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Digital Payments and Micro Pensions

ROLE OF PAYMENTS IN BROAD-BASED DIGITAL PENSION INCLUSION

The previous book by pinBox, “Saving the Next Billion from Old Age Poverty” covered the progress made in pension inclusion by multiple African and Asian countries. There was one common contributor to their success – a thriving, inclusive digital payments ecosystem.

The realization that the vision of broad-based pension inclusion rests entirely on the back of a ubiquitous, seamless, and affordable digital payment infrastructure has been a recent one. It’s only been in the past decade and half, with the advent of mobile money and mobile banking on the African continent, Aadhar enabled e-payments in India, the Alipay and WeChat pay led payment revolution in China, bKash in Bangladesh, and the rise of alternative digital payment channels in Latin America that instant payments for the masses have become a possibility. The emergence of these new digital payments models, powered by new digital ID systems and technological infrastructure have led to 515 million adults being financially included between 2014 to 2017 (World Bank Findex1 data) globally. In fact, in the 10-years spanning 2011 to 2021, digital account ownership increased by 50 percent, covering 76 percent of the global adult population (Findex 2021). In the case of Sub-Saharan Africa (SSA), the bulk of this progress was driven entirely by mobile money.

Digital payment systems like mobile money, filled a huge latent demand – a need for reliable, affordable, real-time peer-to-peer payments. Other types of use-cases like purchasing airtime (phone credit), bill payments, merchant payments, social welfare transfers, unsecured micro loans, micro-savings, and micro-insurance and more were layered on this primary use-case.
This explosion in financial sector innovation, and particularly in digital payments, has had a transformative effect on the uptake of digital financial services, particularly by under-banked and unbanked segments. Digital payments have become and will remain a critical enabler of broader and deeper pension inclusion. Thus, increasing the long-term financial resilience of individuals and households.

Digital Payments ‘unblocked’ multi-decade old challenges around informal sector pension inclusion. One of the biggest challenges of achieving a broad based and truly inclusive micro-pension program in emerging markets including African countries has been the demographic that it targets – financially excluded, non-salaried informal workers with intermittent incomes, distrusting of and intimidated by traditional financial institutions, extremely price sensitive, with limited literacy, and unable to deal with cumbersome formalities that usually come with multiple prerequisites. Digital payments like mobile money on the other hand required people to only have a mobile phone. Powered by easy to onboard, and relatively simple and convenient products, with real time transaction processing and confirmation, combined with a large cash-in cash-out infrastructure of agents, digital payments were designed to serve this underserved and untapped demographic. As mentioned earlier, the providers of mobile money on the continent have onboarded millions of users, and today, Sub Saharan Africa (SSA) boasts of 605 million registered mobile money accounts2, 30 percent of which are active on a 90-day basis and growing. To put this feat in context, the population of SSA is only 1.17 billion people.

Digital payments are the modern-day financial sector rails (like railway tracks) that are a critical piece of must-have infrastructure for successful pension system design and delivery. Digital payments capabilities benefit both pension plan sponsors and intermediaries (supply side) and beneficiaries (demand side). For pension scheme sponsors and providers, digital payments enable secure, remote payment contributions into retirement saving products, and direct digital payouts of pension benefits post retirement. Digital payment platforms are specifically designed to process and reconcile high volume small value transactions. Moreover, most digital payment platforms have functionalities that allow for periodic auto-debit features as well (regulation permitting)3 – that can have a profound impact on voluntary savings persistence. On the African continent, bank-agents and mobile money agents are usually non-exclusive. Meaning, the same agent can provide services for customers of multiple banks or mobile money providers, resulting in a sizeable agent network or cash-in cash-out infrastructure4 penetration. Payment platforms also come with other functionalities like ID verified store of value (wallet or account), ability to conduct Below The Line (BTL) marketing to millions of customers, ability to onboard several thousand clients digitally in a short span of time, educate customers either through SMS or through in-app messaging in case of smartphones, resolve customer complaints, especially those related to payment reconciliation or fraud (through call centers, artificial intelligence based chat bots), and more. These functionalities are the building blocks for an inclusive, digital pension system and also enable micro-pension sponsors and providers to achieve low transaction costs. This in turn ensures that the gains and long-term savings of informal workers are largely preserved and not washed away by high transaction costs and charges.

The rapid pace of digital payment adoption, if channeled and designed appropriately, has the potential to reap long-term dividends for both pension policy makers and pensioners. Below are two heat maps from the OECD5 that show very shallow pension penetration on the African continent when compared to other economies (especially developed countries).