African SMEs to benefit from improved digital payment solutions

This is a contributed piece by Soumaya Hamzaoui, chief product officer at RedCloud Technologies


Recent research by MasterCard [PDF] has shown that cash still accounts for in excess of 90% of transactions in developing countries, while a new KPMG insights report [PDF] highlights how only 24% of adults in sub-Saharan Africa have an account at a formal financial institution.

Two of the main underlying reasons for the general lack of access to financial services in many African countries are geographical inaccessibility and an insufficient banking infrastructure, particularly with regards to new digital channels for payment acceptance and financing. This has led to a significant impact on how business is carried out on a day-to-day basis in the region.

However, even in countries where people have higher levels of access to digital services and mobile money platforms, SMEs often can’t - or choose not to - use them to carry out daily transactional activity. Examples of limited adoption include use cases for consumer-to-merchant or merchant-to-supplier payments, because of either a lack of available services or the fragmentation of existing digital systems, leading to a reduced appeal for adoption. Thus, cash in many instances remains king.

But why is cash such a significant problem? Why go digital at all?


The cash challenge

To take just one example, thousands of large suppliers of goods and services who use retailers as their route to market contend with small businesses that are restricted to physical cash as the method of value exchange. Frequently, suppliers will have to collect cash on delivery, posing significant cash management issues for both the supplier and the retailer. 

It also creates security risks both for the supplier and the small business involved, as with large amounts of cash in their possession, they are potential targets of theft. There may even be conflicting information originating from shop owner and the individual collecting funds on behalf of the supplier.

Once the cash reaches the supplier, the business will sort funds manually, record the payment information for reconciliation and take the money to a bank to deposit. This time consuming process is labour intensive and further increases costs.

Due to its anonymity, cash also poses a Know Your Customer (KYC) and Anti Money Laundering (AML) challenge, as such payments do not create the same clear audit trail that digital transactions do. Thus, companies receiving physical cash could unintentionally assist in money laundering activity, a criminal offence in all markets.


The benefits of going cashless

An integrated and accessible digital financial system enables SMEs to run their operations more smoothly and securely. They also have easier, quicker and better access to more innovative financial products, while financial service providers can make the most of the commercial opportunities at hand that digital systems provide. 

Businesses that supply SMEs also benefit. As a handful of live services have shown, if small businesses on the continent have better access to digital financial services, they no longer have to settle their accounts in cash and accept the burden this places on day-to-day business activity.


Developing a digital system

Many countries across the continent already benefit from some successful (although not necessarily widespread) digital financial services. Kenya’s M-Pesa system is a clear case in point and led to the development of other similar mobile money services globally. The latest GSMA State of the Industry Annual Report [PDF] highlights there are today in excess of 400m such accounts, proving the market opportunity.

However, mobile money platforms have not come without their own challenges. As banks, technology companies and mobile service providers have launched propriety services over the last decade, such closed, parallel services acted to fragment the market, and limit mass market adoption.

Backed by advanced in platform capability and the omnipresence of open APIs, banks and technology companies now have the opportunity to build more open and interoperable systems that will allow businesses and their suppliers to transact seamlessly, regardless of who their own service provider is. The impact is the creation of a larger, more dynamic ecosystem benefitting all stakeholders.

Africa has led the digital revolution with the emergence of mobile money and remains perfectly positioned to adopt new banking technologies. The implementation of an integrated digital financial system will play a significant part to eliminate challenges that exist with SMEs resorting to payments in cash. It will bolster individual business growth and so act to invigorate economies right across the continent.


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