Every day, hundreds of millions of payment transactions are completed across the African continent. This is done using myriad technologies, including cards, mobile money and digital payments. Most, however, are cash. Each of these competitive payments tries to dominate and defeat cash, with a copied “winner takes all” payment offerings for consumers, but which payment type can promote financial inclusion most effectively and thus grow economies and jobs?
Given the success of mobile payments in Africa over the past decade or so, you may be surprised to learn that this is not the technology that is likely to be the game changer for meaningful financial inclusion for the informal productive economy. The best hope for financial inclusion and growth on the continent is rather a digital payment platform that is merchant-centric, and that benefits artisans, SMEs and smallholder farmers. A payment that empowers the productive economy.
Cash and mobile money
At present cash is still king in many African countries. According to one report, cash is more than 50% of the transaction value in South Africa. This is despite the fact that South Africa has one of the most mature banking and payment facilities and the deepest card penetration on the continent.
Despite the growth in digital payments, cash is not going away. In fact, a report by The Currency Association shows that the value of cash in circulation gradually grew between 2008 and 2017 in six major African countries.
This is understandable. Cash is easy to understand. Cash is trusted. You hand over a set amount and get the goods or services you want. It is also so culturally entrenched that there is no need to learn new behaviors or to “trust” merchants that your valuables are being exchanged for money in an account in some way.
Despite its ubiquity and the most established current payment, there are serious disadvantages to cash.
Cash is expensive and does not provide the digital transparency that financial institutions need to provide small merchants with useful products and services. Cash that is taken up in a business and then goes out again leaves no trace of it ever being there, at least to the bank that is trying to serve the business. It is inherently opaque, making it difficult for the bank to understand a business. This opacity effect does not include small businesses and those working in the informal sector, not in the formal economy. Although it is considered ‘included’ for owning a transactional account, cash-based businesses involve too much cost and risk to pay for financial services and credit at a higher value.
Mobile money raises similar issues and introduces consumer fees which is also a major barrier to financial inclusion, especially if the P2P payment is made on a third party platform. One of the biggest disadvantages is the peer-to-peer (P2P) nature of mobile money payments (like cash, going in and out of a business without the transaction being recorded). A merchant can spend or deposit cash and P2P payments anywhere. This is convenient, but the flow of payments can not be seen or predicted and therefore can not be pledged. This leaves the business as unobstructed outside of a low-value fee-based transaction service.
The power of digital payments
Digital payments provide a record in data that forms the basis of a formal banking relationship. This is why the normal merchant-oriented payments, where a customer hands over credentials to a merchant and authorizes the merchant to “withdraw” the payment from the consumer’s account, should be the norm.
This capability is provided to a merchant by an ‘acquiring bank’, which ensures that payment will be received from the bank’s account at the bank. Because the payment cannot be diverted, it is a reliable indicator of the business’ cash flow. These payments can be controlled and used to guarantee a loan, to collect premiums, to set aside savings for pensions and investments, or for wage services. This should be the focus when it comes to financial inclusion for the productive and informal economy in Africa: the use of a digital payment as a gateway to higher value financial services.
For merchants, there should be a much greater benefit to accepting a digital payment for a fee than simply moving away from cash. The exponentially greater benefit comes in the form of a formal relationship with an acquiring bank and the financial services associated with becoming a banking industry. There are many incidental benefits of any good digital payment platform, including contactless payments, instant cleaning and payment of bills. A little consumer convenience is not enough. The consumer and the merchant must have the digital payment.
Trade-oriented payments offer consumer and merchant benefits such as loyalty schemes, but only this type of payment can provide the digital transparency and reliability needed to deepen a business relationship with an acquiring bank where the real value can be realized.
Much has been said about Africa’s potential, but if the potential is to be unlocked, small, medium and micro enterprises (SMMES) must have access to the same kind of formal financial services that large enterprises have access to. Digital mobile merchant payments are a gateway to meaningful financial inclusion for the informal sector. Whoever gets it right must make a real contribution.
By Murray Gardiner
The author is the managing director, Bluecode Africa