars, bracelets, anklets and other body adornments carrying ID. An additional example used at various times in history is brands imposed on people’s skin, a modern variant would perhaps involve bar-codes and micro-chips.

Source: Clarke. 2001. Authentication: A Sufficiently Rich Model to enable e-Business.

such, the report recommends that additional criteria need to be introduced if categorical targeting is to capture people living in the poorest households and as such, proposes a multiple-proxy approach that is generally cost-efficient in capturing the poor. The study further recommends the use of different targeting approaches under differing circumstances. Universal targeting is recommended for areas of widespread extreme poverty, the current community based targeting in highly cohesive communities with a low poverty incidence and a means test approach in communities with low poverty incidence and community cohesion (Kimetrica, 2007.)

 

3.2. Identification and authentication Identification is defined as the “process whereby data is associated with a particular real world identity. It is

performed through the acquisition of data that constitutes an identifier for that entity” (Clarke, 2007.) The identities of human beings are signified in a variety of ways and captured through various identifiers (See text Box 2.1.) Governments and organisations usually adopt a disciplined approach to capturing identity information and do so by constructing models of relevant identity by capturing data into data structures within information systems. (Clarke, 2000) Specifically, an identity is represented by data that is stored in a record, an attribute of an identity is represented by a data-item or field within a record, and an event involving an identity is represented by a transaction.

Authentication on the other hand refers to “the process designed to cross-check against additional evidence the identity signified by the identifier acquired during the identification process. (Clarke, 2001) In our modern electronic age, authentication can be expensive and very ‘high tech’. Human identity authentication usually takes place through the presentation of a token which is an inanimate object (photograph,

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Box 2: Documentation process must be flexible

“Documentation processes must be flexible. The poorest have the most limited access to the bureaucratic resources required to formally document age, income and other qualifying criteria. Targeting [identification] mechanisms that require unreasonable documentation frequently fail to reach the poorest and sometimes generate regressive outcomes – because the less poor often have the greater resources and knowledge necessary to navigate the bureaucratic hurdles while the very poorest sometimes find the barriers impenetrable.”

Source: OECD/Povnet (2008) Good Practice Note on Social Cash Transfers

identity card, identity book etc.) These tokens are often loaded with multi-identifiers including names, multi-attribute identifiers and codes. Numerous options exist for electronic identification including, personal identification numbers (PIN) and biometric authentication through voice or finger prints. At the other end of the ‘non-tech’ scale, authentication is commonly conducted through community authentication, photograph and signature. As authentication mechanisms can be quite costly depending on the sophistication of the technology utilised, the degree of effort invested in the authentication process; the selected technological solution needs to reflect the likelihood or accidental error, and of the harm that would arise if an error occurred (Clarke, 2002.)

In Zambia, the officially recognised token (form of identity) is the National Registration Card (NRC) issued under the National Registration Act. This is a simple paper based card which includes the individual’s name, place and date of birth and photograph. It is not encoded with a bar code and does not contain biometric information. This is the most cost effective manner in which to authenticate an individual as the photograph has a 100% match success and it costs nothing to authenticate the individual by ensuring that the face on the card matches the face of the person in front of you.19 Most beneficiaries of the current SCT pilots are purported to be in possession of an NRC.20 Although the NRC is the officially recognised identity token in Zambia, it is suggested that the SCT scheme adopt a flexible documentation process.21 This is in line with the international lessons of good practice set out in the recently published OECD/Povnet Good Practice Note on Social Cash Transfers. (See Box 2.)

19 Pearson and Kilfoil note that “a photo ID has a 100% match success rate and costs nothing to authenticate. No reader, or communications or power are required to perform authentication. And so, while some may argue that merchants may simply ignore the picture, and thus open the door to fraudulent activity, any analysis of any solution must weigh the costs of implementing it, versus the costs saved by implementing one solution or another.” 20 MCDSS officials and those directly involved with the SCT pilots indicated that the majority of current beneficiaries were in possession of an NRC. This is in contradiction to FinScope which found that only 55% of Zambians were in possession of an NRC. 21 See Cenfri (2008) where the author states that “CDD/KYC requirements were originally provided in the Bank of Zambia Circular 11 of 1998. They were replaced by the CDD requirements of the 2004 Directives. Under Section 6 of the directives financial institutions are required to verify the identity of customers through the national registration card, driver’s license or passport. In the opinion of the Bank of Zambia as well as other formal sector players consulted, most people have a national registration card and the identification requirement is therefore not prohibitive.”

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3.3. Payment mechanism The Business Directory defines a payments mechanism as a “financial system supporting the transfer of funds from suppliers (savers) to the users (borrowers), and from payers to the payees, usually through the exchange of debits and credits among financial institutions. It consists of a paper-based mechanism for handling checks and drafts, and a paperless mechanism (such as electronic funds transfer) for handling electronic commerce transactions.” 22 This simple definition hides a myriad of modern day complexities which must be considered. Gone are the days when traditional financial institutions (banks and MFI’s) and money transfer agents required huge branch networks filled with tellers, people, forms and files, when customers were required to wait in long queues at inconvenient times and complete complex forms to make or receive a payments (Ketley and Duminy, 2001.) Gone too are outdated manual based systems, high transaction costs and antiquated delivery channels.

Enter the age of innovation in delivery, electronic payments systems, e-banking, mobile banking, multiple distribution channels, distribution networks and possible cash-in and cash-out points, together with the entrance of new payment solution providers to facilitate person-to-person (P2P) payments and government-to-person transfers (G2P.) Enter the age where a “plastic strategy” requires multiple authentication choices (PIN ID or biometric) and even more choices regarding the characteristics of the payments instrument (token) issued to the client or beneficiary. Banks, financial institutions such as MFI’s, grant agencies and governments looking to provide their clients with a physical electronically enhanced payments instrument (token) to transact with, face numerous technological choices including issuing simple vouchers to non-proprietary Magnetic Stripe payments cards, on-line or off-line chip enabled Smart Cards run off proprietary Universal Electronic Payments System (UEPS) supplied by the likes of NET 1/ Malswitch, chip enabled interoperable EuroPay, MasterCard, VISA (EMV) cards, proprietary debit cards and interoperable VISA or MasterCard linked cards. Each of these options has its costs and benefits which must be seriously weighed up when considering an appropriate payments mechanism and the implications associated with the choice of one technological solution over another. At the other end of the spectrum, we see the emergence of the mobile phone as an alternative payment solution.23 Who would have thought that this simple device would have the potential to replace traditional bank cards, to serve as a mobile POS terminal, human ATM and internet banking terminal. However, within the social cash transfer space, where access to physical cash remains a primary objective, the mobile phone has its limitations. This device cannot independently convert cash into electronic value or electronic value into cash.24 Mobile solutions will always require supporting cash conversion platforms – whether they be bank branches, ATM’s, or third party agents providing cash-out points (Mas and Kumar, 2008.) This simple fact illustrates the complexity of any proposed technically enhanced payment/ distribution mechanism for a social cash transfer which requires that one examine multiple and interrelated elements of a

22 http://www.businessdictionary.com/definition/payment-system.html 23 See OECD Working Party on Information Economy, 2006 where it is noted that “a wide range of systems have been developed for online payments […] It is divided into account-based and electronic currency systems. Account-based system allow payment via an existing personalized account (usually a bank account), whereas electronic currency systems allow payment simply if the payer has an appropriate amount of electronic currency.” 24 Mobile phones can be used only as the device which facilitates the transfer or transformation of value electronically.

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payments system. Broadly speaking, electronic payments systems can be categorised as systems that rely on the bank and those that rely on a non-bank entity. Maurer categorises the systems as follows:

Those that rely on a bank -

• E-money and plastic, including debit and credit cards: stored-value or pre-paid devices, generally card based, relying on traditional magnetic stripe or chip technologies linked to a remote account. Some of these systems do not directly rely on a bank account but ultimately require one. These include new uses of debit and credit cards, as well as giro cards which permit card-to-card and card-to-account transfers.

• Internet-based payments: relying on an existing bank account and providing access and funds-transfer capabilities remotely via email or web application (PayPal and Skype with PayPal are examples.)

• Mobile payments: mobile phone based applications using chip, SMS, WAP or other software driven mobile interface providing access to an existing bank account or credit card account (e.g., WIZZIT and MTN Banking in South Africa; Obopay in the United States.) Some of these, like Obopay, give the appearance of person-to-person (P2P) transfers—the user experience is an instantaneous transfer of funds from one phone to another—despite the fact that a financial institution serves as intermediary.

• Correspondent banking or branchless banking: third-party systems in which a non-bank retail outlet serves as the agent for an existing bank using POS terminals already present in the retail outlet.

Those that do not require any bank involvement include:

• E-purses: Stored value and pre-paid cards not linked to an existing bank account. Can be recharged by retail agents of the non-bank entity or by third parties (e.g., G-Cash, MEPS Cash; transit cards; phone cards.)

• Mobile wallets: Stored value and pre-paid mobile phone applications, based on an embedded SIM chip or other technology (e.g., M-PESA in Kenya), or based on an interface permitting access to a remote account with a non-bank entity.

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3.4 Conclusions The first step when designing an appropriate distribution/payment mechanism for the SCT programme is to recognise that targeting, identification authentication and payment are separate but interrelated elements. Although the current SCT pilot schemes target destitute and incapacitated households rather than individuals, it is suggested that as the pilots schemes are scaled up that MCDSS consider implementing the recommendations put forward by Kimetrica and use different targeting approaches (universal targeting, community based targeting and the means test approach) under differing circumstances. As the actual targeting and identification of beneficiaries falls outside the scope of this report which focuses primarily on an appropriate payment mechanism for the proposed national social cash grant, these important design elements of and SCT scheme will not be discussed further. In the section that follows, we highlight the fact that deciding on the technological parameters of the payments instrument (token) is perhaps the easiest element of the decision making and design process. Within the social cash transfer context the consideration of four vital principles namely choice, accessibility, affordability and trust (elements often neglected when the payment mechanism is viewed as an afterthought during SCT programme design) must be considered in depth so as to design a payment system which is appropriate to the beneficiary and country context. These four elements are discussed in detail in section 4.

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4. CHOICE, ACCESSIBILITY, AFFORDABILITY AND TRUST Proposing a mechanism for the distribution and payment of a social cash grant is not as simple as selecting a technological payment arrangement over a manual based cash distribution mechanism. Multiple and inter related factors must be considered in tandem. If a technological solution is chosen, deciding on the technological parameters of the payments instrument (token) is perhaps the easiest element of the decision making and design process. More importantly, at the low end of the market, and particularly within the social cash transfer context are the consideration of four underlying principles namely choice, accessibility, affordability and trust. Consideration of each of these within a particular country context should inform the selection of the most appropriate distribution/payment mechanism. We discuss each of these underlying principles below.

4.1 Choice

The poor deserve and are capable of exercising choice. Porteous in his definitive paper Making Financial Markets Work for the Poor notes that two necessary conditions are enough to show the market is working for the poor: 1) that usage by poor people is increasing over time; and 2) that there are alternatives available (Porteous, 2004.) Drawing upon the original ideas proposed by Sen, he states further that “for Sen, true development involves expanding the real choices of poor people; their greatest freedom to choose is in itself the goal of development. Therefore, a market that works for the poor is one which expands the choices available to poor people.”25

Transfers to the poor under social protection have generally been in kind, often taking the form of free or subsidised food and allowing for little choice by the beneficiary. Recent experiences in both development and rehabilitation contexts suggest, however, that there is a larger niche for cash transfer than many suppose.

The delivery of emergency relief aid to beneficiary households in Ethiopia following crop failure and severe drought in the early 2000s through the Cash Relief Programme (CfR) is an interesting case study demonstrating the role of choice in the enhancement of beneficiary dignity. The primary objective for the provision of funds was to enable households affected by crop failure to rebuild their productive assets. An evaluation by the primary funders of the scheme found that cash grants had been particularly successful in regenerating livelihoods (Standing, 2008.) Rather than merely consuming the aid provided (which would have been the case in the provision of food aid) beneficiaries successfully controlled debts and invested cash funds in restoring land productivity. The key element in the provision of cash grants had been the recognition by donors of the ability of the poor to identify their own survival needs and allocate resources accordingly. By providing cash grants individuals and communities were able to prioritise their needs and those of their families and communities and actively deploy relief assistance on their own terms enabling them to retain a greater sense of dignity in a time of crisis (Standing, 2008, & Creti and Jaspers, 2006.) Recognition that ‘poor’ is not synonymous with ‘incompetent’, this case study demonstrates that the power of choice is a

25 Amartya Sen (1999) as quoted by Porteous. 2004. Making Financial Markets Work for the Poor. Paper commissioned by FinMark Trust.

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necessary condition for the achievement of beneficiary dignity and underlies the need for choice in the delivery of cash payments to beneficiaries.

The case for providing cash transfers instead of in-kind transfers has been proven by various pilot projects and discussed at length by experts working in the field. These experiences show that if beneficiaries are allowed to exercise choice, they switch emphasis from the supply side to the demand side, increasing local demand for food and other products, and reducing the disruption of local markets that transfers in kind often cause (Farrington et al, 2005.)

Can the same be said for providing beneficiary choice with respect to the manner in which beneficiaries receive and access their cash transfers? We propose that the answer is affirmative and that beneficiaries deserve and are capable of exercising choice with their own best interests at the fore. Similar sentiments have been expressed by others working in this field. Notably, Bankable Frontier Associates in the 2006 paper, Scoping Report on the Payment of Social Transfers Through the Financial System state that “one key principle to clarify upfront is whether recipients will be allowed to choose their own preferred arrangement for payment from a set of available options; and at which intervals they may change their choice. While allowing choice may bring complexity and may not be possible at the outset, it may create flexibility in the payment arrangements since people may migrate to better options as they become available.”

Current intellectual debate around the mechanism for the distribution and payment of social cash grants appears to revolve around the cost-benefit analysis of so called “pull” and “push” approaches. “Pull” approaches require the beneficiary to physically come to a designated pay-point at a specified time to receive their cash. Pay-points are either fixed points such as bank branches, school halls, post offices etc. or mobile points established through the use of vehicles which establish a temporary presence in a remote area. “Push” approaches on the other hand involves electronically “pushing” the grant into a bank account in the name of the beneficiary. Beneficiaries are thereby able to access their funds through various channels (bank branch, post office, postbank, automated teller machines (ATM’s) and point of sale (POS) devices located at merchants who offer “cash back” facilities (Bankable Frontier Associates, 2006.)26 Whilst some schemes today offer beneficiaries the choice of receiving their cash grants through a “pull” or “push” approach, others impose a particular approach from the top down, allowing beneficiaries very little choice in how they access their cash.27

26 It must however be stated that the technological parameters of the payments instrument (token) will determine whether beneficiaries will be able to use multiple channels (interoperable technology choice) or be limited to the infrastructure deployed by a particular service provider (proprietary technology.) 27 See Bankable Frontier Associates, 2006 where the authors state that “Often, the push towards ‘“push”’ payment arrangements has come from grants agencies which have a strong incentive to reduce their costs in this way. However, without proper design and consideration of the situation of recipients, the costs ‘saved’ by the agency are simply transferred to the recipient, who may be unable or unwilling to bear them, and will resist the change (some in USA, UK) unless the broader benefits are made clear.”

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We propose that wherever possible, beneficiaries should be recognised as capable of making financially sound choices, including the choice of whether to receive their cash grant through a basic bank account (“push” mechanism) or at a designated pay-point (“pull” mechanism.) This view is supported by our observations of basic financial literacy in Zambia. Financial literacy in the most basic sense – i.e. the comprehension of the store of value including, but not limited to cash, are an everyday occurrence for families currently benefiting from the 5 pilot schemes in Zambia. A family living off the small sum of ZMK50, 000 monthly is by necessity making numerous trade-off choices and as the final evaluation of the Kalomo social cash transfer scheme indicates, beneficiaries are making sensible financial choices regarding the manner in which they spend their cash transfer.28 Poor households are in fact, by necessity, active managers of their money (Porteous, 2006.)

All beneficiaries of social cash grants are poor, which does not automatically equate to being financially or technologically inept. Whilst the introduction of a “push” mechanism would require “technology reorientation”, i.e. basic training on how to use an ATM for instance and the costs associated with maintaining a basic bank account should such apply, we maintain that it is the beneficiary who should be given the right to make an informed choice. Commenting on Kerio Valley Cash Transfer Pilot (KVCTP) where Concern partnered with Safaricom in order to pilot the use of the M-PESA system for transferring cash in emergency or development contexts, Brewin notes that illiteracy and unfamiliarity with operating the handsets amongst beneficiaries was an issue, but was overcome by Concern by employing a number of ‘clerks’ in the same way that assistants were employed during the food distributions. These clerks were generally literate young people from the local community who understood how to operate the phones and were on hand on distribution days to assist beneficiaries with the process of receiving M-PESA text messages (Brewin, 2008.)29

The ability of each beneficiary to make an informed choice of which payment approach is to their overall advantage is represented by the uptake of the Sekulula Debit Card in South Africa.30 With basic financial re-orientation and training for beneficiaries, Allpay Consolidated Investments (Pty) a subsidiary of ABSA working together with the South African government’s Department of Social Development succeeded in migrating the payout of approximately 8 million payment transactions per month from cash-based system to an easier electronic payment system. The introduction of this “push” approach has resulted in access to savings facilities,

28 See Final Evaluation Report – Kalomo Social cash Transfer Scheme, Lusaka, September 2007, p. 52 which states that “concluding from the average investment per item as indicated [..], beneficiary households invested more money at evaluation in livestock, in communication (radio), in seeds, hiring labour, ploughing and selling goods for trading. At the same time, investment for agricultural tools and household items reduced, which can most likely be explained by the fact that households were already in possession of them. It seems probably thus that the most incapacitated households were enabled by the SCTS to cultivate land because they could buy agricultural inputs and hire labour. In addition, households were empowered to diversify and improve their livelihoods by investing more goods in goats, chicken and other goods to trade.” 29 The M-PESA system enables virtual cash received on a phone to be redeemed at any one of the network of M-PESA agents throughout the country. 30 See DFID. 2007. Enhanced Payment Options for Social Transfer Schemes. Social Protection Briefing Note Series, No. 5 where it is noted that “The Sekulula account has no minimum balance requirement. Instead of paying around $4 per cash payout, the Social Security Agency pays Allpay $2.25 per month for the maintenance of the account. This fee includes two free withdrawals per month at ABSA ATM’s or usage at POS with merchants with whom ABSA has a direct relationship. Thereafter, fees are charged. The card can be used at any VISA merchant or bank ATM but fees are levied for use of other banks infrastructure.”

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increased safety and access to basic banking services for thousands of South Africans who receive monthly pensions, disability and child benefit payments (Inspiris, 2006.)

What makes this solution stand out above others is that recipients were given the choice and the opportunity to open Sekulula accounts remotely at Allpay pay-points. By mid 2005, nearly 500,000 recipients (two-thirds of grant recipients in the province) had chosen this option (DFID, 2007.) As the debit card is a VISA electron card, beneficiaries benefit from the use of VISA’s payment system to receive payments in a safer, more efficient way.31 A recent case study on the success of the Sekulula and Mzansi product offerings quite clearly states that the value of convenience and safety for recipients is immeasurable as elderly parents and people with disabilities no longer have to wait in long queues for cash (typical of “pull” payment strategies) or worry about keeping payments safe from theft (Inspiris, 2006.)

It is in recognition that the poor, just like the rich, deserve financial choice, that this report ultimately recommends designing a payments solution which provides for a gradual shift from the current “pull” approach to a “push” approach, and as such will allow beneficiaries choice as to how, where and when they access their social cash transfers. By deploying an appropriately phased payment solution from the start and allowing for the voluntary migration by beneficiaries from delivery and receipt of their social cash transfer through a “pull” cash based approach to an electronic “push” based approach, we maintain that the Zambian Social cash Transfer Scheme would serve as a model working example of how to empower beneficiaries, maximise their dignity and provide formal financial access to those at the bottom of the pyramid.32

4.2. Accessibili ty – multiple channels (cash-out points) and interoperability

For the beneficiary of a social cash transfer programme, being able to easily access his/her cash, at minimal cost, is probably the most vital consideration and the definitive measure of the success or failure of any proposed payment solution. In Zambia, as in most developing countries, payment of the SCT pilot social cash transfer takes place at defined payment points through a “pull” approach. As is often the case in circumstances where a “pull” mechanism is deployed, the distance to the nearest designated pay-point may be the primary obstacle experienced by beneficiaries. The channel deployed in most “pull” approaches is a human driven cash disbursement of physical cash or the distribution of vouchers, redeemable through specific suppliers or convertible into cash.

31 As the Sekulula Debit Card card is a VISA electron card, it is also interoperable with every other VISA member bank and enables the recipient to use their card at retail stores that electronically processes VISA transactions and other bank ATMs (although at a higher cost.) As with any “push” strategy, a potential disadvantage of this payments system is that beneficiaries are required to travel to a formal infrastructure environment if they are rurally based. This disadvantage needs, however, to be weighed against the reliability, safety of electronic payment solutions, together with the potential for multiple cash-out points. 32 See Porteous. 2006. Scoping Report on the Payment of Social Transfers through the Financial System, who states that “in some countries, it may not be possible to offer enhanced payment options at the outset of a social transfer scheme since the financial sector is not able to provide the products required. Even in these cases, any scheme should include the scope and even incentives for the payment arrangements to evolve over time.”

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Box 3: The need for interoperability in G2P Payment Schemes

A major reason for the keen attention on the ownership rights attached to technology is the heightened need for interoperability in G2P payment schemes. Companies and individuals who hold sole or proprietary rights to technology usually explicitly intend for it not to be interoperable – this is the way of ensuring the technology remains proprietary, which, in turn, reflects business decisions to extract value from the technology by retaining its uniqueness, rather than going for wide dispersion and usage. In general there is nothing wrong or sinister about this commercial choice. However, it is anathema to the needs, goals and objectives of G2P payment solutions. Governments cannot link the delivery of socially critical services to poor populations to a sole provider – the multiple risks are too great, in the event of system or business failure, or even just disruption. In addition, this type of commercial option usually comes at a premium price, which Government cannot justify, in the context of delivering a service to an element of the population, which, by definition, will have little or no ability to pay for itself.

Source:  Pearson and Kilfoil (2007)  

Cash may be delivered to these points by foot, bicycle, motorcycle or in armed cars. “push” strategies on the other hand, if appropriately designed, provide access to formal financial infrastructure, provide beneficiaries with basic bank account facilities and access to cash at a range of locations and at times of their choosing. This is provided of course that the technological solution proposed is interoperable, mutable and designed to be able to leverage off already existing infrastructure. Inappropriately designed “push” strategies may cause beneficiaries even greater difficulties, forcing them to walk greater distances and costing them more to access their transfers through specifically designated and often proprietary channels such as bank ATM networks may be proprietary and linked to their own customers. It is interesting to note that although in principle beneficiaries of the KVCTP scheme, once they had received their credit message, should have been able to collect their cash from any M-PESA agent, in practice, the majority used a single cash-out point – Kinyach police station – where Safaricom arranged for an agent to be posted on a particular day (Brewin, 2008.) Beneficiaries were actually told to assemble at a particular distribution point on a particular day in order to redeem their credit with the M-PESA dealer. This particular arrangement clearly contributed nothing to increasing accessibility and, as noted by Brewin, given the fixed nature of a single distribution point a particular woman named Taleh spent five hours slowly walking to the police station and five hours back again once she had waited to collect her cash. Many beneficiaries also faced considerable hold-ups once at the police station. These were caused by a number of factors including inter alia waiting for the credit message to arrive on their phones and/or waiting to access a handset and to check whether their SIM had been credited if they were using a borrowed handset (Brewin, 2008.)

What exactly do we mean by an inappropriately designed “push” strategy? In our minds, this would be a payment solution that deployed expensive technology for technologies sake, required substantial investment in new infrastructure and once again limited beneficiary accessibility through the deployment of proprietary technology including proprietary payment instruments and channels. The most recent example of an inappropriately designed and flawed payments system is the Malswitch Net1 Smart Card solution deployed by Concern Worldwide and DFID in the Malawi Dowa Emergency Cash Transfer project.33 Whilst UEPS 33 See Pearson and Kilfoil. 2007. Dowa Emergency Cash Transfer (DECT) Wider Opportunities Evaluation and Recommendations – Solid Lessons and a Promising Vision. Report submitted to Concern Worldwide and DFID, Malawi.

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(Universal Electronic Payments System) technology is arguably the most advanced off-line Smart Card payments technology worldwide and provides the most sophisticated biometric authentication system, the deployment of this technology in Malawi has proven to be somewhat of a white elephant given the “chip only” nature of the Net1 technology, its proprietary ownership, hardware intensity, and the erratic nature of GSM coverage in remote villages. Perhaps the greatest failure of the technology deployed is that it did little to improve beneficiary accessibility, provided no add-on or add-in financial services and limited the use of multiple distribution channels and did not leverage existing infrastructure.

The Net1 technology deployed by Malswitch is a “chip only” technology meaning that once funds are loaded to the Smart Card, beneficiaries are only able to access these funds through contact with a custom designed Smart Card chip reader. As a result, beneficiaries are only able to receive or spend funds via banks that are members of Malswitch and have deployed Net1 ATM’s and POS devices. As four of the largest banks in Malawi (National Bank, FMB, Stanbic and NBS) are not members of Malswitch and have not deployed Net 1 terminals, beneficiaries are excluded from making use of these banks branch, ATM and POS channels to access their cash (Pearson and Kilfoil, 2007.) The cost of a national upgrade to accept these Smart Cards is also prohibitive and the use of one supplier (Net1) to supply cards and terminals causes serious commercial and operational risk which may lead to monopoly pricing. While the ambitions of any disbursement solution should aim to maximise the efficiencies associated with electronic mechanisms, the use of technology should not be for the sake of technology (as was the case in the DECT project) but to meet a defined and measurable benefit to all parties, hence the need to maximise the use of existing points-of-presence in a country as obscure as they might seem.

Demonstrating the concept of forward and rearward compatibility in payments systems, Figure 2 below plots the payment channel against card issuer defined authentication mechanisms. The beauty of an open technology as available from VISA, is that great care is given to ensuring that the payments instrument, in this case a VISA card, works in the manual branch environment, at an ATM, at retail outlets with a POS and funds are accessible via the mobile phone and the internet. This ensures the greatest degree of accessibility possible. The bigger challenge to payment system providers is in ensuring interoperability when authentication requirements are enhanced over time. The key to consistent acceptance is achieved by allowing rearward compatibility. That is, if the card issuer issues an EMV Magstripe that requires PIN to authenticate the cardholder at point-of-sale but the point-of-sale does not support EMV PIN then the card should be able to fall-back to Magstripe and signature authentication. Of course, rearward compatibility comes at the price of risk as it means that a door is opened where the authentication requirements are less stringent and thus more open to abuse.

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Figure 2: Forward and rearward compatibility in payments systems

 

Would it be preposterous to propose that an appropriately designed payments system would allow beneficiaries to access their grants:

• through their closest branch network of any formal financial institution (bank, MFI);

• through multiple channels ATM’s, POS devices, mini ATM’s (cash back) and other secure devices which are able to read a card and accept a PIN; or

• to choose to access their cash through a mobile banking platform supported by a cash conversion point?

In our opinion, the answer that such a suggestion is not preposterous in the least and can be achieved through deployment of an appropriately designed technological solution from the start. The solution may be as simple as combining a bank-based and non-bank based model such as Globe Telecoms GCash service in the Philippines.34 Key to this proposition would however be the selection of an interoperable and open 34 Branchless banking consists of two basic models (CGAP, 2006.) Bank-based models require the customer to have a direct relationship with a prudentially licensed and supervised financial institution – a transaction account, a savings account, a loan, or some combination. The customer deals almost exclusively though with retail agents hired to conduct transactions on the banks behalf. In non-bank based models, customers have no direct contractual relationship with a supervised financial institution. Instead, they exchange cash at a retail agent in return for an electronic record of value. This virtual account is stored on the server of a non-bank, such as a mobile operator network or an issuer of store-value cards (CGAP, 2008.)

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technology solution such as EMV Chip or Magstripe technology owned by VISA, MasterCard and EuroPay35 which would allow transactions from and to a number of participating banks, access to any VISA, MasterCard POS and cash-out through a number of local participating agents. As noted in a recent CGAP Focus Note, over the last few years there has been a substantial channel innovation by banks - with each channel ATM’s, banking vans, in-store POS systems, internet banking, banking agents – outsourced branches and mobile transactions - having been proven in the market and used to varying degrees (CGAP, 2008.) This focus note also highlights that channels are in fact most powerful when used in combination to reach new customer bases both geographically and by socio-economic stratum.

As such, we are currently seeing the increased frequency of mobile phones enabling remote transactions where the mobile phone is used as an in-store POS device by merchants is linked to a network of agents (CGAP, 2008.) Whilst the system implemented in the Philippines by Smart Communications offers a phone SIM card and MasterCard combo and outsources specialised functions to various players, one party, be it a mobile operator or a bank has traditionally served as the “leader” and has ultimately held legal and financial responsibility for the actions of outsourced partners (CGAP, 2008.) Within a social cash transfer programme one would see the Government act as a co-branding partner to the banks when issuing a VISA or MasterCard branded SCT payment card. Alternatively, SCT beneficiaries could opt to bank with any bank in the country and receive “push” payments into their chosen account for whatever reason. The only real reason why a Government would want to issue its own card is largely to control costs on behalf of the beneficiary.

35 This technology follows a common specification set by VISA, MasterCard and EuroPay and is freely available to anyone, including vendors and the 40,000 banks and other financial institutions that are members of any one or a combination of these card associations (Pearson and Kilfoil, 2007.)

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Table 1: How interoperable is branchless banking today?36

Smart Money GCash M-PESA WIZZIT CAIXA

Country  Philippines  Philippines  Kenya  South Africa  Brazil 

Wide network of locations for account opening? 

Open in person at one of several hundred Smart Wireless Centers (must be a Smart owned store) 

Open accounts via mobile and do KYC at any of the 4,900 accredited agents  

Open in person at any of the 850 M‐PESA agents and at Safaricom Customer Care Centers 

Open in person with one of 2,000 WizzKids or at one of more than 400 Dunn’s stores 

Open in person at one of approximately 13,255 agents affiliated with Caixa, or one of 2,442 branches 

Which mobile networks may be used by clients? 

Smart only  Globe only  Safaricom to initiate all transactions, but transfers may be received by user of any mobile network. 

Any mobile network  None – card based model 

Can do account‐to account transactions to and from banks? 

Only for cash into Smart Money account 

No (except for clients of certain rural banks) 

No  Yes  Yes 

Where can users deposit cash? 

At one of 12,000 participating retail outlets using phone.  Also at ATM’s using card or at issuing bank branches. 

At one of 4,900 participating retail outlets using phone 

At one of 850 participating retail outlets using phone 

At PostBank, ABSA, or Bank of Athens (gives WIZZIT largest deposit taking footprint in South Africa) 

At one of 13,255 agents in Caixa’s network or one of 2,442 Caixa bank branches 

Part of card network? 

Yes, MasterCard  No  No  Yes, MasterCard  Depends on type of account (some VISA/MasterCard.)  Many Brazilian POS are not interoperable.   

Can use ATM networks? 

Yes, all 3 ATM networks (6,867 points) 

Cash‐in via Bancnet ATM network 

No37  Yes, all ATM’s in country via SASWITCH 

Yes, own bank plus ATMs on VISA and MasterCard networks 

Additional ways to withdraw funds? 

Cash back at merchants or at teller windows of issuing bank 

No  No  Cash back at merchants 

Teller window at branch.  Cash back generally not available in Brazil.   

36 Source: Adapted from: Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance. CGAP Focus Note No. 43. January 2008 37 It is rumored that customers will soon be able to use pesa point ATM’s as cash-out points. These are however by their very nature proprietary channels.

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4.3. Affordabili ty (cost-efficiency)

‘Affordability’ in the hands of an SCT beneficiary is somewhat of a misnomer because it is largely the responsibility of Governments and/or donors funding such grants to distribute funds at no cost to the beneficiary. One would typically associate affordability criteria with payment mechanisms provided by commercial entities. This being said, cost efficiency in the system itself is potentially a key determinant in how much of the available budget can be passed onto the beneficiary. Where the payments modality is efficient and budgets allow for such, it would be possible to pay out more money to beneficiaries as a result of system efficiency.

Indirect costs do, however, need to be considered when one suggests that payment streams should move away from “pull” systems or when offering the choice of “push” payments options. For example, when offering SCT beneficiaries the choice of receiving their money from a Shoprite store one needs to consider the transportation costs that would be incurred by the beneficiary to get there. Assuming that poor people are not stupid, they would very quickly establish if it made financial sense to travel into town to get their money rather than waiting for the money to come to them. Hence, in order to accommodate for potential travel costs and to incentivise the behaviour, “push” payments incentives should be given to beneficiaries as reward for such behaviour.

Why one would want to incentivise a channel shift towards “push” payments systems? Simply, an opportunity exists to offer a financial product through typical banking and retail infrastructure and, therefore contributes to Government’s goal to facilitate financial deepening and greater financial inclusion. Once a beneficiary has graduated from being excluded to being financially included it is possible to offer further benefits associated with electronic payments systems such as Mobile Phone Banking. More direct benefits of financial inclusion such as access to micro-finance become very real opportunities that, in the longer-term, could help catalyse self propulsion out of poverty.

4.4. Trust

“There is a lot of trust involved when anyone wishes to transfer money overseas. This is not the type of business where anyone can start today and take the market by storm, as the saying goes. People will not hand their money to anyone they do not trust. Western Union has had more than a century and a half during which they have built a strong reputation of being trustworthy and reliable when people wish to transfer money overseas. This is well witnessed through the fact that Western Union has more than 270,000 worldwide centers spread across 200 countries. These numbers make Western Union the biggest money-transfer service in the world.”38

The Western Union money transfer service offered through a number of agent locations including banks, travel agencies, post offices, airports, currency exchange offices, supermarkets, grocery stores, have succeeded in the past largely due consumer trust and belief in the reliability of the Western Union brand together with the company’s leverage off a continuously expanding distribution network. This “walk in”

38 Overseas Money Transfer. (Online.) URL: http://www.overseasmoneytransfersite.com/othmethods.html

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money transfer service still dominates formal and international (inbound) remittances into Africa.39 This figure currently stands at $38 billion and exceeds all other formal remittances from international donor funding and debt relief by a considerable margin (Western Union, 2008.) With over 320 000 agent networks globally, the Western Union brand simply cannot be ignored. Reliable, trusted and relatively quick (no clearing period despite not being real time) the Western Union brand has been pervasive and in the absence of more recent activities such as G Cash, M-PESA this service was considered to be the leader and in many instances was the only choice for low income households. Realising that new mobile money transfer competitors were steadily entering markets where Western Union had previously held an unthreatened and dominant position, on the 18th October, 2007 the global money transfer service provider announced an agreement with the GSM Association to facilitate the development of mobile cross border mobile money transfer services.40 Commenting on the agreement, Christina Gold, Western Union President and CEO stated that “Western Union has a long tradition of innovation. Our focus on the mobile money transfer space is an important step in expanding the range of Western Union’s global services to a new category of consumers. Our brand, extensive network, and compliance capabilities, combined with the GSMA members’ market reach, uniquely positions Western Union in the mobile money transfer marketplace.”41

The success of Western Union would not have been possible without having built its reputation as the provider of a reliable, trusted and relatively quick money transfer service provider. Within the SCT context, beneficiaries must be able to trust that their cash will always arrive and will be available to them at a certain time. It will be of no benefit to the beneficiary if the overall strategy deployed is to “bank the unbanked” through the use of a “push” strategy and the beneficiary finds that his cash transfer is not in his/her bank account when he/she inserts his/her debit card into the ATM. Should this event occur on a regular basis, trust in the financial system will be eroded, and the opportunity for financial inclusion lost. It is more than likely, given the choice that this beneficiary will revert to the face-to-face manual system where an individual (the pay-point manager in the case of Zambia) can be held accountable for non-delivery.

39 The majority of Western Unions remittances are still ‘walk in” cash transactions in which cash is collected by the agent and payment (usually cash) is available for pick-up at another agent location in the designated receive country. 40 Source New York, Oct 18, 2007 Business Wire. The GSM Association (GSMA) is a global trade association representing more than 700 GSM mobile phone operators across 218 countries and territories. More than 200 manufacturers and suppliers also support the Association’s initiatives as key partners. The GMSA members currently serve more than two billion customers which equates to 82% of the world’s mobile phone users. 41 Source New York, Oct 18, 2007 Business Wire. “The western Union mobile service will connect operators to Western Union’s existing global money transfer system, which processed approximately 17 percent of the world’s remittance volume in 2006. Once connected to the Western Union service, operators will be able to use their own “mobile wallet” software to enable person-to-person mobile money transfers over Western Union’s cross-border remittance network. The Mobile Money Transfer service will enable consumers to transfer money to or from mobile wallets and will offer a global network of Western Union Agent locations for cash-to-mobile and mobile-to-cash transactions.”

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4.5 Conclusions

As has been established, for the beneficiary of a social cash transfer programme, being able to easily access his/her cash, at minimal cost is a vital consideration and the definitive measure of the success or failure of any proposed payment solution. Inappropriately designed “push” approaches, deploying expensive technology for technologies sake, requiring substantial investment in new infrastructure and limiting beneficiary accessibility through the deployment of proprietary technology including proprietary payment instruments and channels are not only expensive, but also do little to enhance beneficiary reality or dignity. As such, the payment system must be designed using interoperable, non-proprietary and mutable technology. This will allow the beneficiary to use his/her payment token in the manual branch environment, at an ATM, at retail outlets with a POS and allow funds to be accessible via the mobile phone and the internet. This ensures the greatest degree of accessibility possible. Should a “push” strategy be deployed, in order to accommodate for potential travel costs and to incentivise the beneficiary behaviour, “push” payments incentives should be given to beneficiaries as reward for such behaviour. It is vital that the payment mechanism delivers reliable and quick access to beneficiary funds. As such, beneficiaries must be treated as normal customers of the formal financial system, thereby knowing and trusting that their funds will always be available at a certain point in time and easily accessible through a variety of channels. Building on the four basic principles of choice, accessibility, affordability and trust, in the next section of the report we highlight the growing and complex distribution and payment mechanisms which have been tried and tested in various G2P and P2P contexts.

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5. GROWING AND COMPLEX DISTRIBUTION AND PAYMENT MECHANSISMS USED IN G2P AND P2P TRANSFERS

“It makes sense to examine how technologies are being used in non-social protection contexts (of the type exemplified by M-PESA in Kenya) in order to bridge gaps and learn lessons between the experience of private and social transfers. Electronic technologies may not be the only area for innovation in delivery, and exploration of alternative institutional channels could also be explored, including linkages with treatment programmes such as anti-retroviral therapy.”42

Cash (as opposed to in-kind) based approaches to social protection are steadily being recognised for their potential advantages including cost efficiency, providing recipient choice and dignity, multiplier effects, lower costs for the beneficiary and the avoidance of disincentive effects (Farrington et al, 2005.) It is equally clear is that many of the potential negative concerns raised such as risk, security, affordability and sustainability can be addressed through the design and implementation of an appropriate, scalable, efficient and effective payment mechanism. As highlighted in section 3 above, deploying a distribution and payment mechanism which provides beneficiary choice, thereby increasing dignity; provides accessibility through the use of interoperable technology enabling cash-out through multiple channels; reduces beneficiary cost associated with accessing cash disbursements; and; is trusted by the beneficiary to deliver his/her cash time after time is vital to the overall success of any SCT programme.

Perhaps the most challenging element involved in designing a distribution mechanism, whether it is a purely manual based system which deploys people to deliver cash, or an electronic payment mechanism which makes use of various cash-out points/channels is the low level of monetisation experienced in most rural economies. In Zambia for instance, primary research indicates that it is common for the payout of remittances to be delayed or not paid out in full as a result of the shortage of cash available at many local disbursement points.43 The lack of cash available at cash-out points has also been experience by Safaricom’s M-PESA money transfer scheme. Despite an extensive cash-out network of agents who usually have cash on hand, due to increased demand during certain time periods, Safaricom have reported that agents often run out of cash due to the fact that they have not maintained a sufficient float.44 The poor level of monetisation of many rural economies is unlikely to be solved by formal financial service providers in the short to medium term. This is due to the fact that the provision of various cash-out channels such as ATM’s and POS devices in rural areas often remains unattractive to banks and MFI’s.45 Although some SCT schemes have made use of formal cash in transit service providers to transport cash to designated cash-out points (see Section 5.2.5 below detailing the introduction of convoys of vehicles fitted with cash dispensing machines in Namibia to deliver social pensions), this option may not be viable within the Zambian context. Preliminary interviews with two cash-in-transit 42 (GSDRC, 2008) 43 See Cenfri, 2008 where it is suggested that physical inaccessibility of transfers made through remittance houses account for the low usage of formal P2P remittance mechanisms. 44 Vaughn. 2008. Providing the Unbanked with Access to Financial Services – M-PESA Kenya. Presentation delivered at Mobile Bankers & Financial services Africa Conference, Southern Sun Hotel, Johannesburg, South Africa. 14 – 16 July 2008. 45 Expected low transaction volumes often fail to justify the upfront and continuing cost of expansion and investment in physical infrastructure.

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service providers in Zambia indicates that these service providers tend to operate within the geographical confines of major urban areas and seldom transfer large amounts of cash to rural areas.46 Physically getting the cash to the beneficiary remains a primary challenge in the design of a distribution/payment mechanism. Although general trends appear to suggest a gradual migration from traditionally deployed “pull” payment approaches to “push” payment approaches as social transfer schemes mature of over time, it must be emphasised that the choice of a payment mechanism must effectively respond to developing country context-specific circumstances. A payment mechanism that fails to accurately address social considerations; does not compliment existing infrastructure coverage and fails to address the nature of the physical environment will at the very least fail to achieve cost saving efficiencies.

As the objective of this report is to examine potential alternative distribution/payment mechanisms for the regular disbursement of cash to SCT beneficiaries in Zambia, we commence our analysis in the section by detailing the current SCT pilot budgetary and disbursement process. We then present a number of case studies for consideration. These draw from lessons learnt from other G2P and P2P contexts wherein alternative delivery and payment mechanisms and diverse institutional channels have been deployed with varying degrees of success.

5.1 Overview of the Zambian SCT pilot manual budgetary and distribution system

The text book example of a manual (non-electronic and human resource intensive) and rudimentary distribution mechanism is provided by the system currently deployed by the Zambian SCT pilot schemes. The current system reflects a traditional “pull” approach to the delivery of benefits, reflective of the majority of social transfer delivery systems throughout the developing world.

As represented by Figure 3 below, budgetary request takes place at district, provincial and national levels and commences after the District Social Welfare Office (DSWO) has retired the previous payment cycles administrative and transfer receipts and all accounting forms required to ensure accountability of fund allocations. Districts with unaccounted for expenditure do not receive transfers for the following payment cycle. Unfortunately, beneficiaries suffer under these circumstances as funds are withheld and disbursement does not take place. As such, poor financial controls potentially violate the fundamental purpose of the SCT scheme as disbursements are withheld from beneficiaries. Timeous, regularly and predictable disbursement is therefore compromised. This severely impacts upon beneficiary trust and leaves beneficiaries without a reliable source of financial support.47

46 Both MintMaster and Armcor indicate that their business is almost exclusively based in and around Lusaka and the Copper Belt. Although both companies expressed their willingness to expand their businesses to rural areas, neither had engaged in such an expansion strategy due to the current low levels of demand. 47 Interviews conducted with CARE International indicate that irregular payments have been a feature of several of the pilot schemes. This is purportedly a result of the failure of the financial management system deployed. The Fiduciary Risk Assessment report highlights the weakness of the financial control systems which do not operate in real time and cause associated financial reporting delays.

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Figure 3: Budgetary process flow

 

District

• DSWO draw up budgets for SCT transfer & admin costs for 4 month period & submit to PSWO for approval by 1st of  the month preceding the start of the next financial period

Province

• PSWO receives request & checks for reasonability & queries anomalous expenditure. Approved budgets are summarised and forwarded to MDCSS HQ by no later than 15th of month  

MCDSS HQ

• MCDSS HQ then requests the additional resources from cooperating partners by the 16th of the month

Cooperating Partners

• Cooperating partners receive request for additional resources and releases requested funds by no later than the 30th of the month

 Source: Social Cash Transfer Manual of Operations, 8th Edition, 2008 

In cases where funds are fully accounted for the submission by the DSWO for the necessary transfer funds and administrative costs must take place by the 1st of the month preceding the start of the following financial period. The DSWO draws up and submits budgets for the two following bimonthly payouts to the Provincial Social Welfare Office (PSWO.) The PSWO is responsible for certifying the reasonability of requests and ensuring any anomalous expenditure is queried and satisfactorily accounted for. Once satisfied, the PSWO will approve the budget and forwards the request onto the headquarters of the Ministry of Community Development and Social Security by later than the 15th of the month. Ministry headquarters then request the additional resources required from the cooperating partners who release the funding no later than the end of the month. Once in receipt of the funds Ministry headquarters will ensure that funds are made available to the districts for disbursement to the pay-point manager (PPM) no later than the 10th of the following month. Funds are split and transferred into two separate bank accounts held at banks at district level. One bank account is for cash transfers from which the PPMs are directly paid, the other for administrative costs at district level.

The current beneficiary distribution mechanism deployed by the SCT pilot schemes is labour intensive. It is overseen and implemented by a number of primary functionaries, namely, the DSWO, the PPM and a local Community Welfare Assistance Committee (CWAC) member.

The process commences upon the receipt of released funds into the transfer account. Upon the release of funds the DSW Officer issues hand written cheques and beneficiary payment schedules to be collected by the each of the districts PPMs. Each beneficiary payment schedule specifies the names of the beneficiary (and their

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deputy48), the NRC of the collecting individuals as well as the total amount to be paid out. The DSWO then contacts all PPMs individually, either by mobile phone or word of mouth, to organise collection. Upon receiving the cheque and beneficiary payments schedule from the DSWO, the PPM submits all financial control documentation (of the previous payment) to the DSWO and proceeds to the local bank branch to cash the cheque. PPMs will only be allowed to cash their cheque and withdraw funds once the receiving bank is in receipt of a withdrawal authorisation issued by the DSW Officer detailing the name of the pay-point, the PPMs name and NRC and the amount to be withdrawn. Once in receipt of the funds the PPM returns to his/her district, often as far as 100kms away, and notifies a local CWAC member of the intended disbursement date. The date varies from month to month to enhance the overall security of the scheme. However, to ensure overall predictability and reliability of disbursements, PPMs are required to commence disbursement within the 3rd week of the month. On the announced day beneficiaries (or their deputies) collect their transfers from the pay-point. Each beneficiary is required to identify themselves with a NRC and is required to sign that the transfer has been received. Authentication of beneficiaries is conducted by the CWAC member who is present at the pay-point to ensure the payment process runs smoothly.

Following payment, the PPM will keep all unpaid transfers until he/she travels again to the district for collection of funds for the following month’s payment cycle. During this time the PPM manually prepares a report reconciling the transfers paid to the beneficiary households. These documents are handed over to the DSWO at the start of the next payment cycle and any unclaimed funds are re-deposited into the transfers account at the district bank. The DSWO then also reconciles the transfers and administration funds against the bank statement and manually enters all debits and credits in the cash book. The DSWO reconciliations are sent onto the PSWO for further checks and verification. On completion of verification the PSWO sends the reconciliation from the districts to headquarters for final checks and verifications. This process is schematically represented in Figure 4 below.

48 The deputy is an appointed proxy who may collect the payment on behalf of the beneficiary. The need for a deputy was recognised as necessary as a result of the fact that many primary beneficiaries were often to ill or old to travel the necessary distances to collect the transfer in person. Deputies are identified in the initial targeting process undertaken by the CWAC. The system of deputies is also actively monitored by the CWAC who ensures that opportunities to defraud beneficiaries are limited.

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Box 4: Summary of the situation 5 pilot schemes are already in place. All 5 schemes use an entirely manual disbursement and payments system that requires; • A district office to target beneficiaries in

consultation with local authorities; • The creation of a pay-point often a school or

clinic in the rural area; • The recruiting and training of a pay-point

manager (PPM); • The dissemination of beneficiary lists from

HQ to district offices followed by a bank transfer to district bank account for funds plus administration costs;

• Cash is disbursed manually; • Reconciliation is manual.

Figure 4: Existing SCT disbursement process 

Village

District Office

PPM

Beneficiary

Beneficiary

Beneficiary

Beneficiary

Beneficiary

Beneficiary

Beneficiary

Beneficiary

Beneficiary

Beneficiary

•Step 1.Collect payment schedule & submit financial control doc

District Bank  Branch

•Step 2. Collect cash and redeposit uncollected funds

•Step 3. Return to community and disburse funds to beneficiaries. Beneficiaries use ID and signature to identify and authenticate themselves. Process overseen by CWAC member  

Source: Social Cash Transfer Manual of Operations, 8th Edition, 2008 

5.1.1 Technical findings

As summarised in Box 4, the current mechanism deployed by the 5 pilot schemes is a non-electronic, manual “pull” system that relies on community based delivery systems to ensure the effective disbursement of cash transfers. The system is characterised by low levels of technology usage, limited use of existing financial infrastructure and no deployment of potential alternative distribution channels. The budgeting process is almost completely paper based. The use of electronic funds transfer (EFT) and physical bank branch infrastructure is only deployed up to the district level, where funds are withdrawn and transported in person to various pay-points where they are manually distributed to beneficiaries. Identification and authentication of beneficiaries is manual and relies on the presentation of a NRC and signature. Where technology has been utilised (in the case of electronic databases) the deployment of such technology has been inefficient. Inefficiency is caused by duplication as each of the 5 pilot schemes has its own stand

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alone non-interoperable database. Although these 5 individual databases might currently operate within the defined costs and management parameters of the 5 pilot schemes it is unlikely that this will be the case when the scheme is scaled up to cover 72 districts.

Of further concern is the non-interoperable nature of the system, which renders the systems useless beyond the limited confines of the SCT programme. Our final observation is that the payment delivery mechanism is itself not electronic. This has significant implications for financial management of the scheme as a result of time delayed reconciliation.

5.1.2 Fiduciary risk

Fiduciary responsibility refers to the task of utilising property or power in the best interest of a designated set of beneficiaries. Fiduciary risk can therefore be understood simply as those risks which have the potential to hinder a trustee or agent in the optimal performance of their duty such that the interests of the beneficiary are adversely affected.

The current pilots have established a framework for managing fiduciary risk that has contributed to the satisfactory performance of the SCT scheme in Zambia thus far. The current risk management framework is managed through a bottom-up participatory institutional structure that includes the existing public welfare structures of the Government of Zambia, donors and other cooperating partners as well as incorporating community involvement at district, area and community level.

A detailed manual of operations facilitates capacity building and assists in the implementation of accounting and internal control procedures. Checks and balances established within the confines of the programme to mitigate inherent programme risks include the separation of selection, approval and verification of beneficiaries from monitoring, audit and evaluation of programme expenditures. The community fulfils the role of selection, approval and verification while district, provincial and Ministry staff carry the responsibility of evaluation, monitoring and audit. Further mitigating features of the current scheme include the direct transfer of funds from MCDSS headquarters to district banks; the use of government employees as PPMs; the monitoring of payments and authentication of beneficiaries by CWACs and the identification of beneficiaries (or their deputies) using the NRC and signature.

The overall assessment of the fiduciary risk of the SCT scheme in Zambia has been judged to be substantial (Coffey International Development, 2008.) This must however be contextualised as a rating of “substantial” is considerably low for a programme of this kind. However, two risks namely, corruption risk and key fiduciary risk have been classified as significant. 49 In developing this estimation, potential fiduciary risks as well as actual fiduciary risks have been assessed. Potential corruption risk has been assessed to exist as a result of the decentralised nature of the payment delivery mechanism which requires the PPM to carry relatively large 49 In a detailed assessment of corruption risk three levels of corruption are identifiable. These are grand corruption – the large-scale looting or plunder of state resources; administrative corruption – the manipulation of administrative processes to divert and obtain state resources; and petty corruption – the corruption of service delivery to obtain bribes, monies or benefits to which there is not entitlement

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sums of money significant distances. It has been suggested that as a result of limited monitoring opportunities PPMs could potentially misappropriate the cash transfers in their possession by claiming that the transfers were lost or stolen in an attack en route to the pay-point (CARE International, 2008.)50

With respect to key fiduciary risk, points of concern have arisen around the failure of prompt and accurate financial reporting. Indications are that the necessary bank reconciliation processes at four of the five pilot districts have not been regularly undertaken. For instance, in Kalomo only one of the two required cash books has been maintained and internal audit reports have disclosed the existence of undocumented differences in cash balances. Considerable delays in financial and other reporting processes are also noted.

Therefore, the potential for fiduciary risk is high as a result of the largely manual system of financial management controls. Where technology is utilised it tends to be outdated and limited. This makes the tracking, monitoring and accounting for the flow of funds difficult and labour intensive. Expenditure tracking failure inevitably results in delays in transfer delivery, as budgetary requests from districts with unaccounted for expenditures are withheld. These failures in basic financial management practices present a substantial fiduciary risk and undermine the sustainability and future scalability of the SCT scheme.

5.2 Learning from other SCT programmes

As discussed above, the current SCT pilots in Zambia provide a good example of a manual (non-electronic and human resource intensive) and rudimentary budgetary, distribution and payment mechanism. Before the advent of electronically enhanced payment systems; the design and delivery of banking products specifically designed to “bank the unbanked”; the expansion of traditional banking channels to include mobile banking units, ATM’s, cash advance POS devices, and mobile banking; and independent non-bank m-banking mobile operator led solutions, manual based systems where the only option available to SCT schemes. Over the last few years however, governments and donors have begun to experiment with alternative distribution channels and payment mechanisms. Below, we highlight some key developments observed from various G2P and P2P contexts. We discuss the use of alternative delivery and payment mechanisms and diverse institutional channels which have been deployed with varying degrees of success.

5.2.1 Use of the post office in India

India Post presents an interesting case study of the utilisation of existing infrastructure coverage by financial service providers to achieve greater financial deepening and the inclusion of the poor. Indian Post has one the most extensive distribution channels of any postal service in the developing world. Consisting of 154,919 branches, 90% of which are in rural areas, Indian Post has become the most significant retail outlet for a 50 The occurrence of actual corruption risks have been noted during the course of the fiduciary risk assessment conducted on the scheme. Evidence seems to suggest that some PPMs and CWAC members have, in limited cases, colluded to divert funds from beneficiaries either by underpaying the beneficiary or ensuring that beneficiaries acknowledge receipt of two payments while only receiving one (Coffey International Development, 2008.)

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range of short and medium term savings products, provident funds and cash transfers to the poor. The effective utilisation of India Post’s existing infrastructure coverage as a distribution, collection and disbursement point has meant that financial service providers have been able to offer low-cost financial services which are affordable to the poor through the post office.

5.2.2 Informal banking and money transfer services in Somalia

In response to the humanitarian emergency of 2006 in southern Somalia, a consortium of five agencies, namely Oxfam GB, Horn Relief, AFREC, WASDA and Development Concern implemented the Emergency Drought Response Action (EDRA) programme. EDRA used a money transfer service provider Dahabshil to facilitate the payment of emergency cash relief payments.51 The objective of the emergency cash based intervention was to improve the purchasing power and livelihoods of 16,260 target households, and to develop infrastructure through micro-projects, in the drought affected communities of Lower Juba and Gedo Region of South Somalia (Majid et al, 2007.) The programme consisted of the following components:

• A community based registration process relying on public participation, transparency and pro-active engagement with the clan system in order to advocate for targeting of resources to poor pastoralists and minority groups;

• an initial one-off cash relief distribution of $50 per household in June 2006 to a planned 16,260 households;

• four monthly distributions within a cash-for-work framework for 8,900 households consisting of: 90% of beneficiaries receiving $55 per month as cash-for work; 10% of beneficiaries – the most vulnerable and labour poor households receiving cash relief of $55 per month;

• the identification and implementation of a range of drought mitigation microprojects as part of the cash-for work component.

The programme evaluation report prepared by Majid et al notes that the use of the hawala system, through Dahabshil, to manage and distribute the cash was mixed.52 In exchange for a commission of 7.5% of the overall monetary value of the transfer, Dahabshil carried 100% of the financial risks involved in the distribution and was responsible for its own logistical planning. This commission was considerably higher than the usual 2-3% charged for point to point money transfer services. Overall, results are reported to have been positive with +90% of beneficiaries receiving the full allocated amount, on time and in a convenient location (Majid et al, 2007.) Despite this 90% success rate, and although there were no allegations or evidence of corruption, taxation or unusual security concerns, the communication problems with Dahabshil as experienced by one consortium member, Horn Relief were so serious that alternative distribution plans were made. Of particular importance and relevance are the following problems highlighted by Horn Relief:

51 Dahabshil, Inc. is a U.S corporation that facilitates the transfer of money for immigrant communities and Non-Governmental Aid Agencies. Dahabshil is licensed in all the states that it operates in and is in a strategic alliance with Dahabshil PVT Somalia to make its remittance payments abroad. 52 Hawala is the collective term for the informal banking and money transfer system in Somalia.

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• A lack of communication and coordination between the various Dahabshil Offices. In particular, field offices were not always informed of information received at the Nairobi level.

• a preference to use large dollar denominations ($50s) rather than smaller ones;

• the need for individual payments, not the disbursement $100 to be shared between two beneficiaries;

• receipts in triplicate as opposed to duplicate, in Somali and in English;

• the need for simultaneous payments at multiple sites to improve efficiency, security and avoid people travelling between sites to try and claim false payments

• the need for Dahabshil to have sufficient transport and communication equipment so that it need not rely on project equipment

• the need for sufficient security in case of any potential crowd trouble (Majid et al, 2007.)

Majid et al provide a clear cautionary statement against the use of hawala for the disbursement of emergency relief and state categorically that “the internal structure and systems of Dahabshil are unclear and the means of operation and influence from central levels appear to be different in different field locations. This experience now suggests that careful, context specific, planning and coordination is required with hawala, such as Dahabshil, where they are contracted to do more than their usual money transfer business.”

5.2.3 Direct delivery by the formal banking sector: Bensefi Bank in Mexico and ABSA (Allpay) in South Africa

The emergence of commercial banks as suppliers of social cash payments in middle-income developing countries such as Mexico and South Arica demonstrates that where existing banking infrastructure is sufficient, banks can play a significant role in the delivery of cash payments to beneficiaries in a sustainable, cost effective, desirable (for the beneficiary) and profitable (for the bank) way. As indicated by Figure 5 below, there have been a number of channel innovations by banks over the last few years. Most of these have been supported by technological advances and have enabled banks to extend their reach to areas where the prohibitive cost of setting up a full branch might have curtailed their expansion plans in the past.

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Figure 5: Multiple channels provided by banks

Source: Genesis Analytics (2008) Banking the unbanked

Where banking infrastructure and presence is well developed (usually in urban settings), banks have proved to be appropriate vehicles through which SCT benefits can be paid. The experience of Bensefi Bank in Mexico in catering for low value savings and social cash transfers through their Bonasar and Oportunidades payment account offerings indicates that banks will willingly open accounts specifically designed and priced for the low income segment - capable of providing financial services access to the previously unbanked.53 Account holders maintain set minimum balances and transaction costs can be levied. Existing beneficiary behaviour in both Mexico and South Africa demonstrate that once trust and acceptance of the payment mechanism has been established (usually after 3-4 payment cycles) beneficiaries generally stop withdrawing the full value of their cash transfer and retain minimum balances in their social cash transfer accounts. Further, within 3 to 4 additional cycles, the first sign of voluntary savings begin to emerge and are credited together with regular incoming social payments such that social cash transfer beneficiaries establish themselves as viable relatively profitable banking customers in their own right (OPM, 2008.)54 Associated costs for those banks developing new product for the low income segment would potentially include (a) investment in remote card issuing facilities at originating benefit payments points, (b) card issuing costs and, (c) the development of set tariffs that encourage voluntary crediting to card accounts (OPM, 2008); profitability is assured where

53 Transformational banking is the term that has been coined for this phenomenon. 54 Oxford Policy Management. 2008. Testing Remote Access Models for Southern African Countries

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overall cost is kept to 2% of total turnover. Banks such as ABSA and Bensefi have successfully been able to do this and have aligned their low-income product offerings to their overall retail strategies, profitably opening-up previously untapped markets of the unbanked.

Significantly, ABSA through its subsidiary Allpay, has set up the VISA Electron debit account (Sekulula) to receive social grants that has gone some way to alleviating severe bottle necks of cash distribution to beneficiaries.55 Beneficiaries of social security benefits and pensions, that have self-elected to receive their payment through the Sekulula account, have been able access their funds freely and conveniently through ABSA’s extensive distribution network including its branch network, ATM’s and POS devices. As the card is a VISA electron card, it is also interoperable with every other VISA member bank and enables the recipient to use their card at retail stores that electronically processes VISA transactions and other bank ATMs (although at a higher cost.) As with any “push strategy”, a potential disadvantage of this payments system is that beneficiaries are required to travel to a formal infrastructure environment if they are rurally based. This disadvantage needs however to be weighed against the reliability, safety of electronic payment solutions, together with the potential for multiple cash-out points.

First National Bank of South Africa and Co-Operative Bank of Kenya have been offing SMS Mobile Banking services to their clients for years. However, the recent success of WIZZIT South Africa and M-PESA in Kenya has pushed transformation m-banking solutions into the spotlight.56 Transformational m-banking is defined by Porteous as “the provision of banking services using a mobile phone (m-banking or cellphone banking) in such a way that currently unbanked people are targeted.” Porteous notes further that the term was first coined to differentiate this type of offering from additive m-banking options, where the mobile phone is simply another channel. If m-banking extends financial access at sufficient scale to unbanked people, then the retail financial sector of a country is likely to be transformed (Porteous, 2007.) The success of M-PESA appears to be rare as the banking industry globally has often failed in the transformational m-banking space. For example, MobiPay Spain failed dismally in Europe resulting in the industry realisation that for m-payments to work at scale, solutions need to be pervasively adopted and interoperable.57 Another organisation that is strongly promoting the use of mobile handsets for P2P payments is the GSMA through its initiative the Mobile Money Transfer (MMT) group. While the MMT group has promoted the notion of standards and interoperability it would appear that when it comes to the movements of cash the world is reliant on what’s already in place and

55 The South African Social Security Agency entered into a public private partnership outsourcing contracts for payment of social grants and awarded the contract for Gauteng and Parts of the Eastern Cape to AllPay in 2000. Although this initially cost to the Gauteng Provincial Government ZAR23.06 per head per month, anecdotal accounts indicate that this cost has dropped to +- ZAR17.00 per head per month. 56 WIZZIT bundles the opening of a new debit card-based bank account with the m-banking features. These accounts are usually slightly more expensive than the basic debit card only account, depending on the usage profile, but they offer the convenience that statements and balances can be accessed via the phone, and electronic transfers can be made to any bank account via the phone (Porteous, 2007.) 57 See IEEE Symposium on Trends in Communications (SympoTIC '04), 24-26 October 2004, Bratislava, Slovakia. A report promoting the standardization of Mobile payments in Europe namely, The Secure Mobile Payment Service (SEMOPS - www.semops.com) aims at developing a universal, standard-compliant open mobile payment system that will be able to handle national and international, micro, mini and macro payments. Privacy, security, trust, openness and flexibility are driving forces of this approach.

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hence the likes of Western Union, MasterCard and VISA are critical partners to the success of the GSMA MMT program.

A fact which is largely overlooked is that the greatest transformation aspect of Mobile phone technology has not occurred in the ‘hands of the consumer’ but rather at the till of the merchant. In 2007 wireless handheld models accounted for the bulk of makers' output with some indicating that 75% of devices sold are GPRS enabled. This year, mainland China is expected to surpass Japan as the world's largest POS system market, according to a report from IHL Consulting Group, a research firm focusing on the global retail and hospitality industries. This finding is attributed to the Olympic Games. The research firm estimates 2 million to 3 million POS systems in operation in the mainland during 2008. While not as exciting as Mobile P2P, the mobile technologies that enable the bank to service customers remotely and on-line without the expense of a full branch infrastructure, as noted above in the case of Bansefi Mexico using GPRS POS terminals, appears to be where the Mobile is transforming banking and making the biggest impact on people lives.

5.2.4 Banking vans – branches on wheels: Equity Building Society in Kenya

Given the inaccessible geographical location of most beneficiaries of SCT schemes, and the lack of traditional banking infrastructure (branches, ATM’s cash advance POS devices, POS devices), some banks and MFI’s have deployed mobile banking units (banking vans or branches on wheels) to reach those in low density environments. The case study of Equity Building Society, a highly successful microfinance institution focused on the provision of commercial mobile banking to the un-served and underserved in Kenya’s Central Province, demonstrates the development of a payment delivery mechanism that addresses social requirements and meets the demand for financial services in disenabling physical environments. Recognising the need for the provision of commercial financial services in the high density and economically productive region of Central Province, Equity Building Society has deployed a mobile banking model which addresses a number of issues including access, institutional cost of delivery, monetarisation of rural areas and client convenience. The mobile banking services is offered though village satellite branches which are serviced twice weekly by a mobile banking unit. Each mobile banking unit and satellite branch is attached to a hub-branch. On village banking days, respective customer data is downloaded to a laptop and transported with other hardware equipment, cash, staff and armed security personnel to the satellite, in a customised vehicle. Upon arrival the mobile banking staff provide computerised banking services to clients by connecting the laptop and hardware to a solar or vehicle driven power source. Upon completion the mobile unit returns to the hub-branch and immediately uploads the day’s transactions and data onto the main database. As such the system functions to significantly reduce the physical distance between Equity and its clients, increases the frequency of clients contact and reduces the associated costs for clients who are now able to access full banking services in their villages. The costs of delivering financial services and cash to remote rural areas has reduced as, high population densities ensure appropriate volumes of business that justify the cost of mobile banking service provision. Funding has recently been granted to Equity that will facilitate the automation of current manual processes and link all mobile units in real time to hub-branches using VSAT communication facilities. This automation is likely to lead to a simplification of current processes and result in improved cost efficiencies.

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5.2.5 The use of cash payment services deploying proprietary Smart Cards: Social Pensions in Namibia and the DOWA Emergency Cash Transfer project in Malawi

In Namibia, sparse population densities in rural areas led to the introduction of convoys of vehicles fitted with cash dispensing machines and protected by armed security guards following the privatisation of the social pensions system in 1996. These vehicles visit hundreds of designated payment points every month, and fingerprint identification methods are used for claimant recognition and verification (Devereux 2000.)58 Quoting from the Cash Paymaster Services publicity brochure, Devereux notes that “the high degree of mobility and flexibility that the CPS service allows the client to determine the timing, frequency and location of payouts. The CPS system provides a computerised system of record keeping and financial reconciliation. The information contained in the system is accurate, up-to-date and easy to access. This results in better administration and cost effectiveness. By implementing the CPS system clients have saved millions of Rands due to the dramatic decrease in fraud and irregularities” (Devereux, 2001.) Additional cited benefits of the system include, flexibility and versatility of operations, reduction of time taken to pay beneficiaries and improved management information systems and decision making. Devereux’s review of the payments system paints a different story however. He notes that despite the fact that pension payouts were physically taken to pensioners in vehicles, one in ten pensioners in the south and centre and one in five in the North complained of interruptions in receiving their pensions after the new system was introduced.59 Valuable lessons can be learnt from this experience as the reasons cited for not receiving pension payouts were twofold:

1) the transition from government to CPS administration in 1996 caused some confusion around payment dates and pensioner lists and there was sometimes a breakdown in technology (pensioners did not appear on lists and the biometric fingerprint reader system did not recognize fingerprints);and;

2) some pensioners experienced personal difficulties due to the geographical location of pay-points and loss of personal identification documents.

Although it can be argued that physically taking cash to beneficiaries in cash-in-transit vehicles fitted with cash dispensing machines improves access, the cost of this delivery mechanism, together with the proprietary nature of the Smart Card technology often deployed must be considered. Statements such as the ILO statement quoted below must be thoroughly examined and approached with caution, as, although promising the ideal solution, statements such as these contain a myriad of hidden cost, complications and inconsistencies.

“The universal pension of about US$25 a month has proven to be a major source of economic support to Namibia’s impoverished communities – particularly since the government took steps to make sure that pensions and other grants are paid on time and reliably and conveniently to eligible beneficiaries. To accomplish this aim, the Ministry issued Smart Cards with the beneficiary’s photograph and a fingerprint that can be immediately verified by a machine. Crews headed by a paymaster travel regularly to thousands of pay-

58 In both Somalia and Afghanistan aid agencies have worked innovatively with money transfer companies to distribute cash safely to households in insecure environments (Ali, 2005.) 59 Periods ranged from one month to two years.

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points around the country, carrying with them automated teller machines similar to those found in many banks. Beneficiaries bring their Magstripes, have their identification checked, and receive their benefits on the spot.”60

We concur that such a delivery mechanism may ensure timely, convenient and reliable delivery for the beneficiary. However, this benefit comes at considerable cost. Instead of simply sending a pay-point manager on foot or by bicycle into remote areas, as is the case in the current Zambian SCT pilot schemes and the Mchinji SCT Scheme in Malawi, the Namibian system uses expensive vehicles, fitted out with heavy and expensive ATM’s accompanied by armed security guards to achieve the same objective.

Proprietary Smart Cards can only be read by custom designed Smart Card chip readers or customised ATM’s, both of which are expensive and require a reliable power supply. Whilst it is true that biometrics (fingerprint authentication) has the potential to largely address authentication fraud, the current system as it is deployed in Namibia and Malawi has experience a number of flaws. For instance, the system deployed in the Malawian DECT project allowed for manual override of the biometrically secured system. As such, Opportunity International Bank Malawi (OIBM) is reported to have reverted back to PIN authentication in order to authenticate and pay beneficiaries (Pearson and Kilfoil, 2007.) The potential for a manual override exposes the payments system to the risk of fraud and raises questions about the cost and benefit of such a complicated system, especially when the technology fails completely.61

At the pay-point in Malawian DECT scheme, one observes the almost bizarre consequences of deploying technology for technologies sake. While beneficiaries are authenticated on one side of the custom built mobile bank (best described as modified Toyota bakkie) by having their fingerprints read by a biometric reader, bank staff safely locked up in two kiosks build into the bakkie are still required to load beneficiary Smart Cards by looking up the 10 digit code of the beneficiary and manually loading the Smart Card with funds onsite. Beneficiaries are then required to queue for a second time at the back of the mobile bank where a teller again identifies the beneficiary against the card and processes a full cash withdrawal and disburses cash to the beneficiary (Pearson and Kilfoil, 2007.)

60 ILO, undated. Extending Social Security and Fighting Poverty: A Complex Challenge Experiences from Around the World. (Online.) URL: http://www.ilo.org/public/english/protection/socsec/pol/campagne/files/countryexp.pdf 61 Original data used by Pearson and Kilfoil indicates that the DECT project experienced 123 cases of duplicate payments being made and recorded 399 payment which were manually made where Smart Card technology failed completely.

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5.3 Lessons learnt from the innovative use of payment technologies in non-social protection contexts

The evolution, innovative use and uptake of alternative payment technologies such as SmartPay (Philippines), G-Cash (Philippines), M-PESA (Kenya), WIZZIT (South Africa), MTN MobileMoney (South Africa), indicate that the poor and previously “under-served”, when provided with an efficient, cost effective, accessible, reliable and secure financial solution voluntarily make use of such solutions moving away from previously observed financial behaviour.62 When designing any solution, it is vital to learn from the successes and failures of first movers as replicating flawed technological solutions and those of a proprietary nature for the sake of change are likely to further frustrate attempts at financial inclusion. Lessons learnt from market first movers indicate that for the low income segment, trust, extensive distribution/agent networks, cost, speed of transfer, availability, user friendly and effective registration processes, disassociated cash in/ cash-out points are vital ingredients in ensuring that customers make use of a particular service and or product.

5.3.1 The good (cost, speed of transfer and availability) and the bad (proprietary and potential “tipping” – learning from M-PESA

Airtime distribution channels potentially have the widest customer reach in Africa. Found in formal retail outlets, garages, caravans, old packing crates, derelict buildings, on just about every street corner in every African country and extensively advertised on every available surface (trees, walls, vendor stalls, sign posts etc) the air-time dealer and his/her roll of pre-paid airtime vouchers has become a regular and predictable feature of every African city. This phenomenon is due to the fact that mobile operators in developing countries strive for rapid coverage and often, unlike banks, see the mass lower end market of prepaid customers as their bread and butter (CGAP, 2008.)63 Safaricom, the largest mobile telephone network operator in Kenya capitalised upon this extensive airtime distribution network and launched the M-PESA mobile money transfer service, drawing on an already existing customer base with its “send money home campaign”. Over a period of 14 months the M-PESA, has seen the voluntary inclusion of more than 1, 3 million participants who have sent and received more than 23 billion Kenya Shillings. Registered users are currently able to load their account with e-value at an agent, exchange their e-value for cash, send money to any other mobile phone holder, buy airtime and pay their contract airtime bill.64

Measured against the branch network of Kenya’s largest commercial bank which currently operates 87 branches nationally, the distribution network of the sized of M-PESA’s 3000 agents makes the entire national

62 The new retail payments systems are based on four main technologies: magnetic stripe plastic cards; chips of various kinds; mobile phones; mobile networks; and combinations of these. They include pre-paid cards; new kinds and new uses of debit and credit cards; Magstripes and plastic fobs employing some form of stored value (chip-based, including contactless radio frequency ID (RFID) and near-field communications (NFC) chips); mobile phones employing RFID or NFC systems; mobile phones using Subscriber Identity Module (SIM) chips to store and transmit data; mobile phones using wireless application protocol (WAP) or other wireless protocols and/or standard text messaging (short-message service, SMS); point-of-sale (POS) terminals, either wireless or connected to a land line, used for third-party payments; and electronic funds transfers (EFTs) and forms of branchless banking that rely on any one or a combination of these technologies (Maurer, undated.) 63 Ivatury and Mas. 2008. The Early Experience with Branchless Banking. CGAP Focus Note No. 46, April 2008 64 Monies are sent predominantly from urban informal settlements to rural villages with cash-in cash-out distribution points provided by small airtime dealers recruited by Safaricom.

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banking infrastructure pale into insignificance. For a social cash transfer beneficiary, for whom the transaction cost of operating a traditional bank account (should this be the selected delivery mechanism) and physically getting to a designated cash-out point are often prohibitive factors in receiving cash grants, being able to access a social cash grant at a local airtime dealer would provide a cheaper, more reliable and faster mechanism for payment. Contrary to a CGAP survey conducted in South Africa which indicated that fewer people would trust a mobile banking service if it were backed by a mobile operator rather than a bank65, Safaricom, a trusted brand at the low end of the market has proven that if a product fulfils a need, is accessible, reliable, cheap, easily obtainable and actually works then take up is likely to be a success. What is important and the foundation of any successful mobile money transfer/delivery system is that if an individual residing in an urban area sends money home to a relative in a rural area, that the receiver is able to easily convert this electronic money inflow into cash. Ready access to cash-in cash-out points is therefore vital to support the mobile proposition.66 Although M-PESA runs from Safaricom’s proprietary platform and requires the sender to be a Safaricom subscriber and to acquire a new SIM card with preloaded STK application, those receiving transfers can cash-out at a number of retail outlets, including two of Kenya’s biggest banks, supermarkets, cyber cafes’, small retail shops and spaza’s by showing the code sent to their phones by SMS.

An important learning from the Kenyan experience is that if there is money to be made by exploiting loopholes within a system, there are always those who will take advantage of this. In the case of M-PESA, agents earn a flat commission per transaction and not a percentage of the value of money transferred. As such, there have been instances recorded where agents, despite having sufficient cash have divided the disbursement into a number of smaller payments and requested that individuals return the next day to collect a portion of payment as their income derived from transaction fees as opposed to a percentage of the transaction value (Morawczynski, 2008.)

Recently, Nick Hughes Vodafone's global head of international payment solutions stated that “revenues from M-PESA are growing incrementally”, further that “the objective was to come up with a commercially viable service that addressed the issue of financial inclusion,” and that “the project would not have got started without £1 million from the UK Department for International Development.”67 Despite its fundamental success and the offering of a cheap money transfer solution to low income households, questions need to be asked about the long term consequences of the Financial Deepening Challenge Fund (FDCF) jointly funding the development of a private business operating a proprietary system which requires users to sign up to Safaricom at the expense of other locally owned money transfer businesses and mobile operators.68 If indeed

65 See Ivatury and Pickens. 2006. Mobile Phone banking and Low-Income Customers. Washington D.C.: CGAP, the Vodafone Group Foundation and the United Nations Foundation (in collaboration with FinMark Trust) 66 See Mar and Kumar where the authors note that “customers will want to test the liquidity of electronic money. Typically they will want to convert all electronic money inflows to cash immediately and in full. In places were cards have been used with microfinance clients or low income customers, people who live in all cash economies, most cash-out their loans, government benefits, and so forth, on the spot immediately after they receive them.” Mar and Kumar. 2008. Banking on Mobiles: Why, How, for Whom? CGAP Focus Note No. 48. June 2008. 67 http://beestrees.blogspot.com/2008/06/vodafone-m-pesa.html 68 Funding was provided through the Financial Deepening Challenge Fund (FDCF.) The fund works with private sector

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the MPESA system genuinely lessened the gap between the financially excluded and the more fortunate banked population by offering an interoperable bank account instead of a proprietary money transfer mechanism the said objectives of financial service deepening may be justification for what has become a monopoly of the domestic money transfer market to the detriment of Kenyan money transmission efforts from the likes of PAYM8 Kenya, M-Tranzact Kenya, Tuma Pesa, the National Post Office to name a few.

A lesson can be learnt by regulators worldwide from the deliberate under-regulation by the Bank of Kenya, allowing for the massive growth of the scheme in the face of systemic and fiduciary risk issues. The success of course begs the question as to whether Safaricom is conducting a banking service or not? While the regulator may have been able to excuse the lack of intervention through the suggestion that Safaricom is not a bank it has become apparent that given the scale of ‘deposits’ nearing 1 billion USD at this time, preconceptions need to be revisited. Safaricom is not registered as a bank and as such has avoided regulation in contrast to the claimed intentions of financial inclusion by Dr. Hughs.

This is particularly relevant when considering the potential anti-competitive effects that the early rapid growth of one system which is not interoperable with others can have. In this regard, a recently published CGAP Focus Note states that “the early rapid growth of one system that is not interoperable with others could have a “tipping effect” such that no other system can compete. This dominance could have negative effects on market efficiency and outreach over time, through higher pricing or lower rates of innovation. If there are already substantial existing retail payment systems, and if the new payment systems are foreclosed or inhibited from interconnection with older systems, the result may be substantial inefficiencies that limit growth of the new and the old.” As such, in due course, Safaricom may face ex post regulation mandating interoperability should sufficient evidence emerge that it has become a dominant placer and has begun to exploit the market failure. (CGAP, 2008)69 It is also interesting to note that Safaricom launched M-PESA without a license and is currently viewed by the Kenyan regulator as a non-deposit taking institution. Although M-PESA is compliant with Kenyan banking regulation (100% of prepaid balances are deposited as a pooled account at a bank and held in trust on behalf of customers), the threat of more stringent regulation in the future is a real possibility.70 Perhaps a more suitable use of FDCF funding would have been the funding of the development of an open source technology solution available for download by Governments and NGO’s wishing to make use of the technology for non-commercial purposes, such as the Social Cash Transfer Scheme in Zambia.

Despite the concerns raised above, recognising the potential benefit of partnering with a mobile telephone network operator, in early 2008, Concern partnered with Safaricom to pilot the use of the M-PESA system in the delivery of social cash transfers to disaffected communities in the Baringo North and Pokot East districts. organisations - including banks and multi-nationals - to fund cost-sharing projects. FDCF projects involve the development and piloting of a broad range of financial products and services including credit, savings, insurance, health cover, housing finance and pensions in poor and isolated communities. 69 CGAP. Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance. CGAP Focus Note No. 43. 70 Customers are currently subjected to KYC requirements at the agent where they sign up. Customers are required to provide their name, national ID or passport number and phone number.

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Targeting 571 households (3700 individuals), Concern aimed to provide each household with sufficient cash to purchase 50% of one month’s minimum calorific requirements. In each case the matriarch of each household was registered to receive cash and issued with an M-PESA enabled SIM card. Beneficiaries received a total of two transfers. Both distributions were facilitated by M-PESA agents who traveled down to a single distribution site to disburse cash or “cash-out” funds to beneficiaries, despite the fact that in theory the use of the M-PESA system meant beneficiaries could collect their cash from any of over 2 500 M-PESA agents country wide. This fall back onto a single cash-out point not only resulted in significant delays in pay out of the cash benefit (of up 3 days), impinging the dignity of recipients, but completely negated any advantage of using the M-PESA system to conduct social cash transfers. By not enabling beneficiaries to obtain their cash benefits from a wide network of providers the Concern pilot, like all other SCT schemes on the continent, failed to address the complex distribution issues associated with the provision of social cash transfers to geographically dispersed populations.

5.3.2 User friendly and effective registration process - learning from MTN Mobilemoney

MTN Mobilemoney, launched in South Africa in 2005 as a joint venture between Standard Bank and MTN has not been a phenomenal success.71 With only 280 000 accounts opened to date, a fraction of which are active, being unable to solve the cash-in problem (clients where at launch required to make cash deposits at Standard Bank Branches or through Easypay), and noting that low end customers still prefer to use a card based low cost transactional account such as Mzanzi, Steve Parratt, Business Development Executive MTN Banking recently stated that contrary to original projections, the market that actually has the need for a bank account with a high technology overlay in South Africa has proven to be very small.72 This coupled with high origination costs due to onerous FICA compliance requirements, no access to the Home Affairs database and the payment of commissions to face-to-face field agents has made this service offering impractical and not surprisingly, no less expensive than a traditional bank account.

Unlike a key learning from the M-PESA project, MTN appear to have very little influence over their airtime distribution channel thus making MTN banking no better off than WIZZIT in offering convenient and pervasive customer cash in service points. As noted in a recent CGAP focus note, transformational branchless banking has the potential to serve unreached customers because of the cost savings of using agents equipped with ICT’s in lieu of costlier branched-based staff. However, costs can be driven out of the reach of the poor if AML/CFT rules are not adjusted to permit remote account opening with CDD/KYC checks performed by agents and do not take into account the limited formal documentation normally available to low income clients. AML/CFT risks with subsequent transactions can be limited by using electronically enforced maximum allowable transaction, turnover, and balance thresholds. Moreover, policy makers and regulators increasingly realise that AML/CFT objectives are better served by having clients inside the net of electronic transactions that can be monitored rather than outside the cash economy (CGAP, 2008.)

71 In South Africa, branchless banking through retail agents is only permitted for licensed financial institutions. As such, non-banks are prohibited from accepting deposits. This means that if mobile operators such as MTN are interested in offering branchless banking/m-banking solutions they are required to enter into joint ventures with licensed banks (CGAP,2006.) 72 Parrot. 2008. Mobile Money SA – 3 Years On. Presentation delivered at Mobile Bankers & Financial Services Africa Conference, Southern Sun Hotel, Johannesburg, South Africa. 14 – 16 July 2008.

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Although MTN MobileMoney provides the customer with a fully functioning bank account linked to a MasterCard, giving the consumer the option of using infrastructure of his/her choice (ATM’s and POS), the system is still proprietary to MTN in that customers have to access their mobile accounts by the application on the MTN 32K SIM. Despite its limited success, MTN Mobilemoney has provided the market with valuable lessons. The first of these is that the standard MTN 32K SIM now card purchased with any MTN starter pack is now preloaded with an MTN Mobilemoney application that only need to be activated through registration. By far the most effective feature introduced has been the deployment of a remote sales force who target, sell, register, KYC, activate accounts and train customers in the field. As such, MTN Mobilemoney has taken the product to the consumer, introduced a user friendly and effective registration process and is now capable of remotely opening one thousand accounts a day.73

5.3.3 Effective customer targeting – learning from WIZZIT

At the outset, it is important to note that this open cell-phone based model is more expensive than the tied MTN model (OPM, 2008.)74 Branchless banking in South Africa is permitted only for licensed financial institutions (CGAP, 2008.) As non-banks are prohibited from accepting public deposits (as is the case in Zambia), various mobile operators have created joint ventures with licensed banks in order to offer cell phone based banking services. WIZZIT, a technology firm therefore became a division of the South African Bank of Athens and is now offering cell-phone and card-based bank accounts to the un-banked.75 The WIZZIT system provide two valuable lessons for consideration when considering the design of an innovative payments solution for the SCT programme in Zambia. Firstly, unlike M-PESA and SmartPay, WIZZIT is not tied to any service provider and thus can operate off any network. In the Zambian context, such an arrangement would potentially lead to greater coverage and beneficiary accessibility. Secondly, the use of a commission driven sales force of WIZZKIDS is probably one of the most effective customer targeting strategies seen to date.76 Setting up a similar “work force” of young technologically competent individuals to guide beneficiaries and teach them how to navigate through various cell phone menus (should a mobile solution eventually be deployed) would be highly advantageous in terms of beneficiary “financial and technology reorientation”.

5.3.4 User friendly technology, disassociated cash in and cash-out points – learning from SmartPay and G-Cash (Philippines)

SmartPay and G-Cash offer mobile phone based money transfer services in the Philippines. Through these systems, users are able to perform person to person (P2P) transfers, purchase goods, top-up and pay bills

73 Parrot. 2008. Mobile Money SA – 3 Years On. Presentation delivered at Mobile Bankers & Financial Services Africa Conference, Southern Sun Hotel, Johannesburg, South Africa. 14 – 16 July 2008. 74 Deposits are expensive because WIZZIT uses other banks and retail infrastructure to make deposits. 75 WIZZIT is linked to a clearing bank which provides account holders with access to the conventional e-payments system operational in South Africa, including obtaining cash via ATMs using a Maestro branded debit card which is issued as part of the offering (Porteous, 2006.) 76 WIZZIT is an alliance banking venture operating as a division of the South African Bank of Athens.

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through SMS. Although the two business models are similar, their structure is significantly different in that SmartPay is a partnership lead by Smart Telecoms and supported by Banca d’Oro which manages the customer float and accounting for SmartPay and G-Cash is a purely non-bank led initiative (OPM, 2008.) Perhaps the biggest lesson drawn from these money transfer services is their tremendous reach and the convenience that that brings to their customers. Cash in and cash-out transactions can take place at a large number of agents/partners including retail stores, petrol stations, airtime distributors and banks. The technology is user friendly and easy to use with value being created at an agent (usually through handing over cash), SMS text commands with the recipient code or mobile phone number plus the remitter’s PIN are sent and confirmed with a return message to the sender; the transfer of credit is then made to the recipient; an SMS confirming this is sent to the recipients mobile phone number and the transaction is complete (OPM, 2008.)

5.4 Conclusions

Over the last few years governments and donors have begun to experiment with alternative distribution channels and payment mechanisms. Key lessons can be learnt and implementation failures averted if MCDSS carefully observes the successes and failures discussed above. Drawing from international experience, the following key lessons have emerged:

• Key lesson learnt from use of the post office in India. Wherever possible, existing infrastructure should be leveraged to ensure maximum reach and accessibility for the beneficiary.

• Key lesson learnt from the use of the informal banking and money transfer service “hawala system” in Somalia. Lack of communication, coordination and specialisation of money transfer providers if they are asked to distribute SCT payments may lead to poor results.

• Key lessons learnt for direct delivery by the formal banking sector: Mexico and South Africa. Banking

infrastructure must be sufficient and products specifically designed for the segment; banks are often willing to open accounts specifically designed and priced for the low income segment; and; the greatest transformational aspect of Mobile phone technology has not occurred in the “hands of the consumer” but rather at the till of the merchant.

• Key lesson learnt from the use of branches on wheels: Equity Building Society Kenya. Although expensive,

mobile banking units can be used to reach customers in rural and remote areas, bringing financial services to areas which may have been previously un-served.

• Key lessons learnt from the use of cash payment services deploying proprietary Smart Cards: Namibia and

Malawi. Custom designed Smart Card chip readers or customised ATM’s are expensive and require a reliable power supply; potential for a manual override exposes the payments system to the risk of fraud; and; deploying technology for technologies sake may impinge upon beneficiary dignity and cause unnecessary delays.

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A number of lessons can also be learnt from the use of payment technologies in non‐social protection contexts including:   • Key lessons learnt from M-PESA in Kenya. M-PESA’s 3000 agents makes the national banking

infrastructure pale into insignificance, leading to greater consumer accessibility and convenience; M-PESA SCT pilot failed due to fall back to single cash-out point; agents may exploit loopholes in the system; monopolisation of domestic money transfer market may have been built on the back of FDCF funding, a point which must be considered; and deliberate under-regulation by the Bank of Kenya allowed for massive growth of a scheme in the face of systemic and fiduciary risk.

• Key lesson learnt from MTN Mobilemoney. Costs can be driven out of the reach of the poor if AML/CFT rules are not adjusted to permit remote account opening with CDD/KYC checks performed by agents.

• Key lessons learnt from WIZZIT (South Africa.) Not being tied to a particular service provider potentially leads to greater coverage; and; the use of a commission driven sales force of WIZZKIDS is probably one of the most effective customer targeting strategies seen to date.

• Key lessons learnt from SmartPay and G-Cash (Philippines.) Partnerships between Telco’s and banks and non-bank mobile lead initiatives provide convenience to customers and extended reach and Mobile driven payments technology can be easy to use if designed with the beneficiary in mind.

With these lessons in mind, in the section that follows we present the Electronic Payment Scalability Model as additional justification for the gradual migration from a “pull” approach to a “push approach” for the Zambian SCT scheme.

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6. CHOICE OF AN ELECTRONIC PAYMENTS SYSTEM (EPS) OR A MANUAL PAYMENTS SYSTEM

As discussed in Section 5.1 above, the current distribution and payments mechanism deployed by the SCT pilot schemes is manual. Manual payments systems have been introduced in many countries in the past and favoured over electronic systems. This is almost certainly owing to the large up-front expenses and the specialist skills required in developing and maintaining electronic payments systems. However, in many cases the designers of manual systems failed to recognise the problems in expanding these systems on a large scale. Dis-economies of scale generally typify these systems making them increasingly more expensive to run as they grow. Electronic systems on the other hand typically become more efficient with scale as more and more beneficiaries share the significant development costs. Economies of scale in such systems are also achieved by keeping the system operational over longer periods of time as the largest development costs are incurred only at the initial setup of the system.

Determining which payment system to deploy must be determined on a case-by-case basis. International experience has shown that payments systems that are the most successful in the social cash transfer context are those which deploy technology appropriately to address identified needs whilst ensuring a suitable fit with the environmental circumstances in which it is deployed. This we maintain can best be achieved through deploying already existing infrastructure and augmenting and improving upon the systems that are already in place. Whilst it might be tempting to follow the trend and deploy technology for technologies sake by spending vast amounts of money on the introduction of finger-print authenticated, off-line capable Magstripes, we maintain that this is not the most appropriate solution for Zambia. In this section we models a hypothetical social cash transfer scenario. The model aims to shows that by scaling the manual cash based system by the required parameters of adding additional human resources, marginal costs increase and as a result, dis-economies of scale result. Conversely, in an electronic payments system (EPS), due to a lower marginal cost and a fixed up-front cost, the average cost per transaction declines as one scales outward, thus delivering economies of scale. The model is further extended to show that whilst the argument for an electronic payments system remains valid for standard interoperable technology such as EMV chip or Magstripe, the fixed up-front system cost of Smart Card technology and the proprietary channel needed to support this technology, and the significantly higher marginal cost per payment instrument may mean that the benefits of scale would only be justified far later than compared to a more traditional EPS.

6.1 Assumptions underpinning the model

Typical cash payment models found in developing markets such as, Malawi, Kenya, DRC and Zambia are generally characterised by the following:

• Payments are usually small, less than US$ 10.00 per payment;

• are normally social assistance paid by government or international donors;

• are paid out to chronically poor and destitute households who rely heavily on the support;

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Box 5:  Hypothetical social cash transfer scenario (basic assumptions)

Assumption 1) the social cash transfer is regularly paid in five (5) districts and attracts a consistent administrative cost of 500 US cents per payment.

Assumption 2) In each district 100 payments are made.

Assumption 3) A ministry office identifies and lists poor people who are eligible for a regular grant.

Assumption 4) The Department of Social Welfare is responsible for targeting individuals who meet certain criteria and are therefore eligible for the social cash transfer. These individuals are identified and listed.

Assumption 5) Funds are made available in a bank account at the district level on a monthly basis to cover the value of the 100 payments and an administrative cost, of 500 US cents per payment.

Assumption 6) 100 payments are made by each nominated official.

Assumption 7) Each nominated official is required to physically draw the cash from the district bank account, travel to a pre-determined pay-point a in rural area (e.g. a rural school) and distribute the cash to 100 beneficiaries.

Assumption 8) Each payment is recorded manually on paper.

Assumption 9) Cost assumptions of manual payments model*

Quantity of payments

Tier 1 Regular cost of payments (US$)

Tier 2 Regular cost of payments (US$)

Tier 3 Regular cost of payments (US$)

Tier 4 Regular cost of payments (US$)

Total cost of the scheme (US$)

Total marginal cost to scale (US$)

Accumulated costs of all schemes (US$)

Average cost per payment (US cents)

100 500 0 0 0 500 0 500 500.00 200 1000 0 0 0 1000 0 1000 500.00 300 1500 0 0 0 1500 0 1500 500.00 400 2000 0 0 0 2000 0 2000 500.00 500 2500 0 0 0 2500 0 2500 500.00

‘*Referring to the cost assumptions of this typical cash transfer scenario as represented by the cost table above (assumption 9) should the nominated official make 100 payments and the regular cost of the payments is 500ZMK, the total cost of the scheme would be 500. Therefore 100 payments costing 500ZMK could have an average cost of 500 cents per payment. Assuming that this scenario could be repeated in a consistently efficient manner across 5 districts (500 payments), as the number of payments increases, the average cost of each transaction remains the same.

• are paid out in rural areas not serviced by tar roads, electrical power or telecommunications

• usually deploy ‘“pull”’ payments, whereby the cash is taken to the people and distributed at a number of pre-designated pay-points.

Building upon the 5 common characteristics presented above, we present a hypothetical payments scenario below (Box 5.) This scenario and the assumptions that underlie it will be used in Section 6.2 below to show the dis-economies of scale associated with scaling up a manual payments system; the economies of scale to be reached by deploying an electronic payments system (Section 6.3); and; the potential non-viability of a Smart Card solution (Section 6.4.) Financial models are proposed, assumptions based on realistic circumstances made, results observed, and conclusions justified.  

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6.2 Scaling the manual payments model

Moving from scenario to reality, the MCDSS indicates that in a typical situation, the district office would pay 3,500 deserving households who would be serviced by 100 Pay-point Managers. As noted in Table 2 below, the Ministry’s actual budget for the current pilot schemes shows that the largest cost items for the current 5 pilots are the expenses associated with the payment of payments officials and other human resources required to train staff, monitor the scheme and reconcile the manual payments process.77

Table 2: Overview of the actual costs of the SCT pilot scheme for a bimonthly period (ZMK)

Source: Ministry of Community Development and Social Security Zambia, 2008

It can be assumed that to scale a manual cash payments system, the Ministry would be required to substantially increase its human resource component. The likely problems that would be faced by the Ministry as it added more and more human resources in order to horizontally scale the manual payments solution would be three fold:

77 See Grosh (1995) where it is stated that “as a rule, designers of safety net programmes aim to transfer as high a proportion of total programme costs as possible to beneficiaries or participants themselves, to maximise cost effectiveness and transfer efficiency. This ratio of benefits to total cost is known as the “alpha ratio”. A review of 30 transfer programmes in Latin America (including targeted food stamps or cash transfers, general food subsidies, primary education and primary health care) found that administrative costs ranged from 0.4 percent to 29 percent.”

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• Firstly - the more people one employs at the bottom of the employment pyramid, the more people are required to act as managers and monitors to oversee the rapidly expanding base of employed payments personnel.

• Secondly - in a world of scarce resources, the quality of increasing people will diminish and therefore management costs would have to increase to compensate.

• Thirdly - with more personnel involved, the fiduciary risks associated with the system increase.

In the case of the hypothetical social cash transfer scenario, it is assumed that for every five (5) district offices, one manager is employed at a cost of 300 cents per payment made. A senior manager will be required for every 10 districts to manage the managers and a general manager will be required after 15 districts are launched. The indicative cost of this scale-up scenario is represented below in Table 3.

Table 3: Cost assumptions of horizontally scaling a typical cash transfer scenario Quantity

of payments

Tier 1 Regular cost of

payments (US$)

Tier 2 Regular cost of

payments (US$)

Tier 3 Regular cost of

payments (US$)

Tier 4 Regular cost of

payments (US$)

Total cost of

the scheme (US$)

Total marginal cost to scale (US$)

Accumulated costs of all schemes

(US$)

Average cost per payment (US cents)

100 500 0 0 0 500 0 500 500.00 200 1000 0 0 0 1000 0 1000 500.00 300 1500 0 0 0 1500 0 1500 500.00 400 2000 0 0 0 2000 0 2000 500.00 500 2500 0 0 0 2500 0 2500 500.00 600 3000 300 3300 300 3300 550.00 700 3500 300 3800 300 3800 542.86 800 4000 300 4300 300 4300 537.50 900 4500 300 4800 300 4800 533.33

1000 5000 300 5300 300 5300 530.00 1100 5500 600 150 6250 750 6250 568.18 1200 6000 600 150 6750 750 6750 562.50 1300 6500 600 150 7250 750 7250 557.69 1400 7000 600 150 7750 750 7750 553.57 1500 7500 600 150 100 8350 850 8350 556.67 1600 8000 900 150 100 9150 1150 9150 571.88 1700 8500 900 150 100 9650 1150 9650 567.65 1800 9000 900 150 100 10150 1150 10150 563.89 1900 9500 900 150 100 10650 1150 10650 560.53 2000 10000 900 150 100 11150 1150 11150 557.50

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Drawing from the cost assumptions of horizontally scaling a typical cash transfer scenario set out in Table 3 above, we graphically represent the resulting dis-economies of scale in Figure 6 below.

Figure 6: Diseconomies of scale seen at scale (manual payment system)

As can be seen by Figure 6, scaling a manual cash based payments model by the required parameter of adding additional human resources results in increasing marginal costs and consequently, dis-economies of scale. This diseconomy of scale is caused by:

a) Increased management costs over and above the assumed set cost of a pay-point manager;

b) the fact that the marginal cost per payment (the extra cost to pay one more) is increasing the larger the scheme becomes, and;

c) the substantial increase in marginal cost and average cost across all districts.

In Zambia, noting that 100 pay-point managers are required per district, with 720 in total required for 72 districts across the country, the model indicates that the scaling up of a manual payments solution would be administratively cumbersome, increasingly inefficient and potentially open to a number of systemic risks and failures.

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6.3 Scaling and electronic payments model (EPM)

As discussed in earlier sections, typical electronic payments system (EPS) models found in developing markets are characterised by the issuance of a payments instrument (token) - sometimes a Magnetic Stripe payment card or a Smart Card to the beneficiary. Payment schedules are loaded into the payments system by the department responsible for administering beneficiary grants at the same time as making a lump sum deposit of the funds to be disbursed as well as a transaction fee per payment into a holding bank account often termed a ‘pool account’. In some circumstances the EPS provider would take cash to the beneficiaries who present their payment instrument, authenticate themselves and, thereafter, be paid out in cash. In other instances, beneficiaries would travel to branches or agents of the EPS to receive a cash payment either from an ATM or a POS device. The overall benefits of a typical EPS’s include inter alia:

• Assigning or loading a cash benefit to a payments instrument is largely cost free;

• reconciliation of funds paid out is automatically traced; and;

• audit trails are logged and reconciliation is real-time or almost real-time for off-line Smart Card payments.

While an EPS attracts a significant fixed investment up-front this cost can be amortised over many payments into the future and across many payment channels such as ATM’s POS’s and agent points of presence.

Applying the assumptions applied in the manual cash based model set out above, assuming that the Ministry plan to make regular payments over 5 districts one would calculate the average cost per payment by dividing the total cost of the scheme by the number of payments (see Table 4 below.)

Table 4: Cost assumptions of the electronic payments model Quantity

of payments

Fixed cost up-front for

first phase

Tier 1 Regular cost of

payment (US$)

Tier 2 Marginal cost of

payment (US$)

Tier 3 Marginal cost of

payment (US$)

Tier 4 Marginal cost of

payment (US$)

Total cost of scheme

deployment (US$)

Marginal cost to

scale over Tier

1(US$)

Average cost per payment

(US cents)

100 75500 0 0 0 0 75500 0 755.00 200 0 0 0 0 75500 0 755.00 300 0 0 0 0 75500 0 755.00 400 0 0 0 0 75500 0 755.00 500 0 0 0 0 75500 0 755.00

For a small number of regular payments it would not be unusual to find that the average cost per payment would be higher than in a cash based manual distribution model. However, in comparison with the manual cash payments system, once the initial investment in the system has been amortised, any new payments made through the system would attract a zero marginal cost at a system level.78 The inclusion of each new

78 Moving from a “pull” to a “push” strategy has considerable cost savings for the grantor. OPM note that “the introduction of Sekulula in South Africa has led to considerable cost savings for the Department of Social Development because the cost of

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beneficiary would attract a marginal cost to issue payments instruments, sometimes cards, and minor system administrative costs. As indicated by Table 5 below and corresponding Figure 6 thereafter, scaling the social cash transfer through the deployment of an electronic payments system shows long term efficiencies and economies of scale. This finding is supported by the following:

• There is an initial high fixed cost resulting in the average cost per transaction being relatively high.

• At scale, every new district added to the EPS has a relatively low marginal cost per payment thus lowering the average cost per payment across all schemes.

• At some point, in this case after scaling to eight (8) districts, the average cost per payment is lower than the manual cash payments scheme.

Table 5: Cost assumptions of scaling the social cash transfer through an electronic payments system

Quantity of payments

Accumulated fixed up-front costs

Tier 1 Marginal cost per payment (US$)

Tier 2 Marginal cost per payment (US$)

Tier 3 Marginal cost per payment (US$)

Tier 4 Marginal cost per payment (US$)

Total marginal cost to scale

Average cost per payment (US cents)

100 15100 0 0 0 15100 0 151.00 200 30200 0 0 0 30200 0 151.00 300 45300 0 0 0 45300 0 151.00 400 60400 0 0 0 60400 0 151.00 500 75500 0 0 0 75500 0 151.00 600 75500 300 0 0 75800 300 126.33 700 75500 300 0 0 75800 300 108.29 800 75500 300 0 0 75800 300 94.75 900 75500 300 0 0 75800 300 84.22 1000 75500 300 0 0 75800 300 75.80 1100 75500 300 0 0 75800 300 68.91 1200 75500 600 150 0 76250 750 63.54 1300 75500 600 150 0 76250 750 58.65 1400 75500 600 150 0 76250 750 54.46 1500 75500 600 150 100 76350 850 50.90 1600 75500 600 150 100 76350 850 47.72 1700 75500 600 150 100 76350 850 44.91 1800 75500 900 150 100 76650 1150 42.58 1900 75500 900 150 100 76650 1150 40.34 2000 75500 900 150 100 76650 1150 38.33

payment per beneficiary to AllPay for Sekulula account holders is 65% of its cost of payment for beneficiaries who receive cash. In neither instance is there any direct cost to the beneficiary (OPM, 2008.)

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As graphically depicted in Figure 7 below, due to a lower marginal cost and a fixed up-front cost the average cost per transaction declines as one scales outwards, thus delivering economies of scale and efficiency due to the electronic nature of the payments solution.

Figure 7: Economies of scale (electronic payments solution)

6.4 Smart Card payments model

Smart Card payment systems have dominated the social grant payments system environment for many years in South Africa and Namibia. Despite allowing for payments to take place in off-line environments which experience power and telecommunications constraints, Smart Cards have often done little to improve beneficiary accessibility. They have also provided no add-on or add-in financial services and cannot be used through multiple distribution channels.79 Over the last ten years the unprecedented growth of mobile phone networks across the world now often negates the reason to issue Smart Cards for this reason. Smart Card systems could cost as much as three fold that of a non-proprietary bank card system using Magstripe

79 Chip-based systems may be good for situations where there is no telecommunications infrastructure. Otherwise, they are generally viewed as more abstract, difficult to understand, or complicated to use. Maurer, Retail Electronic Payments Systems for Value Transfers in the Developing World

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technology. Therefore, whilst the argument for an electronic payments system using the aforementioned payments scalability escarpment (see Figure 7 above) remains a valid one for standard interoperable technology solutions such as EMV chip or Magstripe, the fixed up-front system cost of Smart Card technology and the proprietary channel needed to support this technology, and the significantly higher marginal cost per payment instrument may mean that the benefits of scale would only be justified far later than compared to a more traditional EPS. As represented by Figure 8 below, the result may be such that a Smart Card based EPS may never lower the average cost per transaction of a manual cash based system even at large scale and is therefore not recommended as a possible EPS for the Zambian Social Cash Transfer programme.

Figure 8: Non-viability of a Smart Card solution

6.5 Conclusions

The electronic Payments Scalability Escarpment Model is a model of a hypothetical social cash transfer scenario. By presenting this hypothetical scenario, we show that by scaling the manual cash based system by the required parameters of adding additional human resources, marginal costs increase and as a result, dis-economies of scale result. Conversely, in an electronic payments system (EPS), due to a lower marginal cost and a fixed up-front cost, the average cost per transaction declines as one scales outward, thus delivering economies of scale. Whilst the argument for an electronic payments system remains valid for standard interoperable technology such as EMV chip or Magstripe, the fixed up-front system cost of Smart Card technology and the proprietary channel needed to support this technology, and the significantly higher marginal cost per payment instrument may mean that the benefits of scale would only be justified far later than compared to a more traditional EPS. As such, the use of Smart Card technology is not recommended.

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7. EVALUATING ALTERNATIVE PAYMENT MECHANISMS WITHIN THE ZAMBIAN CONTEXT

For the MCDSS, the challenge is to design a disbursement system that achieves the widest coverage with the least cost and investment. An overall assessment of Zambia’s physical environment and current financial and retail reach demonstrates a strong urban bias in the provision of enabling infrastructure. There is little electrical, road or public transport coverage beyond Zambia’s economic crescent with this coverage diminishing further as areas become increasingly more remote. Weak physical environments limit the potential for businesses to achieve profit and decrease the scope of social service budgets such that investment is discouraged and the value of potential social services benefits are diminished. With specific reference to payment mechanisms, an inadequate physical environment and poor investment in rural infrastructure limits the potential for a single-provider solution as the associated risk of investment in infrastructure for such a provider cannot be adequately mitigated.

In this section, we take a deeper look at the beneficiary reality (geographic location, poverty levels, low usage of formal financial services, limited electricity supply, poor road infrastructure, mobile phone penetration and network coverage.) These factors, whilst representing the beneficiary reality also pose a particular challenge for the design of an appropriate distribution and payments solution, particularly if the current manual payments system is migrated to an EPS. Of equal importance is the Zambian government’s commitment to building an enabling payments environment through policy, legislation, regulation and investment in core infrastructure.80 The government’s commitment to facilitating an enabling environment through the Zambian Payment System Project is briefly examined together with recent policy and legislative changes. Working within the bounds of the extreme nature of the rural environment and building upon our core finding that an appropriately designed electronic payments solution would be more efficient and scale better in the long run, we examine a number of potential payments solutions. These include a purely bank driven solution and a number of transformational m-banking solutions including a bank-led retail driven solution; a purely mobile operator – independent non-bank m-banking solution and a payments solution provider driven solution. Finally, drawing upon lessons learnt and discussed in various sections of this report, .we propose an optimal SCT payments system within the current Zambian context.

7.1 Geographic location (physical environment) of SCT beneficiaries The geographic location of Zambia’s critically poor, incapacitated and destitute households poses a particular challenge when designing an appropriate payments mechanism for a regular social cash transfer. For a critically poor household, characterised by high levels of disability and age-related infirmity, physical access to traditional payment points - whether they be under a tree or at school or health centre in a rural area, or at a bank branch or post office in a district capital - may be a prohibiting factor in receiving social grants and must be taken into account when providing recommendations on appropriate “push” and “pull” payment mechanisms.

80 An enabling environment is defined here as the set of conditions which promote a sustainable trajectory of market development (Porteous, 2006.)

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Figure 9: Poverty levels by district

Mpika

Solwezi

Sesheke

Kaoma

Serenje

Kalabo

Chama

Kasempa

Mkushi

Mumbwa

Lukulu

Senanga

Chinsali

Kalomo

Kaputa

Mwinilunga

Kazungula

Lundazi

MufumbweZambezi

Isoka

Kabompo

Mansa

Mongu

Shang'ombo

Nyimba

Samfya

Itezhi-Tezhi

Mbala

Kasama

Chibombo

Chongwe

Kapiri Mposhi

Mungwi

Luwingu

Petauke

Mporokoso

Choma

Kafue

Mpulungu

Lufwanyama

MpongweChipata

Mwense

Kawambwa

Milenge

Monze

Mazabuka

Mambwe

Namwala

Chilubi

Katete

Chavuma

Nakonde

Masaiti

Chienge

Gwembe

Luangwa

Siavonga

Sinazongwe

Nchelenge

Chadiza

Kabwe

Chingola

Ndola

Mufulira

KitweKalulushi

Luanshya

Chililabombwe

Livingstone

Lusaka

0.727

0.739

0.672

0.671

0.711

0.883

0.7040.555

0.642

0.668

0.558

0.608

0.610

0.686

0.735

0.554

0.6640.706

0.406

0.702

0.788

0.797

0.596

0.638

0.702

0.709

0.498

0.674

0.670

0.916

0.605

0.490

0.600

0.639 0.6510.694

0.754

0.737

0.561

0.627

0.582

0.835

0.744

0.7620.750

0.675

0.686

0.722

0.655 0.7070.722

0.830

0.7680.813

0.803

0.715

0.778

0.791

0.767

0.5460.543

0.613

0.8020.587

0.734

0.780

0.570

0.567

0.741

0.689

0.597

Republic Of ZambiaSQUARED POVERTY GAP INDEX

Sour ce: Micro-level Estimates of Poverty In Zambia (CSO)

Squared Poverty Gap Index (P2)0 - 0.1000.100 - 0.1250.125 - 0.1390.139 - 0.1700.170 - 0.2000.2 00- 1

N

EW

S

50 0 50 100 150 200 250 300 350 400 450 500 Kilometers

Source: CSO 2008 

Although poverty is a widespread across all of Zambia, certain spatial poverty patterns are discernable. As can be seen in Figure 9 above, poverty has a clear urban-rural split with those districts with urban and/or commercial centres - such as Lusaka, the Copperbelt and Livingstone displaying the lowest poverty levels. Micro-level estimates of poverty in Zambia 2007 published by the Central Statistical Office (CSO) support this evaluation concluding that poverty rates tend to be lower in more densely populated urban areas, while poverty in the surrounding peri-urban and rural areas is significantly higher (CSO, 2007.) Closer inspection of Figure 8 (above) and Figure 10 (below) also illustrates the link between low population densities and higher levels of poverty (Sesheke district being the notable exception) with those areas with higher population densities tending to experience lower levels of poverty. This is not unexpected as individuals will tend to flock to those district towns and cities that offer the greatest income generating opportunities. It therefore can be concluded that critically poor households are primarily located in sparsely populated rural settings, largely beyond the reach of banking, state or retail infrastructure.

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Figure 10: Zambian population density by district

Source: Central Statistical Office (CSO), (2008), National Road Fund Agency (2003)

SCT beneficiaries generally reside in areas which have no electrical coverage and limited road coverage, making access difficult for road going vehicles. Only 19% of Zambian households have access to electricity. Electrical access has a particularly urban bias. 49.3% of urban households (up from 48% in 2005) and 3.2 % of rural households (up from 2% in 2005) have access. Electrical coverage is primarily limited to Zambia’s central economic corridor running from the Copperbelt down through Lusaka and connecting to Livingstone. Stand alone units (diesel stations) are in operation in various areas beyond the main electricity grid. These “stand alone stations” lack significant distribution capacity, are difficult to maintain as a result of high fuel costs and provide electricity at an extremely high cost. Lusaka Province has the largest proportion of households with access to electricity (51.4%), followed by Copperbelt (43.9%), Southern Province (13.5%),

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and Central Province (11.9%.) The provinces with the lowest proportion of households with access to electricity are North Western (4.5%) and Western Province (3.5 %) (CSO, 2008.)

Recognising these constraints to the provision of greater access for rural communities which constitute 60% of Zambia’s population, pilot schemes testing the use of solar home systems (SHS) are currently being undertaken in Eastern Province. Although the scope of the project is limited, with only about 400 SHS having been installed, initial results which have priced service fees at ZMK 25 000 have been encouraging.

In the 1970s, Zambia had one of the best highway networks in sub-Saharan Africa. In 1990 the National Road Fund Agency (NRFA) estimated that 80% of the road network had deteriorated to the extent that US$400 million had been lost due to the lack of maintenance.81 The government introduced a road fund levy on fuel, and this, together with international aid has improved the highway network. In 2004, the NRFA rated 57% of paved roads in good condition, 22% in fair condition and 21% in poor condition. Zambia has 38,763 kilometres of road of which 6,173 are bitumen, 8,952 km gravel and 23,998 km unclassified. All province capitals and most district administrative capitals are accessible by road throughout the year.82 Moving deeper into the districts it is necessary to use feeder roads which tend to only be accessible by 4 wheel drive and often become completely impassable during Zambia’s rainy season. Roads between important centers are mostly paved and are generally in good condition. Figure 11 below illustrates Zambia’s road infrastructure coverage, road conditions and traffic levels. Like Zambia’s electrical coverage, road coverage is predominant along Zambia’s economic crescent running from the Copperbelt down through Lusaka and onto Livingstone.

81 Total road assets were originally valued at US$2.3 billion. 82 Exceptions are the outskirts of Northern, Luapula, North-Western and Western Provinces.

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Figure 11: Road condition and traffic levels in Zambia

Source : Nat ional Road Agency Fund 2003

7.2 The enabling environment

An enabling environment is defined here as the set of conditions which promote a sustainable trajectory of market development (Porteous, 2006.) With respect to the payments system, this requires sufficient openness of the legal and regulatory environment combined with legal and regulatory certainly. When proposing a payments system for the electronic transfer of cash to beneficiaries (whether this transfer takes place through traditional banking channels or the deployment of an purely mobile operator – independent non-bank m banking solution) it is important to examine the current state of a country’s payments system and infrastructure. Any transformational strategy proposed must be supported by the institutional and infrastructure arrangements of the financial system.

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7.2.1 Overview of reforms in the Zambian payments system

The Zambian payment system project began in 1995. Over the last seven years, the Bank of Zambia has led several fundamental reforms to modernise the national payment system (Kilfoil and Langhan, 2008.) During this period, two National Payment System Vision and Strategy frameworks have been published covering the periods 2002 – 2006 and 2007 – 2011. It is important to note that the focus and objective of the National Payment System Vision & Strategy 2007-2011 is to offer the Zambian populace affordable banking services and to reach the unbanked. In order to reach this objective, the following reforms have been undertaken:

• Separation of clearing and settlement functions; • Adoption of the Zambian Electronic Clearing House Rules; • Establishment of two Electronic Clearing Houses, one in Lusaka and one in Kitwe; • Introduction of Magnetic Ink Character Recognition (MICR) Cheque Standards and the automation of

cheque clearing; • Introduction of the Direct Debit and Credit Clearing (DDACC) system in 2002 to facilitate value retail

transactions; • Launch of Celpay as a mobile payment channel provider in 2003; • Approval of the Financial Sector Development Plan (FSDP) covering the period 2004-2009 in June

2004;83 • Implementation of the Zambian Inter-bank Payment and Settlement System (ZIPSS)/Real Time Gross

Settlement (RTGS) in 2004 to facilitate inter-bank payments; • Launching of (eSwitch) ZAMLINK for subscribing banks in 2005; • Introduction of VISA Electron and non-VISA debit cards for use at ATM’s and POS facilities; • Establishment of the Payments Division of the Bank of Zambia; • Involvement of the Bank of Zambia in regional payment systems initiatives by COMESA and SADC

including the SADC Regional Payments System Project and the Regional Payment Systems Peer Review; • Launch of the VISA-National Net Settlement Service (V-NNSS)84; • Enactment of the National Payment Systems Act, 2007 (Act No. 1 of 2007.)

The Zambian payments system has been considerably modernised, allowing for greater interoperability and providing the infrastructural foundation for all of the potential payment options discussed in Sections 7 and 8 below. In addition, in line with its overall commitment to reforming the payment system and investing in core transaction, clearing and settlement infrastructure, the Zambia Electronic Clearing House Limited (ZECHL) has decided to purchase a national switch which complies with existing international standards and optimises interoperability. The national switch will connect transaction acquiring points such as ATM’s, POS devices and mobile phones to different end points including banks and international card processing organisations (Kilfoil

83 The FSDP aims to inter alia address the weaknesses in and strengthen the Zambian financial sector to make it a stable, sound and market based sector able to support efficient resource mobilisation efforts necessary for economic diversification and sustainable growth (Bank of Zambia, 2006.) 84 The VISA national net settlement system was introduced in 2006. This system is linked to the RTGS system for the settlement of domestic VISA transactions between Zambian VISA member banks.

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and Langhan, 2008.) The Zambian National Switch project is potential key to the SCT strategy as it will allow the use of POS and ATM devices nationally (hopefully at consistent reasonable fees) thereby maximising the use of existing infrastructure deployed by the banks. This makes the option of issuing an interoperable payment card a feasible one. Furthermore it is the intention of the National Switch operated by the ZECHL to offer third party card issuing services. The proposed SCT card could very well be issued by the National Switch at a significantly lower cost than issuing via the typically expensive exiting banking infrastructure.

7.2.2 Regulation and policy

As represented by Figure 12 below, form a regulatory and policy perspective, the design of a payments mechanism (particularly if the payments mechanism proposed is a transformational branchless banking model or a non-bank mobile operator led model) requires the consideration and analysis of a number of policy and regulatory issues.85 As extensive commentary on the current legal, regulatory and policy environment falls outside the scope of this repot, we limit our commentary below to the salient points of the recently enacted National Payment Systems Act, 2007 (Act No. 1 of 2007) and the Prohibition and Prevention of Money Laundering Bill, 2001.

Figure 12: Overlapping policy and regulatory domains

Source: Adapted from Porteous (2006) The Enabling Environment for Mobile Banking in Africa The recently enacted National Payment Systems Act, 2007 (Act No. 1 of 2007) has gone a long way to 85 See Porteous (2006) where it is noted that “as many as five regulators (bank supervisor, payment regulator, telco regulator, competition regulator, anti-money laundering authority) may be involved in crafting policy and regulations which affect this [mobile banking] sector.”

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bringing both openness and certainly to the Zambian payments environment. The regulatory framework for the Zambian National Payment System is based on the Bank for International Settlements (BIS) Core Principles for Systematically Important Payment Systems (Kilfoil and Langhan, 2008.) These principals underpin both the Bank of Zambia’s National Payment System Vision & Strategy 2007-2011 and the Act.86 The National Payments System Act is comprehensive and covers payment systems regulation (Part II); the regulation, designation and restrictions on payment system business (Part III); presentment and electronic transmission of cheques (Part IV); settlements (Part V); and general and enforcement provisions (Part VI.) The legal and regulatory foundation provided by the National Payment Systems Act, 2007 aims to: • provide for the management, administration, operation, supervision and regulation of payment, clearing

and settlement systems; • empower the Bank of Zambia to develop and implement payment, clearing and settlement systems policy

so as to promote efficiency, stability and safety for the Zambian financial system.87 Prior to the enactment of the National Payment Systems Act, 2007, the Bank of Zambia Act, No. 43 of 1996 did not explicitly empower the Bank of Zambia to oversee the entire payments system (Kilfoil and Langhan, 2008.) Legislation covering various aspects of payment systems was fragmented and spread over a large number of Acts.88 Significant reliance was placed on framework legislation, common law and a number of rules and agreements drawn up between banks (Bank of Zambia, 2006.) In the absence of a National Payment Systems Act, the Bank of Zambia was required to rely on section 5(2)(b) of the Bank of Zambia Act which provides that one of the functions of the Bank is to “promote efficient payment mechanisms” and section 44 which reads “the Bank may, in conjunction with other financial institutions, organise facilities for the clearing of their cheques and other instruments for effective payments; and for this purpose organise a clearing system in Lusaka and elsewhere.” The Bank of Zambia is responsible for the implementation of the National Payment Systems Act, 2007 and is tasked with the regulation and oversight of the operations of payment systems so as to ensure the integrity, effectiveness, efficiency, competitiveness and security of the system and to promote the stability and safety of the Zambian financial system.89 Section 5(3)(c) of the Act now provides the Bank of Zambia with direct powers to prescribe rules and arrangements relating to the operation of payment systems and in particular 86 The National Payment System Vision & Strategy 2007-2011 sets out the objective of offering the Zambian populace affordable banking services and reaching the unbanked. 87 The qualifying statement provided by the Bank of Zambia on the need for a well-founded legal basis for the National Payments System reads as follows “legislation supports modern payment system developments. The rights and obligations of participants under insolvency are clear and unambiguous. The exact timing of final settlement has been defined by law and communicated to all participants. All clearing house agreements are legally binding. All netting agreements are legally binding. All agreements relating to collateral and credit facilities for settlement purposes are legally binding. The law supports developments of modern payment system instruments and mechanisms. The role and responsibilities of different management bodies within the payment system have been clearly defined (Bank of Zambia, 2007)”. 88 The payments system drew its legal backing from a variety of sources including the Bank of Zambia Act, 1996; Banking and Financial Services Act, 1994; Bills of Exchange act, 1882; Cheque Act, 1989; various statutory instruments; other statutes for non-bank entities such as the Building Societies Act, Insurance Act, Development Bank of Zambia Act and cooperative Societies Act; Zambian Electronic Clearing House Rules; and agreements between payment service providers and customers. 89 Section 5(1)

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provide for (i) netting agreements; (ii) risk-sharing and risk-control mechanisms; (iii) finality of settlement and finality of payment (iv) the nature of financial arrangements between participants; (v) the operational systems and financial soundness of a clearing house; and (vi) such other matters pertaining to systematic risk.

From a payments system provider perspective, any person intending to operate a payments system in Zambia is required to apply to the Bank of Zambia for designation of their system as a payments system and once approved, a certificate of designation which remains valid until the designation is revoked, is issued.90

Regulatory responses are relevant to technology focused money transmission and payments models because they are deemed to create e-money. Regulators in South Africa, Brazil and India have adopted a hard line approach by taking the view that money, as soon as it is held in electronic form, must be the liability of a regulated banking service provider. In Kenya and the Philippines regulators allow the creation of e-money by non-financial entities as payments system providers and many countries have not formally defined their stance on e-money. Current laws could be interpreted to allow or preclude remote access, but no guidance has been issued and the law has not been tested. Despite the fact that the Bank of Zambia regulations do not define e-money, discussions with the bank revealed that the bank is open to considering applications from payment systems providers in terms of the recently enacted, National Payment Systems Act, 2007. However, this act must be read in conjunction with the section 17 of the Banking and Financial Services Act Chapter 387 which reads:

17 (1) A person shall not conduct or offer to conduct banking business unless the person holds a license for that purpose.

17 (2) A person other than a licensed bank or licensed financial institution shall not conduct or offer to conduct financial service business.

17 (3) A bank or financial institution shall not conduct any banking or financial service business91

(a) that is not authorised by this Act or the terms and conditions of its license, to conduct; or

90 S 7(1.) See Cenfri (2008) where the author set out the risk based supervisory approach followed by the Bank of Zambia. Specifically the report states that “following submission of all the required documentation, the Bank of Zambia is granted 180 days in which to either approve or reject the application. Failure to do so by the deadline implies automatic approval. Though registration and annual fees are levied, no minimum upfront capital requirements are determined in the Act. Rather payment system businesses (PSB’s) are required to assess and set their own requirements for solvency and soundness, which are then approved by the Bank of Zambia on an individual basis. Similarly, no blanket technical business requirements are set for all PBS’s. Rather, PBSs can determine their own procedures and requirements in their rules. The rules are approved through an interactive process between the Bank of Zambia and the PBS to ensure that they are acceptable from the regulator’s point of view, yet tailored to the individual organisation’s needs and clients. In this, the Bank of Zambia follows a risk-based supervision approach.” 91 Banking business is defined as (a) the business of receiving deposits from the public including chequing account and current account deposits and the use of such deposits, either in whole or part, for the account of and at the risk of the person carrying on the business, to make loans, advances or investments (b) financial services; and (c) any custom, practice or activity prescribed by the Bank of Zambia as banking business.”

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(b) in contravention of the conditions of its license.  

In Zambia, licenses are only granted to deposit taking institutions (banks and licensed financial institutions) and as such, this provision is likely to curtail the development of a mobile operator lead initiative such as that of Safaricom’s M-PESA in Kenya, unless such a model is directly backed and led by a deposit taking institution.92 Our preliminary review of relevant regulations and discussions with various stakeholders indicate that bank based models are acceptable due to the fact that a fully prudentially licensed and supervised financial institution stands behind them.93

The Zambian Anti-money Laundering Directives, 2004 require all regulated institutions to require its individual customers when opening an account, establishing business relations or conducting business transactions to produce the in the case of a Zambian national, a National Registration Card or valid Passport or Driver’s License,94 and verify the names and addresses of its individual customers through a number of methods. Regulated institutions are also required to maintain business transaction records for 10 years after the termination of the business transaction and copies of identification records for a period of 10 years after termination of the business transaction with the customer. Even though section 4 of the directives requires regulated financial institutions to produce clear procedures on how to identify a customer who applies to open an account through the internet or other electronic means, such an institution is not permitted to establish a business relationship with the customer unless the identity documents of the customer have been verified or confirmed.95 Both the Anti-money Laundering Directives, 2004 and the Prohibition and Prevention of Money Laundering Bill, 2001 seem not to have taken advantage of the flexibility allowed for by the FATF recommendations and seem not to allow for CDD/KYC to be performed beyond bank branches by entrusted staff of non-bank retail agents. We recommend that if the recommendations proposed in this report are adopted by the MCDSS with the support and backing of the Bank of Zambia, consider exemptions which would allow for remote account opening and CDD/KYC to be performed by trusted individuals in the field or associated retail agents.96

 

92 It is interesting to note that M-PESA has been carefully constructed so as not to constitute banking activity under the Kenyan Banking Act (CGAP, 2008.) 93 Cenfri (2008) note that “[n]one of the Acts above [National Payment Systems Act and the Banking and Financial Services Act (Chapter 387 of the laws of Zambia) of 1994] regulate the distribution channels or agent relationships of banks/financial institutions/payment systems businesses. Rather, it is the bank/financial institution’s responsibility to ensure that products are sold and services rendered by agents/retailers in a responsible way and in compliance with the various rules and requirements to which the provider is subject.” 94 S6(1)(a) 95 This is in line with The Financial Action Task force (FATF) AML/CFT standards and recommendations which require policies and procedures to be out in place to address any specific risk associated with non-face to face business relationships or transactions such as those conducted through the deployment of technologies that might favor anonymity (FATF Recommendation 8.) 96 Senior officials in the Payments System Department at the Bank of Zambia however had a very pragmatic approach to KYC and where more than willing to consider exemptions or limit setting so that the legislation did not become a hindrance.

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7.3 Is a purely bank driven payments solution viable within the Zambian context?

Section 5.2.3 above noted that “where banking infrastructure and presence is well developed (usually in urban settings), banks have proved to be appropriate vehicles through which SCT benefits can be paid.” The success of such a distribution/payments strategy through the formal financial sector depends greatly upon current reach of formal financial service providers and their willingness to customise their product offering to cater for the specific needs of SCT beneficiaries. In a purely bank driven solution, a bank would typically be the direct provider of social cash payments to beneficiaries. The bank would develop a new product or modify and existing product (e.g. ABSA-AllPay Sekulula Debit Card in South Africa) specifically for the low income segment and distribute cash payments through its existing channels (branches, ATM’s, POS.) Below, we examine the current formal financial service coverage in Zambia and look at various banking products that are currently offered by Zambian banks with a view to making a recommendation on whether this solution should be deployed or not for the payment of SCT benefits. We provide an indicative costing of such a solution for MCDSS.

7.3.1 Financial services coverage

Zambia’s financial services sector consists of commercial banks, state-owned accessible finance institutions (AFIs), building societies, social micro-finance institutions (MFIs), commercial micro-lenders, foreign exchange bureaus, insurers and leasing companies. Commercial banks dominate the financial services industry. Together these banks account for 95% of total assets, 97% of total deposits, approximately 75% of all points of presence and 69% of total clients (OPM, 2007.) 97 Competing for the remaining share of clients, assets and deposits are 3 state-owned AFIs, 2 private building societies, 20 social MFIs and 7 commercial micro-lenders (OPM, 2007.) As at November 2007 Zambia had 12 commercial banks. Although dominant players in financial services in Zambia, these commercial banks are small in comparison to other African countries and tend to serve a limited segment of Zambia’s population. According to FinScope™ Zambia 14.6% of Zambians are currently banked while an alarming 78% have never been banked.98 With a total of only 405 888 deposit accounts at all commercial banks out of population of 11 million, 6 million of whom are over the age of 18, Zambia has one of the lowest bank accounts to population ratios in Sub-Saharan Africa (Martinez, 2006.) 5 of the 12 banks have less than 5 million in capital each, while the remaining 7 banks have capital in the range of $5 to $30 million dollars (Martinez 2006.) Table 6 below compares Zambia to selected Sub-Saharan African countries.

97 All calculations exclude Insurance Companies and Leasing companies. Points of presence represented exclude ATM or Point of Sales devices. 98 FinScope™ is a nationally representative study that benchmarks access to, and use of financial services. A FinScope™ study was completed in Zambia in 2005 and will be repeated in 2009. For more information, please refer to www.finscopeafrica.com

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Table 6: Banking supply in selected countries Country Number of deposit taking

institutions Branches per 100 000

population (2005) ATMs per 100 000 population (2005)

Zambia 1699 1.5 0.7 Kenya 53 1.4 1.0 Tanzania 29 0.6 0.2 South Africa 59 6 17.5 Zimbabwe 3.3 3.4 Source: Adapted from Supply‐side study of the inclusiveness of Zambia’s financial system, OPM  2007 

 Use of modern card-based transactional infrastructure to service clients is still in its infancy in Zambia. Banks have made the transition to card-based transactional solutions, “plastic strategies” although most banks have not deployed significant numbers of ATMs or POS devices.100 As indicated in Table 6 above Zambia has only 1.5 branches per 100 000 people.101 At present there are still fewer total ATMs than bank branches in Zambia, with only 0.7 ATMs (less than half the number of branches) per 100 000 population. Placing Zambia’s branch and ATM infrastructure in context, developed markets generally enjoy between 2.5 (Australia) and 4 (UK) ATMs per branch (FSD Kenya 2007.) Within Africa, only South Africa boasts a ratio of more than 2.5 ATMS per branch with a ratio of approximately of 3:1.

Banks have generally focused distribution strategies in urban centres, particularly after the removal of government stipulations requiring the parallel establishment of a rural branch per urban branch (Martinez, 2006.) This has resulted in a notable decrease in the number of rural branches. The ratio of rural branches to urban branches has dropped from 50% in 1990 to 43% in 2005 (Martinez, 2006.) This has further limited the accessibility of banking services for low-income individuals in towns and villages (See Figure 12 below.) A number of banks are however currently expanding or planning to expand into rural areas by investing in low cost branches, mobile branches and rapidly increasing ATMs, Points of Sale (POS) and mini ATM deployment. However, as indicated by Figure 12 below, the three primary retail banks, Barclays, Zanaco and Finance Bank are not present in 24 of Zambia’s 72 districts102.

99 This figure excludes Nigeria’s Access Bank, which was licensed in September 2008 by the Bank of Zambia. 100 The only major bank with significant POS deployment is Barclays Bank with approximately 605 POS devices located primarily in urban areas and at tourist resorts. 101 Although low, it is a noteworthy fact that this ATM coverage is better than the coverage in both Kenya and Tanzania. 102 The spatial analysis in Figure 12 demonstrates the combined reach of Zambia’s most prominent retail banks namely, Barclays, Zanaco and Finance Bank. When combined with Zambia’s smaller banks, the number of districts without a bank presence falls to 18.

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Figure 13: Combined bank branch distribution map for Barclays, Zanaco and Finance Bank

Source: Individual banks

Specialist MFIs also play a specific role in Zambia. These institutions are grouped into two groupings, namely social MFIs and commercial microlenders. Social MFIs are involved in micro-enterprise development and financing and as a group constitute approximately 20 small institutions with a few thousand clients each with a combined client base of 50 000 clients in aggregate (OPM, 2007.) Social MFIs have amongst them an estimated 60 offices, but their geographical reach of their lending businesses is somewhat wider as a result of their reliance on mobile loan officers who might cover more than a single district. According to OPM, 2007 social MFIs have total assets amounting to approximately ZMK 50 billion, with 2/3rds of these deployed as loans. This means that total social MFI lending aggregates to approximately 1% of all bank lending (OPM, 2007.)

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Social MFIs in Zambia still deploy a largely paper-based transactional service and are dependent upon commercial bank infrastructure to facilitate their lending operations. Lending is primarily provided on a group basis. To gain access to loan funds, each individual borrower is issued with a cheque against which he or she withdraws funds from the MFI’s commercial account held at a local bank. Similarly, borrowers make necessary loan repayments directly to the MFIs commercial account. Reliance on commercial bank infrastructure prevents social MFIs from achieving higher levels of market penetration (FinMark Trust, 2007.)

The second group of specialist MFIs are commercial microlenders who focus on salary-based lending to formal sector employees. Microlenders focus on block lending programmes negotiated with major employers who allow microlenders to deduct loan repayments at source via deductions from salary (OPM, 2007.) In the case of Bayport Financial Services, Microfin and Blue, Zambia’s largest microlenders, deductions are electronically debited and paid directly by the employer to the commercial microlender. In a limited number of cases microlenders collect repayments in cash directly from employers. OPM note that despite this model of microlending only having been established in 2000, it has shown incredible growth with a client base of approximately 250 000 borrowers, a total loan book equal to ZMK 160 billion gross and ZMK 144 billion net provisions (OPM, 2007.) This equates to approximately 4% of total bank lending. The reach of microlenders is significant and they play an active role in delivering and collecting cash well beyond the confines of their branches in district towns. According to Bayport, reach is further enhanced via mobile operations which are regularly conducted by staff using 4X4 vehicles. In the field Bayport is able to access their systems in real time utilising a combination of third party and their own infrastructure. As the costs associated with extending this kind service are high, the company is constantly reviewing its delivery channels to seek ways of reducing cost.

7.3.2 Bank product meeting the needs of SCT beneficiaries

The incredible success of the ABSA-AllPay Sekulula Debit Card in South Africa, developed specifically with the needs of social grant recipient in mind is testimony to the fact that “add-in” approaches have positive outcomes. Add-in approaches to the payment of social transfers involve the use of a payment instrument such as a bank account or store value card which integrates the user into the financial system (Bankable Frontier Associates, 2006.) However, as noted by Bankable Frontier Associates, standard bank accounts may not be entirely suitable for SCT beneficiaries as:

3) The charges on a standard account may be too high relative to the value of the grant and there may be minimum balance requirements which might rule out beneficiaries of a social cash transfer.

4) The financial infrastructure may be inadequate.

Whilst a number of Zambian banks currently offer financial products targeted at the low income segment (notably, Barclays Tonse account, Zanaco Seba account and Finance Bank savings account), in order for any one of these products to be attractive and suitable for social cash transfer recipients, the following would have to apply: no minimum balance required to open or keep the account active and no monthly charges. As indicated by Table 7 below, the minimum balance requirements, monthly maintenance fees and limited cash-

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out points disqualify these products (as they stand) as suitable stand alone solutions for the payment of the social cash transfer.

Table 7: Low income bank products currently available in Zambia Account feature Barclays Bank Zanaco Bank Finance Bank Stanbic Bank Standard Chartered

Type of institution Retail bank Retail bank Retail bank Retail bank Retail bank

Name of product Tonse Bank Account Seba Account Savings Account Transact+ Payroll Account

Eligibility req. None None None None None

Opening balance ZMK 40,000 ZMK 30,000 ZMK 100,000 ZMK 50,0000 ZMK 20,000

Minimum balance requirements

ZMK 40,000 ZMK 30,000 ZMK 50,000 ZMK 50,000 ZMK 20,000

Monthly Maintenance ZMK 20,000 None ZMK 2,500 ZMK 17,000 ZMK 20,000

Per transaction

None – Fixed service bouquet limited to proscribed services(see below)

None – Free transactions are limited to proscribed services (see below)

ZMK 10,000 for over the counter withdrawal ZMK 2,000 per ATM withdrawal

ZMK 2, 000 from Stanbic ATMs ZMK 5, 000 other ATMs: Extra statements at cost: ZMK 10,000 Mini statement, ZMK 15,000 for interim statement.

ZMK 1,800 per ATM withdrawal Extra statements are charged for

Penalty fees ZMK 45,000 for usage above the proscribed service offering. Penalty fee is charged once off.

ZMK 30,000 for any additional withdrawals. The charge is debited on the fourth withdrawal in a quarter and then entitles the account holder another 15 transactions without charge. Any further transactions will attract normal ATM transaction fees.

ZMK 10,000 if balance is lower than ZMK 50,000.

Proscribed services (Monthly) (Quarterly) (half yearly) (Monthly) (Monthly)

Proscribed services 2 ATM withdrawals 1Cash deposit 1 CQ deposits 1 Salary credit POS Mini-statement Balance Enquiry Account transfer

3 ATM/over the counter withdrawals

Statements provided twice a year. Extra statements costs ZMK 20,000 per page

1 Full statement provided.

1 X Full statement provided.

ATM 73 54 33 38 – clients can also other VISA ATMs

34

PoS 626 31 0 0 can use Barclays POS

0

Percentage interest paid

None 1% to 2.5% (tiered) Interest earning balance ZMK 200,000

3%, paid half-yearly 1.5% Paid on balances ZMK 1,000,000. and over

None

Source: Bank of Zambia ATM and POS statistics, Septmber 2008; Individual Companies, Company Websites

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In addition to Zanaco’s Seba account, the bank has recently launched XAPIT, a VISA Electron prepaid card and integrated account as a total payment solution added to a proven mobile banking system which provides full transactional facilities, payments to utility companies and mobile phone top up. During an interview with Zanaco we established that the bank would be interested in providing similar accounts to beneficiaries. These accounts would facilitate regular payments and withdrawals through existing Zanaco infrastructure. At the time of writing this report, no financial information was available on the cost of this new product. International experience with similar comprehensive banking solutions including WIZZIT and MTN Banking does however suggest that the cost of such a solution may be prohibitive in the social cash transfer space.

7.2.3 Costing the bank driven solution Should MCDSS elect to use a bank driven solution and to partner with a Zambian bank a number of options are possible.

Zambian bank as issuer of bank account and associated card

Where a Zambian bank is the issuer of the bank account and the associated card, MCDSS would typically be charged a monthly fee per account payable. Where MCDSS and or the SCT programmes supporting donors have not negotiated a particular cost (set fee) for the account with a bank, and agreed to pay this it is likely, all other things being equal, that the cost of operating the account would be passed on to the beneficiary account holder.

International experience has shown that various subsidy arrangements may support the development of basic transactional products which will meet the need of beneficiaries of a social cash grant (Bankable Frontiers, 2006.) MCDSS and various supporting donors would spearhead the negotiation of various arrangements which might include:

• Cross subsidisation through a state-owned financial institution which offers accounts to the broader population from which banks can make money to cover the costs of low income accounts (Bansefi – Mexico, Caixa – Brazil);

• Upfront subsidy per account opened to reduce the initial negative cash flow for the bank involved;

• Ongoing subsidy per account per month.

While a withdrawal fee could be charged separately it is more likely that MCDSS would negotiate a flat account fee per month that would include the cost of one disbursement either directly over the counter or via an ATM. An example of such an arrangement is the South African Sekulula card issued by ABSA bank. This account, depending on the province involved, attracts a fee per account per month of between $1.00 and $2.00. One of the risks to MCDSS in this particular model is that it is rather likely that a Bank would charge the monthly fee irrespective of whether the account is used or not. This may be problematic in the case where choice is given to the beneficiary to receive their payments via multiple channels as this cost may potentially double cost to the Ministry and

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or supporting donor.

Costs of following the bank lead model are estimated as:

• Cost per card per month (issued by the bank on behalf of the Ministry): US$1.00 to US$2.00

• Once off system development in order to integrate to a bank or many banks, estimated as: US$70, 00.

• Ongoing communication/networking costs for a direct real-time integration. . Estimated cost of a leased line connection would US$500 per month.

MCDSS as issuer of card using a third party processor

In order to address this cost exposure risk, an option for the MCDSS is to issue the card itself using a Third Party Processor. Recgnising that the Zambian National Switch, according to the Bank of Zambia and ZECHL, is to include a card issuing service, issuing the card using the ZECHL would likely prove more cost effective than a commercial bank (Kilfoil and Langhan, 2008.)

Given the poor physical coverage of banks in Zambia and low deployment of alternative distribution channels, we do not recommend that a purely bank driven solution be considered without the possible development of a bank-led model of branchless banking where Zambian banks would deliver basic financial services to beneficiaries of the social cash transfer though retail and other agents to increase reach (see Section 7.4 below setting out the bank-led retail driven solution.) In the bank lead model allowance could be made for withdrawal at Retail outlets instead of ATM withdrawal but this would likely require the bank to supply a POS device that communicates to the bank in order to authorise the disbursement. Again, it may be possible that the ZECHL could provide POS devices to disbursing merchants as an alternative to requiring a commercial bank to do so.

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Box 6: Elements of branchless banking

• Use of technology, such as payment cards and mobile phones, to identify customers and record transactions electronically and, in some cases allow customers to initiate transactions remotely.

• Use of (exclusive or non-exclusive) third party outlets, such as post offices and small retailers, that act as agents for financial service providers and that enable customers to perform functions that require their physical presence, such as cash handling and customer due diligence for account opening.

• Offer at least a basic cash deposit and withdrawal in addition to transactional or payment services.

• Backing of a government recognised, deposit taking institution, such as a formally licensed bank.

• Structuring of the above so that customers can use these banking services on a regular basis (available during normal business hours (without needing to go to bank branches at all, if that’s what they choose.

Source: CGAP (2008) Early Experiences with Branchless Banking

7.4 Is a bank-led, retail driven branchless banking solution viable within the Zambian context?

Innovative transformational branchless banking models currently tend to make use of a network of agents to provide financial services to customers who are unable to (because of physical distance) or unwilling to (because of prohibitive fee structures or negative perceptions) take advantage of financial services delivered through traditional bank branches (CGAP, 2008.) Leveraging off the existing infrastructure, provided by small retail outlets and airtime dealers has revolutionised the manner in which low income households are remitting money. These “agent” provider strategies are currently succeeding in serving previously financially excluded individuals as they operate at a fraction of the cost of conventional bank branches and offer customers convenience and familiarity (CGAP, 2008.)103 As represented in Box xx below a branchless banking solution entails a number of elements.

Essentially, two models of branchless banking through retail agents have emerged: one led by banks and the other by non-bank commercial players such as mobile network operators (CGAP, 2006.) The bank-led model consists of a licensed financial institution (bank or MFI) delivering financial services through retail agents. Retail agents handle customer interactions (face-to-face service/cash-in and cash-out) and the financial institution maintains the customer’s account. The basic bank-led, retail driven model is presented in Figure 8 below.

103 Whilst providing access, affordability and ease of transacting, CGAP notes that “the use of retail agents introduces new or enhanced risks policy makers and regulators should consider. For example, agents present a number of risks to the provider and, in particular, reputational risk given that the agent is the public face of the provider. Moreover, the use of agents adds a special dimension to the challenge of satisfying AML/CFT norms and consumer protection.”

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Table 8: The Bank-led Model The Bank-led Model

CUSTOMER RETAIL AGENT BANK

Step 1: Customer requests financial service.

Step 2: Retail agent checks customer’s ID and processes transaction, either directly through bank’s infrastructure (POS) or through payment processing agent.

Step 3: Bank credits and debits bank accounts of customer and other party to the transaction.

Examples of Service Offered: Deposits and withdrawals; money transfers; loan/bill/tax payments; loan application and disbursal; account opening and credit card application acceptance.

Examples of Retail Agents: Retail outlets (grocery stores, lottery outlets, pharmacies etc.); socially motivated organisations (NGO’s, MFI’s, etc.); Post Offices.

Examples of Other Parties: Includes retail agent (for deposits or withdrawals) and recipients of money transfers (other customers, utility companies, tax authorities, etc.)

Source: CGAP (2006) Use of Agents in Branchless Banking for the Poor: Rewards, Risks, and Regulations

Both Equity Bank in Kenya and WIZZIT as discussed in Sections 5.2.4 and 5.3.3 above have partnered with major retail chains to expand their networks, attain local brand presence and access customers in areas where they have no branch presence.104 In the Zambian context, almost every retail store that handles cash could potentially act as an agent of a bank willing to provide this service to SCT beneficiaries. Despite poor electricity coverage in some remote areas, improving network coverage (see Figure 14 below), the advent of solar powered battery charging points in rural areas and the innovative use of mobile phones as handy electronic communication devices has enabled retail agents everywhere to communicate electronically with the bank.105 This is particularly so due to the growth of wireless coverage which has increased the availability of on-line communications. However, in some situations, the cost and reliability of the bandwidth required for services like GPRS and 3-G may prove to be prohibitive (Bankable Frontiers, 2006.)

In 2006 CGAP focus note on the subject, it was stated that this retail agent driven model adds few serious risks as compared with conventional branch based banking (CGAP, 2006.) Two years later however, Focus Note 43 had the following to say “the regulatory significance of the distinction between the bank-based and non-bank-based models lies in the fact that behind every transaction under the bank based model, there stands a fully prudentially licensed and supervised financial institution. This fact may give policy makers false comfort, however. Evidence from the countries studied shows that in some cases, the bank involved in the bank-based model may have outsourced so much responsibility and risk to non bank actors that it, in effect, 104 Equity bank signed a deal in 2007 to use the Nukumatt chain of retail stores as its anchor banking agents and WIZZIT uses Dunn’s chain of 400 clothing stores as account opening locations (CGAP, 2008.) 105 See CGAP focus Note No. 38 (2006) where it is stated that “virtually any outlet that handles cash and is located near customers could potentially serve as a retail agent. Whatever the establishment, each retail agent is outfitted to communicate electronically with the bank for which it is working. The equipment may be a mobile phone or an electronic point of sale (POS) terminal that reads cards.”

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shifted the primary focus of regulatory concern from the prudentially licensed bank to its unlicensed partner (CGAP, 2008.)” Looking at the current massive adoption of M-PESA in Kenya with blatantly little or no input from their Bank CBA is a case in point. This change in opinion highlights the rapidly changing payments environment and the need for policy makers and regulators to keep abreast of developments. Without taking an overly hard stance, regulators need to be aware of the potential risks associated with this model.106

7.4.1 Potential for a bank-led, retail driven branchless banking solution in Zambia

Would a bank-led, retail driven branchless banking solution provide a viable option for the payment of SCT’s in Zambia? Our submission is that retail agents have a vital role to play in improving beneficiary accessibility as retail coverage and presence is often far greater than physical bank branch and ATM coverage. There are many countries (or parts of countries) where retail outlets do not have a presence or do not operate efficiently – and of course in such areas physical delivery may remain the only option. These areas are however fewer than might be expected. Lesotho and Swaziland for example have relatively good networks of private retail outlets which serve even the most remote mountain areas. In Malawi, a country not immediately recognised as having a sophisticated retail network, a study commissioned by DFID in 2001 showed that 85% of the population was within 20 km of a retail outlet belonging to one of the country’s five major retail chains. This doesn’t take into account the existence of the many small independent operators and traders. Zambia has few national chains of any magnitude. Primary retail operations are in the main conducted by micro-enterprises and the low income individuals’ consumption needs are met by local markets found in compound or village “high streets.” Recognising the improving economic climate of a number of African states, many South African retail chain-stores, looking to improve their own growth prospects have aggressively begun to expand across the continent. Zambia has been no exception. South African retail chain-stores currently active in Zambia include clothing retailers, Woolworths and Pep, restaurant chain Steers and grocery chain Shoprite107. Of these, Shoprite has the most extensive distribution network covering major urban centres and large towns in each of Zambia’s 9 provinces. Figure 14 below provides a spatial distribution of Shoprite’s coverage.

106 See CGAP (2008) Focus Note 43 where it is stated that “the use of retail agents introduces new or enhanced risks policy makers and regulators should consider seriously. For example, agents present a variety of operational risks to the provider and, in particular, reputational risk given that the agent is the public face of the provider. Moreover the use of agents adds a special dimension to the challenge of satisfying AML/CFT norms and to consumer protection – two other topics that are critical to transformational banking.” 107 Spar also has a presence in Zambia.

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Figure 14: Existing retail chain-store (Shoprite) coverage

Source: Shoprite company website and Quindiem interviews

Significantly, Shoprite has resorted to a number of innovative strategies to increase foot-flow at its retail outlets and to maintain a competitive edge in the Zambian market. These include the use of satellite communications between outlets and head office systems to ensure transactions take place in real time; the deployment of ATMs (Finance Bank) and Western Union cash transfer points and the provision of free transport to collect shoppers in the remote areas around Monze.

Discussions with Shoprite Zambia, confirmed that it is plausible for the Shoprite group to act as cash-out points for the disbursement of SCT’s at no cost to the scheme or to the beneficiary. This would be contemplated by Shoprite for three reasons: firstly, the majority of payments made by customers are cash based payments and thus they have far too much cash on their premises. The opportunity to hand out this cash is a potential cost saving in cash handling albeit a small percentage; secondly, SCT disbursement arrangements will secure the

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custom of beneficiaries for the purchase of maize meal and other basic products with SCT, thus increasing sales; thirdly, Shoprite would consider the service to be part of their corporate responsibilities to Zambians on the whole.

While requiring beneficiaries to travel some distance to receive their cash transfers may attract some criticism, it is not entirely unreasonable to see SCT beneficiaries travelling to town to receive their benefit. This has been proven over some years by ABSA Bank with the Sekulula Card offered to South African pensioners. It is merely an option to the SCT beneficiary. Considering that Shoprite may perform this function for free and that the current manual based system cost is budgeted by the Ministry at 15% it may become feasible to offer SCT beneficiaries a ‘channel incentive’ equivalent to the saving to the MCDSS of say 10% to 15% or ZMK 4,750 to ZMK 7,150. Noting also that existing money transfer behaviour in Zambia often results in beneficiaries travelling into town to collect funds, for an extra ZMK 7,150 the proposed Shoprite ‘“push”’ channel may become the norm and not the exception.

7.4.2 Potential Shoprite payment methods

1) Integration into Shoprite’s Money Market payment solution (beneficiary presents NRC and is paid cash in store);108

2) Piggy back on Money Market (create a separate bank/service account);

3) SCT card (fully functional bank account.) The account would be provided by or on behalf of a Zambian bank in accordance with Zambian law. The card itself could be proprietary to that Bank, or a more widely accepted VISA card which is recommend elsewhere in this report. Shoprite’s role in this scenario would be that of a merchant offering 'cash back'.

7.3.3 Costing the bank-led, retail driven solution

In a retail lead scenario disbursements could be made at selected retail outlets such as Shoprite Zambia. Disbursements via retailers could use proprietary payment methods, such as the Bar Code book system (see Section 8.2 below) or could be a bank lead POS solution. Assuming that the retailer would accept the responsibility of authenticating the beneficiary using already defined methods such as the Bar Code system described in Section 8.2 below there would be no incremental cost of the channel other than a potential service fee that could be charged by the retailer for providing the disbursement service. In the case of Shoprite, based on interviews with the Financial Director, it would appear that Shoprite would be prepared to perform SCT disbursement services and no charge.

108 An agreement was reached with Finance Bank whereby Money Market counters are run and operated through Shoprite stores. These counters serve as Finance Bank “branches” at which customers can perform cash-in and cash-out functions.

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Costs in this scenario would include:

• The cost of a token accepting device for example the Bar Code reader or a POS device if not already in store.

• The costs of integration work if the retailer requires a direct connection between its systems and the MCDSS database payments module (as described in section xx below.) Estimated cost of a leased line connection would be $500 per month.

• Communication/networking costs between retailer outlets and the Ministry database system (see section xx below.)

7.5 Is a non-bank led independent m-payments solution a viable solution within the Zambian context?

In the non-bank-led model of branchless banking, customers (SCT beneficiaries) do not deal with a bank, nor do they need to maintain a bank account (CGAP, 2006.) In this model, customers (beneficiaries) typically deal directly with a mobile network operator or pre-paid card issuer and retail agents/ airtime dealers serve as cash-out points for customers (beneficiaries.)109 As indicated in Table 9 below, retail agents (talk time dealers) perform the same basic functions as they do in the bank-led model. However, unlike the bank-led model, in this model, settlement takes place with e-money, not through funds in bank accounts (CGAP, 2006.)

109 See CGAP (2006) where it is noted that “rather than deposit money into and withdraw money from a bank account, customers exchange their cash for e-money stored in a virtual e-money account on the non-bank’s server, which is not linked to a bank account in the individuals name… [C]ustomers exchange cash for value stored in a card – or mobile phone-based virtual account. Customers can send this e-money to others, use it to make purchases, or use the e-money account to store funds for future use. They can also convert it back to cash at any participating retail agent.”

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Table 9: The non-bank led model

The non-bank-led model

CUSTOMER RETAIL AGENT NON-BANK BANK

Step 1: customer requests sale or financial services using either cell phone or Magstripe.

Step 2: Retail agent checks customer’s ID and processes transaction on behalf of non-bank, using either cell or Magstripe reader.

Step 3: Non-bank registers transaction, updates the (virtual) e-money accounts belonging to the customer and the other party to the transaction. Non-bank manages individual customer accounts.

Step 4: Bank (generally) holds net funds from non-bank’s issuance on behalf of non-bank. Bank does not have a relationship with customer or retail agent.

Examples of Services offered: deposits to and withdrawals from customers e-money account (cash-in and cash-out); item purchases*; money transfers*; loan disbursal/repayments*; bill/tax payments*.

‘* These services may also be accessible directly via cell phone without visiting a retail agent.

Examples of retail agents: airtime vendors; department stores; supermarkets; other commercial enterprises.

Examples of other parties: includes retail agent (for deposits, withdrawals, or item purchases); recipients of money transfers (other customers, utility companies, tax authorities, etc.)

Source: CGAP (2006) Use of Agents in Branchless Banking for the Poor: Rewards, Risks, and Regulations

The non-bank led, independent m-banking solution requires extensive network coverage, distribution of phones, access to electricity, and an extensive network of “agents” prepared to provide cash-in and cash-out services. Zambia currently has 3 registered mobile service providers, Zain (previously Celtel), MTN and Cell Z with a 4th provider expected to enter the market soon. Mobile ownership is low with only 21% of the adult population being in possession of a mobile phone at the end of 2007 (Renaissance Capital, 2008.) Growth in mobile penetration for 2006-2007 was approximately 7% with further strong growth expected.110 Mobile phone usage, as measured by the number of SIM cards in circulation, was 2.4 million at the end of 2007. According to industry statistics, Zain had a commanding 78% market share or 1.9 million users.111 Differences in usage and mobile ownership are explained by the general practice of multiple SIM card ownership (as costs across different networks are significantly higher than costs within a single network) and the use of a single mobile phone by a number of users. Zain continues to experience rapid increases in the number of new

110 Mobile ownership is however expected to reach 80% of the total adult population by 2015 (Renaissance Capital, 2008.) 111 As at the end of 2007.

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users, having signed up an additional 600 000 users between January and September 2008 with its total number of users standing at 2.5 million users. Zain, the country’s largest mobile operator has coverage in all 72 of Zambia’s municipal districts, effectively covering 71% of Zambia’s total population with 74% of its 1.9 million users to be found in rural and peri urban areas. As indicated in Figure 15 below, extensive coverage is currently provided by Zain along Zambia’s main traffic axis from the Copperbelt in the north including cities Kasumbalesa, Chingola, Kitwe and Ndola via Kabwe and Lusaka down to Livingstone in the south. Main tourist areas also show considerable coverage.

Figure 15: Zain mobile network coverage map

Source: Zain company website 

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Zain distributes talk-time through 70 distributors and 200 000 dealers, making it Zambia’s biggest retailer with 171 dealers per 100 000 of the population, completely eclipsing any other form of formal or informal distribution in Zambia.112 Figure 16 below demonstrates a probable distribution of talk-talk agents in Zambia.113

Figure 16: Probable spatial distribution of ‘talk-talk’ agents

   

112 Figures calculated using the total population estimate of 11 669 534. Source CIA Factbook. Website accessed on 4 October 2008. 113 For competitive reasons, mobile operators were unwilling to provide the authors with the exact location of their distributors and agents.

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7.5.1 Potential for a non-bank led, independent m-banking solution to disburse SCT’s in Zambia

Solution provided by Zambia’s mobile operators

Mobile operators MTN, Zain and Cell Z may consider formally extending their business models – drawing from and adapting the hugely successful P2P Safaricom M-PESA model in Kenya to a G2P model. Service providers would however have to improve their technology offerings, such as USSD2 and GPRS, to tap into the Government and corporate sectors. Offering a provider linked social cash transfer solution is a sound business decision for any mobile operator operating in Zambia as e-money solutions (such as G-Cash and M-PESA) tend to lock customers into a particular service provider thereby adding traffic (and reducing churn) on an installed communications network and adding incremental revenue per subscriber (InfoDev, 2006.)114 As mobile operators actually control the interface for mobile banking they are often able to provide a more secure and appealing customer experience (CGAP, 2008.) As was previously raised in our analysis of the M-PESA model, the potential lack of interoperability in this non-bank, m-banking scenario and the fact that the potential dominance of one early mover could have negative effects on market should be avoided in the Zambian context. Although the Bank of Zambia currently adopts an accommodative stance, having one mobile operator dominate the branchless banking arena, partly on the back of a government led social cash transfer scheme, may not be a palatable solution for the Bank of Zambia in the future.115 However, current mobile operator coverage may present interesting opportunities for the development of alternative payment delivery mechanisms which operate using mobile phone technology and operator coverage. The voluntary inclusion of more than 1,3 million participants in the M-PESA mobile money transfer scheme, responsible for transferring over US$ 295 million, is testimony to the success of using mobile technology, mobile coverage and air-time distribution to delivery cash payments to in low-level infrastructure environments.

Solution provided by payments solution provider

M-payment and m-banking solutions are starting to emerge in Zambia (OPM, 2007.) For example, Mobile Transactions Zambia Ltd, a payment system provider jointly owned by Dunavant Cotton Company and CAD International Ltd has been piloting a payment system in the Zambian cotton industry since July 2007. The solution is currently targeted at companies making payments to the unbanked. Payments are made on any network and customers then transact via their mobile phones or collect cash from an authorised dealer.116 Float accounts are maintained at registered deposit taking banks. A mass-market retail outlet is currently used as a branch network. Mobile Transact will be

114 Churn occurs when customers change the supplier of products or services (to the benefit of a competitive supplier.) For businesses where customer loyalty has a key influence on market success this poses a serious problem. 115 See CGAP focus note 46 where is it noted that “only WIZZIT among the major mobile-enabled branchless banking initiatives works across all networks in the country.” 116 Mobile Transactions Zambia Ltd currently works through an estimated 400 agents which include “talk-talk” agents and agricultural input suppliers.

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formally registered through the Bank of Zambia as a designated payment system by BoZ within 2 months. Whilst the cost of each transaction is relatively high, at ZMK 4,000, Mobile Transactions have expressed an interest in distributing the social cash transfer.

7.5.1.1 Costing the non-bank led, independent m-payments solution

If the m-payments solution provider needs to roll-out or extend their infrastructure reach there would be an associated cost for the provider. This does not equate to a direct cost for the MCDSS. A direct transactional cost would typically be funded by the sender in this case the donor/government and a disbursement fee negotiated accordingly. Usually the scheme provider would negotiate terms with it’s distribution channel to incentives them to do cash-out payments. Mobile Transactions Zambia indicated a cost of around ZMK4,000 per payment but noted that this would be negotiable based on volumes of payments made per month. Likewise, Celpay Zambia were willing to negotiate a per payment per month fee. Indirect costs to the beneficiary may include the cost of being connected and may include the cost of a SIM card if the payment system demanded that each beneficiary was to receive their payment instruction via a mobile phone SMS as an example.

An independent, typically proprietary payments solution provider such as a Net1 on the other hand would typically charge a per payment disbursement fee. They would normally be responsible for authenticating beneficiaries often using a proprietary method like a Smart Card and biometric solution and sometimes a National ID. One would likely consider this option as an alternative to the MCDSS doing the cash payment itself. This would normally be a relatively expensive option because the PSP would need to recover their own fixed infrastructure costs be they vehicles, technology platforms, tokens such as smartcards, cash-in-transit costs and people. PSP costs would normally be expensive because by definition there is little if any use of existing infrastructure. Costs at scale, say over 100,000 payments might be as high as $3.00 to $5.00 per payment.

7.6 Conclusions

A number of potential payment solutions have been presented in this section. Whilst each of these could conceivably be used as the payment solution for the SCT programme, in the section that follows, we present what we believe to be the optimal payment solution within the Zambian context.

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8. DEPPLOYING ALREADY EXSISTING INFRASTRUCTURE – AN APPROPRIATE DESTRIBUTION/PAYMENT SOLUTION FOR THE ZAMBIAN SCT

When selecting an appropriate payment mechanism for the disbursement and payment of a national SCT benefit, a number of criteria need to be examined and weighted against each other. These criteria include inter alia: timely and full distribution of transfers; cost minimisation for the grant provider; cost minimisation to the beneficiary; risk minimisation; maximising the dignity of the recipient; reducing time to implement; enhanced ability to scale up; providing additional financial services to beneficiaries and the surrounding community; and; providing opportunities for non-beneficiaries to improve access to financial services. Whilst it would be ideal to propose a solution that met all of these criteria equally, many of them are competing and must be assessed against the overall objective of the MCDSS, namely to deliver predictable, regular cash transfers to the chronically poor at scale commencing in 2009. In the section that follows, we propose a phased approach which allows for beneficiary choice and incorporates both pull and push options. The proposed system slowly migrates the beneficiary from one option to the other with little stress and maximum dignity as the beneficiary will be using the same payment token (the proposed beneficiary booklet) and simply changing his/her “mode of transacting” over time.

8.1 Evaluating payment options against set criteria

RANKING 1:

Timely and full distribution of transfers

We maintain that the most important criteria of the disbursement / payment mechanism should be timely and full distribution of transfers. It is vital to focus on the key objective of a social cash transfer, namely distribution of a small sum of money to beneficiaries, providing a vital means of ensuring a minimum level of wellbeing and basic survival. We caution against losing sight of the objective of the SCT programme by primarily focusing on a payments system designed with the sole purpose of financial inclusion or "banking the un-banked." At the same time, the objective of facilitating timely and full distribution of transfers can be achieved by designing an appropriate distribution and payment system. Deploying inappropriately designed or untimely "push" strategies requiring extensive investment in additional infrastructure and making use of proprietary technology should be avoided.

RANKING 2:

Reducing the time to implement

As beneficiaries rely on the SCT for survival, reducing the time to implement the payment mechanisms deployed by the SCT programme is the second most important criteria against which the proposed payment mechanism should be measured. By building the core data base with various additive payments modules and adopting the phased approach set out below, the time to implement the national scale up is substantially reduced and the MCDSS would be likely to meet their objectives of a national scale up by early 2009. The core system (central electronic database) with various additive payments modules would be able to cater for the initial electronic receipting and reconciliation method proposed but would also allow for migration to a fully fledged

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payments system over time. The core system (database and payments modules) should be designed to allow for disbursements to be made at a later stage via a card issued by a bank, disbursements via Shoprite stores, disbursements via Celpay and disbursements through the payments solution provider Mobile Transaction Zambia to name a few. Therefore, in order to ensure that the national scale up will be possible in 2009 we propose that the current manual based system is automated as soon as possible to introduce measures that mitigate and reduce risk. As completely changing the system currently deployed by the SCT pilots by making a radical shift to new and expensive technology such as proprietary SMART cards will take significant time to implement and is not a wholly appropriate response for reasons cited throughout this report, this strategy is not recommended. With particular reference to the development of a proprietary electronic payments system, the bigger challenges would come from the deployment of infrastructural capacity. Deploying state of the art computers, Smart Card terminals, biometric readers and, comprehensive networking requirements to host the system are not trivial exercises.

RANKING 3:

Cost minimisation for the grant provider

Grant providers, like beneficiaries have the objective of providing cash transfers to the critically poor and destitute. Both inexpensive solutions and expensive options are available to grant providers. While it might be tempting to issue thousands of finger-print-biometric authenticated, off-line capable smart cards using fancy laptop computers, advanced finger print readers run off portable power generators that are transported by a fleet of brightly coloured expensive 4x4’s this is probably not necessary within the Zambian context. We propose that the investment in a single and coordinated benefits database to which payment modules can be added over time (depending on need and circumstances) would be the most cost effective long term solution for grant providers. Where migration to an EPS is needed over time, the selection of an interoperable and open technology solution such as EMV Chip or "Magstripe" technology owned by VISA, MasterCrad and Eurocard is recommended to minimise cost for the grant provider.

RANKING 4:

Risk minimisation

Risk minimisation is ranked fourth. Within the current manual based system we maintain that risk can be substantially reduced by deploying a single centralised core database and automating the current manual receipting system. This will ensure that tracking, monitoring and accounting for the flow of funds is automatic and does not rely on vast numbers of people to administer the system. Auditability in payment systems is a key criterion to ensure that funds are traceable from source to payee. While no payment system is entirely fraud proof, primarily as a result of internal compromises, payment instructions and thereafter the final disbursement can be tracked to system operators and system participants in an effort to manage risk.

RANKING 5:

Enhanced ability to

The main driver of converting manual payment systems into EPS is due to the potential for enhanced economies of scale (see Section 6.3 above.) A key premise in showing efficient economies of scale is proven by being able to extend the reach and capacity

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scale up

of a scheme at a marginal cost lower than the average cost per transaction. Good economies of scale emanate through maximising the return on a single, albeit a high fixed cost typically centrally focused. Further, a good system design, not relying to heavily on complex periphery infrastructure is a key component to quick and extensive scale. For example, a simpler system that only needs personal computers (PC) and a printer to extend it and not expensive and sometimes proprietary devices such as Smart Card readers.

RANKING 6:

Cost minimisation to the beneficiary

From the beneficiary perspective, being able to access his/her grant in a cost effective manner is ranked higher than beneficiary dignity. Cost minimisation for the beneficiary can be achieved through designing a payment system which allows for multiple cash-out points instead of a single designated pay-point. Beneficiaries would then be able to access their SCT at the closest and most cost effective point, be it a bank branch, ATM, PoS or retail outlet. It will however be vital to incentivise a channel shift from "pull" to "push" approaches should an EPS eventually be adopted. A long term strategy which deploys a single cash-out point and does not provide beneficiary choice, often forcing the beneficiary to walk long distances designated pay-points should be avoided. At the same time, forcing the beneficiary into an inappropriately designed "push" strategy which offers little benefit and reduces the transfer amount available for direct consumption by the beneficiary (i.e. through bank fees passed on to the beneficiary) is not a situation with the MCDSS should promote or entertain.    

RANKING 7:

Maximising the dignity of the recipient

The payments process must serve the poor. As such, as far as possible the poor must be given choice and recognised as capable of exercising choice in their own best interest. i.e. provided with the choice of whether to receive their grant through a basic bank account “push” mechanism or at a designated pay-point through a “pull” mechanism. Those involved in the SCT scheme must recognise and acknowledge that poor is not synonymous with incompetent and invest in providing proper financial and technological reorientation by explaining the costs and benefits of alternative payment options available to beneficiaries. We maintain that a simple authentication process (ID photograph = 100% match success) is the most efficient authentication method. Photo authentication needs no special skills to perform, no special authentication equipment, is always offline and entirely un-reliant on technology. This makes it the most cost effective authentication solution with low upfront costs (camera, PC and printer.) Photo on card is not susceptible to dust, heat, moisture and shock factors which destroy most electronic authentication systems. While complicated authentication technologies such as biometric fingerprint systems appear secure it is the inherent propensity of technology to break or fail in difficult physical environments that makes these authentication technologies less than optimal. While the inherent weakness of Photo authentication is in the hands of the authenticating agent, so too is the ability to compromise more complex technologies to commit fraud.

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RANKING 8:

Providing additional financial services to beneficiaries and the surrounding community

While not necessarily proven at this time, there is a general belief that financial inclusion by way of being banked can have a positive social impact on the financially destitute. Evidence gathered from various G2P payment initiatives such as that in the Dowa region of Malawi showed through research that a fraction of the targeted beneficiaries continued to bank with the Opportunity International Bank of Malawi post the conclusion of the emergency cash transfer. The more basic account targeted at the low income segment appears to be appropriate. These accounts should offer the account holder the ability to save, transact and possibly borrow based on a regular savings history.

RANKING 9:

Least important: Providing opportunities for non-beneficiaries to improve access to financial services

Lastly, built on the opportunity to bank beneficiaries is the opportunity to bank those around them. The benefits to non-beneficiaries would be the same as those to beneficiaries. The benefit to the scheme would be enhanced economies of scale by bringing down the average cost per account holder by serving more account holders in general.

8.2 Optimal SCT payments system within the Zambian context As represented by the Payments Scalability Escarpment Model presented in Section 6 above, it is the human element and not the cost of drawing cash that will make the current manual based payments system inefficient at scale. Additional issues raised in the analysis of the current payments system include the fact that payments are only made every two months due to system inefficiencies and the risk and inefficiencies of the labour intensive manual reconciliation procedures. Based on the assessment of the existing payment solutions available in Zambia and the overall ranking of the criteria above, the following payments mechanism for the national scale up of the SCT programme is proposed. The payments mechanism is based on the following six key principles: 1. KISS or Keep It Simple, Silly; 2. The solution must address the problem; 3. Do not deploy technology for the sake of technology; 4. The proposed solution must scale-up and scale-out; 5. The solution must cater for extending to multiple channels of service delivery; 6. The solution must make use of existing infrastructure to allow for immediate, cheap (or free) and

nationally pervasive reach. We recommend a phased approach which allows for choice and incorporates both pull and push options.117 The proposed mechanism slowly graduates the beneficiary from one option to the other with little stress as 117 In situations where cards are unfamiliar to start with, however, rather than adding features to the card, designers must

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he/she will be using the same (token) – the proposed benefits booklet and simply changing his or her “mode of transacting” over time. As represented by Figure 17 below, the proposed payments mechanism will evolve over three distinct phases.

Figure 17: Evolution of the proposed system through three phases

8.2.1. Phase 1: Building a “centralised database”

The recently published OECD/Povnet Good Practice Note on social cash transfers highlights the fact that many of the recent international lessons of good practice in the SCT realm are operational. Of fundamental importance and informing the recommendation set forth in this report are the two operational lessons set out below:

Enrolment and targeting systems benefit from a single registry of all potential and

Enrolment and targeting systems benefit from a single registry of all potential and actual programme participants. This helps to reduce fraud and promotes greater coverage and take-up. Management systems must be as simple as possible given the programme requirements, and appropriately tailored to the country’s existing capacity constraints. Particularly when non-governmental organisations are serving as implementing partners, a

start with familiar ideas and concepts – like the transfer of airtime credit for mobile phones, for example – and then add financial services functionality. This is how M-PESA developed (Maurer, undated.) This is also the key to systems that are retailer-based: start with the familiar retail exchange relationship in a small shop and add additional services at the point of sale (Jacob, 2005.)

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actual programme participants.

Payments processes must serve the poor.

single registry can minimise coverage gaps and duplication. A single registry works best when government takes primary responsibility for implementation – a national public institution can maintain the database. When programmes follow a decentralised model – and particularly when non-governmental organisations are involved – co-ordination among the implementing partners plays a more critical role.

Payments processes must serve the poor. A client-based approach by payments service providers can protect the dignity of participants and potentially provide access to developmental financial services. Inaccessible pay points, long queues and demeaning treatment undermine the social protection the transfers aim to provide. Appropriate technology and sound management can create opportunities to expand the payment mechanism into an even greater pro-poor instrument potentially offering a savings vehicle and other financial services (OECD/Povnet, 2008.)

Drawing upon these two vital lessons, we maintain that the choice of a distribution mechanism/payment solution within an inadequate physical environment, characterised by poor investment in rural infrastructure cannot be limited to a single-provider solution. We cannot support the push for a single payments solution and do not believe that the answer to the distribution problem needs to be an either/or strategy, i.e. an exclusively “push” or “pull” strategy or a bank or retail or purely mobile operator (independent m-banking solution.) The solution below is a phased approach which will eventually allow the beneficiary to chose whether he/she receives his/her cash payout at any number of different cash out points including bank branches/ATM’s/POS/retail agents or through cash out points provided by payment solution providers. (See Figure 18 illustrating the potential combined reach of banks, chain-store retailers and mobile talk-time agents.)

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Figure 18: Combined reach: banks, retail and “talk-talk” agents

It is quite evident that an inclusive strategy, achieved through building a core system (central electronic database), which is payment system / scheme “agnostic” would address the need for providing beneficiary choice, accessibility, affordability and trust. By stretching the boundaries of pre-conceived thought, drawing upon international best practice and combining the most appropriate technological elements of P2P and G2P experiences internationally we maintain that Zambia may emerge as the world leader in designing a SCT payments solution that really serves the interests of the poor.

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Design parameters of the beneficiary database:

• Analysis, design, development and testing;

• system to maintain and securely store beneficiary details;

• system to track donor organisation programmes;

• system to track benefits as allocated to beneficiaries by donor organisations (does not track the lifecycle - merely planned or post distribution;

• data on populous, geography maintained by government;

• data on programmes and benefits maintained by donor organidations;

• back office administration by government;

• reporting on beneficiary, programme, benefits basis, audit and statistical reporting;

• SQL Database with browser based user interface; and interface for authorised donor organisations to extract data for targeting.

• Estimated once off cost of builfing the database:

US$ 250, 000

Firstly therefore, MCDSS would need to build a core system (central electronic database) with various additive payments modules forms the nucleus/ central element of the payments system. The central database should be managed and maintained by the MCDSS. The hosting of the database should be in a securely managed environment to ensure data protection policies are employed.

General system design criteria must include:

• Open and published API (application program interface) interfaces for Government and Donor organizations whilst ensuring data protection at the highest levels;

• Data interfaces need to cater for the remote capture (registration) of data including on-line ‘mobile’ devices and off line devices;

• A payments module should be incorporated into the system design to cater for the redemption of SCT’s via multiple payment channels.

This database would be able to cater for the initial electronic receipting and reconciliation method proposed, but would also allow for migration to a payments system over time where disbursements could be made via a card issued by a bank, disbursements via Shoprite stores, disbursements via Celpay and disbursements through the payments solution provider Mobile Transaction Zambia to name a few. From a systems architecture perspective, core to being able to leverage of already existing infrastructure, to deploying multiple payments modules and enabling beneficiary “cash out” through multiple distribution channels is the commissioning and design of a core social benefits database. This database should include the ability to “talk to” or directly integrate with differing payment solutions depending on the complexity required. For example, it may be that the system simply tracks the fact that the beneficiary needs to be paid via a transfer into a particular bank account. A schedule would then be created and feedback confirming that the payment has been made (after the fact.) Alternatively, direct integration to the payments scheme provider could allow for real-time tracking and reporting if required. This would be irrespective of the payment scheme/instrument. In other words the system can be designed and programmed with varying abilities including being able to report how far the transfer has progressed in the system and when it has in fact been paid out to the beneficiary in cash.

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Source: Zion Christian Church (ZCC) Kganya Benefits Fund Trust Scheme booklet

Figure 20: Self adhesive barcodes

8.2.2. Phase 1a: “automated pull system”

The first phase of the payments modality is based on a printed beneficiary booklet (see Figure 19 below.) This booklet will include beneficiary details, a photograph and payment receipt pages.

Figure 19: Sample beneficiary booklet

Source: Zion Christian Church (ZCC) Kganya Benefits Fund Trust Scheme booklet

The booklet also includes a page of self adhesive barcodes which act as receipts when removed from the beneficiary’s booklet and pasted into a PPM’s book or against a pre-printed payments schedule barcodes –

electronically readable receipts of payment (see Figure 20.) The bar code system is merely a method of making the existing MCDSS driven payment scheme more efficient. This is in line with our ranking of criteria and the ranking of “reducing the time to implement” as the second most important criteria. It simply replaces the manual nature of payment schedules, hand written reports and manual reconciliation with low cost electronic receipting technology. The bar code system relies on the central database to produce payment schedules and to identify beneficiaries with a manual token or bar-coded token unique to each individual. The benefit of the printed book with self-adhesive bar coded decals (stickers) is that it is entirely un-reliant on

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Figure 21: Barcode scanner

technology being present in the field and thus cannot fail. That is, it is largely a permanent record of transactional activity unlike electronic systems that lose their data when lost, stolen, damaged etc. If witnessing of payments is required by way of a third party another type of book with many pre-printed barcodes can be manufactured and given to CWACs. A CWAC barcode would also be placed into the PPM’s booklet or pre-printed payments schedule acting as an electronically readable token (proof of payment.) Again, depending on the initial scoping of the system a more resilient token by way of a PVC ISO 7816 ‘credit card like’ plastic card could be issued to beneficiaries which too would have a unique barcode assigned to it and linked to a beneficiary in the SBT database. The PVC card could be used in on-line environments where a barcode reader could be attached to a PC with on-line capacity or alternatively portable battery operated barcode readers could be issued to PPM’s to be used in field. Of course both could be issued at the inception of phase 1 with a PVC holder (envelope) attached to the back cover of the book providing for safe keeping of the card.

Portable batch scanners: Portable batch scanners store data in memory for later transfer to a host computer. They are battery operated, allowing more flexibility than a fixed scanner. Portable batch scanners also contain an LCD monitor and keypad that allows users to perform tasks away from the host computer. Batch

scanners come in hand-held, wearable and truck mounted styles. The scanner pictured here is a hand-held Symbol P360 Rugged Barcode Scanner with batch memory capabilities. The P360 pictured in Figure 21 is not only an example of a batch scanner, but also a rugged barcode scanner. This barcode scanner retails for around USD600 in the United States and is available and supported in South Africa. Symbol’s P360 forward-scanning pistol grip allows both automatic scanning and keyed data entry for entering inventory quantities and verifying scan data. It works well in the harshest dusty, humid and even wet environments. The payments process will remain as it is today with the addition of barcodes which will be used as electronically readable receipts of payment.

The incremental cost of issue a booklet to each beneficiary has been estimated as: $ 2.00 per book. Each book would cater for 60 months (five years) of payment history before being replaced. An off-line capable bar code reader that has memory functions and could be loaded with payment schedules would cost approximately $350 per unit. District offices are apparently already PC and internet enabled and thus no incremental cost is expected per district although it would be recommended that new equipment, that is proven to be compatible with a Barcode reader and the associated software is highly recommended. One would budget approximately $1,500 per new computer including modem and software per district.

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Box 7: Parameters of Benefits Accounting System and Disbursement Interfaces

• Analysis, design, development and testing; • Extension to beneficiary database; • System to manage the accounting of benefits

from allocation through distribution; • System to manage voucher based (stock) or

value based (funds) benefits; • Data on benefit allocation maintained by

donor organizations; • Data on disbursement maintained by

distribution agent; • Reporting on programme lifecycle; • Audit and statistical reporting; • Browser based user interface

Estimated cost of this component: US$ 200,000.

Box 8: Technical parameters of Payments Interfaces

• Analysis, design, development and testing; • Extension to benefits accounting system and

disbursement interfaces; • Electronic interfaces from payment systems

allowing the deposit or redemption of benefits; • Accounting against voucher based (stock) or value

based (funds) benefits; • No provision for beneficiary authentication; • Reconciliation reporting;

Estimated cost of this component: US$ 70,000 per Interface.

Benefits accounting system and disbursement interface: The benefit of using barcode receipts potentially include: significant efficiency gains as the process of submitting proof of payment is potentially reduced to minutes rather than days; reduction in the number of mistakes that are likely to be made due to the automated nature of the system; once submitted online to the central database, the payment information is immediately available and more importantly reconcilable to funds disbursed to district offices; lower provincial administrative costs, HQ administrative costs; reduced chance of fraud if only due to quick and timely reporting of payment activity.

Box 7 presents a high level list of functional requirements necessary for the design of the payments module extension. This will be an extension of the core database and will generate, track and reconcile payments made via the district offices using PPMs.

8.2.3. Phase 2: “customised pull system”

In phase 2 of the proposed system beneficiary choice is introduced by offering channels such as Shoprite to payout cash transfers. The SBT booklet can be used in the Shoprite environment. There would be no change to the technology. Information would be submitted via Shoprite stores nationally in real-time to the database for verification that the beneficiary has in fact not been paid using the off-line PPM method. If required an exchange of self adhesive barcode receipts would be used in this environment. After a success early in phase 2 with the payment of benefits via Shoprite, it is recommended that other payment service providers are invited to provide cash out services. Box 8 defines the high level functional requirement that would be undertaken by the system developers in order to facilitate the integration of further distribution channels/interfaces. For example, an interface would be needed to the National Switch or per individual bank in order to allow for the disbursement of beneficiary funds via the Zambian Banks. Likewise, in order to maximise the benefits of the Celpay, Mobile Transactions, Post Office, Western Union or other disbursement agents/partners an interface would be designed and integrated to accommodate each interface / disbursement partner channel.

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As is the case with Shoprite, in phase 2, the requirement to act as cash out service providers would be barcode redemption and receipting. Pricing with each service provider would be on commercial terms.

8.2.4. Phase 3: “push strategy”

This phase of the project sees the introduction of a fully functional pre-paid debit card that should preferably be open-standards based, such as Visa electron debit card, so as to make use of as much existing infrastructure as possible. Two interoperable options exist in this phase.

Firstly, MCDSS could issue a social benefits transfer (SBT) or social cash transfer (SCT) branded pre-paid debit card which would work at all existing ATM’s in the country (assuming the successful deployment of the Zambian National Switch by the Bank of Zambia) or certainly at all VISA ATM’s if a VISA branded card.

Secondly, it would be possible to allow beneficiaries to nominate a bank account into which funds would regularly be deposited. Potential providers of such a bank account include Zanaco Bank and Finance Bank. Where MCDSS does wish to offer beneficiaries the ability to select a traditional bank account payment it is recommended that MCDSS secure preferential pricing arrangements from such service providers as it would for other cash out service channels.

For the payment card to be able to be accepted in the phase 1 manual PPM payments system it should be encoded with a barcode that links the card to the beneficiary in the database.118

118 Technically it is not necessary to issue the same barcode on every token issued to a beneficiary as this can be done in the database where ‘tokens’ and payment instruments can be logged.

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9. CONCLUSION As we have discussed in this report, key lessons can be learnt and implementation failures averted if MCDSS carefully observes the successes and failures discussed throughout. We maintain that the choice of a distribution mechanism/payment solution within an inadequate physical environment, characterised by poor investment in rural infrastructure cannot be limited to a single-provider solution. We cannot support the push for a single payments solution and do not believe that the answer to the distribution problem needs to be an either/or strategy, i.e. an exclusively “push” or “pull” strategy or a bank or retail or purely mobile operator (independent m-banking solution.) The solution proposed in this report is a phased approach which will eventually allow the beneficiary to chose whether he/she receives his/her cash payout at any number of different cash out points including bank branches/ATM’s/POS/retail agents or through cash out points provided by payment solution providers. In conclusion, we highlight once again the principles which have informed the analysis in this report:

1) Payments processes must serve the poor. A client-based approach by payments service providers can protect the dignity of participants and potentially provide access to developmental financial services.

2) Targeting, payment and authentication are separate but inter-related elements.

3) Repeated targeting is wasteful and should be coordinated.

4) One automated and coordinated social benefits database, controlled by a single ministry is key.

5) Technology should not be deployed for the sake of technology.

6) The payments mechanism must be non-proprietary, interoperable and mutable and designed with the beneficiary in mind.

7) Within the developing country context the proposed payments system should leverage existing infrastructure.

8) The payment solution must be scalable and cater for the inclusion of non cash benefits.

9) Beneficiaries are financially literate in the most basic sense, i.e. comprehend the store value including but not limited to cash.

10) Beneficiaries should be given choice.

11) Private sector participation is vital.

12) Maximising the use of existing government and private physical points-of-presence nationally is key.

These principles are supported by the following key lessons drawn from international experience, both the SCT and non-social protection context:

• Key lesson learnt from use of the post office in India. Wherever possible, existing infrastructure should be leveraged to ensure maximum reach and accessibility for the beneficiary.

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• Key lesson learnt from the use of the informal banking and money transfer service “hawala system” in Somalia. Lack of communication, coordination and specialisation of money transfer providers if they are asked to distribute SCT payments may lead to poor results.

• Key lessons learnt for direct delivery by the formal banking sector: Mexico and South Africa. Banking

infrastructure must be sufficient and products specifically designed for the segment; banks are often willing to open accounts specifically designed and priced for the low income segment; and; the greatest transformational aspect of Mobile phone technology has not occurred in the “hands of the consumer” but rather at the till of the merchant.

• Key lesson learnt from the use of branches on wheels: Equity Building Society Kenya. Although expensive,

mobile banking units can be used to reach customers in rural and remote areas, bringing financial services to areas which may have been previously un-served.

• Key lessons learnt from the use of cash payment services deploying proprietary Smart Cards: Namibia and

Malawi. Custom designed Smart Card chip readers or customised ATM’s are expensive and require a reliable power supply; potential for a manual override exposes the payments system to the risk of fraud; and; deploying technology for technologies sake may impinge upon beneficiary dignity and cause unnecessary delays.

• Key lessons learnt from M-PESA in Kenya. M-PESA’s 3000 agents makes the national banking

infrastructure pale into insignificance, leading to greater consumer accessibility and convenience; M-PESA SCT pilot failed due to fall back to single cash-out point; agents may exploit loopholes in the system; monopolisation of domestic money transfer market may have been built on the back of FDCF funding, a point which must be considered; and deliberate under-regulation by the Bank of Kenya allowed for massive growth of a scheme in the face of systemic and fiduciary risk.

• Key lesson learnt from MTN Mobilemoney. Costs can be driven out of the reach of the poor if AML/CFT rules are not adjusted to permit remote account opening with CDD/KYC checks performed by agents.

• Key lessons learnt from WIZZIT (South Africa.) Not being tied to a particular service provider potentially leads to greater coverage; and; the use of a commission driven sales force of WIZZKIDS is probably one of the most effective customer targeting strategies seen to date.

• Key lessons learnt from SmartPay and G-Cash (Philippines.) Partnerships between Telco’s and banks and non-bank mobile lead initiatives provide convenience to customers and extended reach and Mobile driven payments technology can be easy to use if designed with the beneficiary in mind.

We maintain that the value in the design of the solution proposed core database and payments modules solution (Section 8) cannot be understated. The value of being able to disburse funds through hundreds of

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ATM’s and PoS devices or via thousands of CelPay and Mobile Transactions Zambia partners in a matter of a few weeks and at the single nominal cost of $70,000 is significant.119

119 Contextualising the proposed solution: If for whatever reason the Government of Zambia needed to make payments to citisens living in Kenya, a single interface/integration to M-PESA could be achieved in a matter of weeks at the once off cost of $70,000. This would facilitate the payment of funds through over 3,000 M-PESA outlets nationally.

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