Getting the Small Business to Say Yes to Digital Payments

The economy is undoubtedly going digital. And fast. Cash payments declined globally by 4 percentage points in 2022 and the accelerated shift away from cash during the COVID pandemic has not slowed down. This growth is evident in how cash is now being used in Point-Of-Sale transactions - typically payments made to merchants at the counter. In 2022, cash accounted for 16% of POS transactions globally. This is great for digital payments.

But the story is different across countries - for example, up to 60% of payments made to merchants/businesses in Nigeria is in cash. Compared to 56% in Thailand, 34% in Malaysia, 11% in South Korea, and 12% in the United States; falling almost 10% in some countries since last year. But despite the progress, cash is still huge - the 16% of POS transactions stands at $7.7 trillion in cash.

Many parties, from governments, consumers, financial institutions and businesses themselves stand to benefit from this shift away from cash. To reap the benefits, there has been concerted efforts across markets to optimize the acceptance of digital payments by businesses and in doing so, reduce the ‘shadow economy’ that arises from high cash use. This also means ‘mopping up’ those micro and small businesses that seem to love cash. It’s been a hard journey.

Here, we’ll examine why these cashless payments efforts exist and the different forms they typically take to encourage and motivate businesses/merchants to embrace acceptance of digital payments.

Why motivate merchants to accept digital payments

For better or worse, digital payments have become the backbone of modern economies. But high use of cash means that the transaction, and the parties involved, can remain in the shadows. Here, governments, and importantly, the tax regulator, can’t see it. This is a major reason why governments are enamored with digital, and it’s also the reason why the smallest businesses want to avoid it, because more tax means less profits. But on the flip side, using digital and being ‘seen’ means financial institutions have more trust in the credibility of the business; and more trust means better opportunities to access credit. And credit for any business is a critical enabler for growth. When the small business grows, the whole community wins. This is why financial inclusion for businesses can be so powerful.

A second key benefit for all involved in the payment is the clear digital trail that electronic transactions leave. Imagine a customer comes over to your tiny retail store and claims they bought a Lego set for their kid and paid in cash…but you never sold them one. It can be their word against yours because the sure money trail is missing. Or your employee gives in to an urgent, emergency need and helps themselves from some change at the till and you’d be none the wiser. Overall, being seen means the merchant is less at risk of being a victim of corruption.

A third benefit is productivity. This is an issue that challenges all small businesses, regardless of the country they’re based. They struggle with manual administrative processes such as payments reconciliation, inventory management, cash transportation, supplier and employee payments. These take up huge amounts of time, especially for a business that has no or few staff. The opportunity cost of this is better customer management, better strategic thinking, and ultimately business growth. A global study by Mastercard in 2022 revealed that 70% of merchants they asked want better payment reconciliation and almost 60% want tools to help manage their business more broadly. With the level of advancement of payment acceptance services available now, merchants can pay but take advantage other value-added services to lead to much greater productivity and efficiency.

Making the case for these benefits is all well and good (there are many others besides the above). But experience has shown that it’s not that easy. More needs to be done to actually motivate merchants to move from what they know (cash) to the unknown (digital payments). It takes a host of tactics, but let’s examine some common ones now.

Tactics to encourage & motivate merchants to accept digital payments

It takes collaboration and intentionality to effectively motivate merchants, especially smaller ones, to accept digital payments. Here are four strategies that work but they work best when woven together in an optimal way that’s different for each locality.

To convince merchants, you have to convince their customers first:

Merchants will go where their customers go because that is the only way they will survive. If their customers insist on paying with cash, they will prioritize accepting cash. But if their customers don’t carry cash (or enough cash) and insist on paying digitally, merchants will adjust and make it happen. Simply because they want to get paid.

As such, customers need as much, if not more, convincing to use digital payments. Incentives can help pave the rough path. One such incentive is cash - whether in the form of a direct cashback into the customer’s account or a clear discount when they pay digitally. Many customer surveys have shown that the main reason people like to use their credit cards in the United States is the rewards (cashback and redeemable points). This has contributed in no small way to the ~80% of adults having a credit card. And when customers know they’ll get free money for purchasing what they would have anyway, they’ll ask to pay digitally.

Another freebie is in the form of massive rewards gotten through a lottery. The bank could automatically enter card users into a lottery any time they use their card within a certain timeframe. In Albania, people who purchased goods electronically could submit their receipts to be entered into a lottery (Albania Hopes New Lottery Will Curb Tax Cheats | Balkan Insight). Such Receipt Lotteries have also been launched in Taiwan, Brazil, China and Poland.

More recent innovations have been to provide instalment (or part) payments to customers via the use of a card. The idea is the customers can buy what they typically would not be able to afford, but pay in a more manageable way. In the West, banks such as BMO are issuing instalment cards to entice the underbanked to use credit cards. This is a nouvelle tactic that if done right, could work well for emerging markets as well.

Government must have your back:

This can’t work without the right government regulations. Now these regulations don’t necessarily have to target merchants, but they do have to be aimed at reducing cash overall. This then provides the right ecosystem for the merchants to, in turn, reduce their own cash use.

For the benefits discussed above, most governments the world over have been hard at work at this. A common tactic is putting limitations on daily cash withdrawal from banks and ATMs, and limits on cash payments as well. In Nigeria, the weekly cash withdrawal limit is ~USD500 for consumers and USD5,500 for businesses, regardless of channel used. Mandating payments of salaries digitally is also a proven strategy to reduce cash use. Because this motivates people to pay merchants directly from their accounts, and merchants can in turn pay their employees and suppliers (a significant portion of their expenses) directly to their accounts. No stress. Governments such as Saudi Arabia and India (to some extent) have mandated this. Couple this with relatively higher ATM withdrawal fees, and motivation to spend directly from accounts intensifies.

Tax incentives are also possible, though less common and with varying success. India’s government was exploring tax incentives for electronic payments - tax rebates of 1-2 percentage points to merchants who have half of their transactions as digital; with a similar rebate to consumers too. Parties are still trying to get this started. Thailand has been a success story though - when PromptPay (mobile wallet and QR code platform which is interoperable and instant) was rolled out, the government leveraged this to be the only channel for requesting tax reimbursements and submitting tax returns. South Korea has also credited their tax credits for transactions made via electronic payments (by consumers) to be a large part of their move to a cashless economy.

Sweeten the deal for the merchants:

For merchants to be motivated to even try, they need to feel like they’re getting benefits from the processes that dealing with cash can’t give them. That means digital payments must open them up to more money, less cost, less time, less fraud, more peace of mind, better operations, etc.

For example, in India, an incentive of 0.5% of the transaction value is available to merchants for electronic transactions (up to a certain amount). They can also get some cashback on a minimum of 50 transactions - a pretty sweet deal. Reduced merchant fees for electronic transactions, typically through tax rebates by the government or direct discounts from the acquirer or/and payment facilitator help reduce costs for merchants - especially important because of their perception that cash is free. At some points, governments in India as well as Kenya have made transaction fees on card and digital wallets free, thus relieving merchants for a period of time.

Merchants aren’t only motivated by direct cash like the above. Other services can be equally as valuable. Kopo Kopo in Kenya has mentioned that their success with merchants is a direct result of the value-added service they provide - quick and easy revenue-based loans. This has been the biggest motivator for their merchants to accept payments on their platform. Kopo Kopo uses the transactions to quickly assess (and even pre-qualify) merchants for loans, and the merchants request with literally one click on their mobile platform. Disbursement is lightning fast. In developed markets, Square and PayPal are examples of payment facilitators who lock in their merchants with easy revenue-based loans.

Making sure that merchants get immediate access to their funds is a service that many providers underestimate. Cash is immediate; it’s in hand immediately the customer pays. For electronic payments, 2-3 working days is more the norm. But the ability to replicate this immediate gratification for merchants can be a powerful motivator for them.

Overall, it’s worthwhile to consider other value-added services to provide, based on the unique needs of different merchant segments. Enabling payments itself is basic; what additional value can be given that makes the digital process better than cash for the merchant? E.g., credit management for best customers? better sales tracking? better inventory management? faster reconciliations and accounting? better management of customer loyalty? bill payments direct from the payment portal? The possibilities are endless.

Merchants need to be able to switch fast:

Finally, and this is a short one. If it’s going to take 10 documents, technical know-how and visits to a bank branch to set up the payment acceptance, then don’t bother. Switching from cash to digital should be as easy as a snap of the finger for any merchant, regardless of their education level. And help should be a click away. The more intimidated they are by the process, the less likely they’ll be to want to even try.

For example, Nigerian fintech, Flutterwave, onboards both unregistered and registered merchants, requiring a minimum of address, proof of address and means of ID to be uploaded. Allowable transaction limits are increased as the merchant upgrades their account with more documents as needed.

Ultimately, everybody wins when merchants accept digital payments - the merchants themselves are more efficient and have better chances of getting loans at reasonable fees, consumers can get rewards for making purchases they would have made anyway, and the government increases revenue by minimizing their shadow economies. These benefits can be realized by making the switch easy and using incentives backed by the right regulations. This is easier said than done, but success stories which we can all learn from crop up often. There will always be a case for cash, but we all move faster together when digital payments are at the forefront.

References: Balkan Insights | CGAP | NIH | Publishing Service | McKinsey | FIS | US GAO | Meity | The Global Treasurer | KDevelopedia | India Express | Flutterwave