Kenya is showing the way to boosting small business
On a recent trip to Kenya I discovered the joys of using MPesa on my phone to do everything from buying bananas by the side of the road to tipping the driver to paying the yoga studio which didn’t take cards — as well as the supermarket which did.
Fun as it might be for the tourists, the more striking thing about M-Pesa is the way it supports the ecosystem of the informal economy in a way that our domestic payments system does not.
University of Cape Town professor Haroon Bhorat has pointed out that SA’s high unemployment rate goes with a rate of informality which is far below that of other developing countries. His research shows SA could reduce its unemployment rate by as much as 10% if it had an informal economy whose size was similar to that of the average middleeconomy country.
Making it easier for all sorts of informal operators to ply their trade using instant, secure, trusted mobile payments that don’t require a bank account is one of the unintended upsides of M-Pesa. They can receive payments on their phones and see them confirmed instantly, and they can go off and pay their suppliers or employees, all using just a cellphone number or a till number.
But the mobile money system, now owned jointly by Safaricom and Vodacom, was originally launched by the Kenyan mobile operator to enable people to send money home to rural areas. It still plays a major role in remittances. But it’s become so pervasive in high-volume, low-value transactions that it was estimated a few years ago to move around 7% of the value in Kenya’s financial system — and around 70% of that country’s mobile money volumes.
It’s not a savings or banking product as such but is electronic money which acts as a store of value, allowing people to exchange cash or bank deposits for M-Pesa via an extensive network of superagents and subagents who range from tiny rural retailers to large suburban Safaricom stores.
Its rapid growth owed much to the fact that Kenya had few rural banking outlets, and its banking regulators’ adopting a very lighttouch approach to mobile money. MPesa’s success also no doubt owes a lot to the fact that Safaricom is the dominant mobile operator in Kenya — and can provide mobile money at low cost since it helps to maintain that dominance (you have to have a Safaricom number to have M-Pesa).
It’s not necessarily replicable. Vodacom failed more than once to launch it in SA, where a mobile money operator is required to partner with a bank — so bank charges make the cost higher, and the banks may not rush to push competition with their own card and app products, or indeed their ATMs, of which SA has a large number. The cost of data is also a factor.
But M-Pesa does operate in several other African countries. And in recent years similar mobile money payment systems have taken off in a major way in Brazil, India and China.
SA is not a particularly cashheavy economy — at a cash to GDP ratio of around 2.5% it’s much less so than India or even the US. But while more than 90% of SA adults have bank accounts, almost 40% take all their money out of the bank in cash as soon as they receive their monthly wages or grants — and two-thirds draw cash once a week.
The cost of banking transactions is a factor; so too are trust and complexity issues. But mainly lowincome people need cash because so many of the services and goods they need don’t take cards or any kind of electronic money.
The standout finding in a study of the informal sector published by Master Card this week is that only 2% of the informal businesses offered a card machine or the ability for customers to tap their cards on a phone app (such as Yoco) and only 1% offered other contactless payments. They cited difficulty using such electronic systems and high data costs. Yet the survey also revealed that low-income consumers are becoming ever more willing to move away from cash, with more than two-thirds saying they planned to use methods other than cash to make payments in the coming year.
SA has seen the emergence of a variety of electronic and digital payment methods from banks, mobile operators and other financial technology companies and the Covid-19 pandemic accelerated the take-up. But the still limited access to these among small and informal businesses is one of the (many) factors that constrains their expansion and keeps them reliant on cash, with all the safety hazards and costs that come with it.
The Reserve Bank plans to bring nonbanks into SA’s payments system from next year but for now any fintechs or mobile operators have to partner with a bank to provide payments. Bank charges on small transactions can be prohibitive, for merchants and for customers. Mobile data charges are an issue too. It doesn’t help either when loadshedding prevents informal and formal businesses charging their payment devices.
Interestingly too, one of the factors keeping card charges high for merchants is SA banks’ reliance on the international payment platforms of Master Card and Visa, where many other countries (including advanced markets such as Japan) also have cheaper purely domestic platforms.
When policymakers talk of broadening financial inclusion in SA, the focus has often been on access to credit. But the payments system is as or more important in ensuring financial and economic inclusion. SA’s financial regulators are increasingly focused on supporting the kind of innovation that can drive that. Kenya and some of our Brics partners are showing the way when it comes to low-cost electronic payment systems that can support thriving ecosystems of small and informal businesses and job creation.
IN SA ... A MOBILE MONEY OPERATOR IS REQUIRED TO PARTNER WITH A BANK — SO BANK CHARGES MAKE THE COST HIGHER
ONE OF THE FACTORS KEEPING CARD CHARGES HIGH FOR MERCHANTS IS SA BANKS’ RELIANCE ON THE ... PLATFORMS OF MASTER CARD AND VISA