Retail Payments In Growth Markets: From Cash To Electronic Payments

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Introduction
Cash continues to rule as the pre-eminent payment instrument in retail payments in the growth markets. In spite of increasing numbers of plastic cards being issued to consumers in emerging markets, card penetration continues to be low: as an example, according to MasterCard, less than 15 percent of the adult population in Indonesia has access to a card. Meanwhile, merchant adoption of card acceptance is happening at an even slower rate. At the same time, innovative mobile money schemes are beginning to offer credible alternatives to cards as a form of merchant payment. The prime example of this is found in Kenya, where over 80 percent of the adult population is using mobile money, and retail payments via mobile money are increasing at a brisk pace, making it a natural evolutionary step from cash to electronic payments. The Lipa ni mPesa merchant payment service offered by Safaricom is but one good example of electronic over-the-air payments bypassing credit/debit card usage in Kenya. To offer a developed market example, according to the UK Payment Council, it wasn’t until 2014 that the usage of non-cash payments surpassed the usage of cash in the UK.

The retailer dilemma
Rolling out new type of electronic payment schemes — whether cards, mobile money or other alternatives — often face resistance from retailers. The reasons are numerous: adopting to a new way of doing things via electronic money that one can’t hold in one’s hands does not come naturally to everyone; new processes may at first feel slow and more cumbersome, making the payment process feel more complicated; and not all retailers necessarily want all of their transactions recorded–the anonymity of cash may sometimes be preferred. All of this guarantees that if the electronic payment solution is too complex, cumbersome or costly without tangible countervailing benefits, retailers will not switch from physical cash.
Increasing the penetration of electronic payments
The widespread penetration of mobile devices is without doubt a major force in driving the migration from cash towards electronic payments at the point of sale. Mobile devices have become all-pervasive, with Android-based smartphones already available well under US$50—for example mid/high-tier Android smartphones are widely available in Kenya at the time of writing for 3,000-5,000 Ksh. For increasing retail acceptance of card payments, there are card reader accessories available for the Android-based mobile devices at reasonable cost–as an example, EMV compliant card readers are available at less than US$50. This means any recently purchased Android-based mobile device can be turned into a card acceptance mobile point of sale (mPOS) device, at a fraction of the cost of traditional ePOS terminals which currently sell for 300USD upwards. Moreover, given that many merchants in emerging markets now already own Android smartphones, the merchant acquirer need merely to provide (or loan) card reader accessories to merchants to use with their preexisting phones, driving down cost even further.
Beyond traditional cards, mobile devices also enable other electronic payment scenarios. Using mobile money–based payments at the retail point of sale in the form of a direct money transfer between consumer and retailer is one possibility—this is the most common form of e-money merchant payment in Kenya, for example. In addition, NFC reader technology is increasingly available in ever lower cost smartphones which makes it feasible to for retailers with NFC-enabled devices to accept consumer payments through contactless cards or stickers without any additional accessory devices.
For any of these scenarios however, the retailer interest must be there to adopt non-cash payments. The interest is driven by several factors:
1. Customer penetration of the different electronic payment instruments: The retailer won’t want to lose a sale by not being able to accept a particular form of payment. But given that most consumers still also carry cash as backup, this is not an immediate problem. The driver will be the popularity of different electronic payment instruments, whether mobile money, card or another form of payment.

Retail Payments In Growth Markets: From Cash To Electronic Payments

By Peter Ollikainen, SVP, Mistral Mobile

Introduction

Cash continues to rule as the pre-eminent payment instrument in retail payments in the growth markets. In spite of increasing numbers of plastic cards being issued to consumers in emerging markets, card penetration continues to be low:  as an example, according to MasterCard, less than 15 percent of the adult population in Indonesia has access to a card.  Meanwhile, merchant adoption of card acceptance is happening at an even slower rate.  At the same time, innovative mobile money schemes are beginning to offer credible alternatives to cards as a form of merchant payment.  The prime example of this is found in Kenya, where over 80 percent of the adult population is using mobile money, and retail payments via mobile money are increasing at a brisk pace, making it a natural evolutionary step from cash to electronic payments.  The Lipa ni mPesa merchant payment service offered by Safaricom is but one good example of electronic over-the-air payments bypassing credit/debit card usage in Kenya.  To offer a developed market example, according to the UK Payment Council, it wasn’t until 2014 that the usage of non-cash payments surpassed the usage of cash in the UK.

 

The retailer dilemma

Rolling out new type of electronic payment schemes — whether cards, mobile money or other alternatives — often face resistance from retailers.  The reasons are numerous:  adopting to a new way of doing things via electronic money that one can’t hold in one’s hands does not come naturally to everyone; new processes may at first feel slow and more cumbersome, making the payment process feel more complicated; and not all retailers necessarily want all of their transactions recorded–the anonymity of cash may sometimes be preferred.  All of this guarantees that if the electronic payment solution is too complex, cumbersome or costly without tangible countervailing benefits, retailers will not switch from physical cash.

Increasing the penetration of electronic payments

The widespread penetration of mobile devices is without doubt a major force in driving the migration from cash towards electronic payments at the point of sale. Mobile devices have become all-pervasive, with Android-based smartphones already available well under US$50—for example mid/high-tier Android smartphones are widely available in Kenya at the time of writing for 3,000-5,000 Ksh.  For increasing retail acceptance of card payments, there are card reader accessories available for the Android-based mobile devices at reasonable cost–as an example, EMV compliant card readers are available at less than US$50.  This means any recently purchased Android-based mobile device can be turned into a card acceptance mobile point of sale (mPOS) device, at a fraction of the cost of traditional ePOS terminals which currently sell for 300USD upwards.  Moreover, given that many merchants in emerging markets now already own Android smartphones, the merchant acquirer need merely to provide (or loan) card reader accessories to merchants to use with their preexisting phones, driving down cost even further.

Beyond traditional cards, mobile devices also enable other electronic payment scenarios. Using mobile money–based payments at the retail point of sale in the form of a direct money transfer between consumer and retailer is one possibility—this is the most common form of e-money merchant payment in Kenya, for example.  In addition, NFC reader technology is increasingly available in ever lower cost smartphones which makes it feasible to for retailers with NFC-enabled devices to accept consumer payments through contactless cards or stickers without any additional accessory devices.

For any of these scenarios however, the retailer interest must be there to adopt non-cash payments.  The interest is driven by several factors:

  1. Customer penetration of the different electronic payment instruments: The retailer won’t want to lose a sale by not being able to accept a particular form of payment.  But given that most consumers still also carry cash as backup, this is not an immediate problem. The driver will be the popularity of different electronic payment instruments, whether mobile money, card or another form of payment.
  2. Ease of overall payment process with the electronic payment instrument: The payment process can’t be substantially slower or more complex for retailers compared to traditional cash payments.
  3. Cost for the retailer, both transaction and investment cost: One aspect the retailers often don’t see is the cost of cash handling (i.e., risk of theft, effort required to have cash carried to bank, etc.), and they often consider cash to be “costless”, compared to acceptance of electronic payments.
  4. Other factors: Such as willingness to forgo anonymity of cash transactions to having electronic track records of the payments.

When planning a roll-out of electronic payment solutions to a wider range of retailers, all of these factors need to be carefully considered in terms of their impact on electronic transaction volumes growth at the retail point of sale.

Alternative mobile approaches to drive the transition from cash to non-cash

The table below gives a brief comparison summary of the alternative means of using mobile-based payments at the retail point of sale, using a few critical factors for comparison:

Accepting traditional debit or credit cards

 

Using P2P money transfer from customer to retailer

 

Acceptance with contactless card, sticker or mobile device

 

Overview The most efficient solution for traditional card acceptance is to have retailers using mPOS devices (i.e., a combination of smartphone and card reader accessory).

 

The simplest solution in markets with high mobile money penetration is to simply utilize the person-to-person transaction as a means of payment to the retailers.

 

A hybrid solution utilizing contactless technology and fast payment processes.

 

Description of the payment process Retailer keeps the mobile device with the card reader accessory available at all times, and enters the payment information in the application loaded on the mobile device.  Customer swipes or inserts card and enters the PIN to confirm the payment (in other words, the same use flows as when using a card on a traditional ePOS) Consumer requests  the retailer’s phone number  to enable them to make the P2P transfer to the retailer (note that this may slow down the process). The consumers also may not want to have their own phone number revealed to the retailer which can make the verification of the payment cumbersome. Retailer enters the payment information in the application. Customer simply taps the retailer device with their card or sticker, or their/own mobile. Given there is no direct PIN entry as part of the transaction, extra verification step for larger payment amount may be requested from the customer by sending them a confirmation request to their mobile
Transaction costs Ranging from 0.5-3% of transaction value

 

Ranging from 0.5-2% of transaction value Ranging from 0.5-1% of transaction value

 

Investment required Smartphone and a mobile POS accessory combined cost can be as low as 100USD (card reader accessory alone can be well below 50USD) None Smartphone with contactless reading capability, already available under 100USD

 

In all of the above scenarios everything starts with the retailer and their willingness to embrace new innovative ways to receive payment, and ends with customer adoption of the particular type of new payment instrument. None of the methods are mutually exclusive and retailers can support multiple/all forms of payment with a single mobile device, but ultimately it will be customer habits and preference which determines which type of payments will be adopted for non-cash payments.

Summary

There is no single winning approach but consumer preferences within the local market context will largely determine which models merchants will adopt, given that from the merchant perspective, the transaction nor the investment costs for options are not that different.  It is therefore very likely that multiple approaches will be adopted in any given market since different consumer segments will have different payment preferences: not everyone will have (or want) debit or credit cards, and preferences will vary by age, economic and educational status, and so on.
2. Ease of overall payment process with the electronic payment instrument: The payment process can’t be substantially slower or more complex for retailers compared to traditional cash payments.
3. Cost for the retailer, both transaction and investment cost: One aspect the retailers often don’t see is the cost of cash handling (i.e., risk of theft, effort required to have cash carried to bank, etc.), and they often consider cash to be “costless”, compared to acceptance of electronic payments.
4. Other factors: Such as willingness to forgo anonymity of cash transactions to having electronic track records of the payments.
When planning a roll-out of electronic payment solutions to a wider range of retailers, all of these factors need to be carefully considered in terms of their impact on electronic transaction volumes growth at the retail point of sale.
Alternative mobile approaches to drive the transition from cash to non-cash
The table below gives a brief comparison summary of the alternative means of using mobile-based payments at the retail point of sale, using a few critical factors for comparison:

 

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