MasterCard Pins Down the Cash Economy

For many at the base of the economic pyramid in the developing world, the only dependable source of support is through government food and health subsidies. In rural communities, these are usually delivered by hand in the form of vouchers, checks or cash. The problems in this set-up are fairly obvious: it opens the economy to corruption, crime and abuse in the way only bundles of cash can, and it’s not unusual to see situations in which impoverished people line up for days, only to find the cash has run out when their turn comes. In good times, this places an added burden of inconvenience and indignity on poor families; in bad times, it can spell disaster for society’s most desperate members, particularly young children and the elderly.

This issue falls under a class of development challenges termed financial inclusion, which sounds like a problem for the World Bank or the Gates Foundation, but is one that MasterCard is taking up seriously. No, not MasterCard’s philanthropic foundation, but MasterCard Corporation itself, which has declared war on cash. According to Shamina Singh, Executive Director of the MasterCard Center for Inclusive Growth, “When you realize the burdens of a cash-based economy, there’s boundless opportunity to do well and to do good.” Given that 2.5 billion people in the world lack access to secure financial transactions, the potential is enormous.

How can MasterCard help? Well,the company isn’t a bank, but a technological platform that connects customers directly to merchants. Its function is to obviate the need for cash. What’s more, MasterCard’s platform has the potential to connect governments, citizens, financial institutions and merchants to each other, allowing welfare agencies to digitize their social subsidy programs, conserving limited government resources, and dramatically reducing the distribution cost and abuse that is rife in informal cash economies.

Take MasterCard’s 2012 partnership with South Africa’s Social Security Administration and local stakeholders — Net1 and Grindrod Bank. Working together, the government digitized their social benefit programs, delivering 16 million social grants to 10 million beneficiaries. The beneficiaries, mostly women, received a bank account and an option to use their social grants to make purchases anywhere MasterCard is accepted. By combining multiple grants onto one card, the new system saved the government millions of dollars in costs associated with distribution and fraud.

While the payoff for the South African government was clear, delivering the subsidy payment is only the first in a string of potential benefits in streamlining financial transactions. According to Singh, “The longer the money stays digital, the better for person using it, because they’re saving more and they’re less exposed to crime and corruption.” In other words, for the end users — the women and families struggling to survive on limited means — electronic funds transfer equates to decreasing the “leakage” of funds lost to corruption, effectively increasing the security of their income. What was missing in South Africa was an ecosystem that supported digital currency, something MasterCard realized they could help build.

MasterCard’s in-country teams began exploring the financial world of their 10 million new South African customers, identifying the vendors they solicited most. “It’s really mapping the engagement points from the customer perspective,” says Singh, “and then forming partnerships with all of those entities to create a holistic ecosystem that is safe and secure as possible.”

MasterCard went initially to Shoprite and Checkers, the two big chains their South Africa customers preferred, and proposed that the retailers not only accept the cards, but also allow customers to get cash back. After some initial resistance, the stores agreed to try it out — and were astounded by its success. MasterCard enabled beneficiaries to get cash back at the places they were shopping rather than having to go to a bank branch. This led to a massive increase in foot traffic in retail stores and adoption of card usage for everyday purchases. The payment ecosystem is expanding organically as taxi drivers, small business owners and informal traders recognize that digital payments open new business opportunities. And, of course, all of this is enhancing the services available to those at the base of the pyramid.

Obviously, this is a nice story that highlights MasterCard’s corporate social responsibility program — but is all this feel-good stuff paying off for MasterCard’s business prospects? Not yet. The volume on social subsidy cards is puny compared to the spend volume across the MasterCard network, so there’s no immediate windfall. But sustainability inherently requires a long-term perspective, and what MasterCard is doing is fostering demand — and potentially more customers in the future. All this is part of a long-term growth strategy that reaches to the very top of MasterCard leadership.

The company’s CEO Ajay Banga recently told leaders at the Mobile World Congress, “The opportunity to drive financial inclusion is unique to us and our time.” As South Africans and others prosper through financial inclusion, MasterCard is positioned to prosper right alongside them.