21 April 2014

Shift to e-payments saves Mexican government $1.2bn annually

03 December 2013  |  894 views  |  0 Source: Better Than Cash Alliance

The Mexican Government is saving an estimated MXN $17 billion (US$1.27 billion) per year thanks to a concerted and well-planned shift to electronic distribution of many government payrolls, pensions and social benefits, according to a study released by The Better Than Cash Alliance.

The study concluded that most of the savings came from lower fee payments to the numerous banks that had handled the decentralized, cash-based transfers; from the interest earned by not having to deposit funds in advance of payments; as well as reduced unauthorized or incorrect payments. The study estimates that the shift from cash has saved the equivalent of approximately 3.3 percent of those expenditures related to salaries, pensions and social transfers, with the added benefit of increasing transparency, and also laying the foundation for banking services to reach those who have little-to-no access today.

"Federal government spending in Mexico used to be highly decentralized, which made government payments inefficient and costly," said Lic. Irene Espinosa Cantellano, National Treasurer of the United States of Mexico. "Ours is the story of a sustained effort over time driven by successive Ministers of Finance who were sure of the ultimate benefits to government and to recipients of government payments. It is by no means complete and the reforms and policies proposed by President Enrique Peña Nieto are clear actions that it is now accelerating."

The real benefits come when electronic payments are combined with treasury centralization: centralization definitively reduced costs to government and allowed for better controls, budgeting and oversight by Tesofe over all federal expenditure. Coordination among the different payments providers and designing appropriate incentives were an essential part of a successful change strategy.

One of the major lessons of the Mexican experience for other governments considering the benefits of electronic payments is the deliberate, planned nature of the shift. According to the study, the eventual savings were the result of a sustained, 15-year effort by Mexico's Ministry of Finance and the Mexican Central Bank (Banxico) that included work to centralize as well as digitize payments. Beginning in 2010, however, the government further prioritized the shift, creating significant momentum and progress over the last three years.

The success of the shift also relied on installing both the legal framework and technology infrastructure to support the transition, and maintaining momentum across diverse agencies and even through a change in the ruling party.

While the benefits of electronic payments have been known for some time, emerging and developing markets have found it challenging to lead a transition within their economies. The Better Than Cash Alliance was launched in September 2012 in response to public and private sector demand for more strategic advocacy and guidance on how to transition these into electronic payments.

"With $1.27 billion in annual savings, Mexico's leadership should provide a strong incentive for other governments wanting to benefit from a shift to electronic payments," said Dr. Ruth Goodwin-Groen, Managing Director of the Better Than Cash Alliance. "The Better Than Cash Alliance undertook this case study series to share the experiences of visionary governments embarking on the journey to electronic payments, and to provide a proven path for other nations to improve their economies and the lives of their citizens."

The study of Mexico is the first in a series of five case studies by the Better Than Cash Alliance, with partner Bankable Frontiers Associates (BFA), that document and measure the journey of governments to achieving an economy that handles less cash. Such shifts to electronic payments are important because of the large potential for savings: Billions of dollars in cash payments are made to millions of poor people today by governments, as well as the private sector and development organizations, in the form of social benefits, humanitarian aid distribution, and payroll.

Key lessons from the Better Than Cash Alliance's Mexico case study include:

1. Focusing on creating both a centralized and digital payments platform may deliver benefits and efficiency, as it did for Mexico.

2. Having the legal and technical infrastructure in place before shifting is critical to a coordinated effort.

3. A government decree is helpful in creating momentum, but the effort must be sustained by senior political and technical champions over time.

4. Shifting in stages rather than all types of payments at once worked in the Mexican context, and could prove successful for other contexts.

5. While financial inclusion goals didn't drive the shift, they are important outcomes of the digitization of social benefits and rural payments.

6. Not everyone benefits from the shift. Identifying the winners and losers in advance so as to design appropriate incentives is a key part of a successful change strategy.

7. Carefully designed incentives to shift have helped to persuade end recipients.

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