Jake Kendall

Bringing Payments Out of the Shadows: New data on how South Asian and Indonesian households pay and make money transfers

Payments are a neglected topic in the world of development.

As I’ve written on the CGAP blog, payments are the glue of the economic system, and any inefficiency there ripples through the rest of the economy. One of the major consequences of a lack of digital payment options is that poor people are forced to use cash. Therefore, they are shut out of much of the financial system, which finds it too expensive to transact with them.

They are also forced to send remittances to family and friends via informal, cash-based channels such as in envelopes delivered by bus drivers or informal money transfer services. But while international remittances get all the attention (due in part to the nice job the World Bank migration and remittances group does collecting data on them), domestic remittances are used by a much larger share of households in Africa and South Asia and represent much larger flows of money.

Despite the fact that digital payments and remittances are critical for the poor to be able to access markets and formal financial services, there is very little data collected on the development of the payment market.

To remedy this, we launched two surveys. One was conducted in Africa in 2011, which I have previously reported on here. We finished the second survey at the end of 2012 in South Asia and Indonesia, and the results are now in! Click here for the full report.

So what did we find?

First, lets discuss remittances. As I mentioned above, when most people think of remittances, they think of international remittances, the money that migrants send back to friends and relatives in their country of origin. Much has been made of the development potential of international remittances – and with good reason. Worldwide, international remittances topped $325 billion and $307 billion in 2009 and 2010 respectively – larger and more stable than portfolio investment flows and overseas development assistance combined. Despite this, our data shows that only two to three percent of South Asian adults sent or received an international remittance in the past year, while five times that number (17 percent) reported domestic remittance transactions. These domestic transactions appear to be as or more important to survival, with 96 percent of domestic receivers saying the money was highly or somewhat important to their finances. Despite their importance, 64 percent of respondents reported paying in cash through informal channels that can be slow, inconvenient, expensive and risky. It’s clear that domestic remittances are a key part of household finances in this region.

Now the bigger picture, beyond remittances

Of the respondents interviewed in South Asia (Afghanistan, Bangladesh, India, Nepal, Pakistan and Sri Lanka) and Indonesia, a majority (60 percent[1]) of the 1.9 billion adults in this area sent, brought or received a domestic or international payment or remittance in the past 12 months. Sources of receipt included family, friends, employers, the government and agricultural receipts, and payments were sent to family and friends, or to companies or other institutions to meet obligations for school fees and other expenses. These findings are significant; the South Asian region and Indonesia represent 27 percent of the world’s population. The 60 percent who responded affirmatively to sending, bringing or receiving remittances or payments comprise 19 percent of the global adult population.

The vast majority of these remittances and payments were sent or received domestically through an informal system of money exchange — either brought in person to the recipient, or sent by informal means to the recipient by a friend, family member or unofficial third party. This represents a large market of potential adopters of new digital payment options – if providers can reach them.

So, as with the African study, the headline seems to be that large numbers do transactions and most are in cash.

We also saw some other interesting facts:

  • Twenty percent of survey respondents had been paid from the sale of agriculture products, indicating this is a major source of payment flows that commercial providers may want to target.
  • Unlike Africa where ratios were pretty similar between genders, 75 percent of men reported a payment in South Asia and Indonesia, compared with only 45 percent of women.
  • Three percent of respondents reported being cheated or losing money when receiving, with 2 percent of senders reporting the same. Sixty percent of those reporting a loss or overcharge cited the informal means as the reason.
  • Thirty-two percent of respondents reported sending money to a school, company or other institution for a bill or formal obligation, and of those, 84 percent were in cash. It’s very surprising to find so many payments for formal obligations going through informal channels.
  • As in the Africa study, education was one of the best predictors of whether someone used cash or digital means – possibly because formal sector employment was more common with greater levels of education.

Comparison of South Asia and African payment patterns

In total, South Asian and African respondents make a similar number of domestic payments (including remittances, wages, G2P, etc.) However, in Africa, the number of adults reporting domestic remittances exceeds the number reporting bill payments and other formal obligations by about 3:1, while in South Asia, the relationship is reversed – relatively few engage in domestic remittances while many more pay bills. This is a surprising result and a comparison that has not surfaced in previous work. Many mobile money deployments across the world have been (on some level) modeled after the successful deployments in East Africa which target remittances to family and friends, whereas this data seems to show fundamentally different payment behaviors and needs in South Asian markets. This pattern may imply different business models are appropriate in South Asia.

The research uncovered more interesting facts than we can fit here – you can read more for yourself if you click here for the full report.

[1] All percentages are population-weighted averages, accounting for the population size of the country. This means that the numbers from India, the most populous country in South Asia and in this survey (with an adult population of 1.24 billion) get more weight compared with the numbers of a country with a smaller population such as Sri Lanka (20.8 million). As a result, one can compare markets comprising 1.9 billion adults in these seven countries.