Timothy Ogden is an executive partner at Sona Partners, the editor in chief of Philanthropy Action, and co-author of Toyata Under Fire. He also blogs at HBR and SSIR.
At a conference I attended recently, one of the founders of M-Pesa noted that the expansion of mobile payments beyond Kenya has been disappointing. While policy makers in many countries wrestle with the proper regulatory regime for mobile payments, it’s worth looking at some other non-traditional forms of payments and transactions and contemplating the useful role they could play in financial inclusion.
Take for instance the recent announcement that Gift Card Mall is expanding from the U.S. into hundreds of retail outlets of Office Depot and Comercial Mexicana. If you’ve been through a grocery or pharmacy in the US in the last year you’ve probably seen Gift Card Mall—it’s a simple display of dozens of different branded gift cards.
Among the offerings of Gift Card Mall in Mexico is the toditoCa$h card which, for all intents and purposes is a prepaid debit card. The toditoCa$h system allows for purchasing cards of specific value with cash and transfers from account to account (you can also fund a todito account with a traditional credit card or bank account). Each purchase or fill-up appears to incur a charge of about 1-3 percent of value (on a stepped scale). The expansion of Gift Card Mall will put gift cards in convenient reach for an ever larger part of the Mexican population.
It may seem odd to think of gift cards as tools of financial inclusion but that’s exactly how they function in the United States. The gift card evolved in no small part to offer a form of bounded financial inclusion for children and young teenagers.
The gift card route to financial inclusion is potentially very interesting given what we know about the problems the poor have with liquidity—It’s very difficult, for many reasons, to hold onto cash. But holding onto a physical asset seems to be far easier. We all know the stories about keeping the family savings in gold jewelry or livestock. There’s also the results of the Duflo/Kremer/Robinson work in Western Kenya on purchases of fertilizer and fertilizer vouchers. That suggests that prepaid payment cards like toditoCa$h or even just branded gift cards could serve an important role in helping the poor save more readily—by converting cash into cards (though there appears to be a preference for hard goods).
Tying up cash in branded cards limited to one store or, via toditoCa$h, to stores who accept payment cards may seem like a poor choice. But there are a number of reasons to believe they could be useful and appealing to those on the financial margins. Dean Karlan has found commitment savings accounts—which limit savers ability to withdraw funds—to be remarkably popular. Dean Yang has found that remitters will send more cash home if they have some control over how those funds are spent.
Certainly there are downsides to limited use payment cards but those downsides are not obviously worse than alternatives. They are insecure but not more so than cash. They bear transaction costs, but so does any payment mechanism or savings program operating in very small sums. There will be bad actors who charge hidden fees or defraud customers, but again some bad actors exist in every niche of financial access.
The extant research, then, suggests that limited use payment cards deserve more consideration, especially since, unlike mobile payments, gift cards have already leaped the regulatory hurdle in many countries.