TLDR; Government will make just around GH₵ 1.2 billion from taxing electronic money transactions. There’s a better approach to reaching revenue targets set for the E-Levy and that means moving first from production and then to taxation.
In the next seven years, the total value of electronic transactions could reach well over GH₵ 1.64 trillion. At that point, a case-by-case taxation model for specific services will bring the government to the E-Levy revenue estimates. The currently proposed taxation model under the E-Levy will not hit its target. Not now, and not with the current approach.
My experience and derivative insights in the telco & fintech domain are based on work I’ve done previously and as VP of Product for a tech firm that has worked with all of Ghana’s major mobile network operators. Last year, our technology platform processed over a quarter of a billion Ghana cedis in transactions for telcos in Ghana. That may appear to be a large number, but considering it took us more than 13 years and working with over 65 telcos to get here, it’s not as simple and fancy as it appears.
How Did We Get Here?
The Government of Ghana introduced the electronic transfer levy (E-levy) in the 2022 budget for operations related to digital payments and transactions on electronic platforms. The E-levy, which goes into effect on May 1, 2022, levies a 1.5 percent tax on e-money transfers and transactions worth more than GH₵100.
In November 2021, the government proposed this as a way to expand its tax network. Although the purpose of the new tax is to broaden the tax base, given that the majority of the population works in the informal sector, it appears to be a cost-effective way of increasing government revenue. As a result, the government estimates that tax revenue will total GH₵6.96 billion in 2022 and GH₵26.90 billion between 2023 and 2025.
Without a doubt, this tax (and its implementation) has been met with fierce opposition, both in word and deed. According to the Bank of Ghana, transaction value fell sharply from GH₵86.1 billion in November 2021 to GH₵76.2 billion in March this year. Over GH₵10 billion was wiped off the total transaction value, just by its announcement. At this rate, the total transaction value is likely to be reduced by more than GH₵24 billion at the end of this year.
This, coupled with the reduction in volume and velocity of electronic transactions, expert analysts predict will result in the E-Levy accruing less than estimated revenue. This will be from users, businesses and merchants who do not have other alternative means of transacting and who prefer electronic transfers over other payment options due to their convenience. The E-Levy will bring in a way lower than projected revenue – most likely in the region of GH₵1.2 billion, on the back of significant erosion of gains made in digital financial inclusion, and will lead to users churning from service platforms, preferring cash-based transactions.
No Contribution, No Chop
According to a recent E-Levy pre-implementation report I read, 57.4% of Ghanaians surveyed said they would cease using mobile money even if the fee was decreased from 1.75 percent to 1.5 percent. In the era of Cancel Culture, this measure cannot be disregarded especially if it approximates user opinions on the ground. It might have far-reaching consequences for mobile money transactions if consumers believe the government is taking a cut of the money he hasn’t contributed directly.
The Payment Services Bill, which eased P2P payments, e-money issuing, and setting requirements to be a player in this field, is one of the government’s endeavours in streamlining the fintech landscape. Industry players and tech companies, on the other hand, have largely led innovations, investments, and, in many cases, crucial policies in this field. The picture painted is one in which the government has made very little investment into the space but instead seeks to profit from the efforts of these firms that have invested resources, market development, and customer acquisition to increase service adoption, user engagement and grow the market – often to their loss.
The implementation of this service tax jeopardises the jobs and revenue streams of many who work in the mobile money domain: including agents, service kiosks, and middleware platforms that serve as a vital interface between the core mobile money platforms and other distributed services. There have been reports that agents are being compelled to close their service units due to low consumer patronage following the passage of the E-levy. It will undoubtedly have an influence on transactions and by extension, margins obtained by these service providers.
Ballooning Service Costs
Until now, the story has been that there is only one type of service cost: those imposed by telcos. It’s crucial to remember, however, that there are other intermediary fees that all users pay or will pay if they don’t use a native telco mobile money app for transactions. If users use third-party apps for mobile money transactions, they are charged an additional service fee. As service rises, these third-party applications will be less appealing to customers and merchants. In effect, users of these services will churn, and fintech disruption rates will decrease as there will be less incentive to invest in developing solutions for this space.
Ghana’s development is dependent on remittances. Although these inflows do not have a significant impact on the exchange rates, they are an important source of national income and external financing.
Ghana is expected to receive $4.5 billion in remittances in 2022 (GH₵33.52 billion at today’s exchange rate). According to the Bank of Ghana, this figure was $1.3 billion in 2002. The e-money base for all electronic transactions in Ghana is estimated to be at $9 billion currently.
Remittances to Ghana have been a key driver of economic activity in several sectors for the past two decades. The introduction of the electronic transfer levy, however, puts this figure in jeopardy. To provide the quality of life that I’ve seen here in Europe, Africa’s economy will need to grow by roughly 16 times its current size, with remittances playing a key role in this growth.
Recently, I was on a Zoom call with Ghanaians in the UK, US, and other European countries, organised by a leading remittance fintech.
We’ve had these calls every single week for the last 3 weeks. The purpose of this call was to inform users about the impact of E-Levy and to demonstrate user experiences that will be baked into their mobile app, allowing users to include e-Levy charges when remitting funds.
Listening in on the call and engaging the Ghanaian diaspora community, it was clear that user sentiment toward the E-Levy was negative, with participants questioning its impact on remittances for their families, healthcare, school fees, property development, and other obligations, given that there was no fee cap and it was structured as dual charging for monies sent into mobile wallets.
Users will devise workarounds as the cost of remitting through these platforms rises. When possible, the Ghanaian diaspora will use Hawala, cash, and agent networks to avoid paying the E-Levy, especially for large cross-border transfers. The blanket application of the E-Levy is a concern for the Ghanaian immigrant community.
Others have already begun to implement countermeasures, such as adding family members and partners as signatories to their bank accounts, making payments through shared e-wallets, and giving out bank cards to families in Ghana to receive funds without having to pay fees associated with the E-Levy. Users will continue to figure out how to avoid these charges, reducing the total revenue collected from E-Levy.
If This Then That
It is apparent that we must postpone the introduction of the E-Levy to transition from production to taxation as it has and will continue to erode gains made in building the fintech ecosystem and digital financial inclusion over the last one and a half decades in Ghana.
Given the existing circumstances and ongoing developments, its revenue projections will not be met. Furthermore, it will harm fintech, reducing transaction value, increasing user attrition, and wiping off revenue and margins.
The suggested taxation model fails to account for intricacies in the ecosystem and has been overly simplified with a blanket approach that will not produce the desired results. Its implementation will necessitate more investments (in terms of technology, resourcing, and oversight) in monitoring, recon, and disbursements, which will become cost sinks for the government and fintech without corresponding revenue growth. Moreover, the key drivers of transaction value: volume, velocity, and use cases, have begun to stall before E-levy implementation.
A more effective model would be for the government to invest and create an environment for startups and fintech to thrive by introducing newer user cases and accelerating the adoption of P2P payments, Buy Now Pay Later (BNPL) features, micro-lending, mobile commerce, O2O services, insurtech, agritech as well as a shift away from the use electronic money as a cash alternative.
These will drive the adoption of products while enabling layered tiers of services that deepen the ecosystem. A suite of applications that may emerge will make extensive use of these mobile money APIs, consumer spending patterns, and user data to recommend suitable products and services. The number of potential services and their use cases that will emerge is limitless.
A tier-based taxing scheme on transactions from these auxiliary services will guarantee revenue for the E-Levy and will be more difficult to opt-out of because of user lock-ins, service stickiness and their designation as essential to a frictionless customer experience.
The continent’s fintech landscape is booming right now, with startups raising millions of dollars in fundraising rounds to scale up solutions aimed at growing the market and disrupting traditional financial services and models. This demonstrates the market’s size, opportunities, risk appetite, and scale possibilities. The last thing any government (particularly in Sub-Saharan Africa) wants is to be viewed as stifling innovation and ecosystem growth through such taxation regimes.
This Easter, when people celebrate Christ’s resurrection as a renewal and newness of life, I’m not sure we’ll be able to resurrect our mobile money industry if the government goes ahead with the E-Levy.
The signs are written on the wall.
About the Author:
Kingston Tagoe is VP of Product at Rancard. He manages cross-functional teams in the delivery of technology products for telecommunications, retail, AI-enabled conversational messaging, and consumer engagement domains. He previously co-founded a value remittance startup that was featured by the BBC.
Rancard connects global businesses with relevant mobile audiences through AI-powered conversational discovery and activity-based predictive engagement. Rancard’s clientele includes telco networks, technology firms, financial service providers, state agencies, energy firms, FMCGs, and retail and consumer brands.