Cash: the enemy of financial inclusion

Micro merchants and SMEs are the backbones of the world economy. They are the world's largest employers and process trillions of dollars a year in payments. However, even in markets where most consumers have cards, they are largely cash-dependent. This is impractical, inefficient, and comes at a high societal cost. Luckily it might be about to change...
Christoffer Thorsheim
Christoffer Thorsheim
Cash: the enemy of financial inclusion

Micro merchants and SMEs are the backbones of the world economy. They are the world’s largest employers and process trillions of dollars a year in payments. However, even in markets where most consumers have cards, they are largely cash-dependent. This is impractical, inefficient, and comes at a high societal cost. Luckily it might be about to change…
 
The current pandemic has accelerated the world’s progress towards a fully digital economy. But while all goods and services that are bought and sold online are paid for using digital payment methods, a vast majority of transactions in the physical world are still cash-based.
 
Transaction in cash occurs either because the payer does not have a card or digital payment method, or because the vendor does not have the means to accept such payments, or both.
 

Payments: supply and demand

 
Assuming that any consumer who has cards or digital payment options prefers using these over cash, and assuming all merchants in that market accept cards, we would expect the majority of card transactions in that market to be correlated to the number of people that have cards. So far so good.
 
Now let us use the number of cards per capita in a market as a proxy for the number of people who have card payment as an option, and use this is as the “demand” side for paying by card. On the “supply” side we have the number of merchants able to accept digital/card payments. If we subsequently look at the percentage of transactions in cash, we can see how well the supply side is able to meet the demand.
 
In Sweden for example, the number of cards per capita is 2.21. Meaning that the average meatball-loving Swede has two cards or more digital payment options available at any given time. As you would expect the transaction in Sweden are mostly card-based (over 87% card to under 13% cash)
 
In Afghanistan by contrast, the number of cards per capita is 0.01, meaning only one in one hundred adults have a card. As a consequence, virtually 100% of transactions are in cash.
 
Cards per capita in Afghanistan
 
Although these two countries represent polar opposites on the supply/demand card-payment spectrum, both markets have demand/supply equilibrium. In Sweden a high demand for card payments = low cash transactions, and in Afghanistan a low demand for card payments = high cash transactions. Surprisingly, this is rare.
 
Most markets have a supply/demand gap. Croatia for example is a country where the average citizen has more cards payment options than the Swedes (2,6 cards per capita), 73% of transactions are in cash, and only 17% of transactions are digital or by card!
 
In fact, cash is still a more common form of payment than a card in most European countries, although card issuance rates are high, and the unbanked population is virtually 0.
 
In South Africa, (where the government has mandated that all salary payments be made via bank transfer in a laudable effort to increase financial inclusion) the supply-demand gap is even bigger. Despite the average citizen having 4 (FOUR!!!) cards payment options available, 96% of transactions are in cash..!
 
So why (mid-pandemic) are we still so cash-dependent? Because many vendors still don’t accept cards.
 

Why vendors still don’t accept card payments

 
To accept card payments, a merchant must apply to enroll in a scheme, go through a vetting process, fill in forms, and wait anywhere from 3 days to 2 weeks to get their card reader sent to them. The device requires set-up, integration, and maintenance. Not to mention that a new entry-level card reader costs in excess of 30 Euro per device, and often come with leasing/down-payment plans that make them even more expensive.
 
By contrast, accepting cash only requires a till and someone trustworthy to look after it. Cash is just easier.
 
Contactless payments
 
The big retailers, chains, and conglomerates will take any form of payment: McDonalds, Carrefour, and the other major players will be happy to accept your bank card whether you are in Norway or Uruguay. For the big players, the small burden of getting card readers is easily outweighed by the benefit of higher revenue.
 
But for the local hair salon, kebab-shop or café, it is another story. Micro businesses are cost-sensitive, liquidity-focused, and operate on short cost/revenue cycles.
 
Sustaining the expenditure on hardware, overcoming the obstacles and technical complexities to enroll, and having to wait several days for a transaction to be available on their account, are barriers to entry. These are simply too high for many micro-merchants to overcome. This makes them more likely to just operate in cash, and less likely to have bank records or data necessary for access to credit.
 
This is a massive issue. SMEs and micro-merchants make up the backbone of the world economy. According to the World Trade Organization, small-and medium-sized enterprises (SMEs) represent over 90 percent of the business population, 60-70% of employment, and 55% of GDP in developed economies. Despite being such a big part of the economy, this segment is struggling to grow. According to the world bank, access to finance is the main constraint.
 
Small businesses are less likely to be able to obtain bank loans than large firms. As a consequence, they have to rely on internal funds. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises in developing countries, have an unmet financing need of $5.2 trillion every year!
 
IFC research
 
It is imperative to improve SMEs’ access to finance and find innovative solutions to unlock sources of capital, not only to support these small businesses, but because this situation disproportionally affects the developing world, and women. Women-owned SMEs are hugely valuable contributors the society, not only do they foster increased gender equality, they also grow overall wealth in the economy. However, female entrepreneurs face a range of financial and non-financial challenges in realizing their growth potential, and are more likely than their male counterparts to cite access to finance as a major or severe constraint on their business operations. One of the biggest barriers for increased access to finance for women-owned enterprises is the lack of reliable data disaggregated by gender. The credit gap for formal women-owned SMEs across all regions is roughly $2872 billion, which is 30 percent of the total credit gap for SMEs.
 
I have previously written about e-wallets and the importance of credit access and financial inclusion, on an individual level, but this is equally important on a small-business level.
 
Access to financial services enables the poorest and most vulnerable in society to step out of poverty and reduces the inequality in society.
 
Small businesses and micro-merchants that operate in cash, will have difficulty getting access to credit, they will more likely remain liquidity squeezed, and they are less likely to succeed or scale.
 
Again, this is a serious concern for women-owned SMEs, where most of the financial and non-financial barriers affecting occur at the startup stage of the business life cycle.
 
Financial cycle
 

How merchants will go digital

 
That is where we come in, having developed a solution that allows any merchant to accept contactless cards or any digital payments (Google Pay, Samsung Pay, and Apple pay, etc.) Instead of relying on hardware, we have a software-based point of sales system (SoftPOS), that transforms ordinary smartphones into a contactless payment point. The low cost and high worldwide penetration of smartphones mean any merchant with a phone can now download our app and have a card reader. This gives merchants a quick, barrier-free ability to accept card payments directly on their phones, without the cost or logistical challenges of hardware. Reducing their reliance on cash, increasing their revenue, and removing the operational hassles and risks associated with cash operations. It also simplifies credit agencies’ and banks’ ability to evaluate their creditworthiness and facilitates their access to loans!
 
MeaPay SoftPOS
 
SoftPOS is an awesome technology. For mature western markets, it gives merchants an opportunity to take payments more easily, to scale faster, and to reduce reliance on cash and invoicing, as they can accept payments on the go (electricians, plumbers, delivery drivers, etc.)
 
But for the emerging markets and the developing world, SoftPOS technology is a powerful enabler and gateway to increased financial inclusion and access to capital.
 
MeaPay is proud to deliver SoftPOS and work hard to push for the democratization of payments and increased financial inclusion.
 
Bring on the future, and let cash rest in peace.
 
Christoffer MeaPay
 
Learn more about us or join the team.

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