Overview Payment mechanisms (PMs) are the channels through which benefits reach the hands of program beneficiaries. The harmonization of payment flows is critical to delivering the right benefit to the right people at the right time while minimizing costs. In recent years, program operators, financial institutions, and technology innovators have developed strategies for streamlining payment flows efficiently. These innovations, if properly integrated into program management through a Management Information System (MIS) and supported by a rigorous outreach component, can reduce leakages and costs, and trigger positive spillover effects (financial inclusion, improved household income management, and so on).
There are seven steps to building a basic payments system . Steps 1 – 2 relate to payment planning and steps 3 – 7 comprise the payment cycle:
Request or invitation to enrollment : informs governing stakeholders about target groups’ location and possible points of payment
Enrollment of eligible beneficiaries: governing stakeholders enroll recipients and capture their identification. The selection of delivery instruments and explanation of payment process also takes places here.
Requirement compliance: determines transfer size based on beneficiary’s compliance with program requirements - labor, conditions - if applicable
Payment order: governing officials submit funds and list of recipients to payment agencies/agents
Payment delivery: payment agency/agents deliver funds to beneficiaries after verification of identification
Payment reconciliation: Funds are settled and monitored by control and accountability stakeholders
Grievance & redress: Process by which the program utilizes control and accountability measures solve complaints about errors, fraud and corruption.
In addition to flow design, practitioners must identify the roles of stakeholders and assess the incentives they face in the payment process:
Governing stakeholders are government agencies and program administrators that oversee program implementation. They are mainly concerned with the ease of delivery, reliability, visibility and overall cost.
Payment stakeholders are intermediaries that ensure the timeliness, frequency and security of the actual transfers. Some of their main goals include minimizing processing costs and maximizing profits.
Beneficiaries and recipients are payment receivers which seek convenience, reliability and accessibility.
Control and accountability stakeholders include auditors and case management facilitators who evaluate delivery efficacy, redress complaints, and hold governing stakeholders accountable.
Another important issue is the selection of payment agencies and instruments. Ideally, the selection of payment agencies should be on a competitive basis. The preparation of the competitive bidding, as observed in the Kenya case study, may require prior knowledge of service providers’ motivation, coverage, and availability of infrastructure. These aspects can be assessed a priori during a feasibility study and pilots (see Niger case study). However in certain circumstances the government may nominate directly a service provider (e.g. a state bank) for which an interagency agreement will suffice.
The selection of payment instrument (traditional or technology-enhanced) depends in part on program duration, local capacity, cost, and the available financial and technology infrastructure. Often traditional instruments (e.g. direct cash disbursements, vouchers) are preferred in short term programs when transfers need to be disbursed quickly and there is little time to set up electronic payments. However, these tend to generate high administrative burden and leakages as benefits travel physically through various hands. Introducing technology-enhanced instruments (e.g. smart cards, cell phones), as illustrated in the Ecuador case study, can improve performance, coverage, increase cash withdrawal flexibility and reduce fraud. These tools tend to be more convenient in long-term programs as start-up costs and program implementation time can be high.
Before designing a Payments Mechanism: A feasibility study and pilot can assess i) viable technology and available financial infrastructure; ii) potential service providers and tradeoffs; iii) potential institutional arrangements and legal financial framework to pay recipients outside the regular client base; and iv) recipients’ percecption of payments.
Choosing a distributing agency: The use of several payment agencies, including financial entities with experience in handling cash in remote areas, can increase coverage, avoid monopolistic capture and reduce operation costs due to competitiveness. However, dealing with various agencies increases the administrative burden on governments.
Contracting a payment agency: Longer contracts permit agencies to amortize the cost of up-front investments as unit costs fall when programs expand. Without time limits and regulations, however, agencies may create a competitive advantage due to investment in proprietary technology that only they can manipulate. This is further complicated by the high switching costs government faces when a specific payment agency is widely implemented.
Establishing program operations: Stakeholders must have clearly defined rules of operations, tasks, and timelines that are in sync with others involved in the payments cycle. These aspects must be delineated through the production of a payments manual, as done in Pakistan, and a training guide for relevant stakeholders prior to program launch.
Managing information flows: The payments module of an MIS is built upon the information needs laid out in a payments manual. If well developed, an MIS can generate accurate and timely information about whom to pay, how much, when and through which agency. It can also monitor disbursement and estimate financial flows.
Beneficiary outreach: Campaigns should convey the rights and obligations of participants before, during and after payment delivery. A sound campaign ensures recipients understand basic information such as benefit amount, payment location, as well as steps and requirements to collect payments, raise complaints and provide feedback.
Monitoring & evaluation: Process evaluations can uncover bottlenecks in the payment flow and evaluate cost-effectiveness of different instruments - private costs (transportation fees, commuting/waiting time to collect payments) and administrative costs (unit cost, transaction fee per disbursement) versus benefits (time-cost savings).