Murray Gardiner’s thoughts …The thorny issue of financial inclusion in SMMEs

Murray Gardiner is the MD, Bluecode Africa

The concept of financial inclusion is relatively well understood, thanks to a long history of discovery and innovation across Africa. From the “Green Revolution” of the 60s to the present-day Fintech boom, it’s long been accepted that financial inclusion is vital to the growth of emerging economies. Simply put, financial inclusion is defined as the availability and equality of opportunities to access financial services by businesses and individuals alike.

As much as there have been successes on this front, there has always been a disconnect between that understanding and its implementation, particularly when it comes to Small, Medium and Micro Enterprises (SMMEs)

Thus far, with few exceptions, the success story of the recently realised financial inclusion ‘opportunity’ has all been focused on the consumers and immediate consumption. Rural remittances, urban bill payments, other mobile ‘push’ payments and nano-credit has all been about immediate consumption and cash replacement transactions between individuals and bill-pay aggregators for regular (mostly) urban recurrent consumption.

This leaves a glaring gap in this success story, however, and that is small businesses (SMMEs). While the individuals who run these businesses benefit equally from consumer products, the businesses themselves don’t. This is particularly true of the productive and informal economy.

If we are to truly address financial inclusion, we need to bring the productive economy – farmers, artisans, mutual societies, and small, medium and micro-enterprises across all sectors – into the formal financial system with digital transparency and a range of financial products and services that can unlock growth and wealth creation.

Micro-merchants need to be able to receive and make payments, reduce their dependence on cash and enjoy the benefits of higher quality financial services. Digital transparency is critical to delivering this. And it is lacking in many mobile payment offerings. Banks need sight of payments in a small business.

They need to see and predict transaction activity and source data from other historical sources to be able to determine what services the business can afford and benefit from.

SMMEs generate up to 40% of GDP in emerging markets, and are responsible for 50% of global employment, according to the 2019 GSMA State of the Industry Report on Mobile Money. That’s a considerable chunk of the market that is not being financially included.

What’s holding SMMEs back? A number of issues.

Cards are expensive, require specialised hardware and suffer from the inherent risk of compromised data privacy. Risk mitigation and compliance rules like Visa/MC 3D Secure and PCI compliance rules complicate the transaction and add costs, even with virtual cards.

Then there are delays in settlement of funds, the cost of devices such as card machines and POS systems, the inability to quickly convert payment back to cash and the general lack of trust in money they can’t see or feel.  Cash is real now and trusted. To compete against cash there has to be real and immediate value in digital.

Financial services providers need transparency in order to develop and provide appropriate services that are valuable enough to overcome both merchant scepticism and their reluctance to pay service fees. Combined with mobile payments, digital transparency can enrich the payment process with consumer incentive and loyalty while opening the window of transparency for an acquiring bank to extend a broader range of financial services. Without data-based insights, financial services providers cannot assess risk, nor understand what kind of offerings would be of the most value.

Digital transparency of cash flow, coupled with track record data from suppliers and other sources can be used to build a profile of risk and create effective demand for more enriched financial services such as insurance, savings, transactional banking, and lifestyle-related financial services. Digital has to bring positive external benefits that are much more valuable than a simple cash replacement.

Digital payments are the gateway for formal financial products and services.  The more formal finance that can be provided to an SMME, the greater the opportunity to grow the business and contribute to wealth creation, jobs and a mutually beneficial relationship between the enterprise and formal finance.  As these businesses are enriched by formal finance, they grow and in turn increase the total addressable market for financial services.

What is needed is an easy way to break from legacy card payments. A domestic mobile digital account-based payment that can reduce cost and maintain profitability by reducing redundant legacy costs – plastic, compliance, hardware, risk – and challenge cash with a digital mobile payment in local currency and that presents no technological dependencies on foreign entities.  A payment with cross-border capability, but under local rules and governance. Not a plastic card dependent on foreign rules and off-shore transaction processing.

A domestic digital scheme should provide for a full four-party interbank payment (issuer, acquirer, customer and merchant) that can clear transactions between people or merchants and provide for the behind-the-scenes interbank settlements, with no cards, no dollar-based fees, and no dependencies that could imply sovereign dependency that could be exploited in a trade dispute.

The right kind of domestic mobile payments, combined with value-added merchant-centric services can bridge the gap between the informal and the formal economy.  Small farmers, artisans and entrepreneurs need to be able to access financial services and develop a relationship with formal finance that can unlock their real economic potential and drive scale.

The technology exists and is available on the continent. It’s time to move mobile payments forward in Africa.

The writer is the MD, Bluecode Africa

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