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Biometric Smartcards Enhance Developing Countries’ Capacity to Implement Welfare Programs

Smartcards Deliver More Efficient and Less Corrupt Payments in Southeast India

October 27, 2014

According to a recent Dartmouth College – UC San Diego working paper published by the National Bureau of Economic Research, investing in secure payments infrastructure can significantly enhance a developing country's capacity to implement welfare programs. The paper presents the findings from a 2010-2012 study, which found that biometrically-authenticated payments through "Smartcards" could deliver faster, more predictable, and less corrupt payments to the beneficiaries of social welfare programs in India. The study, representing one of the largest randomized control trials ever conducted, was based on the rollout of Smartcards to 19 million people in the southeastern Indian state of Andhra Pradesh.

In the past, state-sponsored welfare programs in India and other developing countries have been constrained by corruption and inefficiencies, whereby in some cases only 15 percent of spending reached the intended beneficiaries. To combat these problems, initiatives involving electronic benefit transfers combined with biometric authentication are underway in over 80 developing countries, including India's massive "Aadhaar" program which will deliver biometric ID cards to all 1.2 billion residents. Since the Andhra Pradesh government's initial implementation in 2006, Smartcards have been used to administer payments on two major social welfare programs: the Mahatma Gandhi National Rural Employment Scheme (NREGS), which guarantees rural households 100 days of paid employment per year and is the world's largest workfare program; and Social Security Pensions (SSP), which makes monthly payments to elderly, widowed, and disabled individuals.

Smartcards introduced two major changes which helped minimize corruption and realize other benefits: 1) beneficiaries were required to biometrically authenticate their identity with their fingerprint before collecting payments; and 2) payments were delivered through a bank-employed Customer Service Provider (CSP) in each village, rather than at a more distant post office. The CSP used a small device which could read the beneficiary's fingerprint and match it with the details stored in the Smartcard, which also included the person's photograph and bank account information. If the match was successful, the payment was disbursed and a printed receipt was issued by the CSP to the beneficiary.

"The results from our study suggest that investments in state capacity can pay off even in as short a time period as two years, and are relevant for understanding the likely impacts of broader initiatives in India and the rest of the developing world," says Sandip Sukhtankar, assistant professor of economics at Dartmouth, who was one of the co-authors of the study. The other co-authors are Karthik Muralidharan, associate professor of economics and Paul Niehaus, assistant professor of economics, at University of California, San Diego. The three co-authors are also affiliated with the Abdul Latif Jameel Poverty Action Lab, which is a research center in the economics department at MIT.

Results and Policy Lessons
Researchers found that the Smartcard initiative reduced the time it took beneficiaries to receive payments, reduced leakages, and increased beneficiary satisfaction, even when the rollout of the Smartcard program was only around half complete. The following is an overview of the results:

  • Implementation: After two years, about 69 percent of villages in the first wave of the program rollout had converted to using the Smartcard-based payment system for NREGS payments (78 percent for SSP), and about 50 percent of all payments in treatment areas were made using the new system.
  • Payment time: In areas assigned to adopt the Smartcard payment system, the amount of time NREGS beneficiaries spent collecting payment fell by 21 minutes (a 19 percent reduction from 112 minutes). The system also reduced the lag between working on an NREGS project and collecting payment by about 10 days (a 29 percent reduction from 34 days). There was no significant effect on the amount of time SSP beneficiaries waited to collect their payments, although SSP beneficiaries perceived payments to be faster.
  • Leakage (i.e. theft of government disbursements): NREGS recipients in areas assigned to receive the Smartcard system reported weekly earnings that were Rupees (Rs.) 35 higher (a 24 percent increase from Rs. 146). However, there were no major impacts on the amount the government spent on the NREGS program, resulting in a 35% reduction in leakage. Similarly, SSP reported earnings went up by Rs. 12 (a 5% increase), while official disbursements did not, leading to a 49% decline in leakage.
  • In the past, leakages often ensued as beneficiaries who are illiterate often relied upon local officials to file their requests for payment; the officials would then take advantage of the program by falsely reporting the number of hours worked on NREGS and/or pocketing some of the earnings, whereby the beneficiary did not receive his or her full payment.
  • Beneficiary satisfaction: In surveys, 90 percent of NREGS beneficiaries and 93 percent of SSP beneficiaries exposed to the program preferred Smartcards to the status quo.
  • Cost effectiveness: Researchers estimated the value of the time beneficiaries spent collecting payments and found that the value of time savings to beneficiaries (US$4.3 million) was approximately the same as the cost of the new system (US$4 million) for NREGS. In addition to the pure efficiency gains from time savings, there was an estimated $32.8 million reduction in annual leakage on NREGS, and a $3.3 decline in SSP leakage (for which costs were $2.3 million).

Dartmouth Assistant Professor of Economics Sandip Sukhtankar is available to comment at sandip.sukhtankar@dartmouth.edu or 603.646.0893.

Last Updated: 9/9/15