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The potential of merchant payments in Cote d’Ivoire: What is the situation in the informal sector?

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Merchant payments has been a top priority for digital financial service providers in 2018. However, the activity rates of acceptor merchants and customers remain low, according to GSMA’s report on the mobile money industry. The adoption of merchant payments in Côte d’Ivoire has been limited, where two mobile phone operators, MTN and Orange, dominate the market.

In November, 2017, MicroSave Consulting (MSC) conducted a diagnostic study on the success factors of merchant payments solutions using e-wallets. We conducted the study with 93 accepting merchants, which revealed that only 5% of payments are made via the merchant solution.

Our study surveyed 255 non-accepting merchants to assess the potential of merchant payments with the Ivorian business fabric. These merchants represent the economic diversity in Abidjan. According to a survey on the informal sector in Abidjan conducted by the National Institute of Statistics of Côte d’Ivoire, there are approximately 610,000 informal production units of non-agricultural market activities in Abidjan. Around 40% of the turnover is from informal trade.

The size of the informal sector in Côte d’Ivoire is considerable and its contribution to the overall Ivorian economy is significant. Hence, the integration and development of merchant payments in this sector could have a multiplier impact on the overall adoption of digital financial services. Our study points out some encouraging attributes of the informal sector.

Merchant payments: An alternative to cash?

Since its launch in 2016, the businesses that the merchant payments solution mainly targeted are the trade chains and large supermarkets that operate in the formal sector. Indeed, our diagnostic study of the Orange Money and MTN money merchant payments networks indicates that 75% of merchant acceptors of merchant payments are supermarkets, petrol stations, pharmacies, and large bookstores. This strategic choice is understandable given the large geographical scope of these businesses, which are generally part of national trade chains. However, the rate of use of the merchant payments solution in these businesses remains minimal, with only 5% of the total volume of transactions carried out via this payments solution compared to 80% in cash.

Informal sector businesses, which represent 95% of our non-merchant sample, are largely untapped in the expansion of merchant payments. They, however, face many challenges that merchant payments could try to solve. These businesses rely heavily on cash to manage their business (98%) and have limited access to money security and savings and credit options. These merchants are nevertheless aware of the problems generally associated with cash management, such as change, counterfeiting, as well as loss and theft of money, among others.

A majority of businesses identify the lack of loose change as the major problem of cash in the local market. Merchant payments come at the right time since it offers a solution to this problem through digital payments or provision of change. This trend points to the possibility of the proposed merchant payments solution being able to target informal sector businesses that existing suppliers hardly manage to serve.

Moreover, merchants who currently use the merchant payments option find that it has attributes that could meet the needs of businesses in the informal sector. They consider merchant payments to be more secure and reliable than cash or any other means of payment. Businesses deplore the possibility of losing money or having it stolen, in addition to incurring unnecessary expenditure by having cash on hand. Since cash is too liquid and can be easily misused, there is a need for access to money security options and tools that promote financial discipline. Merchant payments, therefore, appears to be an appropriate solution to meet the needs: security and reliability.

Furthermore, most transactions in developing countries are still carried out in cash, as confirmed by the majority of the traders in our study sample.

Does technology have a place in the informal trade sector?

Our study shows that a small proportion of businesses (32%) use technology and the Internet to manage their activities. However, personal ownership of technological devices is high, with 90% of people owning a technological device and one-third owning a smartphone. This confirms GSMA’s report on the mobile economy, which notes that telephone penetration in Côte d’Ivoire is 53%. Secondly, in a local environment where the activity rate of mobile money accounts is below 35%, almost half of the traders surveyed (45%) have an active mobile money account. Therefore, we note that neither the ownership nor the use of a mobile money account—often cited as structural barriers as a previous MSC study suggests—constitute an obstacle to proposing a market solution for the informal sector traders interviewed in our study.

P2P transfers allows customers to send the purchase amount directly to the trader’s personal account. Indeed, traders who accept P2P transfer payments prefer mobile money transfers for large transactions and state security reasons associated with possessing physical cash as the main reason for this preference. Field observations from our study suggest that businesses accept P2P transfers for regular and trusted customers or for paying geographically remote suppliers.

The volumes of transactions and recognized business opportunities in this sector suggest that it is possible to develop a use-case specifically for micro and small informal sector companies that have already adopted the P2P mobile money transfer service for business purposes.

So what can suppliers do to seize opportunities in terms of adopting and using the service as well as making the offer profitable?

Lessons for merchant payments service provider

Suppliers could review their network segmentation strategy and target micro and small businesses. By using person-to-person transfers for commercial purposes, they could design a product for informal businesses. This product could focus on the problems of change, and the need for security and access to financial services.
However, given the specific nature of operations in this sector, we need to factor in aspects, such as convertibility of electronic money, the administrative documents required, and transaction costs.

Go-getters and receptive reticents—Merchants who have the instinct, but need support

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This is the second blog in the series on “Digitizing merchant payments in India”. The first blog discusses the potential of the merchant ecosystem in India and the need to design distinct solutions for different merchants. In this blog, we will discuss two merchant personas: a) The go-getters and b) The receptive reticents.

MSC used its Market Insights for Innovations and Design (MI4ID) approach to understanding the barriers to adoption of digital payments by different merchant personas. MSC had also used the MI4ID approach in its cashless experiments in Kerala and Odisha to understand the digital traits and hindrances in the adoption of digital payments products among low-income people. In this blog, we will discuss two merchant personas: a) The go-getters and b) The receptive reticents.

The go-getters

Sanjay is a merchant who operates in the Green Park area of Delhi. He is a middle-aged man and owns a mid-size grocery store that has a high footfall. He is a graduate and clearly shows business acumen. He likes to experiment and is open to trying new payments channels—as long as he sees benefits in them. The heavy traffic of customers in his shop has made him keen to use digital payment services, which offer speed and convenience to customers. Sanjay is also ready to pay for the associated charges. In addition to cash, he accepts digital payments using wallets like MobiKwik and Paytm, as well as card-based payments through a point-of-sale (POS) machine.

Sanjay belongs to the genre of “go-getters” who believe in trying out new payments mechanisms. This segment is not afraid to experiment and shows a remarkable ability and willingness to try out new modes of accepting digital transactions (Behavioral trait: pragmatist). Even after falling prey to a vishing (voice phishing) fraud with one leading wallet provider, where he lost about INR 6,000 (USD 86), he continues using the same wallet because he accepts his mistake and takes the blame. In our interviews, he revealed that the demonetization announcement in November 2016 nudged him to explore the digital channels like Paytm.
What makes Sanjay a go-getter?

This segment of merchants is highly customer-centric and enthusiastic about various modes of digital payments. They play an important role in creating customer awareness and convincing them to pay digitally.

Hence, they have the potential to become “brand ambassadors” of various digital payments channels or products.

What are the typical challenges that go-getters face? 

Connectivity issues mar the customer and merchant experience alike. While our team was interacting with Sanjay, he tried accepting a customer payment on POS. The transaction failed five times before being successful on the sixth attempt!

How do we keep go-getters interested in digital payments?

Merchants like Sanjay are the “poster boys” of merchant ecosystems who hold great promise. Supporting them is important for the overall proliferation of digital payments in the country. Hence, acquirers or providers need to create and provide appropriate solutions to them. The diagram below illustrates some ways in which providers can support this category of merchants.

The receptive reticents

Deepak Das, a 40-year-old semi-literate man, runs a grocery store built on his plot at Bhojerhat on the outskirts of Kolkata. He has been managing his shop for 10 years. On average, 30-40 customers visit his outlet each day. He often visits Kolkata with his family for shopping during the festive season. At Big Bazaar in Kolkata, he has seen customers making large-value payments using POS machine or Paytm. However, Deepak himself has never used any digital payments channel for payments. He was not aware that digital channels can be used for small-value payments as well. He feels that using digital channels to make or accept payments is a complex process.

What makes him a receptive reticent?

The receptive reticent, despite being interested, does not use digital modes of making payments owing to their low levels of literacy or understanding. They are highly dependent on others for handholding and support to comprehend, trust, and use the digital payment modes. They display an accommodative attitude when the customer demands to pay digitally.

The receptive reticents like Deepak accept the payment through a digitally-enabled merchant nearby and later settles it in cash with that merchant. This category of merchants needs to conduct multiple digital payments transactions under a reliable person’s guidance before they can work on their own. In India, urban cultures have been influencing rural areas at an increasing pace. In such a scenario, people like Deepak feels that the day is not too far when people in villages will embrace cashless payments.

What are the typical challenges that receptive reticent face?

Receptive reticents start taking an interest in digital payments because people around them are interested in them (Behavioural trait: social proofing).However, due to information asymmetry, they do not have complete information on digital payment products and hence, are not able to graduate to the “usage” stage. This merchant category is most comfortable in the local language. The primary source of information for these merchants is word-of-mouth. This makes these merchants susceptible to biased information—which may or may not be correct and depends heavily on others’ experiences. Therefore, they can be dissuaded from adopting digital payments easily. Moreover, such receptive reticents are constrained by the multiple modalities and requirements of using different digital products. These present too much information, which is beyond their limited cognitive abilities. The diagram below illustrates some of the other challenges that this category of merchants faces.

How do we on-board receptive reticent to digital payments?

Receptive reticents need hassle-free digital payments products both for the on-boarding process and to complete transactions successfully. They also need proactive support from providers (probably physical visits to merchant outlets) to train and resolve issues. The UI of the digital payment product should suit their limited cognitive abilities. 

“Cookie-cutter” solutions for merchants will not work

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Sanjay, Deepak, Pushpa, and Shailendra are merchants in different parts of India who sell goods from their own shops. They interact and transact with a variety of customers on a regular basis. To a varying degree, all four share a few common traits. They feel that digital payments are good for them. All of them have experienced banking and used financial services at different levels. They show a willingness and capacity to become offline merchants and join the digital bandwagon.

What is it that makes them different from each other?

When it comes to accepting digital payments, each of these merchants sells different types of products, have different financial lives, and exhibit different levels of motivation. They meet different types of customers—some who are “pro-digital payments” and others who do not understand or wish to understand the role or benefit of paying digitally. We have used the following four parameters to segment merchants into distinct personas.

Merchants like Sanjay and Deepak are positive about digital payments and continue to pursue their customers to pay digitally, whereas Pushpa and Shailendra seem less enthusiastic. All four of them need different types of nudges and forms of support to accept digital payments. They exhibit different belief systems and goals to make choices while accepting payments.

The retail payment landscape in India

The retail payment space in India is proving to be a battleground for digital service providers (DSPs), both for the incumbents like banks and challengers like FinTechs. A BCG-Google study estimates that the digital payments market is set to grow to USD 500 billion by 2020. This includes person-to-person (P2P), person-to-merchant (P2M), merchant-to-merchant (M2M), and person-to-government (P2G) payments. Meanwhile, a recent Credit Suisse study estimates that the digital payments market will grow to USD 1 trillion by 2023. The report says that currently in India, cash transactions account for approximately 90% in terms of volume and 70% in terms of the value of total transactions. With a high affinity to cash, India offers a huge opportunity for payments players.

The Government of India launched its flagship “Digital India” program with a vision to transform India into a digitally-empowered society. It prioritized the use of digital payments by each market segment. The vision is to provide seamless digital payments to all citizens of India in a convenient, easy, affordable, quick, and secure manner. To achieve this, the government articulated “faceless, paperless, cashless” as part of Digital India and developed IndiaStack, a presence-less, paper-less, and cashless ecosystem for delivery of services.

IndiaStack is a set of open APIs that leverage the JAM trinity—Jan Dhan, Aadhaar, and mobile phones—to deliver multiple government and business services, which include eKYC, eSign, Digital Locker, and Unified Payments Interface.

The Indian government and the national regulator—the Reserve Bank of India (RBI)—have designed various incentives and policies on the supply side to promote digital payments. One such move was the rationalization of Merchant Discount Rates (MDR) by the RBI to promote debit card acceptance by a wider set of merchants, especially small merchants. As part of this move, the RBI allowed a temporary waiver of MDR for small-value transactions (up to INR 2,000) for two years on all debit card, Bharat Interface for Money (BHIM), Unified Payments Interface (UPI) and Aadhaar-Enabled Payment System (AePS) transactions.

The RBI also permitted cooperative banks, which are well entrenched in rural areas, to deploy their own or third-party point-of-sale (POS) terminals. Cooperative banks can now also install onsite or offsite ATM networks, issue either debit or credit cards or both—either on their own, through sponsor banks or through a co-branding arrangement with other banks.

On the demand side, the past decade has seen tremendous growth in the use of the Internet and mobile phones in India. With a population of 1.34 billion and close to 1.18 billion mobile phone subscribers , 446 million internet users, and 386 million smartphone users, India has all the ingredients in place to develop a vibrant merchant payments ecosystem. The BCG-Google report on digital payments estimates that the size of the person to business (P2B) digital payment market is about to grow to USD 224 billion by 2020. This means that more Sanjays, Deepaks, Pushpas, and Shailendras will join the digital ecosystem—of course, with a little help from service providers.

We can also look at the progress in the digital ecosystem in India based on the macroeconomic data from Findex 2017. The Little Data Book on Financial Inclusion 2018 highlights a commendable achievement on access to financial services. The flagship Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme has played a major role, resulting in the creation of bank accounts for close to 80% of the adults, including 76% of women.

Unfortunately, the same cannot be said for usage. The table shows the percentage of digital transactions conducted by adults in India in the calendar year 2017. This shows how much more must be done to ensure that people transact digitally.

This data shows that there is minimal activity on the side of merchant payments. Only around 6% of merchants in India use digital payments. This means that customers still use cash to make most of their bill payments, while merchants are also happy or content in accepting cash. This, in turn, implies that we need to support more such Sanjays and Deepaks as we motivate more Pushpas and Shailendras.

Considering the size of the economy, India shows an immense potential around merchant payments, which have a high probability to act as a hook for customers to start transacting digitally. MSC’s practical insights highlight that getting merchants to transact digitally is a key challenge. To probe this further, MSC conducted a research activity with merchants—those who accepted digital payments and those who did not—to gather behavioral insights into accepting payments digitally.

We came up with this series of blogs based on these insights. We have categorized merchants, as shown below, under various personas or categories, depending on their personal attributes, across the two dimensions of ability to accept digital payments and their willingness to do so. These categories are go-getters (Sanjays), receptive reticents (Deepaks), high-hanging fruits (Pushpas) and easy catches (Shailendras). Additionally, there is another category of merchants termed as “drop-outs”. Merchants in this last category have tried digital payments for their businesses at some point in time, but have gone back to cash in the absence of an appropriate value proposition and adequate support.

This series of blogs highlight that providers cannot promote merchant payments through standard “cookie-cutter” solutions. What works for one category of merchants may not work for the other category. We need to look at merchants as distinct personas to decipher their characteristics and explore ways to change their behavior.

DBT in Fertilizer: 4th Round of Concurrent Evaluation – A National Study

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DBT in fertilizer is a modified subsidy payment system under the Direct Benefit Transfer (DBT) scheme. Under DBT, fertilizer companies are paid subsidy only after retailers have sold fertilizer to farmers or buyers through successful Aadhaar authentication via Point of Sale (PoS) machines. Based on a request from NITI Aayog, MSC has been conducting a nationally representative study on DBT in fertilizer.

The objectives of the current round of the study were to identify issues and challenges pertaining to the implementation of DBT at the national level, provide the government with evidence of successes and challenges that could lead to policy-level decision making, and provide actionable solutions to improve implementation.

The current engagement was the fourth round of the study—the first one was in September, 2016 in two districts in Andhra Pradesh, where the pilot project was launched. The second was in January, 2017 in six districts across five states, where the pilot project was expanded. The third round was between July and September, 2017 in 14 pilot districts in across 11 states.

 

A comprehensive framework for gender centrality in financial services

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Our incisive understanding of women as a consumer segment and the manner in which their social and economic life influences their financial behavior has enabled us to come up with this framework (gender centrality framework, MSC 2018). This framework can be used by researchers, product and program designers, and policy makers to better gender equality outcomes from their respective work. Gender centrality framework is a much needed patch which integrates women empowerment frameworks with financial inclusion agenda.

MicroSave’s key impact has been to…

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MSC has a deep understanding of the mass-market or the needs of low-income segments. We believe that service is the voice for this sector. Our consultants bring about important interventions in the lives of end-clients. Our work with governments across the globe has been transformative. Our work on government-to-people interventions in India has garnered critical acclaim, and we will replicate our success in other geographies, such as Indonesia. Our efforts bring the unserved section of society closer to the financial sector and enable services that the poor cannot afford. Other examples of our impact include the transformation of microfinance in Bangladesh, the support that we lend to smaller organizations that are not yet self-sufficient across geographies, and our work in leveraging DFS for the financial inclusion market.