Every year, micro, small and medium sized enterprises (MSMEs) accept over $19 trillion in cash payments globally. The opportunity to digitize these payments and earn fees is quite significant.
MSMEs are at the forefront of providing goods and services to consumers. They are also economically important, employing between 60% and 70% of the global population. There are about 100 million MSMEs in Africa, with 42 million in Nigeria alone, and consumer payments on the continent are expected to top $2.1 trillion by 2025. Given that only about 5% of these transactions are currently digitized, banks, Fintech firms, mobile money operators are building innovative solutions to capture this payment opportunity.
Yet the question remains – which entity will solve the fundamental challenges small businesses have with payments on the continent?
Financial institutions and regulators have an incentive to digitize transactions because it costs countries up to 1.5% of GDP to print, distribute and replace bank notes annually. Yet, the digital infrastructure required to make cashless work is often unstable. At the point of sale, paying with cash is often the easier choice for consumers. Paying with cash is a habit with hidden costs; it is accepted everywhere, does not require equipment to process and is usually a faster transaction than other forms of payment.
On the contrary, digital payment solutions often require special hardware to process, have a visible cost to the merchant, are not accepted by all merchants or consumers and are often slow and complicated to use. So, convincing African consumers and merchants to switch from cash to digital payments is an uphill task.
All hope is not lost, though. The COVID-19 pandemic accelerated the adoption of digital payments across the globe. For example, in Nigeria (Africa’s largest economy), the Nigerian Inter-Bank Settlement System reported that the country experienced an 88% year-on-year growth in electronic payments in Q1 2021. The payments amounted to $155 billion USD. POS collections were up 48% while mobile payments surged by 189%, evidence that consumers are increasingly using digital channels for payments.
While different firms pursue the transaction fee opportunity available from digitizing consumer to business payments, the value of data may be the larger prize. New products and services such as merchant cash advances can be created by payment providers or their partners given access to the data. In South Africa, Lulalend, a local Fintech company, uses AI-driven scoring technology to approve SME funding. The treasure trove of transaction data captured using digital payment solutions could be quite valuable.
Payment solutions need to be better and more compelling than cash, with value added services so good that merchants are willing to pay for them. Small and medium sized enterprises have business intelligence challenges such as accounting, sales tracking and forecasting. They seek to strengthen and manage customer relationships with CRM solutions, store credit and promotions and they struggle with raising working capital and value chain financing, while managing inventory. A payment solution provider that helps solve some of these problems for merchants should have an advantage over the chief competitor, cash.
Building the required scale on both consumer and merchant sides to achieve critical mass for adoption is no small feat. Consumers will not buy into a digital payment solution accepted by only a few merchants and the provider will not see much uptake from retailers until there is a large consumer base demanding the payment method.
Regulators have a key role to play here as they push for a cashless economy and establish national standards that encourage interoperability. For example, Ghana and more recently Nigeria have implemented universal QR solutions facilitating transactions between all banks in the respective countries. These moves are encouraging as merchant acquiring is very resource intensive since the solution needs to be pitched to and accepted by businesses and merchants are onboarded one at a time.
In China, where QR payments are ubiquitous, the key players Alipay and WeChat invested heavily on both the issuing and acquiring side to make this a reality. To be sure, China is a single market with one regulator and African regulators could benefit from accelerating integration through the Africa Continental Free Trade Agreement (AfCFTA). The key to achieving scale for Africa payment providers lies in interoperability, starting nationally and expanding across the region to simplify cross-border commerce. The implementation of the AfCFTA broadens the opportunity for merchant payments.
A successful merchant payment solution needs a business model that does not rely strictly on transaction fees to earn its revenues. High fees are a disincentive to transactions via that channel. A large retailer can absorb fees due to the volumes it processes but MSMEs need to pass the costs on directly to customers.
A working mum in Bamako who is at the checkout counter at a local supermarket and is asked to pay an additional 3% to cover the merchant service fee of a POS if she plans on using a card, will quickly look for cash to complete her purchase. However, if the storeowner was getting strong value-added services from the payment provider, he might not try to pass on the fee to the customer. Additionally, if the customer received some loyalty rewards for using that channel, she is more likely to choose it.
It is doubtful that any single player will capture the African market on its own because it is large and fragmented with multiple currencies and regulators. Fintech firms are nimble and innovative with a high propensity for creating value-added solutions. With over 548 million registered mobile wallets in Africa, MoMo operators have significant scale and a deep understanding of consumer behavior. Banks tend to have strong risk management and compliance capabilities and are licensed to provide select financial services such as lending.
There are opportunities along the value chain, and the best merchant payment solutions in Africa will be a result of partnership between players. The opportunity is there for the taking.