Digitizing payments

Every day, micro and small businesses accept and make payments, mainly in cash. Globally, payments made by small businesses were estimated at $34 trillion in 2016—with only 44% made electronically. Digitizing payments not only offers small businesses many benefits and efficiencies, it also provides positive spillover effects for their customers and suppliers, and strengthens financial inclusion efforts.

While COVID-19 has disproportionately impacted small businesses, it has also encouraged many to adopt digital payments. For instance, one survey found that 93% of micro and small business respondents have become more reliant on digital technology because of the pandemic. Globally, the value of merchant payments made via mobile money doubled in 2021, reaching an average of $5.5 billion in monthly transactions, up from an average of $2.8 billion in 2020. Further, there was also a considerable increase in the number of merchants accepting mobile money as a payment method: between September 2021 and June 2022, the number of active merchants that had accepted a mobile money payment in the previous month rose by 48%. This boost could provide small businesses with an opportunity to deepen their use of digital technologies more broadly, which will ultimately strengthen their resilience and increase their growth.

Digital financial services can be transformative for small businesses, especially if they were previously unbanked or excluded from formal financial services. Digital finance encompasses services such as credit, insurance, and savings. For more information on access to finance and insurance, please refer to our other insight briefs. This brief outlines evidence of the impact of payment digitization on small businesses, explores some of the barriers to use, and highlights some insights on how to encourage adoption. We’ll continue to update these insights as we learn more.

Across the globe, micro and small businesses make payments valued at $19 trillion in cash, according to the latest data. This proportion is especially large in South Asia and Africa, where a respective 80% and 75% of small business payments are still made in cash. However, the increased pace of digitalization in recent years, coupled with the impact of COVID-19, has meant that small businesses worldwide are increasingly adopting digital payments.

Digital payments can lead to a cascade of positive effects for small businesses. Research suggests that when small businesses accept and make digital payments, they can increase their profitability through more convenient, secure, and affordable transactions. Research also suggests that the adoption of digital payments leads to an increase in sales for small businesses, as was the case in Cameroon, India, and Somalia. Additionally, research in East Africa found that adopting digital payments by small firms increased their probability of investing in fixed assets, such as machinery or equipment. Digital payments can also encourage the adoption of other digital tools and platforms, such as inventory management, bookkeeping, and market access, leading to improved recordkeeping and transparency, as well as increased participation in e-commerce.

Digitizing payments can also improve competitive advantage by generating new business for small retailers. For instance, in some cases, point-of-sale terminals and platforms can facilitate other types of customer payments, like utility bill payments or mobile top-ups. These can increase foot traffic and provide commissions for completing transactions. This was the case in Zambia, where the vast majority of informal retailers who used Trader Direct reported that it helped them earn more money and also led to an increase in customers. Trader Direct is a retailer till point digital solution from Nomanini, a fintech, that enables retailers to sell a range of digital services, such as airtime, as well as pay suppliers and access lines of credit. Over time, digital payments provide small businesses with a transactional history, which can be used to increase access to financing. Avoiding cash can also have gender-sensitive positive effects; digital payments enable female small business owners and employees to have greater control of their earnings (read more in our insight brief focused on financial services for women-owned small businesses).

Our analysis of the outcomes and impacts of digital payments on small businesses through our Evidence Map has found that digital financial services facilitate the adoption of new, better business practices across the board by small businesses, which leads to resilience and growth. For instance, in the wake of COVID-19, research in France found that small businesses offering contactless payments experienced more sales and an increase in new customers per month compared to merchants without contactless options. In Argentina and the Philippines, micro and small businesses reported that digital payment tools helped them to adapt to the new economic environment.

While the benefits and impact of digital payments on small businesses are promising, cash remains widespread, especially for micro and small businesses in emerging markets. Further, the Center for Financial Inclusion found that while small business owners adopted digital payments early in the pandemic, many reverted to cash later. Below, we outline the barriers to digital payments for small businesses.

There are several barriers—both on the supply side and the demand side—that prevent small businesses from adopting digital payments more widely. Beyond infrastructure barriers, such as limited electricity, lack of mobile network coverage, or poor transport networks, supply-side barriers also include a lack of enabling financial regulation and a lack of harmonized national digital infrastructure (such as digital identification).

On the demand side, small business owners may lack the identification required to open digital accounts or have low levels of financial literacy and numeracy. Further, small business owners may have limited awareness of digital products or be skeptical about their usefulness or security. Research in Tanzania identified a lack of privacy and security as well as a poor understanding of digital banking as the main challenges faced by micro and small businesses. CGAP argues that most small businesses do not feel an urgent need to change their payment system, as they perceive cash as a cheaper, more convenient payment method that works for their purposes. For digital payment products to be a worthy alternative, they need to be as convenient as cash and offer additional benefits. These could include addressing some growth constraints that small businesses regularly cite, such as managing customer relationships or offering business intelligence data. Digital payment products that are also tools to build strong customer relationships, gather business data, and provide access to capital provide such added value.

Beyond concerns about digital payment’s immediate usefulness, there are also perceived barriers, especially conservatism and risk aversion. Small business owners may not value but actually be averse to the additional transparency that digital payments create, as they fear that their tax liabilities will increase. This was the case for some small businesses in India, who were hesitant to conduct business digitally, citing concerns with tax implications. In China, researchers found that digital finance significantly reduces tax evasion by small businesses by alleviating financing constraints and through the increased supply of tax-related data. Governments have explored innovative ways to address these concerns, such as Uruguay’s experience with tax incentives for POS terminals or South Korea’s tax breaks for electronic payments.

More so than other digital financial products, payments digitalization is a two-way street: the willingness to adopt and use digital payments must come from small businesses, in addition to their customers, employees, and suppliers. This balanced relationship is important for expanding the financial inclusion of micro and small businesses.

To better support small businesses to adopt and use digital payments, we’ve identified some recommendations and best practices below. We will update these as we learn from our partners and the wider community.

Offer value-added services that add real value for small businesses

Many small businesses see cash as a convenient and affordable payment method, and thus are unlikely to adopt digital payments for the sole purpose of reducing cash. The pandemic did increase the rate at which small businesses adopted digital payments as an alternative method. Still, uptake could be deepened if providers bundled digital payments with solutions that add real value to existing pain points. For instance, Kopo Kopo in Kenya enables small businesses to offer digital payments in addition to offering merchant cash advances, bulk pay capabilities, and transactional information analysis. These value-added options enable small merchants to help their businesses grow and to access real-time visibility of their transactions.

Other types of digital value-added services that could help merchants include: customer relationship management tools, bulk SMS marketing capabilities, store credit or payment plan functionality, transactional and business analytics, inventory management, and staff management tools. Providers that offer solutions that better address small businesses’ pain points can help drive the adoption of digital payments. In Nigeria, Strive Community has partnered with Boost Technology to leverage transaction data to empower small retailers with real-time insights from their business to make more informed decisions and drive improved business outcomes.

Use financial and business education to drive usage and loyalty

Coupling digital payments with financial and business training can enable positive benefits for providers and small businesses alike. For instance, small-scale merchants who have a better understanding of a provider’s products are more likely to use them to grow their business. For providers, investing in financial education helps demonstrate their role as trusted partners to small businesses, leading to stronger and more loyal customer relationships. 

In Colombia, the Mastercard Center for Inclusive Growth worked with Juntos to offer merchants financial training via SMS and WhatsApp, in partnership with Bancolombia and Movii. Findings from their interactive training program suggest that small merchants took action to adopt new digital financial technology and digital payment acceptance options for customers. Further, participating merchants gave Bancolombia a net promoter score (a metric that asks respondents to rate the likelihood that they would recommend a company to a friend or colleague) of 69—three times the industry average. In Cambodia, Strive Community partnered with Boost Capital to test whether financial education can help entrepreneurs reduce their risk profile by becoming more financially savvy, better qualifying them for affordable financial services. Boost Capital found that the financial providers they were working all expressed an interest in integrating financial education into credit underwriting for small business loans. In Brazil, we partnered with Flourish FI to adapt its engagement and financial wellness platform to empower small businesses to manage their finances better. The app will use nudges and games to incentivize small businesses to adopt responsible money management habits.

Facilitate peer influence to increase small business adoption

Small business owners can play an important role in encouraging customers, suppliers, and other merchants to adopt digital payments. In India, a study identified peer influence as a significant factor in microbusinesses’ intention to adopt digital payments. Providers who facilitate peer-to-peer interactions that highlight the benefits of digital payments can better leverage this word-of-mouth promotion. Learn more about the role of peer interactions in capacity building for small businesses.  

Referral and loyalty programs can encourage small businesses to promote digital payments to their peers and customers. IFC has found that expiring points-based loyalty and referral schemes tend to be effective at building long-term loyalty by encouraging users to increase their interaction with a provider’s payment platform over time. Further, rewards should be tangible and contextual, such as capped or reduced merchant fees, access to or upgraded value-added services products, discounted or free airtime, and merchandise. 

Incorporate cybersecurity and protection against fraud 

Because of the rapid pace of digitalization in the wake of the pandemic, the typically limited cybersecurity precautions of small businesses have left them exposed, with business owners facing an increased risk of fraud and scams. Research found that fintech companies have faced a 15% increase in cybersecurity breaches since the pandemic began. For micro and small businesses, inadequate protection of private, sensitive data remains a major cybersecurity challenge. 

The pandemic has also led to a proliferation of fraud and scams related to digital finance. For example, the onset of the pandemic saw a surge in fake lending applications, particularly in India, Nigeria, and the Philippines. These and other frauds can undermine the trust that small businesses place in digital financial services. By integrating the mitigation of cybersecurity breaches, fraud, and other risks as a core element of a digital payments offering, providers can increase trust for small businesses. You can read more in our brief dedicated to consumer protection for small businesses.

As small businesses continue to adopt digital payments, they gain access to a cascade of positive effects that ultimately strengthen their resilience and increase their growth, such as increased profitability, adoption of other digital tools, and increased participation in e-commerce. Providers that offer solutions that better address the pain points of small businesses can help drive deeper adoption of digital payments.

Strive Community is working with partners around the globe to encourage small businesses to use digital financial services meaningfully. As we learn through our programs and partners, we will continue to update these insights.