ICTworks

I believe in the transformative power of cash assistance for refugees. It provides dignity, choice, and flexibility. But recent research from Kenya questions our usual digital payment systems and shows that we may be inadvertently reducing the impact of humanitarian aid with our technology choices.

New academic research reveals that refugees using digital cash transfers are being charged significantly more – between 16% to 30% higher – than those paying with physical cash for the same goods. This isn’t a small difference; it’s a substantial portion of already limited assistance that’s not reaching its intended beneficiaries.

Digital Cash Transfers Cost 30% More Than Cash

The World Food Programme (WFP) implemented a large-scale restricted cash transfer program in Kenya, providing monthly digital transfers worth between $3 to $13 to approximately 400,000 refugees. These transfers can only be used at licensed shops for food items – a common restriction in many humanitarian programs. In fact, nearly 29% of all humanitarian cash assistance (almost $2 billion) was provided with similar restrictions in 2020.

The problem lies in how this system has created two parallel markets. WFP issued licenses to a select number of vendors who could accept digital payments. In theory, this improved quality, increased accountability, and ensured that aid was spent on approved food items. In practice, it created a two-tiered market:

• Cash Market: Over 1,400 vendors competed to attract cash-paying customers, driving prices down for all the goods they sold.
• Digital Market: Only 252 licensed vendors could accept digital payments, giving them disproportionate market power to inflate prices by 16% to 30% over cash market vendors.

The digital payment mechanism, rather than broadening competition, restricted it. This limited competition has created what economists call market imperfections, allowing these licensed shops to charge higher prices to refugees using digital transfers.

The research shows these licensed shops are doing exceptionally well – too well, in fact. Their monthly revenues are 175% higher than unlicensed shops, and their profits are 154% higher. Monthly profits were $685 greater on average – or 39 times the average monthly food assistance received by each refugee.

While some might argue this is good for local economic development, these profits are essentially coming directly from refugee assistance funds. Refugees are left with less purchasing power, forcing them to make harder choices about food, healthcare, and other essential needs.

What makes this particularly concerning is that we’re seeing this pattern emerge in various contexts. Similar restricted digital transfer programs are used worldwide, from the SNAP program in the United States to eco-friendly purchase programs in Belgium. While these programs may work differently in developed economies with stronger market regulations, in refugee contexts with limited competition and oversight, they can lead to unintended negative consequences.

How to Improve Digital Cash Transfer Programs

Digital cash transfers make aid distribution more efficient and reduce costs. Yet, these benefits are being offset by the higher prices refugees are paying. Their success hinges on competitive markets. Unfortunately, refugee contexts rarely exhibit such competition. High transportation costs, limited vendor access, and regulatory constraints exacerbate the issue.

To mitigate these challenges, humanitarian organizations could:

1. Expand Vendor Licensing: By increasing the number of vendors eligible to accept digital payments, organizations can reduce monopolistic practices and encourage fair pricing.
2. Hybrid Payment Models: Allowing refugees to split aid between cash and digital forms can empower them to shop where prices are lower, leveraging competition in the cash market.
3. Community-Led Market Assessments: Engaging refugees in market assessments ensures that their experiences and insights shape program design, enhancing the alignment of aid models with ground realities.

The evidence from Kenya serves as a wake-up call:  The goal of digital cash transfers should be to empower refugees, not to create new systems of economic disadvantage. We must critically assess the unintended consequences of digital innovations.

The goal is not just efficiency but equity. We need aid that reaches its intended recipients, balancing innovation with vigilance, for aid systems that genuinely uplift the communities we serve.