Viewpoint: The Missing Link for Mobile Payments
Over the past several years, my colleagues and I at Glenbrook have been working on a variety of projects focused on bringing low-cost financial services to the poor in developing countries. While there has been a lot written on how mobile or e-money payments systems such as M-PESA in Kenya have grown in many developing countries—and how they’ve brought much-needed electronic payments to the poor and underserved—there’s a critical missing piece that demands attention.
Specifically, few are talking about the criticality of merchant acceptance of e-money payments. We believe that the lack of widespread acceptance has inhibited growth in these systems and remains a road block to “digital liquidity” in even the more successful of implementations.
Without exception in the developing world, the vast majority of transactions in mobile payment systems are person-to-person (P2P). That’s fine because poor people derive meaningful benefits from the shift of cash to mobile transactions. Those benefits include reducing the theft risk of carrying cash and the efficiency of being able to send money to someone without losing half a day of work to travel across town. For someone able to afford it, the mobile e-money service also can provide a safe place to store value, even though few poor people have the luxury of idle balances in their mobile money accounts.
However, since most merchants don’t accept e-money as payment, their customers must “cash out” their mobile monies in order to spend, a relatively expensive conversion. Those cash-out costs work against the goal of providing low-cost payment services to the poor.
Moving toward Digital Liquidity
We are fortunate to be part of an ongoing working group on digital financial services at the ITU, the United Nations agency for information and communication technologies. One of our working group’s findings is that “digital liquidity” and the associated network effect are critical to the overall goals and growth of any electronic payment system. Keeping electronic money “in the system” creates transaction volume and velocity that keep costs low. That’s true not just within the processing system itself but also when calculating the “all in” costs of cash-out conversions. In short, digital liquidity reduces the expense of cash-out services.
A shift to fully electronic commerce to achieve those savings won’t be easy. Based on our experience in these developing economies, and affirmed by numerous studies, we’ve concluded that there isn’t an easy solution to e-money merchant acceptance.
While each merchant has its priorities—and many complain about the cost of accepting electronic transactions—merchants in developed markets also realize that electronic payment acceptance produces incremental sales. And that they risk losing sales if they don’t accept electronic payments. Incremental sales are driven by the expanded purchasing power made available by credit-based products and services, sales that would not have been made had customer spending been limited to the cash in their pockets. Other merchants understand they could lose sales to competitors if they don’t accept the customer’s preferred payment method (think rewards cards). And of course, merchants selling to online buyers rely almost entirely on electronic payments.
To merchants in the developing world these benefits aren’t compelling—neither for small sellers (who may be poor themselves) or larger ones—for a range of reasons:
- Their consumers are largely unbanked and don’t have access to credit products
- Cash is the traditional payment method. Everyone is used to it.
- There aren’t enough merchants accepting e-money to worry about lost sales to competitors.
- E-money transactions are viewed as costly to accept.
- Merchants usually incur costs of cashing out themselves since there isn’t a robust B2B ecosystem in place, i.e., for supplier payments. The alternative costs of transferring funds from mobile operators’ e-money systems to a traditional bank account—if the option is even available—are high
- Remote commerce, our online or mobile commerce model, doesn’t exist or isn’t on the radar screen.
- It costs a lot of money to develop a merchant ecosystem with uncertain economics.
- Merchants may be concerned that revenues would be visible to tax authorities.
- Many merchants would have to buy equipment dedicated to e-money acceptance, such as a dedicated phone for the store or at each checkout till.
It’s a tough problem, so where do we go from here? Is there hope?
I believe it’s critical that e-money systems develop a robust merchant business. I also believe it’s achievable if done right. But it’s important to understand that, while merchants will pay to garner new customers or generate more visits and revenue from existing customers, there isn’t a single factor that in itself will be sufficiently compelling to drive merchant adoption. In my opinion, success will be driven by a combination of factors:
- Credit History Development. By accepting e-money payments, merchants can create a digital history that enables prospective lenders to extend all-important working capital and other forms of credit to merchants. Recognizing that traditional credit bureaus simply don’t exist in most of the developing world, coupled with the fact that many small merchants don’t have access to credit, we’re starting to see an explosion in alternative credit decisioning, of which e-money transaction history is an important factor. In addition, some lenders could be more likely to extend credit given access to an electronic settlement stream they could tap into for regular or ad hoc loan repayments.
- Contextual E-Commerce. The notion of remote payments is hitting more and more radar screens and it doesn’t need to look like traditional developed-world Web and app-based e-commerce. Remote transactions for low-income customers could be a merchant taking payment for goods now that will be picked up or delivered later.
- Merchant-Provided Credit. Merchants could increase sales by extending small amounts of credit to their own customers, knowing that repayment isn’t necessarily tied to when the customer happens to next visit the store.
- Embedded Payments. As in the developed world, payments eventually will become an embedded part of commercial or community relationships, providing benefits to payment acceptors.
- Cash Reduction. Reduction of cash on hand to reduce theft-and-loss risk.
- Light Regulation. Government entities are viewing a robust e-money system as a priority, often under the financial inclusion umbrella. Relaxed or grandfathered tax policies could go a long way in the critical early years of building a robust merchant ecosystem.
- Social Messaging and Payments. Social networks with commerce-enabling capabilities using e-money are turning toward the developing world and could quite conceivably enable merchants of all sizes.
- Broad Payment Method Acceptance. There’s increasing focus on the notion of interoperability at the payment acceptor level, the ability to accept multiple forms of electronic payment. Open payment platforms based on standards, APIs, etc., are key components to not only help achieve digital liquidity but also to help ensure payments providers compete on price and innovation.
- System Interoperability. Some e-money players are increasingly open to cooperating—pursuing the notion of working together to bring up a merchant business by sharing the cost of some non-strategic functions, creating merchant joint ventures, etc. The network effect could build ubiquity, benefiting all participants in the ecosystem.
My colleagues at Glenbrook and I will continue to participate in many developing world projects, helping to bring affordable financial services to the people and businesses at the bottom of the pyramid. We do this with incredible optimism and enthusiasm. It doesn’t get much better than this for payments geeks like us.
Allen Weinberg has more than 30 years of experience as a consultant and executive at leading financial services and Internet companies. Before co-founding Glenbrook, he worked in new product development, channel strategies and pricing in the point-of-sale, e-commerce, mobile commerce and money transfer markets. He can be reached at firstname.lastname@example.org.
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