Electronic wage payments offer an alternative to traditional financial inclusion approaches for the un-banked. Addressing constraints to savings can allow wages and remittance flows to poor households to translate into greater asset accumulation and resilience to financial or consumption shock

Breza, Emily

Kanz, Martin

Klapper, Leora

LSE Research Online

2017­6­19 Real effects of electronic wage payments: Bangladeshi factory workers ­ IGChttp://www.theigc.org/blog/real­effects­electronic­wage­payments­bangladeshi­factory­workers/ 1/4Authors Emily BrezaAssistant ProfessorColumbia University Martin KanzEconomist, DevelopmentResearch GroupWorld Bank Leora KlapperLead EconomistWorld BankPublished on: 6 Apr 2017Countries: BangladeshResearch themes: Inclusive Growth,Political Economy Real effects of electronic wagepayments: Bangladeshi factoryworkersElectronic wage payments offer an alternativeto traditional ﬁnancial inclusion approachesfor the un-banked. Addressing constraints tosavings can allow wages and remittanceﬂows to poor households to translate intogreater asset accumulation and resilience toﬁnancial or consumption shock.More than two billion people around the world do not haveaccess to electronic financial systems (Demirguc-Kunt et al.,2017). These adults – most of them poor – rely on cash tomanage their day-to-day finances and plan for the future. Cash-only transactions with governments, banks and otherinstitutions lead to high transaction costs, losses due tocorruption, and a widening of the gap between formal andinformal financial systems.Bangladeshi factoryImage credit: Tareq SalahuddinElectronic payments and remittances can reduce incomeinequality, boost job creation, accelerate consumption, increaseinvestments in human capital, and directly help poor peoplemanage risk and absorb financial shocks. A study onBangladeshi garment factory workers reveals the impact ofelectronic wage payments (EWPs) on savings, assetaccumulation and responding to financial shocks, while2017­6­19 Real effects of electronic wage payments: Bangladeshi factory workers ­ IGChttp://www.theigc.org/blog/real­effects­electronic­wage­payments­bangladeshi­factory­workers/ 2/4“revealing key barriers to the market providing EWP services.Electronic payments and remittances can reduceincome inequality, boost job creation, accelerateconsumption, increase investments in human capital,and directly help poor people manage risk and absorbfinancial shocks. ”The beneﬁts of an electronic economyPolicymakers around the world view the migration of poorhouseholds to EWPs as an essential ingredient in expandingfinancial inclusion. An electronic economy has the potential todramatically reduce costs, increase efficiency and transparency,help build infrastructure, and broaden familiarity withelectronic payments.There are considerable benefits when governments shift theirsocial, salary, and procurement payments, and taxation andlicensing receipts to electronic form. It creates a foundationupon which the private sector and person-to-person payments,such as international and domestic remittances, can build.Many governments have begun to experiment with the use ofelectronic payment technologies. For example, as a way tochannel welfare payments to low-income individuals.Colombia’s Familias en Accion Programme, and Pakistan’sBenazir Income Support Scheme, are two examples welfareprogrammes that operate entirely through electronic payments.Formal bank accounts: Opportunities and barriersElectronic payments may also provide a solution to anotherpervasive problem in developing countries: the underutilisationof formal accounts. Electronic payments are often the first entrypoint into the financial system for individuals. They provide anopportunity to create traditional formal bank accounts ormobile phone accounts for savings or payments.While many countries have aggressively expanded their bankinginfrastructure, poor households often still choose to save usinginformal methods. Many formal accounts remain dormant,resulting in their potential welfare benefits not being realised.Demirguc-Kunt et al. (2017), show that, while 50% of adultshave a formal bank account, only 43% report making a depositduring the previous 12 months. Moreover, only 21% of adultsglobally and 7% of adults in South Asia report using theiraccount to receive regular wage or welfare payments.Electronic payments and welfareDespite the assumed importance of modern paymenttechnologies for low income populations, there currently existslittle empirical evidence on the welfare benefits of electronicpayments. Notable exceptions are studies of M-Pesa in Kenya,which has achieved unprecedented success in providing mobilepayment services to over 80% of Kenyan households. Resultsfrom this line of research suggest that electronic payments mayhave significant welfare benefits, as they reduce transaction2017­6­19 Real effects of electronic wage payments: Bangladeshi factory workers ­ IGChttp://www.theigc.org/blog/real­effects­electronic­wage­payments­bangladeshi­factory­workers/ 3/4“have significant welfare benefits, as they reduce transactioncosts and allow for improved consumption smoothing. Mobile-phone based accounts are used to make transfers to individualsaffected by economic shocks, and mobile payments help peoplereceive assistance from a geographically wider network ofrelatives and friends (Jack and Suri, 2014; Blumenstock et al.,2016).Mobile-phone based accounts are used to maketransfers to individuals affected by economic shocks,and mobile payments help people receive assistancefrom a geographically wider network of relatives andfriends. ”Study: Salaried factory workers in BangladeshTo study these issues, a randomised controlled trial wasconducted on salaried factory workers in Bangladesh. Itinvolved two large garment factories which, at the beginning ofthe study, were paid all their wages in cash. Workers were thenrandomly and individually assigned within the same factory toeither continue receiving their wages in cash, or receive EWPsthrough either a bank or mobile account.In two additional treatment arms, bank and mobile moneyaccounts were given with no EWPS. Workers were followedover approximately two years to measure the effect of EWPs onsavings, asset accumulation, and the ability to cope withfinancial shocks.Key resultsPreliminary results suggest that the treatments stimulated theuse of formal financial products, with a detectable increase insavings in both bank treatments. The extensive margin responseof bank EWP is particularly strong. Changes were also observedin the composition of savings in the two bank treatments.In contrast, the mobile money treatments did not have verystrong long-run impacts on total savings accumulation. This isconsistent with the typical usage patterns of mobile moneyaccounts, and a low incidence of savings accumulation in themobile wallet.Moreover, there is evidence that EWPs likely did help workersbetter respond to shocks, especially in the mobile EWPtreatment. All treatments appeared to increase trust in financialintermediaries, especially mobile money platforms.Electronic wage payments: Key barriersOne lingering question is, given the average benefits of EWPSand the costs of cash for the factories, why hasn’t the marketstepped up to expand the scale of EWP services? The studyexposed several key barriers at play:Factories fear resistance by workers. Workers may be nervous atthe prospect of changing their method of payment. However, theresults suggest that workers not only learned how to use theiraccounts and adjusted to the new system, but preferred EWPs.2017­6­19 Real effects of electronic wage payments: Bangladeshi factory workers ­ IGChttp://www.theigc.org/blog/real­effects­electronic­wage­payments­bangladeshi­factory­workers/ 4/4accounts and adjusted to the new system, but preferred EWPs.Insufficient identification documentation (ID). Many workers donot have national ID cards, and among those who do, there aremany mistakes in the information printed on the cards. Thismakes it hard to satisfy the “know your client” (KYC)requirements imposed by the central bank. Moreover, anychanges in national regulatory banking requirements, put theimplementation of EWPs at risk. For example, during the projectimplementation, Bangladesh Bank changed the documentationrequirements five times.Firms fear the costs of upkeep of an EWP system.Troubleshooting is essential to keep payroll accountsoperational. For example, ATM cards may be lost or captured byATM machines, and workers may lose their SIM cards, resultingin a loss of access to their mobile money accounts. The resultsshow that when implementation works well, trust in the financialsystem improves. However, botched implementation can easilyhave the exact opposite result. 

Real effects of electronic wage payments: Bangladeshi factory workers

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