Can mobile money solve for South Africa’s social grant crisis?
Lena Sophia Gronbach
Even in the age of the 4th Industrial Revolution, the usefulness and viability of FinTech innovations depends not only on their technological feasibility but on the socio-economic and regulatory context in which they are implemented.
South Africa’s Social Security Agency (SASSA) recently announced that it is considering mobile money as a new payment channel for social grants. Mobile money has been a tremendous success in several East African countries and certainly has the potential to bring financial inclusion to the poor. However, the technology alone is unlikely to solve South Africa’s grant payment problem.
The emergence of mobile-based financial technologies has transformed the lives of millions of people across the African continent. The classic example is Safaricom’s M-Pesa platform which was launched in Kenya in 2007. Today, the service has close to 35 million users around the globe and mobile money has been at the core of Africa’s ‘financial inclusion revolution’.
However, while it has been an extraordinary success in Kenya, Tanzania and Uganda, mobile money has failed to gain traction in South Africa. In 2016, both Vodacom and MTN shut down their mobile money operations in the country due to strong competition from traditional banks, high levels of financial inclusion, a restrictive regulatory framework and operational challenges.
Defining the problem
SASSA’s recent announcement, however, has spurred speculation about a potential re-launch of mobile money for the disbursement of social grants. Social grants are paid to 17 million beneficiaries and represent the only stable source of income for millions of low-income households. Following the appointment of a private financial company as the sole paymaster for South Africa’s social grant programme in 2012, SASSA has been stumbling from one crisis into the next.
Not only was the award of the tender declared unconstitutional, but grant beneficiaries were hit by a flood of unauthorised and ‘immoral’ debit deductions for financial products and services. A frantic scramble for a new payment provider ensued, resulting in the South African Post Office (SAPO) taking over in September 2018.
However, the transition to SAPO has been marred by technical problems, and the high cost of delivering cash to rural areas has led to the closure of thousands of cash pay points. Many beneficiaries are now forced to travel long distances to the nearest ATM, retailer or SAPO branch, thus incurring significant travel and opportunity costs.
Moreover, an expert panel tasked with overseeing the payment transition has warned of a potential cost escalation, stating that it is unlikely that the decision to award the grant payment contract to SAPO will result in the best use of taxpayers’ money.
Mobile money – A panacea?
In this context, mobile money has emerged as a possible solution to these problems, as it would allow SASSA to transfer grant money directly into beneficiaries’ mobile wallets. However, this optimistic view of mobile money as a cheap, flexible and convenient payment channel for social grants ignores two important issues.
First, most grant recipients, including those who receive their payments into a bank account, still withdraw their money in cash. This ‘dump and pull’ practice has been observed in many developing countries and reflects the continued dominance of cash as a means of payment in low-income communities. Paying grants via mobile money is unlikely to change this and would thus simply shift the ‘cash burden’ from pay points to mobile money agents who are often ill-equipped to handle large amounts of cash.
Second, mobile money is unlikely to reach significant scale in South Africa, given the high levels of bank account ownership among grant beneficiaries. SASSA’s payment model has traditionally been based on bank accounts and debit cards and close to 70 percent of all South Africans are using banks. Mobile money, on the other hand, has generally flourished in countries with a weak formal banking sector and low levels of formal financial inclusion.
Unlike Kenya, South Africa does not have a well-developed ‘mobile money ecosystem’ that allows users to buy groceries or pay school fees directly via their mobile phones. Grant beneficiaries receiving their monthly payments via mobile money would thus most likely continue to ‘cash out’ their grant instead of enjoying the benefits of a cashless mobile payment system.
As it stands, mobile money is therefore unlikely to solve South Africa’s grant payment problems, unless it forms part of a broader ‘mobile money agenda’. This, however, would require significant regulatory reforms aimed at creating a more attractive and enabling environment for mobile money operators. Moreover, mobile money providers would have to create a strong value proposition for potential customers who are currently well-served by the existing financial institutions. Even in the age of the 4th Industrial Revolution, the usefulness and viability of FinTech innovations depends not only on their technological feasibility but on the socio-economic and regulatory context in which they are implemented.
Making mobile money work in South Africa will require a co-ordinated and integrated approach aimed at creating an inclusive and well-functioning mobile money ecosystem, instead of simply using it as yet another technological solution to SASSA’s grant payment problems.
- Lena Sophia Gronbachis a researcher with the Human Economy Research Programme at the University of Pretoria.