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The banking sector in Kenya after The Banking (Amendment) Act 2016: A review of the impact of interest capping on access to finance

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In Kenya, interest rates have historically been driven either by the market or through regulation by various amendments of the Banking Act. The weighted interest rates of commercial banks hit an all-time high over the past two decades between 1995 and 1998, averaging between 25.03% and 29.49%. During this period, commercial banks had started to diversify into the low-income segment. This segment had been considered riskier and less lucrative because of low-value transactions and, therefore, considered a preserve of microfinance institutions. The year 2004 marked the time when commercial banks in Kenya offered the lowest lending rates in recent times, an average of 12.53%. Over the next 10 years, the weighted average rates in the banking industry increased steadily and pushed towards capping the interest rates constitutionally.

Below is a snapshot of the weighted interest rates trends for the commercial banks in Kenya for the years 1995 to 2016.

In 2001, a bill was passed by parliament which introduced lending rates caps at 4% above the 91-day T-bill and deposit rates at 4% below the 91-day T-bill. Popularly known as the “Donde Bill”, banks contested it in court and the bill was reversed even after the then President had accented to it. The second attempt to cap interest rates came in 2013, where Kenya’s Parliamentary Budget Office proposed that the deposit rates be pegged to the lending rates. This too did not succeed. The two bills failed, based on the government’s preference for free-market interest rates as opposed to caps. The Central Bank of Kenya also asked banks to self-regulate and to take measures that would reduce the cost of credit—to no avail.

In a further attempt to have the banks lower their lending rates and enhance transparency in credit to the private sector, Central Bank of Kenya (CBK) introduced the Kenya Banks Reference Rate (KBRR) in July, 2014. The KBRR sought to have banks disclose and explain to their borrowing clients the effective base lending rate and any additional premium above the base rate. When it was introduced, the KBRR was set at 9.13% with a review to come after every six months. On 14th January 2015, CBK conducted a review and the KBRR was further reduced to 8.54%. However, lending rates from banks did not reduce.

Ultimately, in mid-September 2016, following various campaigns by legislators to revive the Donde Bill, CBK introduced interest rate caps through the Banking (Amendment) Act 2016. The act limits banks from charging more than 4% above the Central Bank lending rate, while the deposits attract a minimum of 7% on the benchmark. As at 28th May 2018, CBK had set its benchmark interest rate at 9.5%.

The drive towards the capping of interest rates was meant to stop arbitrary hikes in the lending interest rates, make credit more affordable, and hence promote access to credit to the private sector. Through this intervention, it was envisaged by CBK that the reduction in rate would spur economic growth and lead to the creation of more jobs while ensuring that the operations of the banks remain sustainable. An assessment of the profitability of commercial banks in East Africa countries shows that Kenyan banks were the most profitable over the period between 2012 and 2015.

The growth of credit to the private sector registered a decline during the first nine months of the year 2017, while


credit to the government registered a huge growth as shown in figure 1. The decline in credit to the private sector was attributed to the uncertainty around the elections period as well as the stringent loan requirements following the interest rate cap. There was an increased appetite by the banks to lend to the government because of the inherent minimal risk—hence the huge growth registered in 2017.

It has now been over one and a half years since the interest rate cap came into being. Borrowers now repay loans at a maximum of 14% per annum while depositors earn a higher interest rate on their deposits. This is also true for loan contracts made before the law was passed. However, the Kenya Bankers Association’s economic bulletin of Q3 2017 shows that non-performing loans (NPLs) have continued to soar. Between the second and third quarter of 2017 alone, the gross NPLs increased by 6%. Because of the small-ticket loans from digital credit, these did not have much impact on the overall NPLs in the banking sector. The NPLs were generally attributed to the harsh business environment in the country. Figure 2 shows the trend of NPLs since the year 2011.

 

There have been specific impacts and outcomes in the Kenya banking sector since the enactment of the Banking Amendment Act 2016. Key among them are:
• Conversion of savings accounts into transactional accounts by commercial banks, which allows them to avoid paying interest
• An increased focus on digital lending models—Equity Bank, Co-operative Bank, and KCB have been disbursing small loans using digital channels; digital loans are usually priced higher than the cap
• An increased focus on digital channels with banks, such as Bank of Africa closing down some of its brick-and-mortar channels
• Tightened loan requirements to mitigate default risks previously covered by higher interest rates—Loan requirements have become more stringent, particularly for entrepreneurs that do not have immovable collateral to secure loans
• A decline in consumer lending, as the segment has now been profiled as “risky”, following the caps
• Increased fees, such as loan processing fees to mitigate declining income from loans
• Increased demand for credit from SACCOs, MFI, MFBs, and informal financial lenders—while the interest margins for these lenders are quite exorbitant, they do offer stress-free collateral requirements compared to commercial banks.

What is next for the banking industry and the borrowers?

The strategic changes made by commercial banks to comply with the interest rate caps and the protracted disputed election of 2017 have had an adverse effect on the Kenyan economy. Profitability for the commercial banking sector in 2017 slowed down compared to 2016. The table below shows the profitability of banks in Kenya over 2016 and 2017.

In addition, the enforcement of the International Financial Reporting Standard (IFRS) #9, which took effect on 1st January, 2018, has triggered a preference for shorter loan tenures and relatively smaller loans to reduce the risk of default among borrowers whose credit rating is low. With all these in mind, banks are likely to be even more stringent in lending to minimize default. Access to finance, especially for entrepreneurs, is likely to be even more difficult.
The question is—where do these dynamics place the borrowers? If they wish to access loans easily in the future, borrowers need to have a good repayment record. Borrowers may need to be educated and sensitized on these developments to promote awareness and thus improve their loan repayment discipline.

Applying more stringent loan requirements means a reduction in lending, which may lead to reduced profitability. For the borrowers, a reduction in access to credit may further slowdown wealth creation and thus slow economic growth.

Banks have been pushing for the act to be repealed since its enactment. IMF has also supported the proposal to repeal the act. During the 2018-2019 annual budget speech, the Cabinet Secretary to the National Treasury proposed a repeal of the Interest Cap Act, citing its adverse effects on financial access and economic growth. Kenya has already witnessed a reduction in credit growth to the private sector from 13.5% in 2016 to 2.8% in April, 2018.

On 14th March 2019, the high court of Kenya ruled that the law that caps interest rates at 4% above the Central Bank rate is unconstitutional. However, a 12-months’ window has been provided from the date of the ruling for the parliament to reconsider the provisions of the act. Given this ruling, consumers of credit, that is, the private sector, are not sure whether interest rates will increase once again to previous levels where credit affordability was a burden. Meanwhile, the question remains—which is the better option for credit consumers, the financial sector, and other stakeholders?

How much has changed in just 20 years – Part 1

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In 1998, microcredit organizations, optimistically called microfinance institutions or MFIs, dominated the market. They offered standardized working capital loan products, repayable in weekly instalments. Any savings options were typically limited to “compulsory savings” that were locked in until the client, often referred to as “the member”, left the organization. Unsurprisingly, many clients left just to liquidate their compulsory savings balances.

So what has changed?

  1. From microcredit to microfinance to financial inclusion to financial health              

Over the past two decades, we have seen a change in the terms that are used to describe the industry and its objectives.Cynics would argue that this reflects the body of research that highlights that microcredit has little impact on the income of participating households. However, the evolution of these terms is both important and positive. While there was too much conflation of microcredit and microfinance, the latter term was important. As a term, “microcredit” reflects a recognition that low-income households need access to a range of financial services and not just mono-product working capital credit. The use of financial inclusion as an objective recognized that low-income households should be able to participate in formal financial systems instead of being stranded in the higher risk informal sector.

It is, however, the recent move to assess the success of the industry based on clients’ “financial health” that is most important. The shift reflects the importance of the outcomes rather than the output. These outcomes include savings that are set aside and available for the household to use to respond to emergencies or opportunities. The outputs in this context are the ownership of a savings account or a mobile money wallet—whether dormant or not.

A recent Gallup study for MetLife Foundation concluded, “The relationship between account ownership and perceived financial control is weak at best.” Access to a bank account is not useful by itself, particularly if the customer does not fully trust either the formal, or the digital financial system, or distrusts both. We need to design and deliver financial services that poor people want and can use to manage their money better. We will need to use fintech front-ends to offer these in a way that both corresponds to and aligns with their mental models.

Moreover, we need these financial services to integrate with the real economy and facilitate participation in it, so that people are not just financially—but also socially and economically included. The digital revolution provides the opportunity to do this.

 2. From analog to digital

In 2005, after recognizing the potential of digital financial services in the seminal Electronic Banking for the Poor – Panacea, Potential and Pitfalls, MicroSave was working with Safaricom, Commercial Bank of Africa, and Consult Hyperion on M-PESA. Although GCash and SMART had started earlier, this was the beginning of the digital revolution—and the move from analog to digital. It is difficult to overstate the importance of this move and its profound implications.

Not only did the move offer a completely new range of opportunities to reduce the costs of delivering financial services to the mass market, but it also promised a new era of access for low-income households. The move to digital opened up new business models that required volume and scale if they were to achieve profitability. Furthermore, these business models require deep pockets to finance the infrastructure required to deliver the services. As a result, a range of new players, specifically mobile network operators (MNOs) and big banks began to deliver the services—as far as regulation and their boards would allow them.

Unsurprisingly, MNOs led the charge. Only recently have we seen a significant number of banks begin to respond and recognize the potential of the digital revolution to serve the mass market. Unless they serve niche and remote markets, traditional MFIs are essentially left with a choice to “adapt or die”. Some, but not all, are now reacting accordingly.

This massive change in the market not only affected financial institutions, but it also transformed the nature of the consulting market in which MicroSave operated. Small and medium consulting companies like MicroSave were used to competing with peers. We served and supported the growth and refinement of the strategy and operations for MFIs. With the arrival of MNOs and large banks, we found ourselves with an entirely new set of competitors. We were going head to head with the consultants that had served these large corporations for years—the big 4 accounting firms, along with McKinsey, Boston Consulting Group, and Bain.

3. Digital services and the real-world economy

The move to digital has allowed us to start to answer the all-too-often unasked question— “financial inclusion for what?” with much more credibility. Until only a few years ago, it was assumed that providing people access to formal financial services was valuable by itself—that they would use these services to manage their household budgets more effectively and reduce the risk inherent in informal approaches to storing and managing money. The good news is that people now question that assumption and look for ways to design tools, services, and even apps that help low-income houses meet their needs in the real-world economy. So, how can they finance farm inputs, education expenses, housing, old age, emergencies, among other expenses?

This is not new, but has become a lot more explicit and baked into the design of projects to support financial service providers. However, the digital revolution allows us to take this one stage further to support and finance people’s activities in the real world economy. As a result, there is a growing array of approaches to digitizing agricultural value chains, which include a range of inputs as well as post-harvest marketing with “precision farming”, as well as extension or advice. There are also efforts not just to digitize schools fees but the education process itself. Similarly, digitizing healthcare and remote advisory systems are becoming increasingly advanced.

While many of these are still either small in scale or are controversial, or both, they represent tremendously exciting advances in approaches to complement plain vanilla financial services and to build services that add real value to efforts to reduce poverty and vulnerability.

All that said, in our love affair with all things digital we risk losing sight of the rapidly emerging digital divide. As we roll out a range of empowering and engaging tech solutions for those with access to 3G+ coverage and smartphones, we could leave women and remote, poorer communities even further behind than they already are. This issue requires both better articulation and deeper thought. It appears that the digital divide is being wilfully ignored amid the excitement of the potential of the digital revolution to change lives for the better—for those able to access it.

In the next blog in this series, I will take a hard and critical look at the influences of Silicon Valley, the rise of foundations, and the evolution of the role of traditional multilateral and bilateral donor agencies.

How much has changed in just 20 years – Part 2

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In the previous blog, we looked at the evolution of the industry from microcredit to financial health, from analog to digital and the opportunity to link digital financial services to the real world economy. .

4. The influence of Silicon Valley

The digital revolution has resulted in an unquestioning veneration of almost anything that emerges from Silicon Valley. Diligent market research has been replaced with rapid human-centered design (HCD) exercises that use a handful of interviews to derive insights and build product concepts for rapid iteration. It seems a long time since I was berated roundly for suggesting that product development needed a qualitative rather than a quantitative approach to understanding customers’ needs.

Form over substance

Core to HCD and design thinking is the production of breathtakingly beautiful reports. MicroSave helped one design firm conduct 18 individual interviews, based on which it went away and developed 12 product concepts wrapped in a most extraordinarily engaging and exquisitely presented report. The development and production of the report took a full 50% of the days allocated for the project. The donor was deeply impressed. The financial services provider was deeply impressed. That is, until two weeks later, when MicroSave got a call asking, “What do we do with this report?” To which the answer was “Conduct more research to narrow down the options to three or four and then test them on an iterative basis”.

In a more recent collaboration, the HCD firm flew into India from the US with a series of preconceived ideas and then spent a few days and 13 individual interviews to find and photograph or shoot video evidence to corroborate them. The result was a tremendously impressive web-based report full of emptiness.

“Pivoting”, which involves having to rework a solution completely, seems to be seen as a badge of honor rather than an indication that the solution was built on inadequate research—of both demand- and supply-side issues). It is not coincidental that so many HCD-informed projects flounder on the rocks of supply-side reality and do not progress beyond the pilot stage.

Similarly, there is an almost religious belief in labs and fintech as the way, the truth, and the light. They are viewed as the solution to all the challenges we face as we seek to provide meaningful financial services to the 2 billion people who remain unbanked.

Winners and losers in the global app economy

“In the international development community we have been hugely excited by the potential of the app economy for the past five years or so, and there have been many app training programmes, app competitions, coding boot camps and articles about how places like Nairobi have become a ‘Silicon Savannah’. But we are aware that app platforms, although ostensibly neutral and meritocratic, are far from level playing fields, and the brutal Pareto’s Principle that guides how few apps survive on the top ten list within the app stores means that few are making any money at all” – Caribou Digital

However, to date at least, few labs outside the developed world have spawned successful fintech apps that are used at scale—and the vast majority of apps still aim at the affluent market segments and predicated on the users’ access to smartphones.

Yet a recent Mozilla report highlighted that low-end smartphones have limited RAM, which prohibits running many fintech apps. In addition, these low-end devices also typically have hopelessly short battery life, screens that shatter easily, and a persistent problem with “fat finger error” that makes them almost unusable. Indeed, in our fieldwork, we have seen men proudly carrying prestigious smartphones but using them only to make or receive calls and SMSs. We will have to think creatively about access, and may still have a way to go until app-based solutions deliver real value at scale to the low-income market.

However, many of these issues go unnoticed because of the social media-driven hype that blurs distinctions between the aspirations of projects and their actual achievements. Too often, we see the plans for interventions and their expected results promoted as if they were already implemented flawlessly, the outcomes were already in place, and they already benefit large numbers of people.

One of my favorites was endlessly hyped through video, blogs, a focus note, a paper and a workshop, all backed with an enormous number of tweets and newsletters. After three years, and after spending well in excess of USD 1 million, the project had managed to serve marginally more than 3,000 farmers. Furthermore—and perhaps as a result of having hyped it so much—as costs spiraled, the project was not closed. Instead, the agency sought to set up elements of a digital ecosystem to give farmers somewhere to spend electronic value—and to buy the compliance of farmers through subsidies for the digital solution.

In today’s world of social media, some agencies seem to spend more on the promotion of projects than on monitoring and evaluating them to assess their real value and to learn lessons from failures.

5. The arrival of the foundations

The past decade has seen the growing influence of foundations—both individual and corporate— over the sector. This too has changed the nature of the approach to working to provide financial, as well as many other services to low-income households. The foundations have arrived with more flexible approaches to optimizing the development process, more ambition and drive to achieve system-wide results, less fear of failure or the press, and, in the main, less internal bureaucracy, which allows more rapid responses. They have, in many ways, refreshed the development process in a remarkably positive manner.

The foundations bring ambition and are almost invariably looking for evidence-based policy or decision-making, “big ideas”, and quick results in an environment that is invariably complex and often fraught with socio-political nuances.

Optimal ignorance—forgetting old lessons

On a recent field trip, I watched with horror as four well-dressed, enthusiastic Americans (one of whose sole job seemed to be to photograph and video) had set up a classic “sit them on school benches and tell them how to save” financial education program. The “planning sheets” to guide the poor farmers were in English. The accompanying lecture was delivered by indigenous member of staff who spoke the local dialect and the national language (but not English evidently), translating from another who spoke both national language and English, and had learnt the script from his new American friends.

Outside, in an attempt to create a “digital ecosystem” and somewhere for farmers to spend the e-money they really did not want, the Americans had set up a canopy under which a diffident “shopkeeper” was selling a small range of goods. Two hundred yards further up the mud track was a village shop selling exactly the same goods (and more besides) for a more traditional, and desirable, medium of exchange—cash.

Despite these complexities, there is a tendency to assume that US-based or European consultants will deliver better and quicker, with little appreciation of the value and importance of local knowledge, culture, values or language. This can lead to either inappropriate assumptions or conclusions or both, which have detrimental effects on both the development process and outcomes, and leave years of experience and learning ignored and unused. Furthermore, this approach has undone years of laudable efforts by the bilateral donors to indigenize the development process and build a cadre of local experts to underpin a sustainable approach to problem-solving.

Around the time of the emergence of the foundations as the major funders of work on financial services, we saw another clear trend—one that persists and continues to grow. Increasingly, agencies that were originally established to manage the delivery of funds and to oversee projects are morphing. Ironically, many of these agencies promote “making markets work for the poor” and the development of meso-level, local enterprises to support the development of the financial sector on a sustainable basis. However, in their new avatar, these donor agencies blur the lines between the roles and are increasingly implementing rather than just financing projects. In our last competitive landscape analysis, with a few notable exceptions, all of MicroSave’s chief competitors were erstwhile donor agencies. Today, they raise funds from the bilateral donors and foundations and implement projects on their behalf.

So have we made progress?

There is no doubt that we have made significant progress in terms of both the number of people who have been included and the quality of services they receive. But we have a long, long way to go if we are to realize the full potential of the digital revolution to reduce poverty significantly.

Of the many analyses of the impact and value of microfinance, David Roodman’s analysis is probably the most balanced and nuanced. His conclusions are worthy of repetition because they contain important lessons for those of us who pursue economic and social inclusion through the digital revolution. They include:

  • “Discourage efforts to lend to the poorest, which, far from automatically improving their lot, will add risk to their already risky lives” and instead “Support moves into deposit-taking, insurance, and money transfers…” This sounds like a restatement of the original strategic vision for MicroSave when we started in 1998. The emergent consumer digital credit industry is, as currently practiced, often predatory and damaging in nature. It could usefully learn lessons from the old microcredit industry.
  • “Search for ways to exploit communications technologies to deliver safer and more flexible services than are possible with the low-tech microfinance methods developed circa 1980.” This is a restatement of the strategic shift that MicroSave first made in 2005 and the work that we continue to do on the digital transformation of governments and financial institutions. However, the high-tech digital revolution has the potential to exclude an even higher proportion of the population than the low-tech, high-touch approach ever did.

Roodman concludes, “The microfinance movement got into trouble by allowing its rhetoric to get ahead of the evidence. Only by critically confronting the evidence and the theories used for interpreting it can the movement realize its full potential for helping the poor manage their wealth.” We have not learnt this lesson well enough, and risk waltzing into the same problems if we continue to prefer public relations over steely-eyed evaluation and self-critique.

Inclusive FinTechs Quadrant

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Inclusive FinTechs are “financial technology companies that provide convenient and affordable access to suitable financial services to the un(der)banked and un(der)served population in the world”. We have analysed 100+ global fintechs based on combination of qualitative and quantitative parameters. The Inclusive Fintech Quadrant features 30 such firms that are creating a positive impact towards financial inclusion. The report also highlights a few emerging fintechs that have the potential to disrupt the industry at large.

 

Over the counter transactions: A threat to or a facilitator for digital finance ecosystems?

Posted on by MSC

The digital finance industry is both young and dynamic, and as it grows, it is constantly innovating to address the issues it faces. One of the key contemporary issues is over the counter (OTC) transactions. The delivery of mobile money over the counter raises a number of questions since it can: 1) limit product and ecosystem evolution; 2) decrease provider profitability; and 3) lead to unregistered transactions, which run the risk of money laundering and terrorism financing. This report explores these questions and, with the help of data from the Helix Institute, InterMedia, and the Groupe Spécial Mobile Association (GSMA), provides an analytical perspective on the pros and cons of the OTC to arrive at conclusions and key considerations which move the industry forward. This report was first released by The International Telecommunication Union (ITU)

High-Hanging Fruit and Easy Catch—Merchants who need additional “hooks” and hand-holding

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This is the third blog of the “Digitizing merchant payments in India” series. In the first blog, we discussed the potential of merchant ecosystem in India and the need to design distinct solutions for them. In the second blog, we described the characteristics of the first two merchant personas—the go-getters and the receptive reticents. In this third blog, we discuss the remaining two personas of the merchant ecosystem: a) The high-hanging fruits and b) The easy-catch merchants.

The High-Hanging Fruits

Pushpa Kumari owns a small grocery shop in Terna village of Varanasi district of Uttar Pradesh, India. She has two school-going children and is the sole earning member of her family. She is educated up to Class 3 and has been managing the business since her husband’s demise seven years back. Pushpa does not read newspapers or watch television due to a lack of time. With a footfall of around 40-50 customers per day, Pushpa earns INR 6,000 (USD 86) per month, which is just enough to meet her daily expenses. She makes sales in cash and uses the same to make payments to her suppliers. She does not trust digital payments and does not intend to use them. Moreover, other merchants in her village also accept payments only in cash.

What makes her a high-hanging fruit?

This category of merchants believes in carrying out the current transaction at hand. They are not too concerned about customers’ payment needs and preferences. They have not used digital payments so far and have heard negative things about them. Their limited literacy level also makes them uninterested in accepting digital payments. (Behavioral traits: Skeptics and cognitive misers)

What are the typical challenges that high-hanging fruit merchants face?

High-hanging fruit merchants, by nature, are not very ambitious about their business. They have no great ambition to grow their businesses (or revenues), and hence, they would never need digital channels. Also, they want physical evidence; so they prefer cash as they can see and touch it. This makes them highly reluctant to switch to newer modes of payments. Plus, they are greatly influenced by their local community, which has a strong affinity for cash. Most of their acquaintances and suppliers accept or demand payments in cash. This makes them feel that cash is the best and easiest way of doing business. In several cases, they also belong to the oral segment (illiterate and semi-literate) and this segment exhibits different characteristics compared to the literate segment. (Refer to our pitch-book on the mobile wallet for Oral—MoWo mobile wallet design.)

How do we keep high-hanging fruit merchants interested in digital payments?

Typically, merchants belonging to this category operate in locations where digital payments are not common. These merchants need simple-to-use payment acceptance options such as QR Code, Aadhaar-based payments (like BHIM Aadhaar) and mobile wallets so that customers who approach them can easily make payments. These modes help reduce reliance on cash and also build customer confidence to spend money electronically.
While developing digital financial products and services for this segment of merchants (who are predominantly oral), service providers need to customize their interfaces to accommodate oral habits and practices. The user interfaces need to be developed keeping in mind the cognitive usability constraints of these oral merchant segments.

Some of the ways in which high-hanging merchants can be digitally included are discussed in the image below:

The easy-catch merchants

Shailendra Shinde, a 35-year-old graduate, owns a cosmetics shop in J.M. Road of Pune. He has a bank account as well as an ATM-cum-debit card for personal use. While every other big or small merchant on the street has a Paytm, Mastercard or VISA sticker prominently displayed at their outlets, surprisingly, his shop is the only exception. Our curiosity took us to Shailendra. He clarified that he subscribed to Paytm during demonetisation (November 2016) and used it for a few months. After some time, he removed the Paytm barcode collateral from the main counter and hid it. These days, only when he is sure that a customer does not have cash, he presents the option of paying through Paytm. Nonetheless, almost 50% of his customers ask him to let them pay through Paytm on a daily basis. The money collected using Paytm is mostly used by Shailendra for bill payments and recharges.

On asking if he is losing his customers due to non-acceptance of Paytm, he replied that the value of each transaction at his outlet is small. The customers always have that amount of change and hence, he does not need to accept payments through Paytm. On an everyday basis, about 100 customers visit Shailendra’s outlet and he makes daily sales of INR 15,000 (USD 210). He added that to pay using Paytm, a customer needs to take out the phone, open the app, enter an amount, and then pay. During peak hours, neither he nor customers have the time to make payment through Paytm. A simpler and quicker way at this time is to use cash. Shailendra also said that occasionally, in these peak hours, some customers leave without paying, under cover of the crowd. Overall, he sees using Paytm to collect payments as a hassle. Also another issue which bothers him is the issue of taxation. He is not comfortable with the fact that by going digital, he will be ‘exposing’ his income to the tax authorities. He is also apprehensive about the security aspects of digital payments (though he has no experience to date).

What makes him an easy-catch merchant?

These merchants are well-versed with the use of digital payments but are unwilling to go digital. They are very smart and can quickly gauge the digital options available with them to decide which one could work for them (and in some cases even make this decision without using them). For them the priority is to carry on business safely and securely even if it means sacrificing on customer loyalty. Hence despite having digital payments channels available, they prefer to collect cash payments from their customers. (Behavioral traits: Status quo and choice overload)

What are the typical challenges that easy-catch merchants face?

The easy-catch merchants have the ability to use digital payment channels but are unwilling to do so for various reasons.

How do we keep easy-catch merchants interested in digital payments?

Easy-catch merchants are fairly well-educated and are well-versed in digital technology. They are highly cynical when it comes to trusting the digital payment service providers and hold on to any negative experiences for a long period of time. Some of the ways using which easy-catch merchants can be on-boarded to digital payment modes are discussed in the image below:

Conclusion

Our research notes that providers need to create ‘hooks’ to enable them on-board the various categories of merchants. Some of these which are important to enhance adoption of digital payments are:
• Digital credit: A majority of small-time merchants rely on informal mechanisms to meet their credit requirements. Service providers can use their transaction data to provide or facilitate digital credit to these merchants.
• Simple UI: In the current environment, with plenty of available apps and solutions, merchants would need support in the form of easy-to-use apps, which could also target the ‘oral segment’ of merchants.
• Grievance redress mechanism: A robust and effective grievance redress mechanism—on which the merchants can fall back on in cases of transaction errors, transaction reversals, reconciliation or any other queries—would be of utmost importance.