Newswise — To promote greater financial inclusion among poor and unbanked people, a surprisingly effective tool is a debit card.

In new research my colleagues and I conducted on a Mexican government social program, we found that when benefits were paid directly to poor households via a debit card, rather than deposited into a bank account without a debit card, people were empowered to make their own choices about how to spend their money and how much to save. The changes we observed carry meaningful lessons for promoting financial inclusion in other countries as well as the United States.

Our research focused on five years of program data (2007 through 2011) from Prospera, Mexico’s social welfare program, which distributed 1 million debit cards to recipients. We looked at the before and after impact of the debit card that allowed them to access funds deposited into accounts at Bansefi, Mexico’s government bank. With a debit card, funds could be withdrawn from local ATMs, often within a mile of the beneficiaries’ homes, instead of requiring them to travel an hour or more to the government bank branch.

Such ease of access to their money could have increased spending; instead, as our research found, the debit card led to the opposite result. Over a two-year period, beneficiaries accumulated net new savings equal to 2% of their annual income — in addition to whatever cash they stashed away at home “under the mattress.”

The debit cards also led to greater empowerment of women, who receive the vast majority of Prospera payments, unless a household is headed by a single father. Since they no longer withdrew the entire benefit from the bank, women had less money on hand and, as a result, were not as likely to be pressured for funds by a spouse, partner, or other family member. Instead, these women wielded more decision-making power over how to spend their money on behalf of their families, as the program intended.

Helping the Unbanked — in the U.S. and Beyond

Our observations in Mexico hold important lessons that can be applied in other countries where social programs are paid in cash or by check. These practices have posed challenges during the pandemic, since people have to travel to receive their benefits, which often involves cash changing hands — as has been the case with more than a third of those receiving government assistance in Indonesia.

Now, more countries are using debit cards. For example, Brazil’s “Citizen Cards” operate like debit cards and can be used to withdraw funds from a government-owned bank with more than 14,000 locations and more than 30,000 ATMs.

Debit cards could also be used to a greater extent in the United States to distribute financial assistance and promote financial inclusion. A Federal Deposit Insurance Corporation (FDIC) survey found that approximately 5.4% of the U.S. population is “unbanked,” with no savings or checking accounts with a bank or credit union. The main reason, the FDIC found, was not having enough money to meet minimum account balance requirements; the second was lack of trust in banks.

Building trust, however, takes time. Our research found that only about 16% of Prospera beneficiaries started saving right away after receiving a debit card. For these beneficiaries, the apparent impediment to saving had been the cost to travel to a bank to access their money. With a debit card, which reduced the transaction costs of accessing money, they could withdraw only what was needed, which led this group to begin saving almost immediately.

For the remainder, saving took longer to catch on. Data revealed that this group would often leave only a small amount of money in their accounts. Since the debit cards reduce monitoring costs, they visited ATMs repeatedly to check their balances. When balances were unchanged over time, with no hidden fees eroding them, trust in the bank was established, and more people began to save.

A Community-Wide Benefit

Poor families were not the only ones to benefit. A second study of mine revealed a positive impact on the local community. Prior to the Prospera cards, about a third (36%) of households had debit cards; after Prospera distributed cards, this rose to more than half (54%) of households. This led to more merchants accepting debit cards for purchases, with a 20% increase in the adoption of point-of-sale technology by corner stores.

A spillover effect was to encourage other consumers with debit cards (not issued by the government) to shop locally instead of traveling to larger supermarket chains outside the community. In fact, these “richer” households shifted about 13% of their supermarket spending to local stores now that the local stores accepted debit card payments.

Lessons in Empowerment

The Prospera program carried no stipulation that beneficiaries do anything different. Even after receiving debit cards, people could have continued doing what they’d always done: go to the bank and withdraw their money.

Further, no one can tell people to trust a bank, any more than they can tell them to start saving. Rather, these changes in behavior require empowerment and self-determination. As people experienced the benefits of having a debit card, they made their own financial decisions for themselves and their families — and saving more was one of them.

 This is an OpEd by Sean Higgins, assistant professor of finance at Kellogg School of Management at Northwestern University.