Despite positive advances in financial inclusion on the continent, 95% of all consumer payments in Africa are still made in cash.
Why is this such a bad thing? For the people and micro-entrepreneurs who are trapped in cash-only systems, it is much harder to grow a business, much less safe to save, and more difficult to forge a path into the middle class.
Cash is fuelling what’s called the invisible economy, limiting productivity and growth of vibrant sectors such as small and microenterprises, and making it infinitely more difficult to include these economic activities in any form of official statistics, oversight, taxation and regulation.
The informal economy in sub-Saharan Africa makes up nearly 86% of all employment, according to the International Labour Organisation. The issue is compounded by Africa’s demographic dividend, with the informal sector projected to absorb many of the continent’s young employment seekers.
By and large, it is an issue created by the lack of inclusion, and the lack of access and usage of formal financial tools, especially in economies where wealth and assets are not reasonably distributed. If economic growth is not accompanied by equitable income distribution or an equal rise in employment levels, we see an increase in the growth of the informal economy, given its low barrier to entry. Bringing the informal sector into the formal economy is probably one of the most significant policymaking challenges 21st-century African governments face.
The truth of the informal economy
Unlike common depictions of the informal economy as a single “undifferentiated” group of workers, the sector is hugely dynamic, spanning a wide range of micro-, small and medium-sized enterprises, including workers who are employed at such enterprises and self-employed workers who earn a living from activities such as domestic work, street trading or small-scale farming.
Many of these workers do not join the informal economy by choice — it is a by-product of their need for survival, providing for themselves and their families.
Therein lies the opportunity: bringing this informal economy into the fold by affording previously excluded individuals’ access to basic financial services and networks that help them save, expand their business and become financially secure.
The good news is that innovative technologies are already providing the tools and platforms for infrastructure providers such as banks and mobile network operators to reach these traditionally excluded populations while lowering both the costs and barriers to serve them. The challenge, however, is to ensure that these solutions are easily adopted and actively used.
There are three key ways to ensure that formal financial products are actually used.
1. Focus on customer needs and cultural considerations
Turning cash into digital transactions is all about designing relevant solutions that address the needs and desires of people and businesses, which can vary by geography, individual preference and community. Time and resources are needed to gain a full understanding of their world, and how technologies fit — or don’t fit — into it.
For example, Mastercard’s Farmers Network (MFN) brings a human-centred design approach to agrarian livelihoods, informing the development of a solution that provides smallholder farmers with access to new markets via SMS. By addressing their need for order management, produce delivery and collection, and payment, MFN provides farmers with a path to the use of digital payment products and enables them to get a fair price for their crops without going through middlemen.
2. Build financial knowledge and change behaviour
Knowledge and trust are major hurdles in any financial transaction and are recognised as key barriers that need to be overcome before consumers and businesses embrace digital payments. The public and private sectors need to rethink financial literacy, using innovative models such as gamification and mobile messaging services to encourage behaviour change at scale.
Training and education about new products and digital systems are also critical to ensure take-up. In Egypt, for instance, access to mobile accounts is nearly universal. However, the use of mobile financial services is still rare, mainly due to a lack of trust.
To tackle this issue, financial service providers devised a text messaging option, which lets them communicate with customers and answer key questions about finances and financial pain points. This enhanced awareness and knowledge resulted in a 5%–8% increase in monthly transactions.
3. Build robust digital ecosystems to enable scale
New business models for deploying technology, along with new payment flows and channels, are key to expansion. Mobile and digital technologies can also be used to better bring ecosystem players together and to connect service providers to the underserved in new and innovative ways. This reduces the cost of delivering solutions and improves the effectiveness of providing essential services to people and micro-entrepreneurs trapped in a cash economy.
In Kenya, for example, a first-of-its-kind digital lending initiative by Jaza Duka is helping small kiosk business owners overcome cash-flow constraints, which, together with the absence of a formal credit history, limits their ability to buy and sell more products and ultimately grow their businesses.
The platform tracks how much product a store owner has bought over time and combines that data with analytics. Results are used to provide a microcredit eligibility recommendation to a bank, which can then provide an interest-free credit line. Bringing together the tools and data from different industries has changed the model of small business financing.
Partnerships are critical for impact
Governments and non-governmental organisations have the capability to reach and deliver services to the last mile, while policymakers are critical in creating supportive regulations that can incentivise consumers and small businesses to adopt electronic payments. However, the private sector — including nontraditional stakeholders across key sectors such as telecommunications and consumer goods — must be part of these broader digitisation efforts, as these players are critical to drive innovation and the scale and usage of services.
While the informal economy will never be completely eliminated, we can reduce the cash it generates by harnessing the power of technology and partnerships. This will not only help unlock the informal economy’s massive economic potential but also move hundreds of millions of people across the continent towards long-term prosperity.