CommentaryCan Financial Technology Innovate Benefit Distribution in Payments for Ecosystem Services and REDD+?
Introduction
Conservation science, finance, and practice continue to innovate. Conservation science is innovating: a recent special issue of Ambio on ‘digital conservation’ (van der Wal and Arts, 2015) discusses the role cell phones play in shaping human–environmental interactions. Conservation finance is innovating: greater investments from the private sector are supplementing traditional donor support, while ‘impact investing’ was identified in the latest review of emerging conservation opportunities (Sutherland et al., 2015). Conservation practice is innovating: cell phone applications are being developed that enable local communities to map their land tenure, while there is increasing application of neoliberal approaches such as Payments for Ecosystem Services (PES) (Banerjee et al., 2013, Naeem et al., 2015) and the Reducing Emissions from Deforestation and forest Degradation (REDD+) Program (Dunlop and Corbera, 2016).
Within PES and REDD+ the concept and practice of benefit distribution remains a “current”, “urgent”, “controversial”, and “debated” topic (Chapman et al., 2015, Skutsch, 2013). Acknowledging these broad trends, this commentary evaluates the potential of financial technology (FinTech) to innovate the benefit distribution process. An overview of the two conservation approaches, benefit distribution, and FinTech follows. Subsequently, PES/REDD+ benefit distribution using FinTech is conceptualized, and the overlap of PES/REDD+ schemes and FinTech penetration in different countries is explored. Finally, several considerations are discussed regarding: (1) whether removing actors from the benefit distribution chain is wise, (2) the extent to which transaction costs may be reduced, (3) additional payment options, (4) additional socioeconomic outcomes, (5) cell phone ownership and network infrastructure, and (6) the viability for FinTech companies.
Ecosystem services are the benefits that humans obtain from nature; an example is the climate change mitigation service provided by forests via carbon sequestration and storage. Payments for Ecosystem Services (PES) are voluntary transactions between ecosystem service users (buyers) and providers (sellers) that are conditional on the implementation of new rules of natural resource management (Wunder, 2015).1 PES is a versatile conservation approach that can be used in terrestrial forest, watershed, coastal, and marine settings. Large schemes orchestrated by national governments exist in several countries such as China, Costa Rica, Mexico, and Vietnam (Pascual et al., 2014). PES can also be developed locally, often by non-governmental organizations (NGOs) and/or the private sector through individual buyer-seller agreements (Banerjee et al., 2013, Wunder, 2013). PES schemes of varying scales have been established in many developing and developed countries around the world (Naeem et al., 2015). The total amount paid is often a balance of opportunity costs, transaction costs,2 ecosystem service values, and the amount buyers are willing to pay, or sellers willing to accept (Pham et al., 2016, Thompson et al., 2014, Vatn et al., 2014).
REDD+ is a global initiative that financially incentivizes land users (sellers) to reduce carbon and methane emissions from their land (e.g. through reducing deforestation or increasing forest restoration), thereby mitigating climate change (Dunlop and Corbera, 2016). Developed nations make financial contributions to developing nations, which then implement schemes internally. REDD+ schemes can be challenging to administer due to their large scale, and may remain as pilots (Vijge et al., 2016). REDD+ activities can be managed at the national level, with several countries developing policies and capacity to implement the program such as Brazil, Indonesia, Madagascar, Nepal, Papua New Guinea, Peru, Tanzania, and Vietnam (Poudyal et al., 2016, Vijge et al., 2016). There are also numerous examples of project-scale REDD+ schemes at the sub-national level (Chapman et al., 2015). A crucial consideration for successful PES and REDD+ implementation is the ‘benefit distribution mechanism’ (BDM) (Dunlop and Corbera, 2016, Enright et al., 2012, Pascual et al., 2014, Skutsch, 2013, Zabel et al., 2014).
Benefit distribution3 is the process of disseminating monetary and non-monetary (in-kind) incentives to sellers - typically local communities that alter their land management practices and require compensation for lost revenue (Pascual et al., 2014). The BDM should be effective at producing desired environmental outcomes, economically efficient, and socially equitable (Pham et al., 2013). BDMs can appear in many configurations, and are based on several key considerations including the type, recipients, timing, conditionality, and directness of payment. This could also be termed the what, who, when, why, and how, of benefit distribution (Table 1).
Benefit distribution faces challenges such as corruption, illegitimacy of recipients, and elite capture by intermediaries, government officials, and community leaders (Khatun et al., 2015, Pascual et al., 2014, Pham et al., 2013). High transaction costs can also be incurred either ex-ante through site and stakeholder identification, baseline assessments, and initial contract negotiations, or ex-post through travel time, transport and labour for disbursing payments, as well as monitoring, auditing, and enforcing the process (Banerjee et al., 2016, Cacho et al., 2013, Enright et al., 2012). There can be many actors involved in the payment distribution chain from buyer to seller and some, or all, of these will take a commission. As such, establishing rules of how such funds are to be divided between these different parties to the process, and the final recipients, is of great importance. High transaction costs can ultimately lead to lower PES uptake and performance (Banerjee et al., 2016).
The spatial scale of implementation will greatly affect the BDM of choice (Chapman et al., 2015). Geography has traditionally been a barrier for financial inclusion (Shrier et al., 2016), especially in the context of REDD+ (Poudyal et al., 2016). Likewise, Wunder et al. (2008) notes that working with PES sellers is, “particularly complex logistically (and accounts for the bulk of transaction costs in a working program), as there are usually many sellers dispersed over the landscape”. Involving village hamlets and women in schemes can be particularly difficult due to the spatial distribution of settlements and cultural norms, respectively (Khatun et al., 2015). Despite being a critical stage in PES/REDD+, descriptions of BDMs are often vague (Skutsch, 2013). In all five countries investigated, Dunlop and Corbera (2016) found insufficiently detailed REDD+ fund distribution plans, which, “casts doubt on their ability to distribute finances effectively and equitably, especially at the local level”. Clearly, there is space for financial innovation to create new opportunities for benefit distribution in PES and REDD+.
Financial Technology (FinTech) is the innovation and application of new technology that makes financial services and processes more efficient. Some two billion people are ‘unbanked’ worldwide, and FinTech aims to promote financial inclusion – especially among the world's poor – by enabling payments and savings to be made without the need for hard cash or a bank account (GSMA, 2017).
One major FinTech is ‘mobile money’.4 At least 277 mobile money platforms/services have been launched worldwide, with a cumulative 556 million registered mobile money accounts (GSMA, 2017). Mobile money can be used for airtime purchases, bill payments, wage payments, and sending money to relatives – and its use is increasing (Garrity, 2015, Shrier et al., 2016). Mobile money has also helped disaster relief efforts by enabling marginal populations to receive financial aid (Garrity, 2015). It can also increase financial resilience to personal shocks (such as health problems and job loss) by facilitating access to microcredit and micro-insurance – for example, the Prospera welfare program in Mexico, and the Kilimo micro-insurance plans in Rwanda.
Financial transfers are made via secure coded text messages, and electronic money can be stored in an electronic account, transferred, or withdrawn as cash. In 2012 there were more mobile money accounts than traditional bank accounts in several southeast African countries, partly due to the success of Safaricom's M-Pesa (Fig. 1). In their recent paper published in Science, Suri and Jack (2016) estimated that M-Pesa has lifted 194,000 households (2% of Kenyan households) out of poverty. While Smartphone apps are available, many basic phones are also adequate for executing simple financial operations. The mobile money service provider is usually a mobile network operator (MNO) acting alone or in partnership with a bank. Cashing-in and cashing-out relies on ‘agent banking’, which allows nonbank institutions such as small retail shops to act as mini bank branches (Donovan, 2012). Across developing countries there are almost twice as many ‘mobile money agents’ as ATMs (GSMA, 2016). Charging a commission (typically < 2% of the transacted amount) is necessary for the financial sustainability of mobile payment companies and their agents. Mobile money platforms lower costs for senders and recipients of payments, increase access to banking systems, and improve the privacy, transparency, traceability, and security of financial transactions (GSMA, 2017, Shrier et al., 2016).
Section snippets
Conceptualisation
A FinTech approach to PES/REDD+ benefit distribution would require each individual participant or household to register a phone (and its associated mobile money account) with the scheme implementers (typically an NGO or government agency). Upon verification of project activities or outcomes, the buyers can then sanction bulk transactions to each account registered with the project. Recipients would have the options of saving, paying bills, or cashing-out at a local mobile money agent. Multiple
Application Overlap
Using mobile money for PES and REDD+ will be feasible only in locations where usage of these applications overlap.6 While REDD+ is
Considerations for FinTech in PES and REDD+
This section discusses the possible advantages and drawbacks that mobile payments can bring to PES and REDD+ projects. Since this article marks the first pairing of PES/REDD+ and FinTech, it is important to assert that the latter should not be viewed as a ‘technological fix’, and comes with its own risks and limitations.
Conclusions
This paper introduces financial technology as a novel option for enhancing benefit distribution in PES and REDD+ schemes. FinTech could facilitate higher payment frequencies, help tailor payment amounts to individual participation levels, and greatly reduce the number of middlemen that monies must pass through to get from ecosystem service buyer to seller. While the latter could conceivably reduce elite capture, corruption, and high commissions charged by project intermediaries, there are risks
Acknowledgements
I am grateful to three anonymous reviewers for making insightful suggestions that have strengthened this manuscript. This work was conducted under a President's Graduate Fellowship from the National University of Singapore.
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