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Humanitarian Financial Assistance – How to Reduce Risk and Improve Value

Categories : Cash and Crises, Cash is a contingency and fall-back solution
October 21, 2020
Tags : Aid, Cash and Crises, disaster recovery, Humanitarian
The benefits of humanitarian financial assistance – what the aid world calls ‘Cash & Voucher Assistance (CVA)’ – are pretty well known: Giving people cash instead of food or other forms of in-kind commodity empowers recipients to address their own priorities, reduces opportunities for corruption, and pumps money into local economies. It is, generally speaking, a much more dignified and cost-effective way of meeting beneficiary needs.
James Shepherd-Barron

Disaster Risk Management Consultant, Author, and Founder of The Aid Workers Union

This post is also available in: Spanish

But CVA programmes introduce a whole range of additional fiduciary risks for aid organisations – from a donor perspective, fiduciary risk management means that funds entrusted to an aid organisation are “not used for their intended purpose, do not realise their full value-for-money, or cannot be properly accounted for” (UK-FCDO, 2020) – which have to be integrated into programme design and negotiated with financial service providers and other partners in advance if better value-for-money is to be achieved.

If aid organisations and their donors want to improve the social utility and cost-effectiveness of their CVA programmes, they could consider applying an integrated fiduciary risk management model (See Figure 1) which includes the following cost components:

Fig. 1: The Fiduciary Risk Approach to Cash Assistance (FRACA) Model

Economies-of-Scale: As DFID one famously said in its review of the ‘one cash platform’ in Lebanon in 2016, “It doesn’t take twenty NGOs to load a pre-paid card.” In Jordan, pooled funding saw transaction costs fall from an average of 3.25% to 1.67% as a direct result of fee negotiations with issuing banks and other financial service providers being conducted collectively through a single focal point. The rapid evolution of financial technology now allows mobile money aggregators to provide for multiple donors and multiple logos while using a single platform … which means there is little reason for organisations not to collaborate.

Consolidation: Pooling financial resources shares – and therefore dilutes – fiduciary risk. It also eases the burden of complying with international counter-terror and anti-money-laundering regulations.

Advocacy: Discussions with central banks over issues connected with de-risking and regulatory compliance are taken much more seriously when multiple agencies lobby coherently and collectively through a single representative. For example, such a joined-up approach saw mobile ATMs re-introduced into Jordan’s refugee camps.

Breakage: The term is banking jargon used to describe revenue gained by financial service providers through un-redeemed money loaded onto pre-paid cards that is never claimed … in this case, by humanitarian beneficiaries. Once uploaded onto recipients’ pre-paid cards or mobile wallets, digital cash transfers represent an off-balance-sheet liability. It is assumed that once funds are uploaded they will be spent in full. But they’re not. And, unless specified otherwise in the framework partnership agreement, balances are (quite legally) retained by the FSP. Since this can amount to 5% or more of the total cash transferred, the sums involved can be substantial.

Interest: When pre-paid cards are used for the provision of cash assistance, interest accrues to the issuing bank. When corporate debit cards are used, interest accrues to the donor or partner organisation as funds are only dispersed when the card is used.

Foreign Exchange: International aid organisations rarely, if ever, challenge the bid-offer spread quoted for international money transfers, or attempt to negotiate volume discounts when converting currency locally. Local variances are also irrelevant as long as financial control protocols are followed at headquarters level. In the Yemen during the 12-month period 2017 to 2018 this led to aid agencies unnecessarily paying over $48 million in transaction fees by failing to capitalise on a floating exchange rate (CashCap, 2018).

Multiplier Effects: The recirculation of physical currency in local markets exerts economic multiplier effects that can more than double the face-value of cash assistance over its digital equivalents (ODI, 2015).

Discounting: Local goods purchased in local markets with physical currency (cash-in-hand) tend to be cheaper than those purchased through ‘restricted’ or digital mechanisms as the merchant can rebate the cost of electronic payment fees (Oxford University, 2020).

Regulatory Compliance: By law, financial service providers are obliged to conduct ‘know your customer’ (KYC) due diligence on each potential customer. Additional legal measures covering anti-terror, anti-money-laundering and data protection have also been introduced recently. In crisis situations, at least some of this process is carried out by the aid agency partner, thus saving the service provider the cost of doing so. The overall cost for commercial KYC processing ranges from $15 to $130 per background check and takes an average of 48 days (Consult Hyperion, 2019).

Cost of Customer Acquisition: Cash assistance programmes deliver new customers to the issuing bank effectively for free, thus saving them one of their biggest business costs, the cost of customer acquisition and retention. This ranges from $1,500 per customer for a large US or European bank to about $250 for a smaller bank in a lower-income country (Stratifi, 2019).

Interchange: ‘Interchange’ refers to the fee charged by the issuing bank to the acquiring bank to cover their part in the clearing and settlement process. This fee is set by the card networks, not the banks. Depending on the scale of the programme, it can be negotiated in humanitarian situations with the support of the national central bank. Long an industry secret, these fees have begun to be regulated with the result that interchange fees are beginning to come down. However, there are signs that ‘card scheme fees’ have risen in order to compensate for this reduction.

With the Fiduciary Risk Approach to Cash Assistance (FRACA) model in mind, I suggest that the following recommendations, if systematically applied at programme or country level, would help achieve better value-for-money for humanitarian financial assistance programming while at the same time reducing fiduciary risk:

  1. Hire retail finance consultants from the cash and payments industries – not commercial banks or the aid sector – when constructing business cases, negotiating framework partnership agreements, and managing fiduciary risk compliance during programme implementation.
  2. Transfer funds to beneficiary mobile wallets or pre-paid cards on a just-in-time basis.
  3. Encourage consolidated (pooled) funding at national level.
  4. Become proactive members of local Cash Working Groups and advocate collectively through the Humanitarian Coordinator.
  5. Ensure reimbursement of outstanding balances (breakage) when programmes end and include such provisions in framework partnership agreements.
  6. Where debit cards are viable, us the corporate rather than pre-paid version.
  7. Monitor local ForEx rate volatility and agree daily rates together. Ensure currency conversion uses that day’s local rate, not the interbank ‘spot’ rate quoted.
  8. Work with national central banks to ensure liquidity in money supply so that cashing-out drives local multiplier effects.
  9. Collectively negotiate KYC and Customer Acquisition rebates from issuing banks.
  10. Collectively negotiate interchange rates with card companies.

For more information on cash in crises situations, please check our Cash and Crises page.

This post is also available in: Spanish