When we talk about “on-ramps” to financial inclusion, we are engaging with the idea that there are “entrance points” to the road that will take us to global inclusion, just as there are ways to access a highway to get people closer to their final destinations. We’ve already blogged about a number of different on-ramps: payroll loans, post office service points, savings groups, and mobile money, to name a few.

MasterCard’s Amit Jain and Gidget Hall explore another on-ramp: electronic bill payment.

I would venture to say that most people do not find bill pay exciting. In my house, the prospect of paying bills is a subject that tends to trigger groaning and deferral.

However, Jain and Hall observe that bill payment is a financial management exercise that is common among most people, including those with no existing banking relationships. They argue that of any potential on-ramp to financial inclusion, bill pay is the most common across the world. In addition, they note that bill payment is a regularly recurring process, which, if approached as an on-ramp to financial inclusion, could contribute to a habit of efficient and effective financial management.

From a supply-side perspective, electronic bill payment has the potential to benefit a range of players including retailers, banks, billers, and aggregators. Working together, under this logic, would benefit all of the parties. For example, billers could lower their costs associated with accepting payments at their physical offices, banks could engage and acquire customers, and the government could reduce the black economy and make transactions easier to track.

On the demand side, the authors observe that paying bills electronically could benefit people who would not have to travel as far, or work in cash only, and would therefore attract clients to formal financial services. An added benefit could be the development of good financial habits. This move toward the formal financial system would initiate an engagement with other products, including other electronic payments, borrowing, investment, savings, and insurance.

Perhaps most compelling is the authors’ point that bill payment has the potential to drive lending. When bill payment is electronic, lending institutions have more data on which to base their decisions. The authors offer that in fact, in Bhuvaneswar, India, people are already applying for loans and using their bill pay records to prove their dependability and creditworthiness. Even in the absence of formal credit bureaus, such proof of responsible financial decisions could provide critical information.

For more information and to read the whole paper, visit MasterCard here.

Image credit: The Bill & Melinda Gates Foundation

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We’ve talked in this blog about on-ramps to financial inclusion—the services that get new people into formal financial services, build trust between clients and providers, and establish new financial habits in the lives of individuals. Here’s one example, for one group of potential new customers.

Payroll loans in Latin America were recently called “the coffee date” of financial inclusion by The Wall Street Journal because they’re a relatively low-risk way to let both parties—the client and the financial institution—decide how and whether to continue the relationship.

Payroll loans are disbursed by a bank to a consumer and then automatically repaid through deductions from an individual’s paycheck. Such loans are a natural fit in a formal employment setting, especially if payroll is handled through direct deposit in a bank.

Payroll loans are a convenient way to take advantage of an institutional structure in which employees already have a bank account. They yield a much higher repayment rate than credit cards. They allow individuals to establish a credit history with a small principle and small transactions. It is no wonder that payroll loans increased 16.5 percent last year in Brazil to become an $88 billion market, and 32 percent in Mexico to become a $9 billion market.

At the Center, our vision of financial inclusion includes convenience, choice, and affordability. Here’s where we see payroll loans as perhaps a good on-ramp, but not necessarily a final destination. While payroll loans are convenient because they use the same institution through which clients are already receiving paychecks, they rarely offer a choice of lender. The system does not foster a competitive marketplace for consumers. Banks may have a greater incentive to court employers than individuals. This incentive structure may bring up questions of consumer protection. Does the bank have the best interest of the consumer or the employer in mind?

Another question concerns affordability. Since payroll loans have a higher repayment rate than credit cards (97 percent vs. 95 percent), one might expect them to carry a lower interest rate. In Mexico, however, payroll loans and credit card rates, at about 35 percent per annum, are roughly equivalent.

Even the best coffee dates are seldom the basis for a long-term relationship, so the real question is whether employees whose first experience with credit is through payroll loans actually do build a credit history that they can use to access more services over time.

And as a final note, while we can celebrate the existence of an on-ramp for people with formal sector employment, it is also true that in Mexico, over 60 percent of all households operate in the informal sector, beyond the reach of payroll loans. Is anyone asking those folks out for coffee?

Image Credit: Hatch Collaborative

Have you read?

Are E-Payments a Boost or Bane to FI2020?

Seven Trends to Watch in the March to Full Financial Inclusion for All

Access to Finance as a Network Infrastructure Problem