Written by Khurram Sikander
The release of Apple’s virtual wallet, Apple Pay, has generated a lot of buzz in the FinTech industry. Payment innovations by Apple, as well as their competitors, are being built to integrate with the daily lives of millions of people who purchase goods and services through their platforms or devices.
Innovations such as Apple Pay are more easily deployed in ‘sophisticated’ markets because the systems and infrastructure are developed – customers have easier access to banking facilities, payment systems and channels, thus enabling innovation on the existing ACH and credit/debit card rails. These innovations are generally not focused on the structure itself, but rather the customer experience when interacting with financial institutions and retail merchants.
In emerging markets, however, such infrastructure does not always exist. The challenge then is to first the build the structure in these markets – develop digital payment instruments to create access to the platforms, and change behaviors before broader financial services can be offered. So how do we encourage the same level of innovation and access to digital financial services in emerging markets?
Merchant payments may be one of the services that can help increase the customer base and volume and expand the infrastructure that makes investment in such innovations commercially viable.
Expanding the network of merchants in a market that accept mobile/ digital money would spur innovation by creating the incentives for private sector investment in digital payment / mobile wallet solutions.
Many initiatives have seen limited success, mainly because the majority of the services focus on airtime top-up, P2P, bill payments, G2P, and more recently advanced products such as savings, credit, and insurance. These transactions occur regularly but are low in frequency, therefore limiting the amount that can be generated through transaction fees. Additionally, due to customer ownership debates between banks and telcos, many mobile money deployments have resulted in fragmented structures, developed with closed loop networks and full service agents.
The cost of managing closed loop networks is high, and, coupled with the low transaction frequency of most current business models, does not motivate agents or sustain infrastructure investments. For the customer, the closed loop network complicates regular and sustained use of their mobile money account – lack of interoperability within networks, for example, often prohibits users from utilizing access points.
Digitizing payments for daily household purchases could address these barriers to innovation and scale because of the volume and velocity of these transactions. In most of the markets where Enclude works, annual household consumption of every day goods and services constitutes more than half of their spending budgets, almost all done as cash payments. The scale and frequency of these purchases provide a business case for further investments in this sector and a natural progression towards an integrated / interoperable ecosystem. Although some small to medium sized merchants may initially resist accepting digital / mobile money in order to avoid paying taxes, customer demand and push to use the technology will likely outweigh such concerns.
In addition to incentivizing innovation, digital merchant payments through the wallets would promote greater financial inclusion in emerging markets. The data generated by transactions allows providers to have a more detailed view of the customer and their spending habits. It would also generate valuable merchant sales data that can be analyzed – opening doors to cross-sell more advanced products with wallets such as savings, credit, and insurance products to customers and merchants based on usage patterns.
As the industry evolves, the merchant value chain of suppliers, distributors and wholesalers could be targeted by these providers. The digitization of this money flow, potentially from bank account to wallet and vice versa, could be the catalyst for the integrated ecosystem and we may see payment innovations like Apple Pay building off of mWallets and merchant rails in emerging markets very soon.