Written by Franz Gomez and Alejandra Montes Saénz of Fundación Capital
©Mastercard Center for Inclusive Growth
COVID-19 is making digital payments more appealing and presents an opportunity to bring financial services to more small businesses and the Café Paga Project shows how.
Don Silvio Gómez lives with his family in the village of El Triunfo, near the small city of Pitalito in southwest Colombia. At age 74, he has dedicated more than 50 years of his life to growing coffee. He never imagined that one day it would be possible to make payments using his cellphone. Last September, however, Gómez, along with 182 other coffee growers from Pitalito, participated in a Capacity Building for Financial Inclusion workshop as part of a digital payments pilot. The pilot is part of the sustainable sourcing strategy, NKG BLOOM, of Neumann Kaffee Gruppe (NKG), the largest coffee trading group in the world, and is implemented by its subsidiary in Colombia, SKN Caribecafe Ltd.
As part of the strategy, digital payments help smallholder farmers like Gomez gain access to and training on formal financial services to help them attain better pricing from suppliers, greater savings and faster payments, among other benefits. Fundación Capital, with support from Mastercard and Neumann Kaffee Gruppe, piloted the digital payments program in Mexico and has since expanded to Colombia.
Digitization makes it easier for companies to make their payments to contractors, employees and suppliers by avoiding the mobilization of cash. It also allows greater traceability and operational efficiency.
During the workshop, Gómez and his fellow coffee growers learned about and downloaded the digital solution, Movii, which they can use to manage payments from suppliers and is linked to a Mastercard debit card. They received an incentive of $3 USD credited to their Movii wallet. After the workshop, Gómez, who has had savings accounts with financial institutions before but prefers to use cash, used his Movii wallet and debit card to refuel his motorbike. “I saw that the gas pump had a POS [point of sale], so I swiped the card and tanked the bike.”
Although Gómez’s story occurred prior to the COVID-19 pandemic, the lessons derived from his experience and other participating in the pilot take on special relevance in the context of the current crisis, both for companies and governments. In the case of government-to-person payments, digital financial services function as a flexible and cost-effective way to transfer subsidies and monetary support to a population affected by the crisis. In Colombia, three of the coffee growers in the project were able to receive, in a quick and timely manner, the government-sponsored Ingreso Solidario – a cash transfer from the government to the poorest families in the country to enable them to get through the lockdown period while income-generating activities may have to come to a halt – through their Movii account. Because this transaction was digital, they did not have to approach a financial entity, thus avoiding crowds and unnecessary risks of contagion.
Digitization makes it easier for companies to make their payments to contractors, employees and suppliers by avoiding the mobilization of cash. It also allows greater traceability and operational efficiency. Meanwhile, for payment recipients, digital delivery means less risk of contagion since they do not have to go out to receive a payment. Receiving digital payments is also more convenient, as they can use the money to make purchases and pay bills digitally without having to travel or take public transport.
Digital payments can generate significant benefits for vulnerable individuals and communities, but they require an ecosystem that integrates, encourages and supports them.
Below, we share some of the lessons and recommendations from the digital payments pilot as part of the NKG BLOOM strategy, which have been complemented by Fundación Capital’s extensive experience implementing financial inclusion programs for poor populations in 12 countries in Latin America. We hope their implementation by governments and businesses in the region will help mitigate the negative impacts of the current pandemic on the most vulnerable people.
1. Digitize payments to speed up processes: Electronic payments make it easier for people living in poverty to access resources and acquire essential goods. Cash payments often require costly logistics and operations, and payments in-kind rarely meet people's diverse needs. In the case of Café Paga-NKG BLOOM in Mexico, coffee growers could use debit cards to quickly and securely purchase groceries and agricultural supplies at stores in the Red Qiubo network using money deposited directly into their savings account from their harvest payments. In this way, they were able to avoid long lines at the bank (where they sometimes would wait all day) to cash their payment checks
2. Use financial inclusion to help improve the resilience of the most vulnerable: Electronic payments establish a link between payment recipients and the financial system. This link helps boost the financial inclusion of the most economically vulnerable populations in a country in a massive way and at a reasonable cost. Financial inclusion opens up the possibility for this population to access a wide range of relevant and pertinent financial services—credit, insurance and programmed savings—that increase their chances of being resilient in periods of prolonged crisis, such as the current one. In the case of Movii, for example, through the app, users have access to a loan with a third party, Presty, which is credited to their Movii account and allows them to make payments or purchases with a debit card. Although the loan amounts are low, they are a particularly useful option in case of emergency; they also help users build a credit history, which can open the door to larger loans in the future.
3. Lay the foundation for building a digital payment ecosystem: Digital payments can generate significant benefits for vulnerable individuals and communities, but they require an ecosystem that integrates, encourages and supports them. Building the ecosystem requires joint and coordinated efforts by various actors in both the public and private sectors to address requirements and set the right incentives from both supply and demand perspectives. In the case of Café Paga México, for example, Exportadora de Café California's export partner worked to shift coffee growers’ payments to an electronic account and minimize the use of checks. At the same time, Fundación Capital implemented a financial education strategy to promote awareness among coffee growers of the benefits of using an account and card for purchases and payments. From a supply-side perspective, Red Qiubo worked to set up its point-of-sale system in 209 small shops where the coffee growers purchased their food and supplies. Thus, it was possible to consolidate an ecosystem of digital payments that positively affects the coffee growers, their families and their communities.
Beyond requiring urgent measures to address the adverse consequences of the pandemic, COVID-19 has brought an important opportunity to advance the structural changes required to establish and strengthen digital payment schemes. This involves bringing simple and relevant digital financial products and services to the most vulnerable populations. Doing so helps develop the necessary capillaries in an extensive network of correspondents (or banking agents) who are trained and have the right incentives to stimulate the use of digital payments by a population that has so far been unaware of them. Such a network builds financial capacity through practical financial training programs (simulations) and knowledge and skills building to improve financial health.
The Café Paga-NKG BLOOM project is undoubtedly an excellent example worth studying, replicating and scaling up, as it actively contributes to achieving these objectives. As Silvio Gómez said, “I am starting, I am learning, day by day. We must continue to learn well.”
This article was originally published by Mastercard Center for Inclusive Growth.