By Murray Gardiner, MD, Bluecode Africa There is no doubt that Africa’s economic growth story over the past couple of decades has been nothing short of extraordinary. Until the COVID-19 pandemic hit, the continent had shrugged off global economic shocks and its own political challenges to record impressive levels of growth .
There are still a number of factors, however, preventing Africa from achieving its full economic potential. Across the continent, for instance, many still depend on foreign payment systems with dollar-based fees and remittances.
Digital payments not dependent on off-shore schemes, with the requisite levels of data privacy, could reduce that dependency and protect domestic financial institutions from disintermediation. As a result, they can help countries across the continent build more efficient economies that provide benefits where they’re needed the most.
Formalising the informal sector
Across Africa, the informal sector plays an outsized role in their countries’ economies. In South Africa, for example, the informal sector accounts for 5% to 18% of GDP and employs millions of people . That’s the picture in the most formal economy on the continent. The informal sector accounts for 70 per cent of employment and about 55 percent of sub-Saharan Africa’s GDP.
While the informal sector is undoubtedly essential for protecting lives and livelihoods, any shadow economy like this by its very nature does not pay any taxes or receive benefits generally associated with being a tax-paying entity. Workers in the informal sector are not protected by labour legislation or safety regulations and consumers do not have protections from harm or loss. As a result, much of the work in the informal sector is survivalist by nature and businesses are marginal and far less productive than they would be in the formal economy.
In order to change that, governments need to formalise the informal sectors in their countries. However, for that to happen, a bridge to formal financial arrangements, business services and training is required. This implies transparency and a way to interpret these informal businesses that are close to the border of formal access to formal finance through digital transparency and data. Digital merchant payments can provide the means and incentives to motivate both financial institutions and micro-enterprise to engage in a mutually beneficial relationship.
The value of digital payments
Most businesses in the informal sector are cash-based. While this has some benefits, it excludes them from most of the benefits that their counterparts in the formal sector take for granted. Convincing informal businesses that contactless mobile payments are valuable is a challenge. Digital transparency with their acquiring bank has to come with the benefits of access to a wider range of financial services (insurance, savings, credit facilities, EFT payments) and must help the business establish a track record with suppliers and other service providers to gain access to supplier credit and other commercial benefits. Digital may even open new sales channels, such as e-commerce and sales agent networks, and to offer value-added services to promote customer loyalty, sales campaigns, and partner programmes. All of these potential business benefits flow from the reliability of a digital mobile merchant payment service provided by the bank. Financial institutions use digital transparency and data to understand the business and reduce lending risk and cost, increasing the size of the addressable market. Technology reduces the transaction costs associated with onboarding merchants as customers and creates data-rich, bankable clients.
Embracing a new way
If Africa is to build truly efficient economies and reach its true potential, it needs to move beyond legacy card schemes and siloed person-to-person payments commonly offered by mobile network operators. These consumer-based payments have made, and continue to make, a significant contribution to financial inclusion. But the financial inclusion journey needs to now pivot from the consumer economy to the productive economy and bring informal business into the formal sector. A fully interoperable digital mobile merchant payment with value-added services is a gateway to the formal economy for the majority. Africa needs to embrace digital merchant payments on account rails, away from cards in a local scheme governed by local rules. This is a gateway to more comprehensive and meaningful finance to support growth and development of the productive economy.