Digital payments are growing globally as the market is expected to expand at a CAGR of 19.4% between 2021 and 2028. The coronavirus pandemic has further accelerated the digitization of the payments industry by 2 to 3 years as lockdowns, restrictions, and other consumer health concerns have affected spending trends and consumer habits. Despite the accelerated growth, digitizing merchant payments has proven a hard nut to crack, especially in emerging markets
A World Bank report shows that cash transactions in the retail industry are more than $19 trillion annually, representing over 50% of the $34 trillion in global payments made by Micro, Small, and Medium Retailers (MSMRs). Even in successful mobile money markets like Ghana, cash is still king, with over 99.9% of payments for consumption goods made in cash. This can prove problematic, as merchants often do not have enough cash on hand to pay for products when delivered, resulting in a significant amount of partially fulfilled or returned orders that the FMCG must incur.
In my last blog, I examined the cash problem and how it affects brands and distributors. This article, in contrast, focuses on the problem from the merchants’ perspective and provides a new strategy for solving the cash problem for every player in the distribution chain.
The hidden cost of cash for retailers
Accepting and managing cash payments is expensive, costing many retailers between 4.7 and 15.3 percent of total revenue, meaning that for every $100 sold, the business pays between $4.70 and $15.30 to manage their cash. Every year, retailers lose $99.56 billion to shrinkage, with over 34% of this shrink attributed to cash theft. These costs are mostly borne by ‘mom-and-pop’ shops and other independent small businesses that operate in poor, rural areas and cannot afford sophisticated security and cash transportation systems. Despite these issues, most small and medium retailers still prefer cash as costs are hidden and are perceived to have certain advantages.
To successfully solve the cash problem for retailers, payment providers must accomplish 3 things:
– Educate merchants and retailers on the costs of using cash.
– Provide value-added services to drive merchant adoption of digital payments.
– Provide the technical support needed to make the switch easier.
Any provider that succeeds in digitizing payments for the retail commerce space would unlock a massive opportunity – the $19 trillion in cash payments made in the retail industry, which is almost 500 times the total volume of payments made across the entire mobile money industry.
It’s not enough to be as good as cash, be better.
While the promise of solving digital merchant payments is clear, how to succeed in the space is not. Many successful digital financial services (DFS) players have found out that cash works well enough in retail commerce for merchants. Moreover, to drive merchant adoption rates to sustainable levels, being just as good as cash is not enough – digital payments must be significantly better than cash. Behavioral inertia is significant but can be overcome with a genuinely compelling value proposition.
Compelling value propositions must be built into the payment element and must solve merchants’ challenges. These value-added services should speak to the specific pain points and use cases of the prospective users. 3 major challenges that merchants experience that can be addressed by digital solutions are:
Accessing inventory and capital
The most common challenge that small and medium retailers identify is the lack of access to working capital and credit facilities. 40 percent of MSMRs globally have unmet financing needs and the global credit financing gap for MSMRs is $5 trillion, 1.3 times the current lending rate. Digitizing merchant payments is key to unlocking financial access for these underserved businesses by generating detailed revenue data that support low-cost credit scoring.
Merchants also face several challenges around inventory, which include keeping track of their stock in real-time, reducing lead times on orders, and paying for inventory when delivered. I know a brand in Africa that has up to 16% of orders returned because merchants do not have enough cash on hand to pay for the products when delivered, leaving the brand to bear the cost of unfulfilled orders.
A digital payment solution reduces friction and the cost of doing business, especially when adopted across the entire distribution chain. With an integrated payment and ordering platform, a merchant can communicate directly with the distributor to place an order, pay via the same platform, and receive their inventory quicker.
Managing customer relationships
The inability to identify loyal customers and target them with discounts and promotions is a significant barrier to increasing sales. With digital payments, records of customers and their transactions are recorded automatically, and the POS data can be used to target loyal customers with communications that drive sales. For example, if a merchant knows their top 10 customers, they can send customized SMS messages advertising a new inventory and offering a discount, potentially increasing sales by up to 10%.
By bundling customer relationship management capabilities into a digital solution, merchants will be more likely to adopt the platform, a win-win for the entire industry.
Extracting business intelligence
In developing economies, most merchants only have a vague idea of their business’s health and their ability to drive growth. Much of this perception is based on intuition, rather than detailed analytics. However, DFS providers can build solutions that generate detailed analytics from payment data. This analysis can show how sales this month compared to sales in previous months, for example, and could even compare the merchant’s performance to others in the area. More advanced analytics can use transaction data to analyze micro consumption patterns in the market and give recommendations on product and pricing opportunities to merchants. This sort of market intelligence is invaluable to the small and medium retailers who operate on razor-thin margins.
Unlock a cashless future with RedCloud
A critical look at these pain points shows that the 3 main areas that retailers have challenges: buying, selling, and paying, and these are the 3 areas that RedCloud focuses on delivering value.
RedCloud has built the world’s first integrated open commerce platform that unlocks the value of the retail distribution chain, enabling brands, distributors, and merchants to sell smarter, buy better, and pay simpler. More than just a payment platform, RedCloud tackles the cash problem from both ends by connecting the informal retail sector to the digital economy, eliminating the significant cost brands and distributors incur due to cash processing fees or lost orders and provides value-added services that incentivize merchants to accept digital payments.
RedCloud provides real-time data insights and unparalleled visibility into the distribution chain, turning every transaction into a data point. Now, merchants can communicate effectively with brands, distributors, and their customers, leading to shorter lead times on orders, instant payments, and access to credit via supply chain financing.
We’ve also gone one step further in driving merchant adoption, by enabling merchants to expand their offerings to include digital products like airtime, digital TV services and earn a commission on each sale. Merchants that use Red101 have recorded business growth rates of up 40% within 6 months and even express their willingness to invite their friends.
By empowering small and medium retailers across the emerging world with business intelligence capabilities, faster payments, access to credit facilities, and commissions on digital product sales, we’re building the future of retail – seamless, end-to-end digital commerce that works for everyone.
Partner with RedCloud today to see how we can increase your revenue by up to 25%.