Greater usage of digital payments increases financial inclusion especially in emerging and developing economies. Furthermore, researchers have linked greater usage of digital payments with greater economic growth and poverty reduction. However, adoption and usage of digital payments in some market segments remains low. For example, more than half of all incoming and outgoing payments at micro, small, and medium retailers (MSMRs) globally involve cash according to a World Bank Group report.
By using digital payments, MSMRs benefit from lower cash handling costs, increased revenue, real-time access to revenue and expense data, ability to sell remotely, and, in some cases, greater access to credit. Consumers also benefit in terms of increased safety, ability to purchase remotely, and greater access to other financial products. Furthermore, some merchants are not accepting cash altogether and usage of digital payments by consumers has increased since the start of the COVID-19 pandemic.
In this blog, I discuss the main findings of a World Bank Group report (the Report) that identified countries where incentives to increase MSMR digital payment acceptance were implemented. These incentives were offered by both the public and private sectors, and, in some cases, jointly. I had the pleasure of working with Oya Ardic, Jeff Allen, Santiago Carbo, and Francisco Rodriguez on the Report. The views expressed in this blog are my own and do not necessarily represent the views of the World Bank Group.
Account-Ownership and Digital Payments
Widespread ownership of transaction accounts by individuals provided by a bank or non-bank is crucial for greater adoption and usage of digital payments. According to the World Bank Global Findex Database, 76 percent of adults owned transaction accounts at a bank, regulated institution such as a credit union or microfinance institution, or a mobile money service provider globally in 2021 which is up from 69 percent in 2017, 62 percent in 2014, and 51 percent in 2011. However, while account ownership is necessary, it is not sufficient to encourage MSMRs and consumers to increase their use of digital payments in all instances.
Empirical analysis described in the Report suggests that greater usage of digital payments by MSMRs to pay employees and suppliers increases the likelihood that MSMRs accept digital payments from their customers. To increase digital wage payments, Turkey mandated that wages be paid digitally. Furthermore, the disbursement of government benefits via digital payments has also improved financial inclusion along with reducing the time required to receive benefits. The Report recommends that “public authorities could mandate the use of electronic payments for disbursement of government benefits and wages and encourage electronic payment of private-sector wages.”
Today, there are several digital payment choices available to consumers that range from payment cards, automated clearing house (ACH), and fast payments along with newer forms of money such as cryptocurrencies and central bank digital currencies (CBDCs). Fast payments use a new payment rail to clear and settle non-bank and bank-initiated payments that allow payees to receive funds within seconds from when the payer initiates the payment. For a detailed discussion on fast payments, see this recent blog. Neither cryptocurrencies nor CBDCs have been widely adopted by MSMRs but are getting attention in other payment segments.
The back-ends of the payment infrastructure continues to improve in several countries. The adoption of fast payment rails has become popular in many countries. The Report highlights the success of India’s Unified Payment Interface (UPI), a fast payment network. In five years, UPI payments went from zero transactions to becoming the digital payment system with the most transactions.
In addition, there are several improvements to the front-end of payment infrastructures leveraging mobile phone adoption. For example, according to the Report, in China, mobile payments’ market share increased from around 3.5 percent in 2011 to 83 percent in 2018 in the largest cities primarily because of high smartphone penetration and widespread adoption of quick response (QR) codes. To take advantage of the latest technology, the Report recommends that “public authorities could encourage the development of alternative merchant infrastructures that leverage new technologies to increase acceptance.”
Many FinTech firms compete with traditional payment service providers (PSPs) such as banks by combining payment services with value-added services to MSMRs. Value-added services may reduce operating costs, increase revenue, or provide access to credit. For example, the Report discusses Kopo Kopo, a Kenyan PSP, that offers MSMRs access to loans based on the analysis of over 200 variables to calculate credit risk. Using Chinese data, a recent BIS working paper finds that non-bank lenders providing payment services extend loans to merchants that may not be able to access bank loans. The Report recommends that “public authorities should support a level playing field between banks and non-banks in the provision of value-added services that improve business intelligence and MRMRs access to financial products.”
Generally, goods and services improve when there is competition especially from new entrants. Payment products and banking products, generally, are highly regulated to maintain financial stability and limit exposure to the public safety net creating high barriers for entry especially for non-banks. The Report states that “competition from new types of PSPs have had the greatest impact on electronic payment acceptance for the MSMR segment” in terms of greater adoption and usage of digital payments. Some countries have adopted policies to encourage new entrants to introduce new products while balancing concerns regarding the safety and resilience of financial markets broadly. The success of mobile payments in China and Kenya is partly attributable to the initial light touch regulatory approach to allow new payment solutions such as M-Pesa, WeChat Pay and Alipay to gain market traction quickly.
Monetary incentives from the public sector such as lower taxes or the private sector such as subsidies to reduce the cost of digital payment acceptance infrastructure has been effective to increase adoption and usage of digital payments. The Report stresses that tax incentives can be effective if they are transparent, well implemented, and a part of a broader combination of incentives. In addition to merchant incentives, consumer incentives such as cash-back, tax incentives and lotteries have had varying degrees of success in different jurisdictions, e.g. Mexico, South Korea and Uruguay. In fact, frequent-use rewards by card issuers have come under scrutiny of public authorities in some advanced economies such as Australia for working too well in promoting usage.
Globally, there are many initiatives to increase adoption and usage of digital payments including improving the payment infrastructure, leveraging widespread mobile phone adoption, using low cost QR codes to accept digital payments, and establishing laws to reduce illicit cash transactions such as maximum cash limits on purchases. However, some studies suggest that tax evasion remains the most compelling reason to conduct payments in cash. While digital payments have clear benefits over cash for consumers, merchants, and governments, incentives need to be better aligned to achieve greater adoption and usage.