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Grant distribution failures foil ‘financial inclusion’

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Picture: Oupa Mokoena/African News Agency (ANA)/Taken September 7, 2023 Thousands of social grant recipients were unable to access their money due to intermittent technical issues experienced by Postbank. Private-sector systems set up by MasterCard and Cash Paymaster Services were even more detrimental to the country’s poorest residents. The difference is that Postbank lacked system competence, whereas, for private-sector firms, the motive was profit, say the writers.

By Milford Bateman, Patrick Bond, Lena Lavinas and Erin Torkelson

The Postbank “glitch” earlier this month was devastating for 600,000 social grant recipients, and although the problem was solved last week, according to the state-owned bank, advocacy NGO Black Sash reported continuing crises.

This is a tragedy, in part because of déjà vu: we’ve seen it before when earlier private-sector systems set up by MasterCard and Cash Paymaster Services were even more detrimental to the country’s poorest residents.

The difference is that Postbank lacked system competence, whereas, for private-sector firms, the motive was profit. Ironically, the new World Bank president, Ajay Banga, took office in June without a full investigation into his own predatory-financing history here, especially as MasterCard’s Chief Executive Officer at a time the credit card company pivoted its marketing strategy towards what is known as “financial inclusion”.

Here in South Africa, more than a decade ago, Banga championed a major financial technology (“fintech”) partnership with a data services firm, Net1. A few years later, in 2016, the World Bank’s International Finance Corporation bought 22 percent of Net 1 – the largest single share – for $107 million. The result was catastrophic.

Debt trap for the poor

The world’s most unequal society, South Africa, is also one of the world’s leading sites for financial experimentation. The country’s disastrous foray into commercial micro credit after apartheid ended in 1994 and was followed by mass collateralisation of welfare payments led by Net1.

It is an extensive system for more than 25 million people – of the country’s 60 million residents – today receive a small monthly state grant: unemployment relief (R350), child support (R510), and grants supporting retirement pensions and disabled people (R2,090).

As part of MasterCard’s effort to bank 500 million unbanked poor people across the world, Banga partnered with Net1 to distribute grants for the South African Social Security Agency (Sassa). The use of MasterCard debit cards helped recipients avoid long waits at government offices (the source of many deaths of older people). They were protected from petty criminals who stole grants at pay points.

In January 2013, Banga visited Soweto, which MasterCard still features on its Flickr account. The new system was greatly appreciated for its convenience and efficiency. After the visit, Banga claimed to The Washington Post, “If these guys use their card, I’m going to make money … In the beginning, they’ll take out cash at an ATM. I make very little money if they just take out cash at an ATM. But you know what? They’ll benefit by doing that, and that’s the first step.”

From grant access to financial predation

In 2012, Banga began scaling up MasterCard services in alliance with a local corporate leader, Net1’s Serge Belamant, who collected personal and biometric information of more than 18 million Sassa grant recipients, including a complete history of income and spending patterns.

Net1 marketed exclusively to Sassa welfare recipients, attaching debit orders for new credit-based products like micro-finance, funeral insurance and cellphone contracts. Accounts were often drained to the point recipients had little or no incoming funds each month.

Banga rapidly rolled out 10 million cards, and Net1 prevented grantees from defaulting because debt repayments were deducted automatically. Net1 “service fees” typically amounted to a usurious 5 percent interest rate per month, so the firm gained more income from financial inclusion products than from the distribution of social grants from 2015-17.

Black Sash conducted a survey of grantees between October and November 2016, and 25. 5 percent answered ‘‘yes” to the question: ‘‘Was any money deducted from your grant without your consent?” These occurred outside regulated financial structures because Net1 developed a shadow banking system that segregated welfare recipients into a monopolistic digital payment space.

The deal eliminated nearly all risk of default, using the social welfare state as a guarantor for private credit. In the process, the welfare minister Bathabile Dlamini was herself corrupted.

Black Sash litigated against Net1’s Cash Paymaster Services (CPS), and by September 2020, not only ensured that Net1’s contract would not be renewed but won reparations that forced the subsidiary into formal bankruptcy (although Net1 continues to play a payments distribution role in South Africa and several other countries).

Poverty collateralisation

The de-risking strategy turned welfare benefits, underwritten by the state, into a new form of collateral. The very purpose of anti-poverty cash transfers, namely, to alleviate levels of deprivation through monetised poverty relief, was reversed. Similar processes were tried in Brazil.

The World Bank was long opposed to such cash transfers on the grounds that they would exacerbate poor people’s destructive consumption habits. But having envisaged the ease of debt-loading a regular income stream, Bank staff began championing cash-transfer schemes as the new social policy blueprint for the Global South starting in the early 2000s.

The Bank claims that if provided with greater access to a set of digitalised micro-financial services (small loans, savings opportunities, money transfer payments and technology, and debit orders, among others) delivered by for-profit investor-driven fintech platforms, billions could escape poverty.

The evidence to back up this heady contention is very weak. Much wider access to such services had already been achieved since 1990 thanks to the micro-finance revolution and widespread debit-card issuance. Yet even former advocates now accept that micro-finance had zero impact on global poverty. Early fintech platforms that were once widely applauded, such as Kenya’s M-Pesa, matured in a destructive manner and now increasingly exploits their clients.

Even leading fintech CEOs, such as PayPal’s Dan Schulman, now readily concede that financial inclusion is simply a euphemistic “buzzword” for recruiting as many new clients as possible. Banga’s appointment to lead the World Bank will likely promote Western consumption norms and over-indebtedness via the spread of fintech platforms. Bank fingerprints on this abuse were confirmed in its 2022-26 South Africa Country Partnership Framework assessment of the Sassa- MasterCard-Net1 deal, which declared that its objectives were ‘mostly achieved’.

Banga is thus the perfect new president of the World Bank, since its historic role has been largely predatory and since mass poverty creation has regularly occurred through pro- corporate “development” projects and macroeconomic structural adjustment programmes. Add now to this the financial inclusion rhetoric that runs from 1990s microfinance through to Banga’s collateralisation of poor people’s welfare grants.

Bateman, Bond, Lavinas and Torkelson are based, respectively, at the universities of Juraj Dobrila (Croatia), Johannesburg (South Africa), Rio de Janeiro Federal (Brazil), and Durham (England).