Transforming the Informal Economy

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By Sampa Diseko

The World Bank has long held the view that digital payments are essential to economic growth. By integrating digital into payment solutions and platforms, developing economies can bypass many of the challenges in legacy payments and banking, in order to gain access to affordable and relevant financial solutions.

The use of digital devices like mobile phones and the internet, have the potential to transform the informal economy and provide businesses of all sizes with the opportunity to reach new markets and to ‘formalise their operations’. Certainly, the evolution of digital payment solutions has done just that with more and more small businesses benefiting from the inclusion that mobile, digital and connectivity bring. The challenge has been to ensure the solutions and platforms add sufficient value for merchants for merchants to embrace digital against cash. A digital payment has to bring the merchant far more value than simple cash replacement, which most mobile digital consumer payments find it hard to do. Most are variations of the same P2P digital cash equivalent ‘me too’ technology that is simply not enough of an incentive for informal business to want to adopt at scale.

This is particularly true in light of the global pandemic. The 2020 McKinsey Global Payments Report found that the pandemic has sped up trends in consumer and business behaviour when it comes to digital payments, instant payments and card displacement. While some of the surges towards contactless, cashless and digital payment platforms to avoid human contact or remain within the constraints of lockdown will dissipate, the overall sentiment is that the boost that digital payments received in 2020 will continue their trajectory significantly over the next five to ten years, accelerating a process that was already underway. This is reflected in the McKinsey report, which found EMEA’s growth in payments slightly exceeded the global average due to the increase in emerging markets, such as Africa, at 10% growth in revenue.

While the pandemic may have been the fuel that lit the digital fire for many sectors, the reason why digital will remain so prolific is its proficiency across multiple levels and layers. It is not just that it enables tap and go, secure spend or access to multiple payment types. Digital payments open the door for those organisations that need access to alternative forms of payment the most.

Those in the productive and informal economy can leverage digital payments to enter into the formal economy and enjoy the multiple benefits that this brings. This is why digital is not just a rapid plug in a hole created by a virus. It is a new way of living, working and transacting for many people that will remain as relevant tomorrow as it did over the past year. The value of an efficient payment system that provides this, improves the countries stability across all income tiers stimulating economic development.

Digital payments are lowering the barrier to entry for entrepreneurs, small to medium enterprises, and micro-enterprises. This barrier once stood high, limiting which companies banks could serve. Now, with digital, small businesses can access not just multiple wallets and payment methods but also embedded financial tools that come with many of the leading digital payment solutions. Digital is levelling the playing field for so many industries, and now it’s happening to payments.

Considering how the informal sector and the middle-class play such a powerful role in driving wealth through communities and allowing for opportunities to make a living, this lowered barrier represents a significant milestone. It has also seen an almost seismic shift in the industry – the GSMA State of the Industry Report for Mobile Money 2018 found that mobile money represented only $19 trillion in payments from customers, while the same report in 2020 has found that daily transactions were exceeding $2 billion with ‘astonishing growth in emerging markets’.

The accessibility of mobile payment solutions and the array of functionalities on offer within digital payment platforms has allowed for the rapid and impressive evolution of the payments as a platform model. A model that pulls increasingly higher numbers into its orbit as it continues to reach deeper into areas that have been disconnected and unbanked in the past. The GSMA report revealed more than one billion registered mobile money accounts, 57 per cent of digital transaction values exceeding cash-in and cash-out values, and more than 50 million new registered accounts in the past year alone. The future isn’t digital anymore, it’s in harnessing the potential of digital to do more and allow for greater innovation and development.

For financial regulators, this seething sea of opportunity and benefit presents an equal opportunity to refine regulation to ensure that it is integrated intelligently to allow for further growth and inclusion. There is the risk that regulation can squash further innovation and development, limiting access and growth through heavy controls and limitations. This needs to be addressed and digital payment regulations must be consistently revised and adapted to take the digital payment market into account.

Many of the laws that currently govern financial transactions are still a leftover legacy from the traditional, heavily regulated card environment of the past. For continued transformation and development, and the seamless growth of the business and informal sector, regulations need to adapt to the new ways of doing business to allow for digital to flourish. With the constant change, markets have no choice but to evolve, move and adapt to the digital world and no country should be left behind.

… Diseko is the Communications Executive, Bluecode Africa