November 30, 2012
The Promise of Electronic PaymentsBy Timothy Ogden
A few weeks ago I wrote that a transition to electronic payments will not be a boon to poor households unless the financial systems that undergird payments become more focused on serving poor households. It’s vitally important to think of the value and benefits of electronic payments within a system.
A couple of recent news stories highlight what a financial system enabled by electronic payments can do, even without the active cooperation of traditional banks.
In the last two months, both Amazon and Google have launched programs to extend credit to small business customers. Amazon is making loans available to people who sell through the company’s website to finance larger inventories heading in to the Christmas shopping season. Because Amazon handles both the order placement for these businesses, it has very good data on who can expect a surge of orders and therefore would likely benefit from increasing their inventories. Perhaps more importantly, because Amazon handles the electronic payment processing on orders it has the means to enforce repayment. And, Amazon can offer a very competitive interest rate on loans because it also takes a cut of sales made through its site. Electronic payments in this case provide information to select good borrowers, lower transaction costs for delivering the loans, protect Amazon from default, and lower interest costs for borrowers (while increasing access to credit). And there isn’t a traditional financial institution in sight.
Google has created a similar program to make loans to small businesses which use Google’s search advertising. While Google doesn’t host these businesses store fronts it does have very good data on which advertisers attract interest from buyers. Electronic payments allow Google to enter the credit market without having to make any infrastructure investment. Again, financial access is increased without the involvement of traditional financial institutions.
In both cases, small firms that would have trouble accessing credit are able to get it on (probably) reasonable terms. That’s what electronically-enabled financial systems can do. Electronic payments can be a fantastic enabler of increased financial access. But electronic payments, independent of a system that delivers value and quality services to excluded households, don’t do much on their own.
One critical conclusion to draw from that fact is that it would be unfair to judge efforts to accelerate the transition to electronic payments based on direct impact on poor households. Electronic payments are not like microcredit or savings where we should make policy decisions based on directly observed impact. Instead, the push for electronic payments should be seen as simply a first step. We should judge the Better than Cash Alliance and other efforts to promote electronic payments based on their ability to push ahead systems that create useful infrastructure for delivering services to poor households (which is by no means automatic, something I’ll discuss in future posts).
That doesn't let proponents off the hook however. Once the infrastructure is in place, we should judge them on whether they follow through and promote the use of the infrastructure to actually deliver on the promise by expanding access to the services that poor households need.