New research finds opportunity in the cashless ecosystem

Small merchants can jump-start the growth of a cashless economy in developing countries where many people currently have little access to financial services, a new report says.

The study, called “Small Merchants, Big Opportunity: The Forgotten Path to Financial Inclusion,” said small business owners represent a huge potential market. It estimated about 180 million micro merchants operate in developing countries and conduct business with more than 4.5 billion customers daily. These transactions, worth $6.5 trillion per year, are often cash-based.

Small merchants are entrepreneurs who run neighborhood kiosks, stores, restaurants, minimarkets and other enterprises. This economic sector could be an opportunity to drive the process of financial inclusion, where the poor are more able to access financial services at a cost they can afford, and enable cashless payment systems to develop and thrive in less developed parts of the world, the report said. That, in turn, would boost economic activity, create wealth and allow access to the broader world economy.

“Clearly [digital payment] transaction makes it more convenient,” said Jorge Ortega, head of financial inclusion for Latin America and the Caribbean at Visa,* during a panel discussion in Washington, D.C., on Wednesday. “[But the goal] is to bring these small merchants into the financial system so that they can open bank accounts, have savings, [and] have access to credit insurance,” he said.

Currently most small merchants prefer cash to digital payment. Less than 10 percent accept digital payments because the systems or technology involved are generally not developed to meet their needs, the report said. It mentioned an example from Peru, where a small merchant had to return her card terminal due to an inability to sustain the service fees, which cost her 5 percent of sales.

“They are either too expensive or come with benefits that small merchants find too expensive,” said Joe Dougherty, a partner at Dalberg Advisors, who led the study of the report. Poor infrastructure and lack of technological know-how are also hindrances to greater use of digital payments.

The report, which was commissioned by Visa and authored by Dalberg Global Advisors and the Global Development Incubator, sees a potential for growth in the small business sector in the developing world.

It believes small merchants are “opportunistic entrepreneurs” who have the potential to drive their local economy’s transition from cash-based transactions to digital payment.

Tim Calberg, senior project manager at Dalberg Advisors, said the research studied more than 300 merchants and 75 key financial stakeholders in emerging markets. It concluded many small merchants were ready to accept digital payment systems because they are young, educated and tech-savvy. But they operate with thin margins and don’t have enough disposable income to invest or give away for things such as transaction fees. It recommended financial service providers directly target this underserved market by improving existing products and innovating new ones.

Here are five key takeaways from a discussion of the report that focused on how financial service providers can leverage on the opportunities that small merchants bring:

1. Create a customer friendly policy.

Financial service providers should work with government regulators to ensure that policies are designed to incentivize merchants to embrace digital payments, instead of excluding them.

Calberg cited the example of how “mobile money,” which lacks strict regulations, has been successful in some countries because it met the needs of the population who had been excluded from the formal banking system for not meeting the requirement needed for opening a formal bank account. Mobile money enable customers to make payments or transfer money to family members and friends with their phones. A lot of people who were excluded from the formal sector of the economy now have access to adapted versions of traditional financial services through their mobile phones.

When policies and regulations that create barriers are removed, more people gain access to financial services.

2. Digital payment is not the end goal: greater financial inclusion is.

Digital payment systems are the gateway for advancing financial inclusion and not the goal itself.

When introducing digital payment systems to small merchants, it is important for financial service providers to emphasize other services that would be of benefit to them. Such services include microcredit, microsaving and microinsurance.

Training opportunities focused on financial literacy should also be made available at the grassroots to help these merchants and their customers grasp the full potential of digital payment system. This will eventually encourage cashless payment systems to spread among customers within their communities.  

3. Companies — digital and financial — should collaborate more.

At the time that the research for this report was conducted, more than 80 percent of payment transaction was still cash-based at the point of sale in most communities. This provides an opportunity so large that digital payment companies can collaborate and create different products t meet the needs of these micromerchants.

“Opportunity is so high that I don’t mind collaborating with the competitors,” Ortega said. Visa is open to seeking more ways to collaborate with others and share its network to proffer solutions that would increase the access small merchants have to financial services, he said.

4. Simplify products and make them affordable.

As companies develop new products for the market, it is important for it not to be forced on the merchants.

Digital payment products should be developed in a coordinated effort that would ensure the recipients can access it easily and in a cost effective way, said Shailee Adinolfi, the technical adviser on digital finance services at FHI 360, a New York-based nonprofit development group with operations around the globe.

The products should be designed to serve the needs of small merchants in a way that current products in the market do not. Adinolfi also suggested merchants should be engaged during the product development process.

5. Open the financial sector to new players.

The financial sector in most developing countries is heavily dominated by commercial banks that are not suited to serve poorer segments of society, Dougherty said. To unlock the opportunities in that underserved sector, it is important to open the market up to other types of financial services operations. That will then make it easier for customers from low incomes to open bank accounts and for small merchants to get business licenses that would enable them open business accounts.

“Allowing … nontraditional financial service providers into the market will spread the innovation that is required to get new products out there,” said Dougherty.

* Update, Nov. 6, 2016: This article has been updated to attribute this quote to Jorge Ortega.

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