But experts disagree on one important question: Which financial tools and services will have the biggest impact?
Sean Higgins, assistant professor of economics at the Kellogg School, explores the reach of a potentially powerful tool: debit cards. In two recent research projects, he examines the impact of the Mexican government’s decision to distribute debit cards to poor families so they can receive their cash payments from the government.
In an initial study, he and his colleagues looked at how households that received the debit cards changed their saving behavior compared to when they received the same cash transfers but had to go to a bank to access their money. They found that cardholders seem to save more because of debit cards.
The second study grew out of the first after Higgins learned that about half of debit card recipients used their cards at local stores. How, Higgins wondered, could a large infusion of new debit cards produce ripple effects in a local economy? It found that many other constituencies, such as small retailers and other consumers, benefited.
“Findings about secondary benefits for small retailers and wealthier consumers suggest that this type of policy to subsidize financial inclusion could be politically popular,” says Higgins, “even among wealthier households who pay more tax share’.
A deluge of new debit cards
The program that caught Higgins’s interest is Mexico’s conditional cash transfer program, Prospera. It provides bimonthly cash payments to female heads of poor households as long as these families send their children to school and schedule preventive health checkups. Almost a quarter of Mexican households receive benefits from Prospera. Program participants receive payments via direct deposit into accounts managed by Bansefi, Mexico’s state-owned bank.
The researchers used anonymized data on about 350,000 urban Prospera beneficiaries, all of whom received cash transfers from the program to their bank accounts before 2009, when Prospera began introducing debit cards.
In the first investigation, Higgins cooperated Pierre Bachasto the World Bank; Paul Gertler, at the University of California, Berkeley. and Enrique Serra, at the Instituto Tecnológico Autónomo de México. They analyzed approximately five years of beneficiary transaction-level bank account information from 2007–2011 (spanning before and after the introduction of debit cards). They also looked at Prospera’s survey data, which included information from a subset of participants about their consumption and income. feelings of trust towards the bank; and use of debit cards and ATMs.
The Ripple Effects of Debit Card Usage
Before getting debit cards, only 13 percent of Prospera beneficiaries kept savings in their bank accounts: rather, the vast majority withdrew all their cash shortly after each transfer was deposited. Immediately after receiving the cards, however, that number jumped to 29 percent, and two years later it was 87 percent. During that two-year period, the average beneficiary accumulated savings of two percent of annual income.
And even more remarkably, the results suggested it was new savings—not just people moving their savings. Prospera’s research showed that while most respondents’ income levels didn’t change after getting a debit card, their spending went down by about the same amount that savings in bank accounts went up.
“We’re finding evidence that saving in the bank account isn’t just beneficiaries taking money they’ve been saving under the mattress and moving it into the bank account, but rather new, overall saving,” says Higgins.
Why did this new savings occur? Higgins and his fellow researchers point to two main explanations.
The first was a new level of comfortable access to their money. Before receiving the cards, transfer recipients could only withdraw cash from one of the country’s 500 Bansefi bank locations. For the average Prospera participant, the trip to the nearest branch was approximately five kilometers (just over three miles). Debit cards, on the other hand, could be used at any of Mexico’s 27,000 ATMs. For the average Prospera beneficiary, this reduced the distance they had to travel to get cash or check their balance to about one kilometer (less than a mile).
Second, owning a debit card appeared to increase a person’s trust in the bank. The researchers noticed that most debit card recipients in the sample didn’t start saving right away, but instead did frequent balance checks using ATMs—presumably to confirm that their money was safe. A survey administered by Prospera found low levels of trust in the bank among many beneficiaries who reported not saving in the accounts. The cards offered a convenient way to establish trust over time that the bank did not remove balances through hidden fees or other means. Indeed, the researchers found that the longer beneficiaries kept their cards, the less often they checked their balances and the less likely they were to report in surveys that they did not trust the bank.
At this point in the analysis, one question remained open to the researchers: Why did families save more overall after receiving the cards than before?
“The natural question is,” says Higgins, “whether these households wanted to save before they got debit cards, but didn’t save in the bank account because they were too far to travel or didn’t trust the bank because they didn’t have savings somewhere somewhere else, like under the mattress?’
Part of the reason seems to be the difficulty of resisting certain types of “temptation purchases” when extra cash was pouring into the house. The researchers noted in Prospera’s survey data that after a year with the card, beneficiaries reported a significant reduction in spending — equal to about 5% of their income. The purchases that declined the most during this interval were those in the “temptation” product category—alcohol, tobacco, soda, candy, and junk food—down about 14 percent.
A second pattern stood out to the researchers: getting a debit card had the biggest effect on savings among families whose female head of household had little decision-making power in her family when it came to finances. (This level of “bargaining power,” as the researchers called it, was measured by an index they created based on five questions in the Prospera household survey about whether important decisions were made by a female head of household, her male counterpart, or together. )
“We think that in households where these women already had high bargaining power, maybe informal saving is not that difficult,” Higgins explained. “They could save under the mattress and not worry about the male head of the household taking the money and spending it.” For women with low bargaining power, on the other hand, keeping extra money in a bank account with a linked debit card represented a safe new way to raise funds — while allowing for easy withdrawals if the need for cash arose.
The wider impact
The second paper, conducted by Higgins himself, looked at the impact of these cards not only on those who received them, but on the local economy—which, on average, saw the percentage of households with debit or credit cards jump from 36 % to 54% due to the new Prospera cards.
In addition to the Prospera data, Higgins used a confidential dataset on payment technology adoption among retailers, as well as another confidential dataset housed at the country’s Central Bank. This included records of all debit and credit card transactions in Mexico from 2007 to 2015—about five billion transactions.
It also used a household survey conducted every two years by Mexico’s National Institute of Statistics. This survey is in the form of a consumption diary. From this, Higgins was able to discern where consumers shopped and whether their habits changed when previously cash-only retailers were equipped to accept cards.
He found that the jump in new cardholders typically had a domino effect: more businesses—especially small retailers like corner stores—started adopting point-of-sale (POS) terminals to accept the cards. In the mid-county, 18 percent more corner stores used POS terminals two years after Prospera cards arrived than those in areas where the cards had not yet arrived.
The ability of more small retailers to accept cards appeared to catalyze an uptick in card adoption among non-Prospera participants. Two years after the cards were distributed, 28 percent more non-Prospera participants had adopted and started using their own cards.
Interestingly, thanks to this wider adoption, the wealthiest 20 percent of all consumers—most of whom already held cards before the Prospera effort—converted 13 percent of their supermarket spending to corner stores. In fact, the benefits to consumers other than Prospera recipients are quite significant. Higgins estimates that the monetary value of this group being able to use debit cards at more retailers—saving time to shop closer to home and often lower prices at corner stores—is about 37 times the direct cost to the government to deal the cards.
A low-cost tool for enhancing financial inclusion
Policymakers trying to alleviate poverty often try to weigh social benefits against collective costs, Higgins explains. A common limitation of the programs is the politically dangerous cost to the wealthiest members of society who bear a proportionately higher tax burden. But his research shows that with this kind of policy, both the poor and the rich can benefit.
“These could actually be very popular political initiatives,” says Higgins, “as long as people know the secondary effects.”
Another selling point, he says, is that such a policy is relatively inexpensive because it leverages a social program — cash transfers — that already exists. It estimates that distributing debit cards to make that cash more accessible costs just $2 per card, and managing bank accounts costs just $13 per year per account.
“Those costs are just dwarfed by the benefits I appreciate,” he says.