Cash can be costly, especially when it comes to financial inclusion.

For years, policy makers have advocated for strategies that increase financial inclusion. According to the Consultative Group to Assist the Poor (CGAP), providing financial services to underserved populations has the potential to improve household welfare, stimulate economic growth and reduce income inequality. Still, in spite of global efforts to increase financial inclusion, more than half of working age adults across the world lack access to appropriate financial services.

How a country uses cash has implications for financial inclusion. For those without access to an account at a financial institution, electronic payment instruments such as  prepaid cards and mobile phones offer tools for storing savings.

But the adoption of cash alternatives also depends on the availability of financial services. Without access to savings accounts, payment cards or mobile money, households and businesses are faced with few alternatives to saving and transacting in cash.

In the so-called Next Eleven economies (including Egypt, Mexico and Indonesia), financial inclusion remains an important consideration. And for good reason: Unlike the US, these three countries each have rates of bank account ownership that lag far behind the global average.

The Relationship between Cash and Financial Services

Among the countries currently being studied by CEME, there is a clear relationship between the importance of cash in the economy and financial inclusion. Measures of narrow money (M1), which include demand deposits and currency in circulation outside of banks, are a useful starting point for estimating the importance of cash in a country’s economy. The following chart compares account ownership with currency in circulation outside of banks as a percent of narrow money:

While the US is considered an outlier because of the dollar’s unique position as the world’s reserve currency (which means more dollars in circulation), there is a strong correlation between the importance of cash in the Egyptian, Indonesian and Mexican economies and their respective levels of bank account ownership. Egypt, which has seen currency circulating outside of banks grow to over 70% of narrow money (M1) after the 2011 Revolution, also has the lowest rate of account ownership at just 10%. In contrast, Indonesia has a slightly higher rate of account ownership (20%), and has just over 50% of narrow money in cash outside of banks. Mexico boasts the highest rate of account holders among the three nations and also depends significantly less on cash, although cash usage and financial inclusion continue to pose challenges.

Payments, Savings and Access to Cash Alternatives

Households and businesses that use cash incur significant transportation and time costs as they travel to pay or receive payment. And those who keep their savings in cash expose themselves to the risk of theft, which can be devastating for vulnerable populations struggling to make ends meet. Therefore, providing access to cash alternatives is a crucial component of any strategy for increasing financial inclusion.

Across the four Cost of Cash countries, there is a consistent gap between the percentage of adults who reported saving money and those who kept their savings at a financial institution. Even in the US, where 67% of adults maintained some form of savings in 2011, only 50% kept their savings in an account at a financial institution. The difference is even larger in Egypt, Indonesia and Mexico, where less than half of savers have access to a financial institution.

The discrepancy between those who save and those with a savings account suggests that many businesses and households are saving their money in cash. Even in countries where savings clubs provide a viable alternative to savings accounts, group savings are likely stored in cash. Increasing access to savings accounts can help to reduce reliance on cash and the risks that large cash holdings entail.

Access to an account at a bank or MFI also provides consumers and businesses with a low-cost way to send and receive payments. Businesses that use a bank account are able to minimize their cash holdings while also reducing the transaction costs associated with paying suppliers and receiving payments from customers. For households, account ownership offers a convenient way to receive wages,  government payments and  remittances. This allows households to avoid traveling long distances and standing in line to send or receive payments. Moreover, accounts provide a low-risk, non-cash instrument for storing funds until they are needed.

Unfortunately, given the low rates of financial inclusion in Egypt, Mexico and Indonesia, account use for these purposes remains limited. This is particularly true in Egypt, where account use for payments is well below 5%. However, over 10% of Mexicans now use their accounts to receive wages, with Indonesia not far behind. Not surprisingly, most Americans use their bank accounts to receive wages, reflecting the widespread availability of direct deposit among American employers.

Another measure of financial inclusion and an indicator of cash dependence is the use of electronic payment instruments. Many electronic payment instruments such as debit cards, prepaid cards and mobile phones serve both payment and savings functions, making them potentially effective tools for increasing financial inclusion and reducing reliance on cash. However, aside from the US, the countries being studied by CEME lag behind in terms of electronic payments adoption.

Comparing account use with the types of electronic payments used, it appears that countries where wages are received by direct deposit tend to have higher debit card ownership. But electronic payment usage is also lower than debit card ownership, which suggests that these cards are more frequently used for savings or withdrawals than for payments.

In countries where bank account ownership is low and electronic payments infrastructure is underdeveloped, mobile phones have the potential to provide the unbanked and under-banked with a way to save money and make cashless payments. Yet, of the four countries discussed here, only Mexico has seen a small uptake in mobile money. Still, the numbers are not extraordinary: In 2011, only 4% of Mexicans used their phones to pay bills, while 3% used them to receive payments. But it is slightly higher than in Indonesia and Egypt, where less than 1% of the population uses mobile money.

The Bottom Line

In the words of the Better than Cash Alliance, “When designed with financial inclusion as a goal, electronic payment programs can offer stepping stones to greater financial tools and services.” Just one more reason to promote a shift away from cash and towards alternative payment technologies.

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