For many micro and small merchants in developing countries, the ability to accept electronic payments is out of reach. Spotty electricity and internet access prevent reliable connectivity to payments infrastructure. The merchants’ low profit margins make buying equipment and paying service providers difficult. And in many cases, their customers prefer to pay in cash.
Yet a recent study commissioned by Visa argues that reliance on cash excludes individuals in the developing world from the wider economy. It says that access to affordable digital services has the potential to help lift individuals and families out of poverty.
While the expansion of digital transactions into the local economy through micro and small merchants benefits underserved populations, it also represents a significant opportunity for companies who provide financial services – payment facilitators chief among them.
The report, Small Merchants, Big Opportunity: The Forgotten Path to Financial Inclusion, which was conducted by the Global Development Incubator (GDI) and Dalberg Global Development Advisors puts the number of micro and small merchants – which it calls MSMs – across the developing world at more than 180 million, representing more than $6.5 trillion in transactions per year.
According to the report, fewer than 10% of those merchants accept digital payments today – a gap from the global number that represents a significant untapped potential market for financial service providers.
“In fact,” the report says, “if MSMs saw the same level of usage of digital payments as that observed for consumer payments globally (around 40% by transaction value), they could represent a market opportunity of $35 billion in transaction fees annually— or nearly $100 million per day”
The Bill and Melinda Gates Foundation, which operates a “Financial Services for the Poor” initiative, supports the idea that access to more sophisticated financial services and infrastructure is needed to help create greater financial security for individuals in developing countries.
“Effective tools for saving, sending, and borrowing money and mitigating financial risks can help people weather setbacks and achieve greater financial stability over the long term,” the organization says on its website.
The foundation lists digital payment systems among its areas of focus for the initiative.
The PF Opportunity
The report identified a number of drivers for the lack of penetration electronic payments has among micro and small merchants. Among them are several that the payment facilitator community is uniquely qualified to address.
Current systems and hardware fail to meet the needs of these merchants, and the business model of typical large financial service providers does not make serving these merchants an economically feasible option, the report says.
Entry into these markets is challenging, thanks to difficult regulatory environments and other barriers, but the need for an innovative approach built around the merchants to serve their needs and help them grow their businesses is an interesting prospect for PFs to consider.