Policy Instrument:
Definition
Payment mechanisms refer to the methods through which governments disburse payment to individuals or families. Payment mechanisms can be broadly classified into two main categories: digital and manual.
Rationale
According to the Global Findex (2022), one in every four adults receive some sort of payment from the government. Such payments are delivered through different methods across countries. The choice of method responds to a multitude of variables, including a country's infrastructure, digital financial ecosystem, legal and regulatory framework, and prevailing policies. Programmes may employ a single digital or manual payment mechanism, or even a combination of methods to ensure that all beneficiaries receive their entitlements.
Well-designed payment systems can reduce administrative costs, minimise opportunities for leakage and fraud, and enhance financial inclusion by connecting beneficiaries to formal financial services. Conversely, poorly chosen mechanisms can create barriers to access, particularly for populations with limited connectivity, digital literacy, or formal identification. Governments must therefore assess the full spectrum of available mechanisms and adapt their delivery approach to the specific context in which a programme operates.
Key Features
- Digital account-based payments: Payments made directly into all types of accounts, including bank accounts, mobile money accounts, and Savings and Credit Cooperative Organisation (SACCO) accounts. These may be further categorised as:
- Limited-purpose accounts: Accounts subject to restrictions on usage, such as the inability to save or make digital payments.
- Fully functional accounts: Accounts that allow recipients to save, deposit, and make digital payments freely.
- Digital non-account-based payments: Electronic transfers that do not require a personal accountbut instead use codes or one-time passwords for fund access at ATMs or point-of-sale (POS) terminals.
- Manual payments: Paper-based disbursement methods, including paper vouchers, cheques, or direct cash-in-hand distributions.
Poor and vulnerable individuals and households targeted in cash transfer programs
Payment mechanisms can potentially exclude certain sections of the eligible population, based on the mix of payment methods used. As an illustrative example, certain groups may face significant direct and indirect costs to travel long distances to collect cash-based payments in the absence or inaccessibility of digital payments. Conversely, other groups may be unable to access digital payments due to digital literacy challenges or the lack of access to digital financial services and internet connectivity. Recipients of payments may also have limited flexibility in the use of funds based on the type of accounts made available.
Consequently, payment mechanisms must be designed in a manner that provides for multiple channels, while relying on digital payments as the predominant channel to enable scalability, timely and secure access to funds, as well as opening pathways to increased financial inclusion.
-