Digitalisation: A game changer for sub-Saharan Africa's informal merchants

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Payments represents a natural starting point for this effort, creating a foundation on top of which small, informal businesses can grow.

That’s according to Martin Wright, CEO of Kazang, the prepaid value-added services (VAS) and card acquiring business within JSE-listed fintech Lesaka Technologies.

He says that informal merchants are the backbone of African economies, providing livelihoods for millions and contributing significantly to GDP.

The impact that this segment has on the wider economy should not be understated. According to Mastercard, there are around 3.3 million micro and informal businesses in South Africa alone. The sector is especially important in creating economic opportunities for marginalised communities such as women, youth and people in remote areas.

Yet informal merchants’ potential for growth is constrained by a heavy reliance on cash transactions and manual processes, which in turn inhibits their access to formal financial services, lowers their efficiency, and increases their exposure to higher cash-related operating costs and risks.

Says Wright: “Low levels of digital adoption among small and informal merchants in sub Saharan Africa is one reason that many of these businesses remain in survival mode. A lack of formal financial records or repeatable business processes means they can’t access loans to scale their businesses or insurance to protect themselves from risks.

“This, in turn, means that they are heavily exposed to the risks of cash crime and are not able to invest in growing their businesses by, for example, buying stock in bulk. It also means some are struggling to keep up with changing consumer preferences as more customers look to pay by card or digital wallet.”

Payments as catalyst for digital transformation

Moving towards supporting card and digital wallet payments serves as a natural starting point for digitalisation of smaller businesses, which in turn, can help these merchants to grow and join the formal economy.

The costs of entry are low and affordable, thanks to today’s fintech payment acceptance platforms, and implementation is easy. Wright says that digitalisation of payments has a number of spin-offs for small, informal businesses as well as the economies in which they operate.

One of the most visible benefits comes from reducing the costs and risks associated with handling cash, making operations smoother.

Furthermore, receiving digital payments catalyses the use of other financial services, such as storing, saving, and borrowing money or seeking insurance.

This is because digital transactions provide the financial footprint small and informal merchants need to access credit and other formal financial services. Providing informal merchants with a pathway to digitalisation can, ultimately, help to drive economic benefits for their communities and wider society, says Wright.

These merchants will help to keep money circulating in their own communities, create jobs as they grow, and provide more choice to consumers.

Fintechs facilitating progress

Wright says: “The pace of digitalisation in Africa’s informal sector is picking up, with fintech companies like Kazang introducing solutions that enable informal merchants to accept card payments. Barriers such as high monthly rental costs and transaction fees have faded away.

“Today’s digital payment services often form part of a wider set of solutions that help informal merchants to grow and become convenient, one-stop shops for customers. Merchants can use the same terminal to process cashbacks, and vend services such as prepaid electricity, prepaid airtime and data, bill payments and gaming vouchers.

“Digitalisation helps merchants to tighten cash flow management and creates a safer trading environment for their customers. It also accelerates digital transformation across the wider ecosystem. With our terminals, merchants can pay FMCG suppliers from a digital wallet, so they don’t need to exchange cash to pay for stock.”

He adds: “The shift to digital payments across Africa's informal and microbusiness sectors offers immense economic potential. Digitalisation can increase financial inclusion and drive economic growth. Most importantly, it can unlock opportunities for millions of entrepreneurs whose small businesses are their livelihoods.”