Beyond Payments for African Businesses- Osahon Akpata
Introduction
About 95% of retail payments in Africa are in cash and consumer payments are expected to top $2.1 trillion by 2025. With a growing youthful population and rapid adoption of smartphone technology, the continent is a hotbed for Fintech innovation as companies build solutions to capture the payments opportunity by simply digitizing transactions. In 2021, African technology startups have raised over $4 billion in venture investments, largely in Fintech, but are merchants’ needs being met comprehensively?
Payments and the MSME marketplace
The COVID-19 pandemic is credited for accelerating the growth in digital payments globally and in Africa, we have seen increased adoption of electronic payment forms, however, according to McKinsey & Company, cash remains king in retail payments, and its reign is not expected to end anytime soon. Cash has many hidden costs for consumers, merchants, and even governments, who spend a small fortune printing and distributing currency notes and coins which often cost more than their face value. It is, therefore, no surprise that African governments are implementing cashless policies. For example, in October 2021, Nigeria launched the e-naira, a central bank digital currency (CBDC) and cost-effectiveness is a key factor.
There are almost 100 million MSMEs in Africa and these businesses are economically significant, employing an estimated 80% of the workforce. Adjoa runs a nail and hair salon in Kumasi with 7 employees. Her business is like almost all businesses in Africa, employing 1 to 10 workers and she cannot afford expensive payment equipment and solutions. To serve these micro enterprises at scale would require the use of innovative technology to provide them with cost-effective solutions. The natural tendency for payment service providers is to serve the larger SMEs (small and medium-sized businesses) with greater capacity to pay. This may be short-sighted. Today, it may be argued that it was because African banks, constrained by their service and distribution models of expensive branch networks largely targeted the affluent for services and this resulted in a financial inclusion gap with mobile money and Fintech firms capturing the massive financial services opportunity closer to the bottom of the pyramid. To be sure, other factors such as infrastructure, literacy, and regulations amongst others contributed to the current state of financial services across the continent.
Businesses’ challenges may be solved by offering them value-added services
African micro, small and medium-sized businesses have many challenges to contend with from financial administrative and market access issues. Financial issues are some of the key problems businesses need to solve. They need ways of accepting payments both offline (in-store) and online. Some may want to be able to accept cross-border payments. They also need to be able to pay their suppliers domestically and sometimes internationally. Businesses need access to credit and liquidity. They need escrow services to manage counterparty risk and must be able to calculate their taxes and make prompt payments.
Entrepreneurs need to handle a myriad of administrative issues. To get started, they need to handle registration of their businesses which might include incorporation, obtaining licenses and permits, or other certifications. They have accounting needs including payroll, invoicing, and general business management (management accounting). They need to understand fundraising, what their strategy should be, and have a firm handle on market dynamics. These businesses need data analytics and inventory management to keep track of stock and supplies.
Accessing the marketplace can also be tricky for businesses. This includes finding a location for a storefront, establishing an online presence, handling delivery logistics, identifying and reaching the target market for goods or services offered and the list goes on.
Today, solutions exist for many of these challenges which businesses face, however, they are often inaccessible to the business owners. This is either due to a lack of customization, high costs of implementation or a lack of awareness. Offering these solutions as tailored, value-added services by payment service providers could bridge the gap for many MSMEs.
The way forward
The continued growth and sheer volumes of mobile money transactions in Africa, up 23% to $490 billion in 2020, is evidence of the potential for payments on the continent. Without a doubt, digitizing cash transactions and earning a fee is a starting point for success as has been observed with successful companies like Yoco, who simplified offline payments in South Africa and beyond as well as Flutterwave and Paystack, doing the same for online payments, starting in Nigeria and expanding across the continent. Relying on digitizing payments and collections alone might not be prudent. Take rates are trending lower on the acquiring landscape as large merchants negotiate lower service charges, consumers seek fee-free services and regulators put downward pressure on these income lines to drive cashless adoption.
There is an opportunity to leverage innovative, cost-effective technology to provide digital collection solutions as well as value-added services that help micro, small, and medium-sized businesses solve the other administrative, financial, and market access challenges they face. Operators should note that value-added services may bring them higher margins as customers have a higher willingness to pay for them and they are largely unregulated. Doing so at scale in a cost-efficient manner would meet the needs of many businesses across the continent. A sustainable business awaits those who can do so successfully.
