Innovation in Electronic Payment Adoption: The case of small retailers June 2016 Acknowledgements This report is a result of a collaborative effort across the World Bank Group’s (WBG) Finance & Markets Global Practice and the World Economic Forum’s Financial Services Industry team; and, specifically, with the Promoting Global Financial Inclusion project. Collaboration Lead Ghada Teima, Program Manager and Lead Financial Sector Specialist, WBG Core Team Nina Bilandzic, Financial Sector Specialist, WBG Oya Pinar Ardic Alper, Financial Sector Specialist, WBG Nicole Meyers, Project Manager, Promoting Global Financial Inclusion, World Economic Forum; Financial Inclusion Fellow, McKinsey & Company Overall Guidance Tony Lythgoe, Practice Manager, WBG Douglas Pearce, Practice Manager, WBG Massimo Cirasino, Global Lead, Payment & Market Infrastructures, WBG Matthew Gamser, Chief Executive Officer, SME Finance Forum Peer Stein, Adviser, Financial Institutions Group, International Finance Corporation Technical Guidance Ivan Daniel Mortimer-Schutts, Senior Operations Officer, WBG Thomas Lammer, Senior Financial Sector Specialist, WBG Harish Natarajan, Lead Financial Sector Specialist, WBG Lois Quinn, Senior Payment Systems Specialist, WBG The team thanks Amitabh Saxena, Founder and Managing Director, Digital Disruptions, commissioned by the WBG to produce this report. The team also thanks Euromonitor International for its contribution to the global market sizing analysis. Michael Koenitzer, Annelyse Freyman and Lisa Donegan contributed at the project design stages. We extend a special thanks to the participating organizations and Camilo Tellez, Knowledge and Research Manager, Better than Cash Alliance, who contributed to the case collection phase of the report. The study also benefited from the market research in Indonesia, funded by the State Secretariat for Economic Affairs (SECO). Case collection support was provided by Achin Bansal, Consultant, WBG. The team is grateful to the following reviewers: Samuel Maimbo, Practice Manager, WBG, Girish Bhaskaran Nair, Senior Operations Officer, WBG; Harish Natarajan, Lead Financial Sector Specialist, WBG; Ivan Daniel Mortimer-Schutts, Senior Operations Officer, WBG; Matthew Gamser, Chief Executive Officer, SME Finance Forum, Thomas Lammer, Senior Financial Sector Specialist, WBG; and Chris Dooley, Project Lead, Promoting Financial Inclusion initiative, World Economic Forum. The team also thanks Aichin Lim Jones for design and graphics. This report would not be possible without the generous support of the Ministry of Foreign Affairs of the Netherlands and the Bill & Melinda Gates Foundation, provided through the WBG Financial Inclusion Support Framework (FISF) programme, as well as the support of the SME Finance Forum. Rights and Permissions © 2016 The World Bank Group in this work do not imply any judgement on the part of The World The material in this work is subject to copyright. It may 1818 H Street NW Bank Group concerning the legal status of any territory or the be reproduced, in whole or in part, for non-commercial Washington DC 20433 endorsement or acceptance of such boundaries. purposes as long full attribution to this work is given. Telephone: + 1 202 473 1000 Internet: www.worldbank.org Any queries on rights and licenses, including subsidiary rights, World Economic Forum® should be addressed to the Office of the Publisher, The World This work is a product of the staff of The World Bank Group Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: + 1 © 2016 – All rights reserved. with external contributions. The findings, interpretations and 202 522 2422; email: pubrights@worldbank.org. conclusions expressed in this work do not necessarily reflect the views of The World Bank Group, its Board of Executive Directors or the governments they represent. REF 310516 The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colours, Case: 00020544 denominations and other information shown on any map Contents 4 Foreword 5 Executive Summary 7 Part 1: constraints and opportunities 8 Introduction: the importance of the merchant segment for financial access and inclusion 10 Expanding merchant payments: a $19 trillion business opportunity 12 Constraints on merchants’ use of electronic payment services 17 Part 2: innovation trends and cases 18 Overview 19 Insight 1: Comprehensive business solutions: expanding retailer acceptance 22 Insight 2: Non-card payment models: reaching retailers in developing markets 25 Insight 3: The use of data: providing value-added services to merchants 28 Insight 4: The supplier’s role: boosting merchant adoption of electronic payments 31 Insight 5: Partnerships: reaching merchants via non-traditional payment actors 35 Part 3: catalytic actions for consideration 36 Actions for industry 38 Actions for policy-makers 41 Acronyms 42 References and further reading 44 Annex 1: glossary 47 Annex 2: guiding principles of payment aspects of financial inclusion 49 Case Annex List of figures 6 Figure 0: Global Payments among MSMRs, Estimated Volumes (2015) 8 Figure 1: Interrelations of foundations and catalytic pillars to achieve universal access to and frequent usage of transaction accounts 10 Figure 2: Types of payments 11 Figure 3: Person-to-person payments by MSMRs, estimated value (2015) 11 Figure 4: Business-to-Business payments among MSMRs, estimated value (2015) 12 Figure 5: Key obstacles to expanding adoption of electronic payments to small retailers (2015) 18 Figure 6: Key innovation trends for merchant payment solutions 22 Figure 7: Four-party model and three-party model 25 Figure 8: Global growth of smartphone penetration and social network users 31 Figure 9: Merchant acceptance of the electronic payments value chain 36 Figure 10: The roles of industry and policy-makers in addressing the key obstacless List of boxes 14 Box 1: Payment behaviour of merchants in India 15 Box 2: Payment behaviour of Indonesia’s traditional retail market Table 28 B2B electronic payment value, retail to suppliers ($ millions), by type of retailer and region The case of small retailers 3 Foreword The importance of financial inclusion to development is nowadays widely recognized in the international development community and by policy-makers in developed and developing economies. Still, an estimated 2 billion adults globally do not have access to a transaction account that can be used to receive payments and make deposits. Yet, research shows that low-income and financially excluded populations have active financial lives and need a range of financial services to take advantage of economic opportunities and manage and mitigate risks. Similarly, an estimated 200 million enterprises in developing economies are still constrained in terms of financing, even though small and medium enterprises generate the greatest number of new jobs, employ the largest number of people in aggregate and, hence, are important for job creation and economic growth. Moreover, Gloria Grandolini improving access to financial services plays an important role in reducing the world’s poverty levels Senior Director, and increasing shared prosperity. Finance & Markets Global Practice Recognizing the transformational potential of financial inclusion for economic development, the World World Bank Bank Group President, Jim Yong Kim, and partners put forward an ambitious goal of universal financial Group access by 2020. The goal envisions that all working-age adults have access to a transaction account held with banks or other authorized and/or regulated service providers (including non-banks), which can be used to make and receive payments and safely deposit funds. While many foundations and drivers exist for achieving financial access and inclusion, the potential impact of extending digital financial services through a more widespread acceptance of electronic payments among small retailers (merchants) is substantial. Traditional retailers in developing economies, the majority of which are micro, small and medium enterprises, generally do not use electronic payments and are excluded from the regulated financial sector. The regularity and frequency of consumer purchases can help everyday retailers expand consumers’ use of electronic payments. These retailers not only can play an important role in increasing consumer acceptance of Giancarlo Bruno such payments, but also can contribute to improved supply chain efficiency by paying their suppliers Head of Financial electronically and, ultimately, can encourage financial inclusion. Services Industry World Economic Over the past year, the World Bank Group and the World Economic Forum have collaborated on this Forum USA effort to better understand the adoption of electronic payments by small and medium merchants, and wish to thank the contributors for their efforts in creating this report. We hope that the insights herein encourage service providers and policy-makers to develop innovative pathways to accelerate the adoption of electronic payments by merchants in their markets. 4 Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants Executive Summary This report aims to deepen the understanding of 2. The global market opportunity for expanding the barriers to and incentives for the acceptance and use adoption of electronic payments by merchants is of electronic payments, from the perspective of micro, large, estimated at $19 trillion of payments made and small and medium retailers (merchants). Developing and accepted in cash and checks by micro, small and accelerating acceptance of electronic payments by these medium retailers (MSMRs) in 2015. The global market merchants is essential to expanding financial access. A sizing study, a companion and complementary piece basic transaction account for payments and deposits is to this report, estimates the global value and volume of considered an entry point to the formal financial system, and person-to-business (P2B), business-to-business (B2B) can act as a gateway for individuals to adopt other relevant and business-to-person (B2P) payments by MSMRs.1 financial services they need to smooth their consumption Overall, the findings estimate that in 2015, MSMRs made and manage income shocks. However, equipping individuals and accepted around $34 trillion in supplier payments, with only basic transaction accounts is not sufficient. The wages and salaries, and customer payments, of which use case for payment services becomes increasingly $15 trillion were made electronically and the remaining effective as individuals gradually move to a cashless $19 trillion in cash and checks. Electronic payments are economy, where electronic payments are widely accepted more widely used by non-grocery retailers compared to for regular and frequent purchases. The report highlights the grocery retailers, regardless of whether they are P2B, following important dimensions to consider in the efforts to B2B or B2P transactions. expand electronic payments for merchants: 3. New business models that aim to expand 1. Multiple factors hinder the adoption of electronic acceptance and usage of electronic payments payments by merchants. Six obstacles are identified by small retailers, though still in early stages of as significant impediments to deepening these development, are making progress and beginning payments, especially in developing countries: (i) an to demonstrate their potential. While many products inadequate value proposition for merchants, including and offerings are relatively nascent, they nonetheless product design that does not adequately encourage pave the way to five compelling insights that, collectively, them to migrate from cash to electronic payments; (ii) could be the key to overcoming the obstacles identified. weak product and stakeholder economics in traditional One of the best-known payment innovations in the card models; (iii) insufficient aggregate customer United States is Square, which has recently focused demand, needed to reach the “tipping point” that drives on providing a comprehensive business solution to demand and supply towards an electronic payments meet the needs of its micro and small merchants, in ecosystem; (iv) inconsistent technological infrastructure addition to facilitating payments for them. In developing and regulatory environment in developing markets to markets, where traditional card adoption is still not support electronic payments; (v) ineffective distribution widespread, more disruptive models are emerging, models to serve hard-to-reach merchants in areas with as demonstrated by two cases in Kenya: Safaricom, limited economic capillarity (i.e. low density of micro, a mobile operator; and Kopo Kopo, a start-up that small and medium enterprises MSMEs and customer “acquires” small merchants using Safaricom’s money populations); and (vi) difficulty in formalizing enterprises transfer platform. Recognizing the admittedly thin and reluctance of merchants to pay full taxes on sales. margins from retail payments, and responding to the financing needs of its merchant customers, Kopo Kopo Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants 5 in particular has begun using big data analytics, gleaned based on demand-side analysis, focusing on traditional from its payment transactional data, to offer a range of and non-traditional data and leveraging different value-added services (in particular unsecured, short- features of technology, recreating business models term loans). Another start-up, Tienda Pago in Latin by offering niche services, and forging partnerships America, also uses data analytics, but is focusing on with stakeholders to address gaps in the payments facilitating transactions between retailers and suppliers. value chain. Policy-makers have key roles to play Suppliers receive large volumes of cash on a frequent in encouraging an enabling electronic payments basis from retailers (an inconvenience on their part) and environment: they can facilitate the opening of a are interested in business solutions that can reduce this transaction account (while protecting customer data pain point and decrease operational costs. These same privacy, given innovations that may require handling suppliers leverage their strong merchant relationships sensitive personal data), stimulate the formalization of and existing distribution models to coordinate bringing merchants and forge public-private partnerships. payment solutions to retailers, partnering with traditional payment service providers (PSPs). A joint-venture The report’s structure is as follows: led by Grupo Bimbo, a bakery company based in Mexico, is one example of a non-traditional payment –– Part 1 describes the specific market challenge and its actor partnering with a large bank and a payments importance for financial inclusion; quantifies the market processing firm (Blue Label Technologies) to install card- opportunity with global sizing estimates for cash versus accepting machines, reaching tens of thousands of small electronic transactions for the total value of B2P, B2B convenience stores across the country. and B2P payments; and frames the six main obstacles that hinder merchants’ adoption of electronic payments. 4. In light of the identified obstacles, the case studies –– Part 2 presents five innovation insights observed from and five innovation insights, the report proposes the case collection exercise and provides in-depth action areas as suggestions to drive solutions for descriptions of selected relevant cases. merchants to accept electronic payments. The –– Part 3 suggests actions and focus areas for industry industry (established PSPs, Fintech start-ups and practitioners and policy-makers to consider as levers for challengers, and non-traditional stakeholders such as driving acceptance and uptake of electronic payments fast-moving consumer goods companies), the public by merchants, their suppliers and customers. sector and, of course, public-private partnerships, develop and promote solutions. Proposed industry actions include: creating tailored solutions for retailers Figure 0: Global Payments by MSMRs, Estimated values (2015) Global Total: $34 trillion Electronic: $15 trillion (44%) Europe & Central Asia High-income OECD Total: $3.1 trillion Total: $11.1 trillion Electronic: $1.3 trillion (46%) Electronic: $7.9 trillion (71%) Middle East & North Africa Total: $1.3 trillion East Asia & Pacific Electronic: $0.4 trillion (30%) Total: $9.5 trillion Electronic: $2.7 trillion (31%) South Asia Latin America & the Caribbean Total: $4 trillion Total: $3.5 trillion Electronic: $0.8 trillion (20%) Electronic: $1.5 trillion (46%) Sub-Saharan Africa Total: $1.5 trillion Electronic: $0.4 trillion (25%) 1 B2B payments include only those from the retailers to immediate suppliers Source: World Bank Group (2016a) 6 Innovation in Electronic Payment Adoption Part 1: Constraints and Opportunities Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants 7 Introduction: The importance of the merchant segment for financial access and inclusion Retailers sit at the crossroads of the cash economy and can Most merchants accept and effect payments mainly in cash, help expand the use of electronic payments by consumers. primarily because of their belief in its being “safe”, according The regularity and frequency of purchases made from to interviews conducted in seven countries selected for everyday retailers define the value of retail payment solutions in-depth primary research of this global sizing study - to consumers, and generate an anchor for them within the Colombia, France, Kenya, Lithuania, Morocco, Pakistan and formal financial sector.2 Turkey.3 Many retailers also have limited access to formal credit for inventory and working capital, and are poorly Merchants in developing economies, however, exhibit integrated into electronic supply chains operated by supplier limited acceptance and use of electronic payments, and consumer goods companies. In developing countries, despite progress in elevating financial access and inclusion electronic payments have not yet achieved sufficient at both the global and country level, and the important scale and widespread adoption to change user payment role merchants play in the economy. According to the behaviour. As long as merchants, their suppliers and global market sizing study, developing countries have a customers hold on to cash, scale will remain elusive. Many higher percentage of paper-based payment transactions participating stakeholders – banks and non-bank payment (cash and checks). The trend is also more prominent service providers (PSPs), and suppliers – would like to with micro retailers, where many self-employed firms or expand acceptance and usage of electronic payments in mom-and-pop stores tend to shy away from electronic order to grow their reach and improve supply chain and transactions, such as using debit or credit cards, because cash management operations. of extra costs (including transaction and bank fees), lack of awareness, difficulty in accessing financial services and Retailers must be able to readily pay out through one hand other challenges. For B2B transactions, estimates indicate what they have received in the other. In many markets, that only 31% of the total volume of payments by retailers both of these transactions are taking place in cash. In other in Sub-Saharan Africa are made electronically, with a level markets, payment instruments (e.g. card, check, cash) and of 45% among retailers in Latin America and a low of 26% accounts differ from those for business transactions; for in South Asia. These are significantly below the 81% level in example, suppliers may accept an electronic funds transfer high-income countries of the Organisation for Economic Co- from the retailer to their bank account, while customers operation and Development (OECD). only pay the same retailer in cash. This can hinder the fluid reuse and management of funds and decrease the competitive edge of electronic payments vis-à-vis cash. Solutions that allow small retailers to digitize both sides, i.e. to receive electronic payments from consumers and pay their immediate suppliers electronically, will thus more likely be adopted. For this reason, this report covers both angles: merchants as receivers (from consumers) and initiators (to their immediate business suppliers) of electronic payments. Figure 1: Interrelations of foundations and catalytic pillars to achieve universal access to and frequent usage of transaction accounts Universal access to and frequent usage of transaction accounts Transaction Leveraging Readily Awareness Catalytic pillars - Drivers of access and usage { account and payment product available access points and financial literacy large-volume recurrent design payment streams Financial and ICT infrastructures Foundations - Critical enablers { Legal and regulatory framework Public and private sector commitment Note: ICT = information and communications technology Source: CPMI and World Bank Group (2016); emphasis on the transaction account and payment product design pillar has been added 8 Innovation in Electronic Payment Adoption Developing and accelerating electronic merchant payments Cash continues to be used widely for a host of reasons: it is at the broader level can help countries advance financial familiar, easy to count and exchange, divisible, anonymous access and financial inclusion. Figure 1 outlines the guiding and, perhaps most importantly, universally accepted.6 framework and highlights the importance of these drivers While service providers have tangible costs in running of access and usage.4 Transaction accounts and payment and managing electronic payments,7 and merchants (in product design represent one of the catalytic pillars for traditional cases) have costs for accepting them, key driving access and usage. Expanding access to a basic stakeholders can reap multiple benefits by adopting transaction account that allows for payments and store of value is considered a first step to broader financial inclusion. electronic payments. Using basic payment or savings accounts can gradually lead to access to and usage of other financial services, such Benefits of electronic payments as credit, insurance or pensions. The three foundational enablers are also highly relevant levers for helping to –– For retail merchants: (i) security: cash is more liable to improve the usage and adoption of electronic payments by theft, loss and fraud; (ii) better and faster ability to assess merchants. the health of their business operations (e.g. cash flows, profit and loss) through synergies with e-payments; (iii) Transaction account and payment product design is ability to generate revenue from new channels and digital especially relevant for electronic payments for retailers. This financial services (if they keep balances with banks and includes user experience characteristics such as simplicity, other PSPs); and (iv) value-added services that come reliability and customer support, and product features such as low- or no-cost payment services. Additional, non- bundled with payments, or for making or receiving payment features that help retailers broadly manage their payments (e.g. loyalty, credit, marketing support) business and serve their customers better are also included. –– For customers: (i) simpler payment method for cases where customers already manage and receive their As underscored in global sizing estimates, cash-based finances through a deposit transaction account; payments still dominate around the world, and particularly at (ii) savings through access to loyalty schemes and the retail (microbusiness) level in developing markets.5 Cost- promotions; (iii) extension of purchasing power via efficiency has been one of the key arguments for moving access to a revolving line of credit (for products such as from paper-based to electronic payment instruments. credit cards), often interest-free if paid in full at the end Studies have shown that transitioning from cash and of the statement cycle; (iv) enhanced ability to assess paper-based to electronic payment instruments can lead to spending patterns and manage budgets; and (v) build-up significant savings. Yet, payment transactions are some of the most common daily interactions and make for behaviour of a transaction history and other relevant electronic data that is difficult to change. trails that may give customers easier or faster processed access to credit Early efforts on two fronts appear to offer learnings for –– For suppliers: (i) lower operational costs and risks from consumer and retailer adoption and use of electronic cash collections; (ii) better ability to provide short-term payments. The first is that providing retailers with a liquidity to retailers and managers, or enable a bank comprehensive solution for managing their business, such to better manage credit to retailers; (iii) enhanced as better inventory and sales management (which can be infrastructure to manage marketing promotions, loyalty enabled by electronic payments), offers them additional schemes and sales incentives; and (iv) less frequent need value in the form of improved profits. Second, of all actors for retailers to place large orders in the payments value chain, suppliers have the most to –– For PSPs and collaborators:8 (i) fee income from either gain from retailers paying them electronically; managing all the cash they collect from retailers is a veritable pain payment or adjacent services (financial and non- point, and has a measurable and significant financial financial); (ii) opportunity for cross-selling; (iii) enhanced cost. Also, providing merchants with credit is easier via ability to monitor performance with retailers; and (iv) electronic means than through cash. Therefore, the general opportunity for collaborators to earn part of the overall familiarity with and use of electronic payments can also revenue or sell adjacent services help merchants be more comfortable in accessing other –– For governments: (i) better tools to monitor trends in innovative financial services. Such services (e.g. alternative consumer spending and the retail sector; (ii) expansion lending platforms) can help grow their business. of financial access and inclusion; (iii) expansion of the tax base through formalizing MSMEs and possible reduction of leakage; and (iv) growing evidence that shifting spending behaviour to electronic payments can increase overall economic output and enhance social welfare9 The case of small retailers 9 Expanding merchant payments: a $19 trillion business opportunity Global market sizing: defining the landscape Person-to-Business Payments The World Bank Group, as part of this effort, conducted a The findings show that within each region, small and medium global market sizing analysis10 for three types of payments: retailers use electronic payments more commonly than micro person-to-business (P2B), business-to-person (B2P), and retailers. During interviews, small and medium retailers cited the first leg of business-to-business (B2B) or payments from convenience and safety as reasons for accepting electronic a retailer to its immediate supplier, all within the micro, small payments. Non-grocery retailers use electronic payments and medium retailer (MSMR) segment. Highlights from the more than grocery retailers because they sell higher-value findings on the value of payments include: goods. Using cash for P2B payments in micro retailers is less –– Total value of P2B retail payments worldwide by MSMRs common in developed economies. Use of electronic payments is estimated to be $18.8 trillion, 37% of which are made increases with the size of the retailer. electronically. –– Total value of B2B retail-supplier payments worldwide by In developing regions, especially in South Asia and Sub- MSMRs is estimated to be $13.4 trillion, 53% of which Saharan Africa, the value share of electronic P2B payments are made electronically. is very low among micro retailers (Figure 3). Micro retailers –– Total value of B2P retail payments worldwide by MSMRs still prefer cash payments because their main customers are is estimated to be $2 trillion, with 50% of payments mostly lower-income consumers who make more frequent made electronically. and smaller-value purchases, and do not always have access –– These imply a global market size of $34 trillion for to formal financial services. The costs associated with owning payments by MSMRs, with $15 trillion worth of payments or leasing a point-of-sale (POS) terminal are still considered a made electronically and $19 trillion made in cash and deterrent to accepting electronic payments. checks. –– Electronic payments are more widely used by non- Business-to-Business Payments grocery retailers compared to grocery retailers, regardless of whether they are B2B, P2B or B2P The study’s findings11 indicate a greater use of electronic transactions. payment instruments for MSMR B2B payments compared to P2B payments. B2B payments are also larger in value Different types of payments exist under each payer or per transaction, and retailers are constrained by supplier payee, as depicted in the payments grid (Figure 2), with the requirements in payment terms and conditions. The value highlight indicating the primary focus of this report. While share of electronic B2B payments increases with retailer size. B2B payments technically cover all those conducted along Additionally, across the regions, non-grocery retailers use a supply chain (for example, from supplier to distributor), this electronic payments more than grocery retailers, on average. report focuses mainly on micro, small and medium retailers as “payees” (from their customers) and “payers” (to their Business-to-Person Payments immediate suppliers). Moreover, although both physical and online stores constitute a “business”, the case collection Most of the MSMRs in less developed economies use cash to insights and selected cases in this report focus primarily on make B2P payments (i.e. salaries). Cash is more commonly the former – in other words, on in-store payments. used by grocery retailers as opposed to non-grocery retailers. Anecdotal evidence collected during the research suggests Global sizing research was informed by detailed country that cash is preferred by both retailers and employees, and analyses in seven countries, as data gaps in the retail that many employees do not have transaction accounts. In payments landscape had to be filled to facilitate the more developed countries, however, MSMRs pay salaries estimation. In-depth country analyses were conducted electronically into accounts. This may reflect the preference of during mid 2015 in Colombia, France, Kenya, Lithuania, employers or employees, and is sometimes mandated by law. Morocco, Pakistan and Turkey via face-to-face interviews with retailers, suppliers, trade associations, financial According to the World Bank Group study on global market institutions and other key players. The countries were sizing, formal MSMRs around the world accept $18.8 trillion grouped in clusters and global estimates were made. The of payments from customers every year, of which only 37% data collected not only allowed to estimate the global size of are conducted electronically. Much of the remaining $11.9 cash and electronic transactions in the B2B, B2P and P2B trillion is accepted in cash in addition to checks, especially in payment spaces for MSMRs, but also provided interesting markets with underdeveloped payment networks. and deeper insights for the seven countries. Figure 2: Types of payments Payee Consumer Business Government Agency Payer Consumer P2P P2B P2G Business B2P B2B B2G Government Agency G2P G2B G2G P = Person, B = Business, G = Government Sources: World Bank (2015a); CPMI and World Bank Group (2016) 10 Innovation in Electronic Payment Adoption Figure 3: Person-to-business payments by MSMRs, estimated values (2015) Source: World Bank Group (2016a) The global market sizing analysis further estimates that besides $7.1 trillion in electronic payments, about $6.3 trillion in paper transactions are conducted from retailers to suppliers (see Figure 4 for the geographic breakdown). In addition, of the estimated $2 trillion in salaries paid by MSMRs, $1 trillion is in cash and checks. Hence, a total of over $19 trillion is handled in cash and checks at the retail point of sale. Figure 4: Business-to-business payments by MSMRs, estimated values (2015) Source: World Bank Group (2016a) The case of small retailers 11 Constraints on merchant use of electronic payment services Despite this large market opportunity as evidenced in the sub-optimal transaction account and payment service previous section, why have traditional retailers adopted product design (e.g. interoperability, reliability, user focus, electronic payments only on a limited basis, and why is this access) may also be slowing the widespread adoption of advancing slowly? Is the market moving as fast as it could? electronic payments. Particularly in the developing world, limited uptake by consumers to pay electronically, combined In the short term, consumers and business face with the high fees retailers must pay to accept electronic disincentives in migrating to electronic payments. If they payments, hamper adoption. receive income in cash, for example, they may need go to a bank or agent to deposit it into their account before having Six obstacles hinder micro and small retailers from adopting the ability to use a bank card or a mobile phone. Conversely, electronic payments at a faster rate (Figure 5). Although to pay someone who only accepts cash, they may not they do not apply to all markets, these factors are most have easy access to withdraw funds at a nearby branch prominent in those where retail payments are conducted or automated teller machine (ATM) when they most need primarily in cash. it. To those not familiar with it, a card or mobile phone may appear complicated to use at first for conducting electronic 1. An inadequate value proposition for merchants: payments, or be seen as open to fraud if lost. Adopting Particularly in the developing world, small retailers do not new ways to make payments, such as electronically, must often report that accepting cash is necessarily a major be accompanied by a high degree of trust. While trust is obstacle or “pain point”. This does not mean that they the essential element of economic transactions, trust in would shun a more convenient mechanism of being paid: financial institutions is particularly low among low-income they are aware that, while accumulating cash increases populations,12 who may face fees or other costs to withdraw the risk of theft and robbery, cash is convenient for funds or make payments to suppliers. Thus, while paying by quickly conducting a transaction, especially for small cash may indeed be costlier for users,13 they may perceive amounts, and for paying suppliers who often do not it to be more convenient compared to paying electronically. mind being paid in cash. For example, focus groups with Furthermore, while strides have been made in unbanked selected merchants, conducted in Tanzania by the World consumers shifting from cash to electronic payments for Bank Group in 2015, revealed that the incentive for services such as person-to-person transfers, less progress accepting electronic payments is to keep up with sales, has been made with cash-in, face-to-face transactions. rather than to change the payment instrument itself. Many reasons exist for preferring cash, but the main one 2. Weak product and stakeholder economics in is that cash is entrenched in people’s daily interactions. traditional card models: Traditional card payment Despite the apparent benefits – most notably speed and models require a commission (the merchant discount security – for consumers and merchants alike to migrate fee or merchant service charge) that is usually a fixed fee to electronic payments, user behaviour is notoriously hard and/or a percentage of the payment amount (anywhere to change. In addition to the “sticky” habits of financial from 1% to 6%); merchants often pay for set-up fees behaviour, the overall perception in multiple markets of as well. The acquiring banks that set these fees pay, in Figure 5: Key obstacles to expanding adoption of electronic payments to small retailers 2. Product Economics 1. Merchant Value 3. Customer Proposition Demand 6. Business 4. Distribution Formalization Models 5. Technology & Regulatory Infrastructure Source: World Bank Group analysis 12 Innovation in Electronic Payment Adoption turn, an interchange fee to an issuing bank that manages 5. Inconsistent technological infrastructure and the relationship with the customer. Additional costs for enabling regulatory environment to support acquiring banks can stem from covering settlement and electronic payments in developing markets: In fraud risk. The acquiring banks’ operating margin is used addition to requiring effective distribution models to to pay the costs of marketing, a sales force and, in many access semi-rural and rural merchants (obstacle no. cases, a card-accepting POS terminal. 4), acquirers must also contend with poor or unreliable connectivity and electricity, especially in the developing Retailers in particular are more price sensitive to these world. Point-of-sale terminals need electricity and basic commissions, as their operating margins tend to be connectivity to process transactions, and while some thin. On the acquirer side, the projected low volumes innovations described later in this report use basic of electronic payments from small retailers hinder the phones and smartphones as acceptance devices, even economies of scale and increase the cost of distribution. these require network connectivity to initiate, approve and/or confirm transactions. Retail is typically a high-volume, low-margin business, so small merchants rarely have enough profit margin to give Restrictive policies hinder access to financial services to commissions (unless, as described previously, they for those that do not have them. For example, stand to lose the sale). On the acquirer side, itself a low- documentation requirements for opening an account margin business, small merchants have low overall sales may exclude workers in the rural or informal sector compared to their larger peers; thus, it makes business who are less likely to have wage slips or formal sense to acquire them only in the rarest of cases. This proof of residence.15 Thus, a supportive regulatory “lose-lose” proposition means that both parties have little environment that permits innovations to thrive is a key economic incentive to work together. element underpinning all electronic payments. Such an environment enables easy opening of electronic and 3. Insufficient aggregate customer demand: The bank accounts (e.g. required documentation, such as electronic payments model is a traditional “two-sided” customer identification and proof of residence), the market, where the demand of one side influences that of issuing of electronic money, extending services through the other. Markets with fewer active cardholders further banking agents (who are often retailers themselves) drive down interest on the merchant side (obstacle no. and permitting non-bank actors to participate in core 1), as merchants are less likely to accept electronic elements of the payments value chain. Indeed, many payments if they see that their customers are content regulators around the world have made great strides paying in cash or by check. In some cases, such as in in providing an enabling environment for electronic Indonesia,14 service providers offer incentives to stimulate payments, and continued effort is under way in other usage, such as card-accepting terminals at no charge, markets to do so. Relevant guidance for striking the but traction has been slow to date. As a network service, appropriate balance between a protective and an payments must be used regularly by a wide range of innovation-ready environment is reflected in the Payment consumers and businesses in order to generate value for Aspects for Financial Inclusion (PAFI) report, in guiding users. In traditional card models, customers have been principle 2 on the legal and regulatory framework. It primarily encouraged through a host of benefits beyond states: “The legal and regulatory framework underpins the payment mechanism itself, such as a revolving financial inclusion by effectively addressing all relevant credit line (in the case of credit cards) to extend their risks and by protecting consumers, while at the same purchasing power, and loyalty schemes, such as rewards time fostering innovation and competition.”16 (points, miles, cash back). With the resulting increase in scale, more regular use of electronic payments can also 6. Difficulty in formalizing enterprises/reluctance to help to reduce marginal costs, leading to positive effects pay full taxes on sales: Traditional franchise rules for from payments for the broader economy. card networks insist that all accepting merchants be formal businesses registered with the local government. 4. Ineffective distribution models for serving hard-to- Small retailers, especially in developing countries where reach merchants: Merchants benefit from being located informal businesses are more prevalent, are resistant in high-traffic areas, not only for their core business to formalize and pay full taxes on their sales. Moreover, but also in driving up aggregate demand for payments even formal merchants often under-report sales volumes (obstacle no. 3). Providers that want to serve small to decrease their tax liability; accepting electronic retailers located further away from densely populated payments implies that a digital trail exists, which tax areas require strong distribution models for sales, training authorities could insist on verifying during an audit. and customer service. This is especially the case in markets where first-time merchants are unaccustomed Related user research focusing on the traditional retail to handling electronic payments and/or have low financial (merchant) sector in India and Indonesia illustrates the literacy. dominance of cash payments and some of the obstacles described in the six obstacles. See Box 1 and Box 2 for highlights of merchant payment behaviour from the two research studies. The case of small retailers 13 Box 1: Payment behaviour of merchants in India17 A study was recently commissioned to understand the current behaviours towards and perceptions of digital payments among consumers and merchants in low-income communities in India. Key insights indicate that the adoption and use of electronic payments has yet to make strides. Cash transactions are a matter of habit: 97% of retail transactions in India are conducted in cash or by check Few consumers use electronic payments: Only 11% used debit cards for payments in the past 12 months Few merchants accept electronic payments: Only 6% of Indian merchants accept electronic payments 1. Merchants who accept and consumers 2. Awareness and interest is low among who use electronic payments are highly merchants who do not accept and satisfied with the experience. consumers who do not use electronic payments. 89% of debit card-accepting merchants and 97% of mobile money acceptors stated that they would recommend In the sample, only about 40% of merchants not accepting accepting electronic payments to other merchants. They payments via debit cards were aware that they could do highlighted a number of benefits of acceptance, most so. Of those, only about 40% were interested in accepting prominently safety, faster transaction speeds, ease of use cards in the future. For mobile money and bank transfers, and a reduced hassle of finding change. For consumers, the numbers are even lower. Approximately 20% of 84% of users of mobile money and 91% of bank transfer merchants not accepting these instruments were aware users said they would recommend these instruments to that they can accept payments through these channels, others. and just 30% of them were interested in accepting these instruments in the future. Only 28% of respondents who did not hold debit cards were aware of them. 3. Merchants and consumers are trapped in a cash ecosystem, which inhibits their interest in electronic payments. The need to make cash payments to suppliers was the top-ranked reason for merchant disinterest in adopting debit cards. Lack of awareness was the second reason, and low consumer demand ranked third. 14 Innovation in Electronic Payment Adoption Box 2: Payment behaviour of Indonesia’s traditional retail market18 The Indonesian market has an estimated 2.5 million retailers, of which the majority is in the traditional and informal space. Most of these retailers pay their immediate suppliers in cash. Estimates of sales through traditional retail range from about $46 billion to about $80 billion, depending on the scope of goods covered and the classification of traditional retail versus modern retail. Selected highlights on profiles of traditional retailers in Indonesia demonstrate the following: –– Formal business management functions, such as accounting and tax management, are simply not performed by traditional retailers. Most of these retailers do not keep track of their stock or profits. If money remains in the cash box at the end of the day, it signals a profit. –– Most traditional retailers are not registered business entities and do not pay tax. The impetus for a traditional retailer to register its business is to receive a loan; this is a prerequisite for a bank. –– Most traditional retailers do not use a bank account for their business. They mix their personal and business finances. Generally, traditional retailers only use a bank account for savings or a bank loan. They often stop using the account once the loan has been repaid. Merchant vignette 1: Wholesaler, seven years in business, family owned, no bank account, 10 suppliers “We pay all our distributors in cash, even for big orders worth millions.” Payment Process: All payments are made in cash, even for the largest orders of rice. The owner does not have a bank account, but deposits savings each week in the son’s bank account. Savings are used for large orders, and will be used as well to start a second store for the son. Merchant vignette 2: Small retailer, eight years in business, no bank account, 10 suppliers “I had a bad experience paying with a debit card, so now I will never use it again.” Payment Process: The owner pays suppliers in cash. After a bad experience using a debit card, she was charged twice, and refuses to use or offer electronic payments in her store. The owner does not have a bank account, and manages all her business in cash, including her savings. She does not offer credit to customers, does not have a bank loan or use supplier credit. While she wants to expand, she does not want a loan. The case of small retailers 15 16 Innovation in Electronic Payment Adoption Part 2: Innovation Trends and Cases Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants 17 Overview A brief note on methodology on relevant reports that emerged during the time period concerned (2015-2016). Cases that focus directly on Stakeholder survey: The World Bank Group and the merchant payment innovations were analysed and clustered World Economic Forum, in collaboration with the Better around major themes. Subsequent interviews were Than Cash Alliance, conducted a joint survey exercise conducted with executives from organizations in relevant in mid 2015, reaching out to over 180 stakeholders on cases to provide greater detail. electronic payments and technology-driven innovations to advance financial inclusion. It covered input from a diverse Key insights: Electronic payment innovations targeting set of actors, including payment networks, banks, mobile small retail merchants have only recently expanded, and operators, start-ups, investors, technology vendors and their emergence is coinciding with the growth of innovative development organizations. The survey aim was to collect non-bank financial services. Most cases have occurred over and feature innovative cases and business models that the last five years. New models for expanding merchant illustrate how digital payment systems, instruments and payments to underserved segments are still in the “proof-of- technology-enabled innovations advance financial inclusion. concept” stage. In effect, substantial experimentation is still The particular focus of the stocktaking exercise was the under way to discover sustainable business models – from merchant (MSME) target segment in the retail sector market segmentation, technology selection, pricing tactics (B2B and P2B), as well as government and government- and product mix to sales and distribution force, strategic led initiatives (such as government-to-person [G2P] partnerships and customer service. Moreover, the “right” payments).19 For the purpose of this report, a scope filter model will change, based not only on market structure, was applied to the case collection results to focus on those regulatory dynamics and the enabling environment for trends cases directly serving merchants to enable or facilitate their in innovation and technology, but also on the business electronic payment needs. objectives and capabilities of the service provider in question. The stocktaking exercise identified five innovation Case collection scope and results: The Case Annex trends relevant to merchants adopting electronic payment lists the 90 cases collected through the stocktaking (Figure 6). The individual cases used to illustrate the trends exercise.20 These cases represent those collected from are intended to be descriptive rather than prescriptive the primary outreach to stakeholders, as well as additional models. cases supplemented through secondary research based Figure 6: Key innovation trends for merchant payment solutions Payment Service Provider Data Payments 3 The use of data: providing value-added 1 Comprehensive business solutions: services to merchants expanding retailer acceptance Customer Merchant Payment 2 Non-card payment models: reaching retailers in developing Merchant markets 4 The supplier’s role: boosting merchant adoption of electronic payments Supplier 5 Partnerships: reaching merchants via non-traditional payment above Source: World Bank Group team analysis 18 Innovation in Electronic Payment Adoption Comprehensive business solutions: expanding retailer acceptance Insight 1: Small retailers are more likely to payments market (the retailer side). Nevertheless, early adopt combined solutions that help manage indications from these cases appear to show that they are successfully capturing part of the retailer segment that and grow their business, in addition to the previously accepted only cash. ability to pay electronically. Yet in other cases, easing the onboarding payment Every market contains a segment of retailers that does not experience is not sufficient to generate consistent adoption accept electronic payments, but may be willing to do so if by merchants, particularly among retailers that are less a solution is designed appropriately to meet the merchants’ savvy financially and doubtful of the benefits. Instead, needs. This could be because they are not aware of services that allow retailers to earn additional income, precisely what works, have not been targeted by PSPs, such as enabling customers to pay bills, or helping them or find the current electronic payment solutions expensive to manage their business (e.g. inventory management or or cumbersome. The core value proposition of accepting monthly budgeting tools), truly respond more to their core electronic payments – a secure, efficient way of being paid – needs than a service that facilitates payments. This creates needs to resonate with the merchants’ business needs. “stickiness” of the solution that will more likely lead to ongoing use of payments and long-term financial inclusion. A number of innovations received in the survey did indeed address this segment by adjustments to business and One large mobile operator in Africa, for example, offers technical models. Square is the most frequently cited retailers an easy way to accept payments from a customer’s example of this: in 2010, it began its mPOS (mobile point mobile money “wallet”, or electronic money account. The of sale) service, so called because it converts the retailers’ user experience is nearly identical to one already well existing smartphone into a card-accepting device by known to consumers: a P2P transfer, where payers initiate adding a small piece of hardware, called a “dongle”, in the a transaction from their phones and receive a confirmation headphone jack (Case Box 1). The company also made the when it is completed. It does not charge merchants and set-up process paperless and efficient: merchants register customers a fee, and offers an airtime bonus if merchants online and receive the dongle within days, along with simple, accept it. Despite this seemingly well-designed product clear pricing. which, it was hoped, would boost financial inclusion, the two-year-old service is looking for further solutions to reach By enhancing the merchant experience from registration wider traction with the merchant segment. Indeed, free to set-up and pricing, such changes have allowed a new services with simple user experiences and wide customer class of micro- and small-business owners in the United bases of several million active users need accelerators. States to start accepting electronic payments, primarily These challenges indicate that the strongest value as card payments. These retailers, including coffee proposition for these products – currently, payments plus shops, convenience stores and independent contractors, value-added services – has yet to be determined (i.e. the understood the benefits of electronic payments but disliked type and number of services offered can vary widely from the existing options from banks. iZettle (Sweden), Clip market to market). It is difficult to achieve a balance between (Mexico) and Absa (South Africa and Australia) are some a product’s value proposition – one that is compelling to examples from the case database that aim to replicate both merchants and customers, provides incentives and Square’s business model in their respective markets. Initially, succeeds in positively affecting the user’s behaviour (as mPOS solutions assume a sufficient cardholder base and in migrating from cash to electronic payments) – and its are therefore focused on building out only one side of the commercial viability for the provider. Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants 19 In focus groups with the previously mentioned mobile operator’s merchants, however, most respondents showed only partial interest in the merchant payment products. However, they responded positively to prototypes of adjacent services that could support their business, such as financial management tools, inventory control and unsecured small-business loans. Retailers responded positively to other ideas, including revenue-generating activities such as bill payment or mobile top-up reselling capabilities. The payment itself is only one aspect – and sometimes not the most important feature – for attracting merchants, as described in the case boxes of two merchant payment initiatives in Kenya (Safaricom’s Lipa Na M-PESA [insight 2], and Kopo Kopo [insight 3]). Comprehensive and combined business solutions can be the “hook” for small businesses to accept electronic payments. In turn, they can lead to access to other products, as well as to elevated level of “business savviness” for the merchant. A transaction account, in addition to being a financial service in itself, can also serve as a gateway to other financial services.21 It can particularly facilitate credit underwriting (which is supported by electronic transaction data and the linkage to settlement flows for payments22) and non-financial services, such as supply chain automation, inventory management, customer loyalty programmes, data analytics and other business support services.23 But retailers who currently do not accept electronic payments may not see the benefits of doing so and/or perceive too many obstacles; thus, offering non- payment services that respond to their core business needs, coupled with a payment functionality, can be one strategy to boost financial inclusion. This would not only increase adoption and use of transaction accounts, but also enable access to other financial services. Innovations that go beyond facilitating electronic payments to provide value-added services for the small retailer promise high success, particularly for lower-income merchants. 20 Innovation in Electronic Payment Adoption Case in point: Square In attempting to stay ahead of competitors, Square has continued its strategy of building out value-added services. When it was launched, Square had the initial goal of It now offers a range of applications to manage and grow a enabling electronic payments for the 27 million US small retailer’s business, including: merchants who, at that time, transacted mainly in cash. –– Inventory management: reordering, stock alerts These merchants often lose out on potential sales because –– Employee management: timecards, permission levels they are unable to take payments by card. To enable card –– Payroll services: direct deposit set-up, tax withholding payments prior to Square, merchants had to register for –– Powerful applications for customer relationship a merchant account directly with a card acquirer, a costly management: marketing, promotions, loyalty and time-consuming process that did not guarantee the –– Instant, unsecured credit lines through Square Capital merchants’ acceptance. (from mid 2014; a product which Kopo Kopo also began offering in Kenya at roughly the same time [see insight 3]) To solve this pain point, Square innovated with a technological product and business model. For the product, Square devised a card reader, a small piece of hardware Case box 1: Square that plugs into the headset jack of any mobile phone or tablet to transform it into a card-accepting terminal. It later came to be known as an mPOS device. Unlike other card Business profile readers at the time, Square’s product was small, convenient and required no installation. Name: Square Type of organization: Technology start-up The second, and perhaps more significant, innovation was its business model: Square eliminated the costs, complexity Year operations launched: 2009 and uncertainty that a small merchant faced when Active countries: United States, Canada, Japan, registering for a merchant account. The company negotiated Australia with card networks, such as Visa and MasterCard, to allow Square to serve as a “mobile processing aggregator” and effectively act as a mini-acquirer for physical merchants, Payment Channels, Technology And Innovation something that only a few firms were permitted to do online Features at the time. This designation meant that Square could take on the responsibility (and risk) of allowing merchants P2B: Person-to-business (P2B) payments, value-added to use cards and route transactions to their main acquirer services processor, Chase Paymentech (owned by JPMorgan Acquirer: Chase Paymentech Chase, one of the country’s largest banks). Opening an account was paperless and fast, and did not require a credit Payment instrument: Debit card, credit card check or long-term commitment. With adjustments made Payment instrument form factor: Payment card to the card payment rules, Square could offer free, easy Front-end technology: Provides hardware card reader and seamless registration to small merchants through its (“dongle”) or tablet website. Additionally, and upon registration, merchants were also immediately sent a Square card reader. Innovation: As a payment aggregator, Square offers fast, easy account sign-up and card acceptance for micro When launched, Square was cheaper, offered a faster merchants using hardware that connects to their existing registration process, and was more transparent than the smartphone existing alternatives available to merchants. Its fee structure was simple and clear: a “fee per swipe” of 2.75% (as Merchants opposed to about 4% for traditional acquirers). Merchants conducting less than $250,000 in annual card payments Target segment: Micro, small and medium retailers; could pay a flat monthly fee of $275. Over the course of independent contractors 2015, Square processed $35.6 billion through its over 2 million active merchants. Number of merchants reached: More than 2 million, as disclosed in Square’s S-1/A filing (November 2015) As expected, other start-ups and acquirers noted Square’s success and began offering similar services and price Other cases relevant for this insight: Clip (Mexico); izettle points. Faced with imitators in its core business, Square (Sweden), Absa (South Africa) began providing its users business analytics insights generated from the electronic payments. Small merchants could now view sales trends and product popularity through the Square application. By helping to improve their business decisions and, potentially, their profits, Square was delivering additional value to these merchants that they could not find elsewhere. The case of small retailers 21 Non-card payment models: reaching retailers in developing markets Insight 2: Innovators are eschewing non-card Broadly speaking, electronic payment solutions for micro infrastructure in many developing markets to and small retailers collected during the stocktaking exercise include two types of innovations: sustaining and disruptive. create new payment models for reaching low- The so-called sustaining innovations include those cases income retailers. that modify part of the existing card-payment infrastructure, as seen previously with Square. The second type are more Since their rise in the United States in the 1950s, debit and disruptive, comprised of non-bank organizations that create credit cards have become the most common mechanism a new set of operating rules, such as Safaricom’s mobile for consumers around the world to conduct electronic money merchant payment product, Lipa Na M-PESA (Case payments. Two main, so-called “schemes” have emerged: a Box 2). This is a critical point in reaching retailers (and thus deepening financial inclusion): the innovator is no longer four-party model and a three-party model. constrained by some of the obstacles mentioned in the Introduction that necessarily may be part of the traditional In the four-party model, cardholders have a relationship business model, such as high merchant fees or lack of with their financial institution (called the “issuing bank”, customer demand. or simply “issuer”), while entities accepting the card, usually merchants, have a similar relationship with their By extension, some of the most groundbreaking financial institution (called the “acquiring bank”, or simply innovations are therefore occurring where traditional “acquirer”). Transactions are routed between the two card payment infrastructure is limited, such as in Sub- financial institutions through a shared platform, managed Saharan Africa and certain developing Asian countries. by a “governance authority”. In contrast, the governance Conversely, in developed markets, where the card authority in a three-party model manages both the infrastructure is well entrenched, organizations looking to target small retailers are more likely to opt for “tweaking” the customer and the merchant relationship (Figure 7). existing card model than creating a completely new one. MasterCard and Visa are the most recognizable international Two variables affect this decision and also reflect how schemes managing four-party models, whereas American entrenched the existing card payment schemes have Express is most commonly associated with three-party become: market fragmentation of issuers and acquirers, models.24 The likes of Visa and MasterCard play a key role and the number of cardholders and payment-accepting in establishing a series of “franchise rules” for their member merchants. In the most pronounced case (in the United financial institutions, such as for card design, brand identity, States), for example, millions of cardholders transact with data formatting, and clearing and settlement conditions. hundreds of thousands of local merchants, who in turn Critically, however, they do not set the fees charged to belong to hundreds of acquiring and issuing domestic merchants for accepting electronic payments (the merchant banks. This bank fragmentation increases the payment networks’ value exponentially. In addition, the aggregate service charge), which is often a percentage of the payment customer demand would make it difficult to persuade amount. Visa and MasterCard have grown to include over merchants to accept a payment solution that does not 10,000 participating member financial institutions each, already take advantage of a payment instrument used and from nearly every country. In some markets, domestic by their customers. In fact, most of the recent merchant networks, often owned by local banks, provide many of payment innovations in the United States – by companies the same functions as international networks, such as such as Apple, Samsung, Google and Square – all work easing the processing of in-country electronic payment with MasterCard and Visa schemes rather than, for transactions.25 example, a proprietary payment mechanism developed in- house. Figure 7: Four-party model (L) and three-party model (R) Governance Governance authority authority (card issuer and card acquirer) Card payment Card issuers Card acquirer Cardholder acceptor Card payment Cardholder acceptor Source: ECB (2014) 22 Innovation in Electronic Payment Adoption Leveraging existing payment infrastructure to deepen Developed markets may only require adjustments merchant acceptance is not necessarily undesirable, to existing domestic and international card models and, in certain cases, comes with advantages, such as to reach small retailers with electronic payments. reliable technology and established operating rules. But in However, innovators in developing markets, primarily markets with very few cardholders (despite the presence of non-bank organizations, will need to create tailor- traditional card payment infrastructure), innovative firms that made business models to address the merchant chart their own course are more likely to be found. segment’s obstacles and needs. More flexibility in decreasing price points associated with acceptance of electronic payments. Retailer margins are usually thin, compared to other businesses such as those in the service sector. Thus, traditional card-based merchant service charges (MSCs) are often prohibitively high, despite recognition of the value in accepting electronic payments. In many cases, non-card innovators have greater flexibility in determining MSCs than traditional acquiring banks (who often use interchange rates for calculating the retailers’ MSCs) because they manage their own “schemes”, and often in a three-party model. This flexibility allows innovators to set MSCs that are more amenable to merchants, encouraging the ongoing acceptance of electronic payments. The case of small retailers 23 Case in point: Lipa Na M-Pesa26 Safaricom has also begun offering promotions to boost customer awareness and interest. It launched a campaign Safaricom, Kenya’s largest mobile-network company, offering prizes – from home appliances to three-bedroom launched M-PESA, a mobile money transfer service, in homes – to randomly selected consumers who use Lipa 2007. Since then, M-PESA has become the world’s most Na M-PESA. For a short time, Safaricom also marketed widely known mobile money solution. It allows people to the service as free for consumers. (This was not exactly transfer money using their mobile phones, even without the case: merchants could choose to pass on part of the a bank account. Today, M-PESA is used by 22 million processing fee to their customers, which was not very Kenyans (70% of the population), with monthly M-PESA transparent.) Since then, Kenyan regulators have required transactions totalling $150 million. Despite M-PESA’s Safaricom to disclose Lipa Na M-PESA’s fee structure. success, 94% of transactions by volume in Kenya were Safaricom has also taken steps to educate customers about still done in cash.27 Furthermore, general estimates indicate when the service is not free of charge. that the ratio of merchant transactions to P2P transactions in a well-developed market approach 16 to 1. In other words, capturing merchant payment transactions through Case box 2: Lipa Na M-PESA Safaricom’s mobile money payment network represents an immense opportunity. Business profile In 2012, Safaricom launched Lipa Na M-PESA, a mobile payment service specifically aimed at merchants (as Name: Safaricom Lipa Na M-PESA suggested by the name, which means “buy goods” in Type of organization: Mobile network operator Swahili). Customers pay merchants for goods and services by accessing M-PESA on their phones and entering a Year operations launched: 2012 (2007 for M-PESA merchant’s identification number to direct the payment. The service) merchant and customer then receive confirmation messages Active countries: Kenya from M-PESA that the transaction has been completed. Across Kenya, 36,000 merchants accept Lipa Na M-PESA; 70% of them have been active over the previous 30-day Payment Channels, Technology And Innovation period. Safaricom has signed up a range of participating Features businesses and organizations, including supermarkets, public transportation providers, gas stations, airlines, hotels, Services: P2B payments, B2B payments, value-added schools and banks. For November 2015, transactions services through Lipa Na M-PESA totalled KES 15 billion (Kenyan Acquirer: Safaricom shilling), or approximately $145 million. Payment instrument: Mobile money Lipa Na M-PESA merchants enjoy a number of concrete Payment instrument form factor: Consumer’s mobile benefits. As mentioned previously, electronic payments are phone (feature phone or smartphone) generally an improvement on cash payments because they eliminate the handling costs and risks associated with the Front-end technology: Merchant’s mobile phone (feature latter. Furthermore, Lipa Na M-PESA charges merchants a phone or smartphone) transaction processing fee of not more than 1%, compared Innovation: Following M-PESA’s success with its P2P with fees that generally range between 3-5% for accepting money transfer service by phone, Safaricom signs up card payments. And, given the prominence of M-PESA small merchants to enable its customers to pay with among Kenyans, merchants have good reason to believe mobile money. their customers will be interested in paying via Lipa Na M-PESA. According to Paul Kavavu, Head of Emerging Business-Financial Services at Safaricom, Lipa Na M-PESA Merchants intends to better target merchants who have low margins (from small retailers to gas stations, whose profit margins Target segment: Micro and small retailers are regulated by the government), and who prefer accepting Number of merchants reached: 36,000 cash over Lipa Na M-PESA. Kavavu estimates that most of the current merchant base did not have bank accounts previously, and that the ongoing use of Lipa Na M-PESA, Other cases relevant for this insight: Kopo Kopo (Kenya), as well as the current M-PESA money transfer service, is Tigo (Paraguay), Telenor (Pakistan) helping to close this important financial inclusion gap. 24 Innovation in Electronic Payment Adoption The use of data: providing value-added services to merchants Insight 3: As more retailers adopt digital Moreover, the gap can represent an opportunity for consumer technologies for personal and innovators in the electronic payments space, in particular to tailor products and innovations to female entrepreneurs and business use, innovative providers are using female-owned merchant businesses. the resulting data trails to supply greater value-added services back to those retailers. Consumer adoption of mobile and internet technologies has had two major impacts on electronic payments. First, and Individuals worldwide are adopting consumer technologies, most obvious, it has provided the platform for offering ever such as smartphones and social media, at a rapid pace more innovative payment alternatives to users: Safaricom (Figure 8). Unique smartphone subscribers will rise from 4.0 M-PESA’s launch in 2007 was contingent on an active billion in 2016 to 4.6 billion by 2020, representing 59% of mobile phone user base of nearly 12 million Kenyans at the world’s population. The Asia-Pacific and Sub-Saharan the time; and WeChat, a social media service of Chinese Africa regions are driving much of the growth. internet giant, Tencent, with over 650 million monthly active users, has aggressively pursued “social commerce” to Moreover, smartphone penetration is projected to increase allow customers to buy goods and services using electronic from 50% to 65% of the population by 202028 because payments through the social network itself. So far, WeChat of two key reasons: a falling “total cost of ownership” for users have stored 200 million bank cards on the platform.30 smartphones, which includes the cost of handset, taxes and mobile data; and a shift from 3G to faster 4G networks Because many small merchants are individuals, the second forecast to be accessible to half the population by 2020. impact of consumers’ adoption of technology, although less Mobile access to the internet is also fuelling the growth in visible, has arguably just as much potential. Financial service social media users. Roughly 2 billion consumers access providers can analyse data generated by an individual’s social networks (Figure 8), and this figure is predicted to technological activity – text, voice, data, location and increase to 2.5 billion by 2018. However, the upward trend social media – and offer compelling services back to the is uneven, demonstrated by recent research pointing to merchant that increase efficiency and value generated for a wide gender gap: over 1.7 billion women do not own both the merchant and the service provider. For example, a mobile phone in low- and middle-income countries. MicroEnsure, a microinsurance firm serving nearly 18 Moreover, women are 14% less likely to own a mobile million mainly unbanked customers in Africa and Asia, has phone than men, translating into 200 million fewer women partnered with Telenor Pakistan, the country’s largest mobile owning mobiles phones than men. Addressing this gap operator, to offer free life insurance to users, based on a could unlock an estimated $170 billion market opportunity minimum purchase of prepaid airtime per month.31 for the mobile industry in the next five years.29 In addition, the algorithm could serve merchant insurance Figure 8: Global growth of smartphone penetration and social network users, 2013-2018 (billions) Sources: GSMA (2015a); eMarketer, in Taylor (2016) The case of small retailers 25 needs. Similarly, banks use a small business’s social media Kabbage, a US-based company founded in 2009, asks activity to reduce internal costs through stronger fraud small-business owners to enter personal, financial and prevention32 and optimized call-centre operations. sales information, as well as social media activity; funds can then be disbursed in as little as a few minutes. AMP Using electronic payment data, in particular, has gained the Credit Technologies requests access to daily cash-flow data most traction for offering value-added services to micro, through credit or debit cards, and offers unsecured loans small and medium businesses. Such data not only informs in two days to businesses in Hong Kong, the Philippines overall sales volumes, but also reveals key patterns for and Singapore. Telmex, a Mexican telecom company, offers gauging a firm’s financial health, such as transactions from loans of up to $40,000 to its small-business customers, unique customers, frequency of supplier payments, best- based in part on data analysis of their phone records.33 selling products, stock-keeping units (SKUs), variance over time (day, week or month) or seasonality. Square analyses Addressing information asymmetries in financial payments and customer data processed through its markets provides opportunities for individual and firm platform to offer powerful insights to merchants for retaining merchants to gain access to financial and non-financial customers and boosting sales. Safaricom offers a free products and services that previously were hard to “M-Ledger” smartphone app to help small-business owners obtain. Using alternative data, as already discussed and as better understand their sales and expenses by matching covered in the case examples, addresses the information two data sources: M-PESA SMS confirmation messages asymmetry gap, a key obstacle to expanding financial stored on users’ handsets, and users’ six-month M-PESA inclusion to individuals and firms. Harnessing digital and transaction history located on the company’s servers. While alternative data trails can make for new ways of assessing banks have historically used electronic payment data to creditworthiness of previously unserved segments – those offer financial products and analytical services to their small- that are financially constrained and potentially good business clients, the Safaricom example shows the value of borrowers, but are not able to serve under traditional combining payment and non-payment data to deliver value underwriting models.34 back to the merchant. Analysing electronic payments to offer merchant loan “Big” and “small” data, both payment- and non- products is an innovation gaining worldwide acceptance. payment-related, will increasingly be used to offer With a hassle-free application process and rapid turnaround value-added services, particularly microloans, to time, this meets two needs. First, small businesses are often small businesses. Merchant acceptance of electronic strapped for short-term capital and do not have the time (or payments will expand as more business owners a strong enough credit score) to undertake a lengthy credit- adopt a variety of consumer technologies, from approval process. Second, providers can use data to gauge today’s smartphones and social media to the future’s risk and improve underwriting, allowing them in most cases wearables and virtual reality. to offer unsecured loans at high margins. Big, Small and Alternative Data: New Opportunities, New Challenges Much has been made of “big data”, particularly in fintech and with the rise of alternative lending and underwriting. While combining multiple, sophisticated data sets can yield powerful results, some basic analysis on even a handful of variables can improve segmentation, boost customer loyalty and reduce loan losses. Harnessing digital data for innovations in merchants’ adoption of electronic payments has great potential and is taking many forms, as well as for other types of financial services. This trend also requires special attention to assessing and developing adequate practices for protecting consumer data, ensuring data security and privacy, and, at the same time, providing an enabling environment for innovation. For more information on this trend, see Costa et al. (2015), CGAP (2015d) and World Bank (2016). 26 Innovation in Electronic Payment Adoption Case in point: Kopo Kopo35 Grow has approximately 1,000 merchants so far and has disbursed $3 million, with a loss rate of just 2% on In the first few years following Safaricom’s M-PESA launch in an average loan of $4,000 over four months. It has been 2007, mobile money services included mainly P2P transfers, successful enough for the company to declare recently deposits and withdrawals (also known as “cash in” and that filling the “SME finance gap” will be its primary aim in “cash out”) at retail agents, as well as airtime and utility the future, with merchant payment acting as the necessary payments. In 2011, the start-up Kopo Kopo (Case Box 3) “hook” to attract merchants. The company has not only recognized an untapped opportunity to offer acceptance survived, but also thrived: it raised $2.1 million in a Series D of electronic payments to merchants using the M-PESA round of financing at the end of 2015, and is now providing platform; Kenya had many small retailers, very few of whom merchant acquisition and customer support, as well as accepted bank cards. At the time, only 16,600 of the several managing settlement for Safaricom’s Lipa Na M-PESA hundred thousand retailers in Kenya had POS terminals, service. according to the Central Bank of Kenya. Those retailers who had been approached were reluctant to pay the merchant Case box 3: Kopo Kopo fees of roughly 3-5% of sales. The World Bank Group’s report, Cash vs. Electronic Transactions by Small Retailers: Estimating the Global Size, approximates the total sales Business profile of micro, small and medium retailers in 2015 at over $35 billion. In addition, only 12% of the over 1 million cardholders Name: Kopo Kopo (company); Grow (product) held credit cards; the bulk were debit cards used primarily Type of organization: Technology start-up to withdraw cash rather than make payments. Conversely, M-PESA had nearly 17 million registered users, or roughly Year operations launched: 2014 (2011 for standard 70% of Kenya’s adult population, out of the 19 million total merchant payments service) mobile money users at the end of 2011. Thus, the two- Active countries: Kenya sided market had already been “cracked”: customers were actively using electronic money to make transfers to other individuals, but did not have a means to do so at retail Payment Channels, Technology And Innovation merchants. Features Kopo Kopo launched its merchant processing platform Services: P2B payments, value-added services in February 2012, and started acquiring small retailers by Acquirer: Kopo Kopo offering a 1.5% commission on all sales conducted through M-PESA. Customers would enter a merchant “till” number Payment instrument: Mobile money to identify the merchant, and Safaricom would clear and Payment instrument form factor: Consumer’s mobile settle the transaction. Kopo Kopo quickly gained hundreds phone of merchants, enough for Safaricom to begin offering its own merchant payment product, Lipa Na M-PESA Innovation: Kopo Kopo provides unsecured, instant (described earlier), directly to merchants in mid 2013. credit lines to its acquired merchants based on historical Eventually it slashed the commission fee to just 1%. payment data. Kopo Kopo recognized that competing directly on mobile Merchants merchant payment processing against a much larger challenger represented a challenge, especially given Target segment: Micro and small retailers Safaricom’s brand, distribution and lower price. It thus responded with a two-pronged strategy: first, it built value- Number of merchants reached: 1,000 for the Grow added services that directly addressed merchant needs product (10,000 as overall base) and pain points, such as business intelligence and targeted SMS marketing. Second, it used predictive analytics on Other cases relevant for this insight: Alibaba (China), both the payment processing and customer relationship including partnerships with Lending Club (USA) and data to offer Grow, an instant cash-advance product, to its iwoca (Spain, UK); Kabbage (USA); Square Capital 10,000-strong merchant base in 2014 (most of whom are (USA); AMP Credit Technologies (Philippines, Singapore, active). Repayment was cleverly deducted from future sales Hong Kong); Telmex (Mexico) made through Kopo Kopo’s merchant payment platform. About 40% of active users are eligible for a loan; although effective monthly interest rates are 3-6%, the loan is priced as a flat-fee model. Decisions are almost immediate and disbursement occurs within 24 hours because credit decisions are being revised daily, based on historical electronic payment cash flows before the request. The case of small retailers 27 The suppliers’ role: boosting merchant adoption of electronic payments Insight 4: Suppliers have financial incentives Third, and most compelling, is the strong business case and operational capabilities to encourage on the supplier side. Unlike P2B transactions, where the business may not necessarily be “hurt” by being paid in retailers to pay them electronically. cash, suppliers almost always manage substantially large Of the payments between retailers and suppliers, the first- volumes of cash. Doing so, however, is a veritable pain leg B2B supply chain payments are substantial, at over $13 point: the cost of handling cash, paying for insurance trillion.36 Moreover in most emerging markets in Asia, Latin and suffering an occasional robbery or theft amounts America, the Middle East and Africa, only one-third of the to almost 1.7% of total volumes, according to one value is transacted electronically, representing an enormous, payment network interviewed that works with a large untapped opportunity. The Table lists the estimated annual regional beverage distributor. Moreover, one multinational value of electronic payments by type of retailer and region fast-moving consumer goods (FMCG) company believes (emerging regions are highlighted). that the morale of their delivery-team employees would improve because they would feel more secure driving Several factors make the shift from cash to electronic without cash. As the company handled over $1 billion in payments more plausible for B2B transactions. First, cash payments yearly to over 300,000 small retailers in Latin suppliers often have corporate bank accounts to manage America, its regional unit was keen to explore different ways their business finances; they tend to be more sophisticated of building up the electronic payments value chain, such entities, and to conduct more payment transactions as buying portable POS terminals for drivers and paying and manage more payment volume than small retailers. card merchant fees. Moreover, suppliers often have bank Thus, merchants can more easily transfer payments into accounts which, from a technical perspective, make it easier an existing account. This differs from the P2B model, for merchants to “push” payments into an existing account. where both parties in many cases do not have active This is in contrast to some P2B cases, where service accounts to begin with (as mentioned in the Introduction). providers need to “crack” a two-sided market in which Second, merchants tend to pay their suppliers frequently neither the consumer nor the merchant has an account. and in a consistent way, usually every week or two, and more often for products that turn over quickly, such as In developing countries, an obstacle to merchant-supplier beverages. This, in turn, makes it easier for merchants to payments is that even if suppliers have bank or electronic become accustomed to and comfortable with conducting accounts, few retailers have funds available to pay suppliers. transactions electronically. Table: B2B electronic payment value, retail to suppliers ($ millions), by type of retailer and region Grocery Grocery Grocery Non-Grocery Non-Grocery Non-Grocery Retailer Type/ Total MSMRs Micro Small Medium Micro Small Medium Region High 390,546 524,173 830,169 466,788 662,825 673,874 3,528,375 Income: OECD Europe & 64,888 103,375 137,455 53,662 164,329 164,870 688,579 Central Asia East Asia & 156,562 101,988 441,633 114,700 315,163 357,823 1,487,870 Pacific Latin 68,598 76,729 119,073 43,192 142,321 155,190 605,103 America & Caribbean Middle East 12,833 21,732 60,781 13,789 33,547 62,204 204,885 & North Africa South Asia 14,150 41,495 121,808 16,018 62,709 145,766 401,946 Sub- 5,239 21,328 82,027 8,803 28,833 44,576 190,807 Saharan Africa Source: World Bank Group (2016a) 28 Innovation in Electronic Payment Adoption Consumers rarely pay retailers electronically, and retailers seldom deposit cash payments from consumers in a bank account on a frequent basis. Thus, merchants simply prefer to pay suppliers in cash. Suppliers can help limit the frequency of making such bank deposits by offering credit in the form of deferred payments. Another obstacle is that very few suppliers have enough leverage to persuade individual retailers to pay electronically. Even the largest supplier may represent only 30% of the cost of goods sold by a typical small retailer, and most suppliers represent a small fraction of that. However, a stronger case for a business owner to adopt electronic payments would be if several suppliers both used such a payment solution and represented the majority of a retailer’s costs. (Tienda Pago has signed up multiple large suppliers, as described the subsequent case). Paying suppliers with money received electronically from consumers can help build positive network effects. Retailers prefer to receive payments from customers and pay suppliers and employees from the same account because it is convenient. For example, if consumers are content to pay retailers electronically, but retailers in turn cannot pay suppliers in a similar way (or if the suppliers demand cash instead), the retailers are more likely to insist that consumers pay them in cash. But the opposite is also true: suppliers who accept electronic payments are more likely to have retailers who welcome such payments from consumers, creating a virtuous cycle that increases the use of payments and the underlying transaction account (deposit transaction account or e-money). Suppliers can take an active role in promoting electronic payments for retailers, to the mutual benefit of both parties. Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants 29 Case in point: Tienda Pago37 Case box 4: Tienda Pago The Latin-American start-up Tienda Pago (Case Box 4) sees an opportunity to enable B2B electronic payments. Tienda Business profile Pago leadership, who previously ran Movilway, an airtime reseller with 85,000 distribution points across Latin America, Name: Tienda Pago recognized that Movilway was effectively competing with other distributors (primarily FMCG companies selling Type of organization: Technology start-up beverages, snacks and toiletries) for the same limited Year operations launched: 2014 cash that retailers had on hand when they passed by. Active countries: Venezuela, Peru Furthermore, while mobile wallet initiatives had existed for some time, they required retailers to preload funds Payment Channels, Technology And Innovation before initiating a payment transaction to a supplier, which Features inconvenienced retailers who did not want to make frequent trips to the bank. Services: B2B payments, value-added services Tienda Pago’s innovation was to first offer a credit line to Acquirer: Tienda Pago the retailer, based chiefly on historical transactions made to Payment instrument: Credit transfer (directly from the suppliers Tienda Pago had signed up. Technically, no Tienda Pago to merchant supplier) disbursement was made to the store’s account; when the retailer needed to pay a supplier, it initiated a transaction Payment instrument form factor: Retailer’s own phone that instructed Tienda Pago to pay the supplier directly. The Innovation: Tienda Pago provides short-term (1-2 weeks) retailer would then repay Tienda Pago for the credit line, working capital credit to small retailers to pay suppliers, along with interest of about 1-2% per week, by depositing whom the company signs up to its platform. cash at a bank branch. Since its start in the fourth quarter of 2014, Tienda Pago Merchants has signed up over 4,000 retailers and some large suppliers, such as The Coca-Cola Company, SABMiller and Movistar Target segment: Micro and small retailers in Venezuela and Peru, and plans to expand to Mexico. It Number of merchants reached: 4,000 (2,000 has focused on the outskirts of urban centres, as well as on merchants in each Venezuela and Peru) rural areas where the banking sector traditionally has not served retailers well. Other cases relevant for this insight: N/A Suppliers have welcomed the product, being keenly aware of the high cost of collecting cash. Because retailers can now pay electronically, one supplier has reduced the number of its weekly visits from three to two; and, thanks to the credit line provided to the retailer, the supplier’s sales volume has increased. The retailer benefits as well – from increased sales to its consumers and a safer, more efficient mechanism to pay its supplier. 30 Innovation in Electronic Payment Adoption Partnerships: reaching merchants via non-traditional payment actors Insight 5: Partnering with non-traditional Traditional acquiring banks are well aware of these payment actors is essential to reach small challenges. In fact, the heavy staff costs required to reach new merchants is one of the main reasons why merchant retailers at the “last mile”. payments have not expanded in harder-to-reach areas, particularly if sales volumes from electronic payments, and Despite the gains and innovations in merchant payments thus revenues, are projected to be relatively low. Moreover, made possible by advances in technology, most user countries with large rural populations, such as those in experiences and innovations that can potentially become South Asia and Sub-Saharan Africa where nearly two-thirds large-scale in the foreseeable future will not be purely digital, of the population38 live in rural areas, remain underserved and will require a hybrid solution. Particularly developing from a financial inclusion perspective, in large part because markets will continue to need well-equipped sales forces, current distribution models for banking and payments have training and onboarding, installation and troubleshooting not worked. of corresponding hardware and software, regular follow-up visits, and dependable customer service. This is especially For this reason, a lead role exists for stakeholders who are the case for retailers using electronic payments for the first not part of the traditional acquiring value chain to own key time – those who are more likely to be less comfortable with elements of it. This includes both non-bank actors,39 such payment technology. as technology companies, and groups that traditionally have not played explicit roles in the value chain already The traditional acquiring value chain, primarily comprised of described. Microfinance institutions (MFIs), mobile airtime activities with merchant interaction (acquisition, onboarding resellers and FMCG suppliers, in particular, are well suited and relationship management) and technology (fulfilment to play this role. They already interact with micro, small and and processing), is shown in Figure 9 along with its principal medium businesses on a regular basis, and often know their actors. While various operational models exist, a financial financing needs intimately (especially in the case of MFIs, as institution or technology company often take the lead with the credit underwriting process is contingent on assessing functions related to merchant interactions; sometimes a financial capacity to repay). Moreover, they have established combination of the two are involved (e.g. a joint venture). strong trust with the businesses, which is critical to help Not only is it relevant for non-traditional payment actors persuade them to adopt payments technology. to play a part in the value chain, but it is also needed; in particular, they can have a competitive or complementary At the onset, mobile operators used their airtime resellers advantage for the value chain’s merchant onboarding and to build out the mobile money business, by nature of their relationship management elements. existing relationship. Rather than develop their own sales forces, many mobile operators, acting as both “issuing” and Addressing the so-called “last mile” to expand merchant “acquiring” institutions, leveraged the existing capabilities payments – in other words, providing the critical sales and and relationships established by their airtime distributors service support to retailers not currently using electronic with local retailers to expand the mobile money agent payments – remains a stubborn challenge; mainly a strong network. As with any channel outsourcing, the service sales function, usually comprised of front-line personnel and provider takes on additional risk and pays commission, not technology, will still be required to overcome it. which is arguably the only sustainable way of rapidly acquiring the agent infrastructure. Figure 9: Merchant acceptance of the electronic payments value chain Merchant Merchant Fulfillment Processing Merchant Acquisition Onboarding and Activation & Settlement Relationship Mgmt Identify targets market, Validate merchants, Install, maintain and Processing Management of sell and acquire underwrite their associated support transactions and settle merchant relationship merchants. potential risk and activities to enable funds across schemes & address customer onboard merchants merchant acceptance issues at P01 of multiple payment types Source: MasterCard (2016) as referenced in ITU (2016). The case of small retailers 31 Retailers in rural areas will particularly benefit from partnership models. Transaction costs for financial services, including payments, tend to be higher in rural areas because of poor infrastructure for roads, electricity and telecommunications connectivity relative to urban areas. Rural populations also tend to have smaller transaction sizes (e.g. loans, saving balances and average payments), and are less literate and financially savvy. As a result, few authorized financial institutions target rural areas, and many financial services that do exist for them are informal or semi-formal (e.g. loans from agricultural suppliers). Partnering with actors that have an existing, ongoing relationship with rural retailers can help financial institutions create a viable business model to offer payment and other financial services. This can assist non-banks as well, who have begun offering mobile money accounts to the broader public. Because of their existing interactions with small retailers, non-traditional payment actors are well positioned to help acquire and retain retailers for electronic payments in developing countries. 32 Innovation in Electronic Payment Adoption Case in point: Grupo Bimbo - Blue Label40 So far, retailers are responding well; most are active, and statistics show that their average sales volume per transaction increases once they start accepting card Grupo Bimbo, a multinational company producing bakery payments. Blue Label Mexico speculates that this comes products and based in Mexico City, saw an opportunity from sales that would have normally gone to a larger grocer to partner with payment companies to service small or supermarket. The project, Blue Label Mexico admits, convenience stores (changarros) in Mexico. It faced strong is still in the “proof-of-concept” stage, although it has competition from larger, more modern retailers and large constructed the business to be financially viable despite convenience chains, such as 7-Eleven and Oxxo, who focusing on a segment that is notoriously difficult to target. offered cardholder solutions such as card payments and It contends that Grupo Bimbo’s recognized brand, along airtime top-up. This led to lost revenue among many small with the relationship its sales force already has with retailers, retailers, forcing some to close down. In 2011, the company provided the trust needed for retailers to try the service and created a joint venture with Blue Label Technologies, a pay commissions, despite their tight margins. In the future, payments processing firm in South Africa, to create Blue it envisions offering additional value-added services to the Label Mexico (Case Box 5) and offer payment solutions to retailers’ end users, and enabling retailers to pay suppliers, Grupo Bimbo’s existing retail customers. with the aim of creating more opportunities for the retailers and the company to increase revenues. In the same year, it started installing electronic airtime and bill payment POS solutions at retailers so that they could sell these services to consumers. Not intended as card-reading Case box 5: Grupo Bimbo - terminals initially, they nonetheless allowed retailers to earn Blue Label Mexico additional commission by purchasing airtime and paying bills electronically on behalf of the end user. Based on the initial pilot’s success, Blue Label Mexico started offering traditional card-accepting terminals in 2013 through a partnership with Banamex, one of the country’s largest private banks, and Visa. Business profile This network, called Red Quibo, also became a brand around the platform. Banamex acts as a traditional acquirer Name: Blue Label Mexico (processing transactions and opening the retailer account), Type of organization: Joint venture (Grupo Bimbo while Blue Label Mexico serves as a “payment aggregator” [Mexico] and Blue Label Technologies [South Africa]) to acquire small retailers and aggregate the transactions on Year operations launched: 2013 (2011 for non card- behalf of Banamex. Currently, Blue Label Mexico’s platform accepting terminals) has 75,000 retailers, of which roughly 30% are traditional card-acquirers. Blue Label Mexico charges a 3.5% fee per Active countries: Mexico sale to the retailer, and pays a portion of that to Banamex. Blue Label Mexico trains a dedicated sales force, branded Payment Channels, Technology And Innovation with the Grupo Bimbo logo, which visits most retailers to Features sell the service, technically install and integrate the POS terminals, and conduct customer service visits up to three Services: P2B payments, value-added services times daily. Because store owners often do not have time Acquirer: Banamex to leave the premises to buy airtime, the sales force staff frequently go to the bank and do it on the owner’s behalf. Payment instrument: Debit cards and credit cards Blue Label is the main point of contact for the retailer, Payment instrument form factor: Payment card staffing a dedicated call centre to address retailer needs. Innovation: Blue Label Mexico leverages the existing Grupo Bimbo sales force to sign up small retailers and provide them with card-acquiring POS terminals. Merchants Target segment: Micro and small retailers Number of merchants reached: 22,000 (of the 75,000 merchant base) Other cases relevant for this insight: N/A The case of small retailers 33 34 Innovation in Electronic Payment Adoption Part 3: Catalytic actions for consideration Innovative Solutions to Accelerate the Adoption of Electronic Payments by Merchants 35 In light of the core insights, the considerations for action centre on reducing or eliminating the six main obstacles to expanding adoption of electronic payments to retailers, as described in Part 1. Specifically, and as depicted in Figure 10, the private sector may consider action to address obstacles 1-4 (highlighted in blue), and policy-makers would primarily target obstacles 5 and 6 (highlighted in green). Figure 10: The roles of industry and policy-makers in addressing the key obstacles 2. Product Economics 1. Merchant Value 3. Customer Proposition Demand I NDUS TRY PO LICY MAKER 6. Business S 4. Distribution Formalization Models 5. Technology & Regulatory Infrastructure Source: World Bank Group analysis Actions for Industry –– The payment services industry, operators of large- volume payment programmes and other stakeholders In revisiting the framework in Part 1 (Figure 1) and the recognize that the payment habits and needs of guiding principles from the PAFI report, guiding principle currently unserved and underserved customers are 4 is particularly relevant to inform actions of both industry likely to differ, and therefore engage in market research and public-sector stakeholders, and is reproduced here as and/or other similar efforts to identify and address follows:41 those payment habits and needs. –– PSPs work to ensure that the payment needs of the PAFI guiding principle 4: Transaction account and private and public sector entities with whom holders of payment product design transaction accounts regularly conduct payments are The transaction account and payment product offerings met as well. effectively meet a broad range of transaction needs of the –– PSPs work to ensure that the products that target target population, at little or no cost. unserved or underserved population segments are easy to use. Key actions for consideration: –– PSP efforts to continuously improve their transaction –– Where reasonable and appropriate, PSPs provide account offering include both traditional and innovative a basic transaction account at little or no cost to all payment products and instruments. individuals and businesses that do not hold such an account and that wish to open such an account. For the following considerations, industry participants are –– PSPs offer transaction accounts with functionalities grouped into three categories: established PSPs; start- that, at a minimum, make it possible to electronically ups and other challengers; and non-bank actors, such send and receive payments at little or no cost, and to as microfinance institutions and FMCG companies, that store value safely. specifically know and interact with MSMRs. –– PSPs leverage efficient and creative approaches and effective management practices in their efforts to offer transaction accounts and functionalities in a commercially viable and sustainable way. 36 Innovation in Electronic Payment Adoption Established PSPs –– Redefine business and operating models, rather than extend an existing one: Traditional models of offering PSPs are directly involved with providing payment services payments encumber current PSPs, such as banks, to underserved retailers. Traditionally, they have been banks processors and card schemes, but do not hinder start- and authorized non-banks (e.g. specialized acquirers and ups and challengers. In fact, if the legal and regulatory merchant aggregators), but not card schemes, as those environment allows for it, start-ups and challengers can do not interact with users. More recently, they have been define their own “business rules” in some cases. They mobile network operators, as in the case of mobile money in can simplify certain know-your-customer processes emerging markets.42 Actions for consideration are: to make opening accounts easier for businesses (e.g. paperless account opening), temporarily or permanently –– Understand the demand-side dimensions of the waive or reduce merchant discount rates, or offer quicker products and services that MSMRs need: This should settlement than traditional providers. In addition, they cover both payment and non-payment perspectives. often build on existing payment service offerings. As mentioned in the Introduction, product design is a guiding principle for enabling financial inclusion through –– Offer niche services and/or cater to niche segments: payment products. This can be achieved by doing Start-ups can hone in on and design a service for a primary market research with retailers and customers specific part of the payments value-chain that has yet (surveys, focus groups, design thinking) and having to be addressed – for example, loyalty programmes for managerial staff observe and/or speak directly with prospective merchants. The ideal shift is in addressing low-income merchants. Additionally, specific merchant actual pain points and wants (user-focused) – and, sectors (healthcare, grocery, energy) can be profitable ideally, multiple pain points through a single, simple entry-points for disruptors, despite their relatively small solution – versus going to market with institutionally numbers or sales volumes that also make them a low focused services that may have been developed without priority for large incumbents. validation by users. –– Iterate with speed and agility towards creating –– Establish a comprehensive understanding of data winning products: The ability to move fast when sources: These can be merchant and non-merchant, developing solutions is the greatest advantage of any and payment and non-payment sources. Moreover, it start-up over an incumbent. Being capable of adjusting should be determined how they can be used specifically quickly as many times as needed is another advantage, to deliver value, either back to the merchant or to the service provider itself. conditional on the country’s regulation of payment systems and its oversight rules. This applies particularly –– Explore opportunities to stimulate customer demand to the retail financial services sector, where banking and and break the catch-22 payment problem: For payment providers – especially large, established ones example, offering an adjacent electronic product as a that have a substantial user base – can be slower, more “hook”, such as a mobile person-to-person transfer deliberate and less nimble in innovating than players in product or a utility payment, can help customers feel other sectors. comfortable with electronic transfers, as can using mobile wallets for merchant payments. Once enough Non-Bank Actors customers are registered and actively using mobile wallets, merchants are more likely to accept electronic Non-banks, as defined by the Committee on Payments money as a payment instrument. and Market Infrastructure (CPMI) are those entities that –– Consider strategic partnerships with start-ups, are “involved in the provision of retail payment services technology providers and/or non-bank actors whose main business is not related to taking deposits from (particularly for distribution): The following section the public and using these deposits to make loans”. Non- addresses this. This approach can help reduce upfront banks include firms that specifically have existing sales and/or fixed costs, and shift to a variable cost structure relationships with MSMRs (the so-called “last mile” that that would reduce overall financial risk. It also allows physically reaches them); they tend to have a major, though service providers to own or lead with elements they do frequently underestimated role to play in offering electronic best, such as focusing on their competitive advantage, payments, often as so-called “front-end providers”.43 and to outsource the rest. As already mentioned and as seen in the Blue Label Mexico case, this role often takes shape through strong Start-Ups and Other Challengers partnerships with technology companies and/or payment As illustrated in the highlighted cases, a host of Fintech providers. Two other actions may be worth pursuing: start-ups have offered payment services over the past few years. At the same time, deep-pocketed challengers outside the traditional payment sector, such as mobile network operators in developing countries and technology firms in developed ones, have also made significant inroads that challenge incumbent banks and payment providers. They can deepen acceptance among small retailers in three main actions for consideration: The case of small retailers 37 –– Assess the savings generated by shifting from high-quality and liquid assets, and depending on the cash to electronic payments: While many consumer legal regime, specially protected accounts at banks goods companies generally feel that handling cash is and possibly trust accounts). expensive, few have precisely analysed the cost of cash –– The framework requires PSPs to clearly disclose, acceptance, and the potential corresponding savings using comparable methodologies, all of the various from migrating to electronic payments. Constructing a fees they charge as part of their service, along with business case, even with estimates, constitutes the first the applicable terms and conditions, including liability step to understanding the size of the opportunity. The and use of customer data. World Bank developed a comprehensive methodology –– The framework requires PSPs to implement a for estimating retail payment costs for the demand side, transparent, user-friendly and effective recourse and supply side and total economy, while also calculating dispute resolution mechanism to address consumer claims and complaints. the savings in moving from cash and paper-based to –– The framework preserves the integrity of the financial electronic payment instruments.44 system, while not unnecessarily inhibiting access of eligible individuals and businesses to well-regulated –– Understand which capabilities would be of greatest financial services. use in expanding payment acceptance: Consumer –– The framework promotes competition in the goods companies have the obvious benefits of a marketplace by providing clarity on the criteria that dedicated sales force and a deep knowledge of and trust must be met to offer specific types of service, and in retailers. Other, more intangible “assets”, however, by setting functional requirements that are applied could be put to greater use: a strong, recognizable consistently to all PSPs. brand; historical payment data; or, in the case of –– The framework promotes innovation and competition some organizations such as beverage companies and by not hindering the entry of new types of PSP, new instruments and products, new business models or microfinance institutions, past assessments conducted channels – as long as these are sufficiently safe and for their core businesses to help underwrite new loan robust. and insurance products offered by financial service providers. The following actions for consideration for policy-makers are grouped into three categories: E-payments infrastructure, Actions for Policy-makers formalization of enterprises, and partnerships and alliances: Policy-makers have an opportunity to set up a conducive E-Payments Infrastructure environment that safeguards customers and merchants, while enabling an open, unambiguous regulatory –– Simplify the opening of accounts: The bedrock of environment for innovation by industry actors.45 electronic payments is an electronic account (repository) for customer and businesses alike; funds can be The PAFI report’s guiding principle 2 on the legal and deposited into, received in or paid from such accounts. regulatory framework is applicable here and is reproduced Certain countries have regulatory environments that allow as follows:46 for simplified accounts – usually with limited functionality, such as a maximum balance threshold to reduce risks – that require less paperwork and identification,47 and have PAFI guiding principle 2: Legal and regulatory fewer know-your-customer requirements. This would environment allow service providers to establish a basic transaction The legal and regulatory framework underpins financial account at little or no cost.48 Many such basic accounts, inclusion by effectively addressing all relevant risks and by however, either have a minimum balance, or come with protecting consumers, while at the same time fostering a small fee. Ideally, both conditions would be waived innovation and competition. to allow first-time, low-income users to open such an account and use it on an ongoing basis with minimum Key actions for consideration: friction. –– A robust framework is established to foster sound –– Allow the issuing of e-money: Many innovations in risk management practices in the payments industry, developed markets, particularly mobile money, involve including through the supervision/oversight of PSPs issuing electronic money against receipt of actual funds and PSOs [payment service operators] by regulatory via a prepaid model. This is particularly important for authorities. non-bank actors in their taking a lead role in directly –– The framework requires PSPs and PSOs to develop serving customers and merchants, as they would not and implement risk management measures that be permitted to offer actual bank accounts. Regulators correspond to the nature of their activities and their who permit the issuing of e-money greatly expand the risk profile. competitive landscape of innovations in payments, such –– The framework aims to promote the use of transaction as those in Russia, Turkey, India, the European Union accounts in which customer funds are adequately and Uruguay.49 For example, Russia’s National Payments protected through appropriate design and risk Law, which permits the issuing of e-money, has allowed management measures, such as deposit insurance or for the creation of over 350 million active prepaid functionally equivalent mechanisms, as well as through accounts through 2014, clearly indicating that e-money preventive measures (e.g. supervision, placement of accounts can serve a useful purpose in boosting customer funds held by non-deposit taking PSPs in payments. 38 Innovation in Electronic Payment Adoption –– Ensure consent and consumer data protection: With “a series of studies show that formalization does not the rise of myriad types of consumer data described automatically lead to greater access to finance given in insight 3, regulators would need to define protocols other factors such as the productivity of the firm, state that stipulate the conditions under which providers can of development of the financial system within a country, use data, as well as protocols for safeguarding data behaviour of banks and ownership structure”.54 As and ensuring data privacy and protection. As bank some payment schemes only allow formal businesses and non-bank service providers explore ways of using to accept electronic payments, policies that facilitate digital customer data, they need to ensure they follow formalization will help remove a key obstacle to their country’s corresponding regulations on customer expanding the acceptance network. consent and data privacy. This particularly concerns providers who do not directly “own” the customer or –– Simplify tax codes to encourage informal merchants their data, and enter into partnership with those who to formalize. Simplification of taxes or tax procedures do. (The issue of who controls the data is important and has been demonstrated to have a positive effect on firm needs to be addressed; as in many cases with current creation and formalization; however, the results differ by international and national regulations, it is often not clear type of firm.55 Studies indicate that some unofficial small who is the responsible “data controller”, especially in a firms may respond positively to tax reforms, since they borderless world of technology and with various uses give firms the opportunity to expand their customer base and types of data.)50 through more advertising and issuing tax receipts. Some larger firms operating formally may actually be under- –– Help establish effective interoperability: representing sales and are thereby not encouraged Interoperability, as applied to payment systems, to fully comply, even with streamlined tax processes. contributes to “promoting competition, reducing fixed Evidence suggests firms’ response to tax reforms varies costs, enabling economies of scale that help in ensuring by sector; for example, some sectors with low entry the financial viability of the service, and at the same time costs (e.g. retail) have greater compliance after reforms.56 enhancing convenience for users of payment services”.51 Simplifying tax procedures may help otherwise reluctant B2B payments, where a single retailer pays several micro and small retailers to formalize and pay taxes to suppliers, are particularly concerned (rather than P2B migrate from cash to electronic payments. payments, where several customers pay a retailer). A retailer must be able to hold a single transaction account Partnerships and Alliances that can then pay into different merchant corporate accounts. But interoperability, defined as the “seamless –– Build an ecosystem of private- and public-sector interaction of two or more proprietary acceptance and stakeholders to work towards a common solution: processing platforms, and possibly even of different With individuals having small transaction volumes, payment products”,52 may be limited in markets where expanding electronic payments for small merchants traditional card payment infrastructure is not yet requires a significant amount of scale to be viable. As entrenched (as discussed in insight 2) – for example, a “neutral” party, government can take a lead role in as in the case of card and mobile money schemes. bringing together some of the industry actors already The role of policy-makers is not necessarily to mandate interoperability, but to engage stakeholders in defining mentioned – financial institutions, mobile operators, the key technological, operational and financial standards technology companies and fast-moving consumer goods that underpin the core architecture for processing companies – and ensure that they work together to transactions. target as many consumers, merchants and transaction cases as possible. The Government of Peru, in Formalization of Enterprises coordination with the Bankers’ Association of Peru, the International Finance Corporation and the Better Than –– Create incentives for firms to formalize: Alleviating Cash Alliance, created a public-private partnership with a obstacles to formalizing firms, especially MSMEs in new legal entity, Modelu Peru, to launch a wholly bank- developing markets, is an area of focus for regulatory mobile-other interoperable white label retail payments and business incentives. The evidence on the benefits of product managed through an open wholesale payments formalization is mixed, and depends on which segment platform to enable multi-FSP interoperability for digital a firm is part of on the informality spectrum, and on the financial services across the country. Modelu Peru firm’s characteristics.53 It is recommended that policy- brings together 34 financial institutions to connect to makers focus on informal firms that have interest and a payments platform designed by technology vendor the potential for growth. Access to finance is also an Ericsson, and functions over all three of the country’s important dimension to assess on this spectrum of firms telecom networks with a common brand, registration targeted for formalization. Financial constraints may process and product features. only be applicable to the firms situated towards the end of the continuum (i.e. mostly registered). While access to finance is a crucial potential benefit of formalization, The case of small retailers 39 Innovations that promote electronic payments for small and medium merchants are still emerging. They represent, however, an enormous potential to accelerate commerce among underserved populations and deepen financial inclusion for merchants and consumers alike. While more pilots and implementation are required, and more research and data points need to be gathered, the five identified insights, featured cases, global sizing and related analysis are intended to serve as inspiration for exploring and conceiving similar product concepts. Moreover, this report reflects the optimism that the concrete considerations discussed herein can help policy-makers to set an enabling regulatory environment, and industry to accelerate the creation of winning solutions. 40 Innovation in Electronic Payment Adoption Acronyms ATM Automated teller machine BIS Bank for International Settlements B2B Business-to-business B2P Business-to-person C2B Consumer-to-business FMCG Fast-moving consumer goods G2B Government-to-business G2G Government-to-government G2P Government-to-person GPFI Global Partnership for Financial Inclusion ICT Information and communications technology IFC International Finance Corporation MFI Microfinance institution mPOS Mobile point of sale MSC Merchant service charge MSME Micro, small and medium enterprises MSMR Micro, small and medium retailers OECD Organisation for Economic Co-operation and Development PAFI Payment Aspects of Financial Inclusion P2B Person-to-business P2G Person-to-government P2P Person-to-person POS Point of sale PSO Payment service operator PSP Payment service provider SKU Stock-keeping unit SME Small and medium enterprise WBG World Bank Group The case of small retailers 41 References and further reading Bachas, P., P. Gertler, S. Higgins and E. Seira (2016). Banking on Trust: How Debit Cards Help the Poor to Save More. Bower, J. (2015). “Modelo Perú: A Unique Approach to Financial Inclusion”. Better than Cash Alliance Blog, 9 October. At https://www.betterthancash.org/news/blogs-stories/modelo-peru-a-unique-approach-to-financial-inclusion. Central Bank of Kenya (2015). “Number of ATMs, ATM Cards, and POS Machines”. At https://www.centralbank.go.ke/ index.php/nps-modernization/payment-card-submenu/number-of-atms-atm-cards-pos-machines2?yr=2011. Chaplin, J. (2014). “Should banks consider domestic payment schemes?”. Banking Technology blog, 22 August. At http:// www.bankingtech.com/241301/should-banks-consider-domestic-payments-schemes/. Chen, I-Chun (2014). “Kathryn Petralia slings the Kabbage, but you better be on Facebook if you want some”. bizwomen. At http://www.bizjournals.com/bizwomen/news/profiles-strategies/2014/03/kathryn-petralia-slings-the-kabbage-but-you- better.html?page=all. Cirasino, M., T. Lammer and H. Natarajan (2016). “Solving payments interoperability for universal financial access”. World Bank Private Sector Development blog, 25 February. At http://blogs.worldbank.org/psd/solving-payments-interoperability- universal-financial-access. Citigroup (2016). Digital Disruption: How FinTech is Forcing Banking to a Tipping Point. Citi GPS: Global Perspectives and Solutions. Committee on Payments and Market Infrastructures (CPMI) (2014). Non-banks in retail payments. BIS: Basel, Switzerland. CPMI and World Bank Group (2016). Payment Aspects of Financial Inclusion. BIS: Basel, Switzerland; World Bank Group: Washington DC. Consultative Group to Assist the Poor (CGAP) (2015a). Global landscape of innovations in digital finance. CGAP: Washington DC. CGAP (2015b). “Digital Financial Inclusion: Implications for Customers, Regulators, Supervisors, and Standard-Setting Bodies”. CGAP: Washington DC. CGAP (2015c). “How to Drive Merchant Payments? Build Solutions Merchants Want”. CGAP blog, 3 August. At http:// www.cgap.org/blog/how-drive-merchant-payments-build-solutions-merchants-want. CGAP (2015d). “The Potential of Digital Data: How Far Can It Advance Financial Inclusion?”. Focus Note. CGAP: Washington DC. Costa, A., A. Deb and M. Kubzansky (2015). Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers. Omidyar Network. Demirguc-Kunt, A., L. Klapper, D. Singer and P. van Oudheusden (2014). The Global Findex Database 2014: Measuring Financial Inclusion around the World, Policy Research Working Paper 7255, World Bank Group: Washington, DC. Edwards, B., H. Stallings and I. Cheng (2014). ”Using Human-Centered Design for e-Payment Systems in Indonesia”. CGAP blog, 30 July. At http://www.cgap.org/blog/using-human-centered-design-e-payment-systems-indonesia. eMarketer (2013). “Social Networking Reaches Nearly One in Four Around the World”. 18 June. At http://www.emarketer. com/Article/Social-Networking-Reaches-Nearly-One-Four-Around-World/1009976. European Central Bank (ECB) (2014). Card Payments in Europe – A Renewed Focus on SEPA for Cards. ECB: Frankfurt, Germany. Global Partnership for Financial Inclusion (GPFI) (2015). Innovative Digital Payment Mechanisms Supporting Financial Inclusion Stocktaking Report. At www.gpfi.org. GSMA (2014a). 2014 State of the Industry: Mobile Financial Services for the Unbanked. GSMA. GSMA (2014b). Digital Inclusion Report. GSMA. GSMA (2015a). The Mobile Economy. GSMA Intelligence. GSMA (2015b). Bridging the gender gap: Mobile access and usage in low- and middle-income countries. GSMA. International Finance Corporation (IFC) (2013a). Closing the Credit Gap for Formal and Informal Micro, Small, and Medium Enterprises. IFC: Washington DC. IFC (2013b). Systematic Review of SME Banking and Business Regulation. IFC: Washington DC. IFC (2016). Considerations for Mobile Money Merchant Payment Interoperability in Tanzania (forthcoming). IFC: Washington DC. International Labour Office (2011). “Empowering rural communities through financial inclusion”. ILO Rural Policy Brief. ILO: Geneva, Switzerland. At http://www.ilo.org/wcmsp5/groups/public/@ed_emp/documents/publication/wcms_159004.pdf. International Telecommunication Union (ITU), Digital Financial Services Focus Group (2016). “Enabling Merchant Payment Acceptance in the Digital Financial Ecosystems”. Forthcoming. 42 Innovation in Electronic Payment Adoption Kendall, J., R. Schiff and E. Smadja (2014). “Sub-Saharan Africa: A major potential revenue opportunity for digital payments.” McKinsey & Company. At http://www.mckinsey.com/industries/financial-services/our-insights/sub-saharan- africa-a-major-potential-revenue-opportunity-for-digital-payments. Krishnamurthy, K. (2013). “Leveraging Big Data to Revolutionize Fraud Detection”. InformationWeek, Bank Systems and Technology. At http://www.banktech.com/leveraging-big-data-to-revolutionize-fraud-detection/a/d-id/1296473?. Lapowski, I. (2013). “The Man Who Made the Cash Register Obsolete”, Inc. At http://www.inc.com/audacious-companies/ issie-lapowsky/square.html. McEvoy, M. (2014). “Enabling financial inclusion through ‘alternative data’”. MasterCard Compendium (MasterCard Advisors). At http://compendium.mastercard.com/app/SKU_pdfs/alternativeData.pdf. Mas, I. (2009). “The Economics of Branchless Banking”. Innovations: Technology, Governance, Globalization. Spring 2009, Vol. 4, No. 2, pp. 57-75. MIT Press: Cambridge, MA (USA). MasterCard International, Salazar, Aguilar and Lasko (2016). Enabling Merchant Payments in the Digital Financial Ecosystem. Mercator Advisory Group (2011). Growing P-Card Programs: Engaging with Suppliers. Mercator: Maynard, MA (USA). Microcapital (2013). “Microcapital Brief: MicroEnsure, Telenor Pakistan, Jubilee Life Insurance Company to Offer Free Life Insurance to Prepaid Mobile Customers in Pakistan”. At http://www.microcapital.org/microcapital-brief-microensure- telenor-pakistan-jubilee-life-insurance-company-to-offer-free-life-insurance-to-prepaid-mobile-customers-in-pakistan/. Parada, M. and G. Bull. (2015). In the Fast Lane: Innovations in Digital Finance. IFC: Washington DC. Safaricom (2016). H1 FY16 Presentation. At http://www.safaricom.co.ke/images/Downloads/Resources_Downloads/Half_ Year_2015-2016_Results_Presentation.pdf. Taylor, F. (2016). “One quarter of the world’s population now use social media”. 15 May. At: http://www.fran-taylor.com/ blog/2015/5/15/one-quarter-of-the-worlds-population-now-use-social-media. Tencent (2015). Tencent Announces 2015 Third Quarter Results [News release]. At http://www.tencent.com/en-us/content/at/2015/attachments/20151110.pdf. The Wall Street Journal (2016). “Is FinTech Forcing Banking to a Tipping Point?”. CIO Journal, 15 April. At http://blogs.wsj. com/cio/2016/04/15/is-fintech-forcing-banking-to-a-tipping-point/. USAID (2015). “Why India Loves Cash and Why That Matters for Financial Inclusion”. At https://www. globalinnovationexchange.org/beyond-cash. Visa (2016). Perspectives on Accelerating Global Payment Acceptance. Visa: www.visa.com. World Bank (2012a). Developing a Comprehensive National Retail Payments Strategy. World Bank: Washington DC. World Bank (2012b). Innovations in Retail Payments Worldwide: A Snapshot. World Bank: Washington DC. World Bank (2014). “World Development Indicators”, Agriculture and Rural Development. World Bank: Washington DC. World Bank (2016). Big Data, Financial Services and Data Protection: Do International Standards Cover the Issues? Forthcoming. World Bank: Washington DC. World Bank (2015a). A Practical Guide for Measuring Retail Payment Costs (Draft for Consultation). World Bank: Washington DC. World Bank Group (2015b). “Small and Medium Enterprises (SMEs) Finance”. World Bank: Washington DC. At http://www. worldbank.org/en/topic/financialsector/brief/smes-finance. World Bank Group (2016a). Cash vs. Electronic Payments in Small Retailing: Estimating the Global Size. Forthcoming. World Bank: Washington DC. World Bank Group (2016b). Supporting Payment Sector Development: B2B corporate payments requirements in the traditional retail sector – Profiles from Indonesia. Forthcoming. World Bank: Washington DC. World Economic Forum (2015a). The Future of Financial Services: How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed. World Economic Forum. World Economic Forum (2015b). The Future of FinTech: A Paradigm Shift in Small Business Finance. World Economic Forum. Interviews conducted by phone for the in-depth case analyses, with: Dan Cohen of Tienda Pago, 23 February 2016 Hortencia Contreras of Blue Label Mexico, 16 February 2016 Paul Kavavu of Safaricom, 3 February 2016 Quang Nguyen of Kopo Kopo, 18 February 2016 The case of small retailers 43 Annex 1: Glossary Term Definition Source Overall note on Merchants: For the purposes of this report, unless otherwise noted, the terms “merchants”, “retailers” key terms and “small businesses” are often used interchangeably, as well as formal “micro, small and medium retailers” (MSMRs), which is the term used for the global sizing study. Electronic payments: The term “electronic payments” denotes all payment transactions comprising direct debit (direct debit and wire transfer), card (debit, credit, prepaid, gift) and mobile (conducted by a mobile device, such as a phone or tablet). For the purposes of this report, “electronic payments” is the most frequently used term. If the term “digital payments” is referenced, it denotes electronic payments. Acceptance 1. For transfer systems: the inclusion of a transfer order for funds or securities World Bank in a system’s operations for further processing, potentially following various (2012a) checks (e.g. regarding technical standards or the availability of funds), as specified in the system’s rules. 2. For cards and mobile money: the process by which a terminal, merchant or other entity accepts a particular brand of card or mobile money. Acquirer An entity (or more than one entity) providing merchants with services that accept World Bank electronic payments related to the clearing and settlement of transactions. (2012a) Business-to- Includes all payment transactions occurring between two or more businesses, Euromonitor business (B2B) such as retailer payments to suppliers and wholesalers. For this report, this initial International transactions leg is the only form of B2B payment considered. Card payment These include credit card payments, charge card payments and debit card World Bank payments, and typically involve use of a physical plastic card by a payer to (2015a) discharge the payment obligation to the payee. Payment cards can be used for in-person purchases, as well as for remote payments, such as e-commerce. Increasingly, card-based payments are accepted in all standard banking channels, such as ATMs, internet banking and mobile banking, and at kiosks. Cash Banknotes and coins, issued by a central bank or government, that are World Bank recognized as legal tender in the respective country, or accepted next to local (2015a) currency for retail payments. Clearing/ The process of transmitting, reconciling and, in some cases, confirming payment World Bank Clearance orders or security transfer instructions prior to settlement. It may include the (2012a) netting of instructions and the establishment of final positions for settlement. At times, the term is used, though imprecisely, to include settlement Electronic Payment instructions that enter a payments system via the internet or other World Bank payments telecommunications network. The device used to initiate the payment could be a (2012a) computer, mobile phone or POS device, among others. The payment instrument used could be an e-money product, payment card product, credit/debit transfer or other innovative payment product. E-money A record of funds or value available to a consumer, stored on a payment device, World Bank such as a chip, prepaid card, mobile phone or computer system, as a non- (2012a), World traditional account with a banking or non-banking entity. E-money products are Bank (2015a) further differentiated into prepaid cards, online money and mobile money. 44 Innovation in Electronic Payment Adoption Financial The availability of appropriate financial services and products – including savings, Alliance for inclusion payments, credit and insurance – to adults of all income groups, at a cost Financial affordable to the customer and sustainable for the provider, and provided in a Inclusion, responsible manner. Consultative Group to Assist the Poor (CGAP), Global Partnership for Financial Inclusion (GPFI), United Nations Secretary- General’s Special Advocate for Inclusive Finance for Development (UNSGSA), World Bank Interoperability A situation in which payment instruments belonging to a given scheme may be World Bank used in other countries and in systems installed by other schemes. Interoperability (2012a) requires technical compatibility between systems, but can only take effect if the schemes concerned have concluded commercial agreements. Issuer An institution that issues the payment instrument. The term typically refers to the World Bank institution issuing a payment card or e-money instrument. (2012a) Merchant A payment involving a merchant as payer or payee. See “retail payment”. World Bank payment (2012a) Mobile financial Financial services that are accessed via a mobile phone, which is also used GSMA (2014a) services to execute financial transactions. Such services include mobile money, mobile insurance, mobile credit and mobile savings. Mobile money An e-money product where the record of funds is stored on a mobile phone or World Bank central computer system, and can be drawn down through specific payment (2012a) instructions issued from a bearer’s mobile phone. Mobile network A company with a government-issued licence to provide telecommunications GSMA (2014a) operator services through mobile devices. Non-banks Any entities involved in providing retail payment services, and whose main CPMI (2014) business is not related to taking deposits from the public and using those deposits to make loans. Payment A transfer of funds that discharges an obligation on the part of a payer vis-à-vis a European Central payee. Bank, Glossary of terms related to payment, clearing and settlement systems, 2009 The case of small retailers 45 Payment service An entity that provides payment services (remittances and/or other payments) Committee on provider directly to end users, such as consumers and businesses. This includes both Payment and entities that take deposits and allow transfers of funds to be made from those Settlement deposits (i.e. most banks and many non-bank deposit-takers), and non-deposit Systems (CPSS)- takers that transfer funds (e.g. money transfer operators). World Bank, General principles for international remittance services, 2007 Payment system A set of instruments, banking procedures and, typically, interbank-fund transfer CPSS-BIS, A systems that ensure the circulation of money. glossary of terms used in payments and settlement systems, 2003 Person-to- All payments made by consumers (“persons”) to businesses in return for products Euromonitor business (P2B) or services. International transactions Retail payment A payment that meets at least one of the following characteristics: (i) the payment World Bank is not directly related to a financial market transaction; (ii) the settlement is not (2012a) time-critical; (iii) the payer, the payee or both, are individuals or non-financial organizations; and (iv) either the payer, the payee or both, are not direct participants in the payments system that processes the payment. This definition includes payments that are person to person, person to business, business to person, business to business, person/business to government, and government to person/business. Retailing Retailing refers to the sale of new and used goods to the general public for Euromonitor personal or household consumption. The term excludes specialist retailers of International motor vehicles, motorcycles, vehicle parts and fuel. It also excludes food service, rental and hire, and wholesale industries (cash and carry). Retailing refers to the aggregation of store-based and non-store retailing. Micro retailers Those retailers selling goods to consumers and employing one to five people. Euromonitor International Small retailers Those retailers selling goods to consumers and employing 6 to 25 people. Euromonitor International Medium retailers Those retailers selling goods to consumers and employing 26 to 100 people. Euromonitor International Traditional Traditional grocery retailing is the aggregation of channels that are invariably Euromonitor grocery retailers non-chained and, therefore, owned by families and/or run on an individual basis. International Traditional grocery retailing is the aggregation of three channels: independent small grocers, food/drink/tobacco specialists, and other grocery retailers. While there can be modern (e.g. chained) food/drink/tobacco specialists or other grocery retailers, due to the store’s presence in the channel, these stores are still considered as traditional. Modern grocery Modern grocery retailing is the aggregation of those grocery channels that have Euromonitor retailing emerged due to the growth of chained retail. Modern grocery retailing is the International aggregation of five channels: hypermarkets, supermarkets, discounters, forecourt retailers and convenience stores. 46 Innovation in Electronic Payment Adoption Non-grocery Retail outlets selling predominantly non-grocery consumer goods. They exclude Euromonitor retailers retailers selling predominantly food, beverages and tobacco, as well as fuel, International automotive and other parts. The term “non-grocery retailers” represents the aggregation of the following: –– Apparel and footwear specialists –– Electronics and appliance specialists –– Health and beauty specialists –– Home and garden specialists –– Leisure and personal goods specialists –– Other non-grocery retailers Service retailers The aggregation of food service retailers (restaurants, cafes, bars and others) Euromonitor and other miscellaneous service retailers (automotive repair, electrical, plumbing, International insurance, legal and other service-oriented enterprises). (Note: The global- sizing component of the project only covers goods [formal] retailers.) Settlement An act that discharges obligations in respect of the transfer of funds or securities World Bank between two or more parties. (2012a) The case of small retailers 47 Annex 2: Guiding principles of payment aspects of financial inclusion57 Guiding Principle Description 1. Commitment Commitment from public- and private-sector organizations to broaden financial inclusion is explicit, strong and sustained over time. 2. Legal and regulatory framework The legal and regulatory framework underpins financial inclusion by effectively addressing all relevant risks and by protecting consumers, while at the same time fostering innovation and competition. 3. Financial and ICT infrastructures Robust, safe, efficient and widely reachable financial and ICT infrastructures are effective for the provision of transaction accounts services, and also support for the provision of broader financial services. 4. Transaction account and payment The transaction account and payment product offerings effectively meet a product design broad range of transaction needs of the target population, at little or no cost. 5. Readily available access points The usefulness of transaction accounts is augmented with a broad network of access points that also achieves wide geographical coverage, and by offering a variety of interoperable access channels. 6. Financial literacy Individuals gain knowledge, through awareness and financial literacy efforts, of the benefits of adopting transaction accounts, how to use those accounts effectively for payment and store-of-value purposes, and how to access other financial services. 7. Large-volume, recurrent payment Large-volume and recurrent payment streams, including remittances, are streams leveraged to advance financial inclusion objectives, namely by increasing the number of transaction accounts and stimulating the frequent usage of these accounts. 48 Innovation in Electronic Payment Adoption Case Annex For the full listing of cases collected for the purpose of this report, please refer to the Case Annex here. The case of small retailers 49 Endnotes 1. World Bank Group (2016a). 2. For the purposes of this report, unless otherwise noted, the terms “merchants”, “retailers” and “small businesses” are often used interchangeably, as well as formal micro, small and medium retailers (MSMRs), which is the term used for the global sizing study. For additional details and other terms relevant to this study, please refer to the Glossary. 3. According to interviews conducted in seven countries (Colombia, France, Kenya, Lithuania, Morocco, Pakistan and Turkey) selected for in-depth primary research of the global sizing study. Market sizing estimates and list of countries as per World Bank Group (2016a). 4. CPMI and World Bank Group (2016). The Payment Aspects of Financial Inclusion (PAFI) report examines demand and supply-side factors affecting financial inclusion in the context of payment systems and services, and suggests measures to address these issues. The report has been prepared by a task force of the Committee on Payments and Market Infrastructures (CPMI) and World Bank Group (as chair), consisting of representatives from CPMI central banks, non-CPMI central banks active in the area of financial inclusion, and international financial institutions. 5. World Bank Group (2016a), Visa (2016). 6. Mas (2009). 7. For more detailed analysis, see World Bank (2015a). 8. In some cases, PSPs are extensions of existing companies that facilitate payment for a firm’s core business (e.g. a mobile operator selling airtime, a technology company enabling payment of goods on its marketplace). 9. Visa (2016). 10. World Bank Group (2016a). For more information and to view methodology and more statistics, download the full sizing report at http://pubdocs.worldbank.org/pubdocs/publicdoc/2016/6/219031465585757849/WBG-Electronic- Payments-Small-Retailing.pdf 11. For the purposes of the study, B2B payments were restricted to the payments by the retailers to their immediate suppliers, and other supplier payments along the supply chain were excluded. A reliable estimate of all B2B payments along the supply chain was not feasible on a global scale. 12. See Bachas, Gertler, Higgins and Seira (2016) for a study on trust in Mexico, as it relates to the use of debit cards for savings. 13. Costs incurred by the user include “resource costs”, such as those due to time, logistics, infrastructure and production, and “transfer costs”, which are fees paid to the service provider, such as transaction fees. Users bear higher transfer costs for electronic payments compared to cash, but significantly lower resource costs. Other costs are borne by the service provider. For a full methodology, see World Bank (2015a). 14. Edwards et al. (2014). 15. GPFI (2015). 16. CPMI and World Bank Group (2016). 17. USAID (2015). The highlights of the study have been noted verbatim. 18. World Bank Group (2016b). Indonesia market research was undertaken by the IFC Indonesia Digital Financial Inclusion project, funded by the State Secretariat for Economic Affairs (SECO). 19. The joint stakeholder reach-out exercise was conducted in alignment with the learning agenda of the Markets and Payment Systems Group of the Global Partnership for Financial Inclusion. Information from several cases was used to inform a recent report by the Global Partnership, entitled Innovative Digital Payment Mechanisms Supporting Financial Inclusion Stocktaking Report (2015). 20. The Case Annex is available separately as an addendum to this report. 21. CPMI and World Bank Group (2016). 22. ITU (2016). 23. CGAP (2015c), ITU (2016). 24. Since 2006, American Express has also offered its branded network and transaction processing services to select issuing and acquiring banks, which more closely resembles a four-party model. 25. Chaplin (2014). 26. Interview by phone with Paul Kavavu of Safaricom, February 2016. 27. Kendall et al. (2014). 28. Smartphone penetration figures from GSMA (2015a). 29. GSMA (2015b). 50 Innovation in Electronic Payment Adoption 30. Tencent (2015). 31. Microcapital (2013). 32. Krishnamurthy (2013). 33. World Economic Forum (2015b). 34. McEvoy (2014), World Economic Forum (2015b). 35. Interview by phone with Quang Nguyen of Kopo Kopo, February 2016. 36. World Bank Group (2016a). 37. Interview by phone with Dan Cohen of Tienda Pago, February 2016. 38. World Bank (2014). 39. CPMI (2014). 40. Interview by phone with Hortencia Contreras of Blue Label Mexico, February 2016. 41. CPMI and World Bank Group (2016). 42. Some companies previously considered as “challengers”, particularly mobile network operators, could arguably have been seen as more established PSPs in some markets (e.g. Safaricom in Kenya). The considerations herein are oriented towards incumbents and challengers versus associating them to any particular sector. 43. CPMI (2014). 44. World Bank (2015a). 45. The considerations that follow are specifically oriented to policy-makers, although the broader government does have a role to play. Most significantly, recurring, often small-value G2P payments, such as pension or unemployment benefits, child care support and government employee salaries, can and should be provided electronically rather than through checks or cash. Stipulating that G2P payments should be disbursed electronically may not necessarily be an explicit policy per se (and, thus, fall outside policy-makers’ remit); it is, nonetheless, an action that their counterparts in government agencies can take. 46. CPMI and World Bank Group (2016). 47. In parallel, governments can design national identification schemes for identifying all individuals. While not exclusively for facilitating payments, the two purposes have substantial benefits between them. In India, for example, the government has registered nearly 900 million individuals through Aadhaar, a 12-digit unique identification number, and has recently rolled out a product for making welfare payments to a corresponding bank account enabled by Aadhaar. See https://uidai.gov.in/authentication-2/payments.html. 48. CPMI and World Bank Group (2016). The report particularly urges PSPs to “provide a basic transaction account at little or no cost to all individuals and businesses that do not hold such an account and that wish to open such an account”. 49. Ibid. 50. For an assessment of international and regional standards regarding data protection issues, see Big Data, Financial Services and Data Protection: Do International Standards Cover the Issues?, a forthcoming 2016 World Bank publication. 51. CPMI and World Bank Group (2016). 52. Ibid. 53. IFC (2013b). 54. Ibid. 55. Ibid. 56. Ibid. 57. CPMI and World Bank Group (2016). The case of small retailers 51 The World Bank Group plays a key role in The World Economic Forum, the global effort to end extreme poverty committed to improving and boost shared prosperity. It consists of the state of the world, is the five institutions: the World Bank, including International Organization for the International Bank for Reconstruction Public-Private Cooperation. and Development (IBRD) and the International Development Association The Forum engages the (IDA); the International Finance Corporation foremost political, business (IFC); the Multilateral Investment Guarantee and other leaders of society Agency (MIGA); and the International to shape global, regional Centre for Settlement of Investment and industry agendas. Disputes (ICSID). Working together in more than 100 countries, these institutions provide financing, advice, and other solutions that enable countries to address the most urgent challenges of development. The World Bank World Economic Forum 1818 H Street NW 91–93 route de la Capite Washington, DC 20433 CH-1223 Cologny/Geneva Tel.: +1-202-473-1000 Switzerland www.worldbank.org Tel.: +41 (0) 22 869 1212 Fax: +41 (0) 22 786 2744 contact@weforum.org www.weforum.org